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Filed Pursuant to Rule 424(b)(2)
Registration No. 333-43169
PROSPECTUS
CAPSTEAD MORTGAGE CORPORATION
5,495,850 SHARES
COMMON STOCK
(PAR VALUE $0.01)
1,436,100 SHARES
$1.26 CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B
(PAR VALUE $0.10)
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Capstead Mortgage Corporation, a Maryland corporation (the "Company"),
directly or through agents, dealers or underwriters designated from time to
time, may issue and sell from time to time up to 5,495,850 shares of its common
stock, par value $0.01 per share ("Common Stock"), and up to 1,436,100 shares of
its $1.26 Cumulative Convertible Preferred Stock, Series B, par value $0.10 per
share ("Series B Preferred Stock") (such Common Stock and Series B Preferred
Stock, collectively, the "Securities"). The Securities offered pursuant to this
Prospectus may be issued in amounts, at prices and on terms to be determined at
the time of the offering of such Securities.
The Company may sell all or a portion of the Securities through agents
or to or through underwriters or dealers, and is a party to certain Sales
Agency Agreements relating to the sale of Common Stock and Series B Preferred
Stock. See "Description of Sales Agency Agreements" and "Plan of Distribution."
The specific terms of sales of shares of Common Stock and Series B
Preferred Stock pursuant hereto will be set forth, from time to time, in a
Prospectus Supplement filed under the applicable paragraph of Rule 424(b)
promulgated under the Securities Act of 1933, as amended (the "Securities
Act"). Such Prospectus Supplements will set forth the number of shares of
Common Stock and Series B Preferred Stock sold, pricing information with
respect to such sales, if applicable, net proceeds to the Company and the
amount of any compensation payable by the Company to any sales agent(s) with
respect thereto.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION AND NEITHER THE
COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS JUNE 22, 1998
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
AGENT OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT NOR ANY DISTRIBUTION OF SECURITIES BEING OFFERED PURSUANT
TO THIS PROSPECTUS AND AN ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION
CONTAINED HEREIN OR THEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THEREOF. THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE,
SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports and proxy and information
statements filed by the Company with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: Northeast Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048 and Midwest Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may be obtained from the Public Reference
Section of the Commission at its principal office in Washington, D.C., at
prescribed rates or may be examined without charge at such office of the
Commission. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission at http://www.sec.gov. In addition,
reports, proxy statements and other information concerning the Company can be
inspected and copied at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005-2601, on which outstanding shares of the
Company's Common Stock, Series A Preferred Stock and Series B Preferred Stock
are listed.
The Company has filed with the Commission a registration statement on
Form S-3 (the "Registration Statement") under the Securities Act with respect
to the Securities offered hereby. For further information with respect to the
Company and the Securities offered hereby, reference is made to the
Registration Statement and exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or other documents are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or documents filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, heretofore filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference,
except as superseded or modified herein:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
2. The Company's Quarterly Report on Form 10-Q filed with the Commission
on May 11, 1998 for the fiscal quarter ended March 31, 1998;
3. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A as filed with the Commission on May
14, 1985, and all amendments and reports filed for the purpose of
updating that description; and
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4. The description of the Series B Preferred Stock contained in the
Company's Registration Statement on Form 8-A as filed with the
Commission on October 27, 1992, and all amendments and reports filed
for the purpose of updating that description.
Each document filed subsequent to the date of this Prospectus pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to
termination of the offering of all Securities to which this Prospectus relates
shall be deemed to be incorporated by reference in this Prospectus and shall be
part hereof from the date of filing of such document.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement herein, in any
accompanying Prospectus Supplement relating to a specific offering of
Securities or in any other subsequently filed document that is also
incorporated or deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus or any accompanying Prospectus Supplement. Subject to the
foregoing, all information appearing in this Prospectus and each accompanying
Prospectus Supplement is qualified in its entirety by the information appearing
in the documents incorporated herein by reference.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and an accompanying
Prospectus Supplement is delivered, upon the written or oral request of any
such person, a copy of any document described above (other than exhibits).
Written requests for such copies should be directed to Capstead Mortgage
Corporation, 2711 North Haskell, Suite 900, Dallas, Texas 75204, Attention:
Investor Relations. The Company's telephone number is (214) 874-2323.
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THE COMPANY
The Company was incorporated on April 15, 1985 in the state of
Maryland and commenced operations in September 1985. The Company generates
earnings from investing in mortgage-backed securities, servicing mortgage loans
and other investment strategies. The Company's mortgage investment portfolio
consists primarily of adjustable-rate mortgage-backed securities issued by
various government-sponsored entities ("Agencies") and also includes
investments in AAA-rated private mortgage pass-through securities. The
Company's collateralized mortgage obligation ("CMO") collateral and investments
includes Agency-issued interest-only mortgage securities. Mortgage loan
servicing includes collection activities, accounting for principal and interest
payments, escrow administration and other responsibilities relating to the
administration of the mortgage loans. In exchange for providing this service,
the Company receives periodically a servicing fee representing an annualized
percentage of the outstanding principal balance of each such mortgage loan.
The Company, and its qualified real estate investment trust ("REIT")
subsidiaries, have elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"), and intend to continue to do so. As a
result of this election, the Company and such subsidiaries are not taxed at the
corporate level on taxable income distributed to stockholders, provided that
certain REIT qualification tests are met. Certain other affiliated entities
which are consolidated with the Company for financial reporting purposes, are
not consolidated for federal income tax purposes. All taxable income of these
affiliated entities are subject to federal and state income taxes, where
applicable.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement for
any offering of Securities, the net proceeds from the sale of Securities
offered by the Company will be available for the general corporate purposes of
the Company. These general corporate purposes may include, without limitation,
repayment of maturing obligations, redemption of outstanding indebtedness,
financing (in whole or part) future acquisitions (including acquisitions of
companies and/or assets and of mortgage securities, servicing rights and other
mortgage-related products), capital expenditures and working capital. Pending
any such uses, the Company may invest the net proceeds from the sale of any
Securities or may use them to reduce short-term indebtedness.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
The following table sets forth the historical ratios of earnings to
combined fixed charges and preferred stock dividends of the Company for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDING YEAR ENDING DECEMBER 31,
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MARCH 31, 1998 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends (a) . . . . . 1.19 1.24:1 1.20:1 1.12:1 1.17:1 1.18:1
</TABLE>
(a) Includes fixed charges related to CMO's issued by the Company's
finance subsidiaries. Excluding interest expense on CMO debt, the
ratio of earnings to combined fixed charges and preferred stock
dividends would have been 1.32, 1.42:1, 1.40:1, 1.29:1, 1.48:1 and
1.79:1, respectively, for the periods indicated.
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DESCRIPTION OF SALES AGENCY AGREEMENTS
The Company may sell Common Stock and Series B Preferred Stock (1)
through arrangements with underwriters or dealers, (2) directly to one or more
purchasers, or (3) through agents. The Company has entered into separate sales
agreements with each of PaineWebber Incorporated ("PaineWebber") and Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") with respect to
sales of Common Stock and Series B Preferred Stock, and may, in the future,
enter into other sales agreements with other sales agents or underwriters.
PAINEWEBBER AGREEMENTS
With respect to the sale of Common Stock, the Company is a party to an
Amended and Restated Sales Agency Agreement between the Company and PaineWebber
dated as of March 30, 1998 (the "PaineWebber Common Agreement"). The PaineWebber
Common Agreement amends and restates the Sales Agency Agreement between the
Company and PaineWebber dated December 6, 1995, as amended. With respect to the
sale of Series B Preferred Stock, the Company is a party to an Amended and
Restated Sales Agency Agreement between the Company and PaineWebber dated as of
March 30, 1998 (the "PaineWebber Preferred Agreement", and together with the
PaineWebber Common Agreement, the "PaineWebber Agreements"). The PaineWebber
Preferred Agreement amends and restates the Sales Agency Agreement between the
Company and PaineWebber dated September 17, 1996, as amended.
Pursuant to the terms of the PaineWebber Common Agreement, the Company
may issue and sell up to 10,625,000 shares of Common Stock from time to time
through PaineWebber, as sales agent for the Company; 7,879,150 of such shares
have been sold as of the close of business on June 19, 1998, with up to all of
the remaining 2,745,850 shares being offered under the Registration Statement of
which this Prospectus forms a part. Pursuant to the terms of the PaineWebber
Preferred Agreement, the Company may issue and sell up to 4,500,000 shares of
the Company's Series B Preferred Stock from time to time through PaineWebber, as
sales agent for the Company; 1,155,300 of such shares have been sold as of the
close of business on June 19, 1998, with up to 1,436,100 of the remaining
3,344,700 shares being offered under the Registration Statement of which this
Prospectus forms a part.
MERRILL LYNCH AGREEMENT
The Company is a party to a Sales Agency Agreement between the Company
and Merrill Lynch dated as of November 19, 1997 (the "Merrill Lynch
Agreement"). Offerings of Common Stock and Series B Preferred Stock pursuant to
the Merrill Lynch Agreement may occur concurrently with offerings under the
PaineWebber Agreements.
Pursuant to the terms of the Merrill Lynch Agreement, the Company
initially may issue and sell up to 5,000,000 shares of Common Stock and up to
2,000,000 shares of Series B Preferred Stock from time to time through Merrill
Lynch, as sales agent for the Company. Such amounts may be changed from time to
time by mutual agreement of the Company and Merrill Lynch. As of the close of
business on June 19, 1998, no shares have been sold under the Merrill Lynch
Agreement, and the Company anticipates that sales thereunder will begin as soon
as practicable and mutually agreed to by the Company and Merrill Lynch.
CERTAIN TERMS OF THE SALES AGENCY AGREEMENTS
Sales pursuant to the PaineWebber Agreements and the Merrill Lynch
Agreement (collectively, the "Sales Agency Agreements") may be effected on a
daily basis. If the Company fails to meet the exemptive provisions set forth in
Rule 101(c)(1) of Regulation M of the Exchange Act, with respect to the Common
Stock or the Series B Preferred Stock, the number of shares of Common Stock or
Series B Preferred Stock, respectively, that may be sold on any day, including
shares sold pursuant to the Sales Agency Agreements and any other sales
agreements on such day, shall not exceed 10% of the average daily trading
volume of the Common Stock or the Series B Preferred Stock, as the case may be,
for the 60 days prior to such date.
The compensation to PaineWebber or Merrill Lynch, as the case may be,
for sales of Common Stock and Series B Preferred Stock will equal a fixed
percentage of the gross sales price of any shares sold, in the form of a
commission, as will be set forth in the applicable Prospectus Supplement. The
remaining sales proceeds, after deducting any transaction fees imposed by any
governmental or self-regulatory organization in respect of such sales, shall
constitute the net proceeds to the Company for the sale of such shares. Unless
otherwise indicated in a further Prospectus Supplement, PaineWebber and Merrill
Lynch, as sales agents, will act on a reasonable efforts basis.
The offering of Common Stock and Series B Preferred Stock pursuant to
each respective Sales Agency Agreement will terminate upon the earlier of (i)
the sale of all shares of Common Stock and Series B Preferred Stock subject
thereto or (ii)
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termination of such Sales Agency Agreement. The PaineWebber Agreements may be
terminated by the Company or by PaineWebber upon thirty days prior written
notice and in certain other circumstances specified therein. The Merrill Lynch
Agreement may be terminated upon thirty days prior written notice by the
Company or Merrill Lynch on or after the first anniversary of the Merrill Lynch
Agreement, and in certain other circumstances specified therein.
DESCRIPTION OF SECURITIES
GENERAL
The Company may offer under this Prospectus up to 5,495,850 shares of
its Common Stock and up to 1,436,100 shares of its Series B Preferred Stock. The
terms of any specific offering of Securities will be set forth in a Prospectus
Supplement relating to such offering.
The authorized capital stock of the Company currently consists of
100,000,000 shares of Common Stock, par value $0.01 per share, and 100,000,000
shares of Preferred Stock, par value $0.10 per share. As of the close of
business on June 19, 1998 the Company had 61,564,686 shares of its Common Stock,
377,341 shares of its $1.60 Cumulative Preferred Stock, Series A ("Series A
Preferred Stock") and 17,299,313 shares of its Series B Preferred Stock issued
and outstanding. The Common Stock, Series A Preferred Stock and Series B
Preferred Stock are listed on the New York Stock Exchange. The Company intends
to list any additional shares of its Common Stock which are issued and sold
hereunder.
REDEMPTION OR REPURCHASE OF CAPITAL STOCK TO MAINTAIN THE COMPANY'S STATUS AS A
REIT
The Company's charter provides that if the Board of Directors
determines in good faith that the direct or indirect ownership of stock of the
Company has or may become concentrated to an extent which would cause the
Company to fail to qualify or be qualified as a REIT under Sections 856(a)(5)
or (6) of the Internal Revenue Code of 1986, as amended (the "Code"), or
similar provisions of successor statutes, the Company may redeem or repurchase
any number of shares of Common Stock and/or Preferred Stock sufficient to
maintain or bring such ownership into conformity with the Code and may refuse
to transfer or issue shares of Common Stock and/or Preferred Stock to any
person whose acquisition would result in the Company being unable to conform
with the requirements of the Code. In general, Code Sections 856(a)(5) and (6)
provide that, as a REIT, the Company must have at least 100 beneficial owners
for 335 days of each taxable year and that the Company cannot qualify as a REIT
if, at any time during the last half of the Company's taxable year, more than
50% in value of its outstanding stock is owned, directly or indirectly, by or
for not more than five individuals. In addition, the charter provides that the
Company may redeem or refuse to transfer any shares of capital stock of the
Company necessary to prevent the imposition of a penalty tax as a result of
ownership of such shares by certain disqualified organizations, including
governmental bodies and tax-exempt entities that are not subject to tax on
unrelated business taxable income. The redemption or purchase price for any
such shares shall be equal to the fair market value of such shares as reflected
in the closing sales price for the shares if then listed on a national
securities exchange, or the average of the closing sales prices for the shares
if then listed on more than one national securities exchange, or if the shares
are not then listed on a national securities exchange, the latest bid quotation
for the shares if then traded over-the-counter on the last business day for
which closing prices are available immediately preceding the day on which
notices of such acquisitions are sent or, if no such closing sales prices or
quotations are available, then the net asset value of such stock as determined
by the Board of Directors in accordance with the provisions of applicable law.
SPECIAL STATUTORY REQUIREMENTS FOR CERTAIN TRANSACTIONS
Business Combination Statute. The Maryland General Corporation Law
establishes special requirements with respect to "business combinations"
between Maryland corporations and "interested stockholders" unless exemptions
are applicable. Among other things, the law prohibits for a period of five
years a merger and other specified or similar transactions between a Maryland
corporation and an interested stockholder and requires a super-majority vote
for such transactions after the end of such five-year period.
"Interested stockholders" are all persons owning beneficially,
directly or indirectly, 10% or more of the outstanding voting stock of a
Maryland corporation after the date on which the corporation had 100 or more
beneficial owners of its stock, or is an affiliate or associate of the
corporation and was the beneficial owner, directly or indirectly, of 10% or
more of the voting power of the then outstanding stock of the corporation at
any time within the two-year period immediately prior to the date in question
and after the date on which the corporation had 100 or more beneficial owners.
"Business combinations" include any merger or similar transaction subject to a
statutory vote and additional transactions involving transfers of assets or
securities in specified amounts (other than in the ordinary course of business
or pursuant to a dividend or any other method affording substantially
proportionate treatment to the holders of voting stock) to interested
stockholders or their affiliates. Unless an exemption is available,
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transactions of these types may not be consummated between a Maryland
corporation and an interested stockholder or its affiliates for a period of
five years after the date on which the stockholder first became an interested
stockholder and thereafter may not be consummated unless recommended by the
board of directors of the Maryland corporation and approved by the affirmative
vote of at least 80% of the votes entitled to be cast by all holders of
outstanding shares of voting stock and 66 2/3% of the votes entitled to be cast
by all holders of outstanding shares of voting stock other than the interested
stockholder. A business combination with an interested stockholder which is
approved by the board of directors of a Maryland corporation at any time before
an interested stockholder first becomes an interested stockholder is not
subject to the 5-year moratorium or the special voting requirements. An
amendment to a Maryland corporation's charter electing not to be subject to the
foregoing requirements must be approved by the affirmative vote of at least 80%
of the votes entitled to be cast by all holders of outstanding shares of voting
stock and 66 2/3% of the votes entitled to be cast by holders of outstanding
shares of voting stock who are not interested stockholders. Any such amendment
is not effective until 18 months after the vote of stockholders and does not
apply to any business combination of a corporation with a stockholder who was
an interested stockholder on the date of the stockholder vote. The Company has
not adopted any such amendment to its charter.
Control Share Acquisition Statute. The Maryland General Corporation
Law imposes limitations on the voting rights of shares acquired in a "control
shares acquisition." The Maryland statute defines a "control share acquisition"
at the 20%, 33 1/3% and 50% acquisition levels, and requires a two-thirds
stockholder vote (excluding shares owned by the acquiring person and certain
members of management) to accord voting rights to stock acquired in a control
share acquisition. The statute also requires Maryland corporations to hold a
special meeting at the request of an actual or proposed control share acquiror
generally within 50 days after a request is made with the submission of an
"acquiring person statement," but only if the acquiring person (a) posts a bond
for the cost of the meeting and (b) submits a definitive financing agreement to
the extent that financing is not provided by the acquiring person. In addition,
unless the charter or bylaws provide otherwise, the statute gives the Maryland
corporation, within certain time limitations, various redemption rights if
there is a stockholder vote on the issue and the grant of voting rights is not
approved, or if an "acquiring person statement" is not delivered to the target
within 10 days following a control share acquisition. Moreover, unless the
charter or bylaws provide otherwise, the statute provides that if, before a
control share acquisition occurs, voting rights are accorded to control shares
which results in the acquiring person having majority voting power, then
minority stockholders have appraisal rights. An acquisition of shares may be
exempted from the control share statute provided that a charter or bylaw
provision is adopted for such purpose prior to the control share acquisition.
There are no such provisions in the charter or bylaws of the Company.
Reference is made to the full text of the foregoing statutes for their
entire terms, and the partial summary contained in this Prospectus is not
intended to be complete.
COMMON STOCK
GENERAL
Each share of Common Stock, par value $0.01 per share, is entitled to
one vote. The outstanding shares of Common Stock are fully paid and
non-assessable. Holders of shares of Common Stock do not have cumulative voting
rights or preference, conversion, exchange, subscription or preemptive rights.
Subject to the Company's obligations to pay dividends on all shares of its
outstanding Preferred Stock, including the Series A Preferred Stock and Series
B Preferred Stock, each share of Common Stock is entitled to participate
equally in dividends on the Common Stock when and as declared by the Board of
Directors of the Company and in the distribution of assets of the Company upon
liquidation after payment of liabilities and liquidation preferences with
regard to the Preferred Stock, including the Series A and Series B Preferred
Stock. The foregoing summary does not purport to be a complete description of
the Common Stock and is subject to, and qualified in its entirety by reference
to, the Company's charter and bylaws, in each case as amended and supplemented
to date and filed as exhibits to the Registration Statement.
As of the date of this Prospectus, the charter of the Company
authorizes the issuance of 100,000,000 shares of Common Stock. As of the close
of business on June 19, 1998, 61,564,686 shares of Common Stock were issued and
outstanding.
PREFERRED STOCK
GENERAL
The Board of Directors has authority to issue authorized but unissued
shares of Preferred Stock, par value $0.10 per share, without further approval
of the stockholders, subject to certain restrictions described below, and to
fix the preferences, limitations and relative rights thereof, including voting
rights, dividend rights, conversion rights, redemption rights and liquidation
rights of each series of Preferred Stock. As of the date of this Prospectus,
the charter of the Company authorizes the issuance of 100,000,000
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shares of Preferred Stock. As of the close of business on June 19, 1998,
17,299,313 shares of Series B Preferred Stock were issued and outstanding, as
described hereafter.
SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK
General. In November, 1989, a wholly-owned subsidiary of the Company
was merged with and into Strategic Mortgage Investments, Inc., a Maryland
corporation ("Strategic"), and each outstanding share of Strategic common stock
was converted into one share of Series A Preferred Stock of the Company. In
December, 1992, Tyler Cabot Mortgage Securities Fund, Inc., a Maryland
corporation ("Tyler Cabot"), was merged with and into the Company, and each
outstanding share of Tyler Cabot common stock was converted into one share of
Series B Preferred Stock of the Company. The Series A Preferred Stock and
Series B Preferred Stock are fully paid and non-assessable and neither has
preemptive rights. The Series A Preferred Stock ranks on a parity with the
Series B Preferred Stock, and each rank on a parity with any other series of
the Company's Preferred Stock which is not by its terms made junior or senior
to the Series A Preferred Stock or Series B Preferred Stock with respect to the
payment of dividends and distribution of assets in liquidation.
Dividends. Holders of the Series B Preferred Stock are entitled to
receive, when, as and if declared by the Board of Directors of the Company out
of funds legally available therefore, cumulative preferential cash dividends at
the annual rate of $1.26 per share, and no more, payable in equal monthly
installments on each monthly dividend payment date. Holders of the Series A
Preferred Stock are entitled to receive, when, as and if declared by the Board
of Directors of the Company out of funds legally available therefor, cumulative
preferential cash dividends at the rate of $1.60 per annum per share, and no
more, payable in equal quarterly installments on each March 31, June 30,
September 30 and December 31. Whenever dividends are in arrears and until all
accrued and unpaid dividends on shares of Series A and Series B Preferred Stock
outstanding have been paid in full and the then current dividend on each such
series shall have been paid or declared and sufficient funds set aside for
payment thereof, the Company may not declare or pay dividends on the Common
Stock or any other class or series of capital stock ranking junior to the
Series A Preferred Stock and the Series B Preferred Stock in respect of
dividends ("Junior Stock") or redeem, purchase or otherwise acquire for
consideration any shares of Common Stock or Junior Stock.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, the holders of the
Series A Preferred Stock and the Series B Preferred Stock will be entitled to
receive out of the assets of the Company available for distribution to
stockholders, whether from capital, surplus or earnings, before any
distribution is made to holders of shares of Common Stock or Junior Stock (1)
in the case of the Series A Preferred Stock, an amount equal to $16.40 per
share of Series A Preferred Stock and (2) in the case of Series B Preferred
Stock, an amount per share of Series B Preferred Stock equal to $11.38 per
share of Series B Preferred Stock, in each case, plus dividends accumulated and
unpaid to the date of final distribution. A consolidation or merger of the
Company with or into any other corporation or transfer of all or any part of
the Company's assets for cash, property or securities will not be considered a
liquidation, dissolution or winding-up of the Company.
Voting Rights. Except as indicated below, as otherwise provided in the
Company's charter or as required under the Maryland General Corporation Law,
neither the holders of shares of Series A Preferred Stock or Series B Preferred
Stock will have voting rights. If at any time all or any portion of the
dividends on the Series A Preferred Stock or Series B Preferred Stock shall be
in arrears and unpaid for any two or more dividend periods (whether or not
consecutive), then the number of directors constituting the Board of Directors
of the Company shall be increased by two in case of such arrearages on one of
the Series A Preferred Stock or Series B Preferred Stock and four in the case
of arrearages on both. The holders of Series A Preferred Stock and Series B
Preferred Stock, voting separately as a class, will each be entitled to elect
two directors to fill such newly created directorships. At such time as all
dividends in default have been paid in full and dividends for the current
quarterly period have been paid or declared and a sufficient sum for payment
has been set aside, the term of any director then in office solely as a result
of the voting rights described in this paragraph will terminate.
The affirmative vote of at least two-thirds of the outstanding shares
of Series A Preferred Stock and Series B Preferred Stock, in each case voting
separately as a class, will be required to (i) create or increase the number of
authorized shares of any class of stock ranking prior to the Series A Preferred
Stock or Series B Preferred Stock as to dividends or distributions upon
liquidation, (ii) authorize any reclassification of Series A Preferred Stock or
Series B Preferred Stock, or (iii) amend, alter or repeal any provisions of the
Company's charter which would adversely affect the rights, powers or
preferences of the Series A Preferred Stock or Series B Preferred Stock.
So long as 20% or more of the aggregate number of shares of Series B
Preferred Stock issued in connection with the Tyler Cabot merger remain
outstanding, the affirmative vote of at least a majority of the outstanding
shares of such Series B Preferred Stock will be required for the sale, lease or
conveyance by the Company of all or substantially all of its property or
business, or its consolidation or merger with any other corporation unless the
corporation resulting from such consolidation or merger will have
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after such consolidation or merger no class of shares either authorized or
outstanding ranking prior to or on a parity with the Series B Preferred Stock
except the same number of shares ranking prior to or on a parity with the
Series B Preferred Stock and having the same rights and preferences as the
shares of the Company authorized and outstanding immediately preceding such
consolidation or merger, and each holder of Series B Preferred Stock
immediately preceding such consolidation or merger shall receive the same
number of shares, with the same rights and preferences, of the resulting
corporation.
Except as described herein or otherwise required by law, no consent of
the holders of Series B Preferred Stock will be required for (i) the creation
of any indebtedness of any kind of the Company, (ii) the creation, or increase
or decrease in the amount, of any class or series of stock of the Company
ranking on a parity with, or not ranking prior to, the Series B Preferred Stock
as to dividends or as to amounts distributable upon liquidation or (iii) any
increase or decrease in the amount of authorized Common Stock or any increase,
decrease or change in the par value thereof.
Redemption. Neither the Series A Preferred Stock nor the Series B
Preferred Stock is subject to mandatory redemption and neither is entitled to
the benefit of a sinking fund. The Company at its option may redeem the Series
A Preferred Stock, in whole or in part, for cash in an amount per share equal
to $16.40 plus accumulated and unpaid dividends to the date of redemption,
whether or not earned or declared. At any time after December 2, 1997, the
Company may at its option redeem the Series B Preferred Stock, in whole or in
part, for cash in an amount per share equal to $12.50 plus accumulated and
unpaid dividends to the date of redemption, whether or not earned or declared.
Conversion Rights. Holders of the Series A Preferred Stock may, at
their option, convert shares of Series A Preferred Stock into shares of Common
Stock at the rate (the "Series A Conversion Rate") of 2.0421 shares of Common
Stock for each share of Series A Preferred Stock converted. Holders of Series B
Preferred Stock may, at their option, convert shares of Series B Preferred
Stock into shares of the Company's Common Stock at the rate (the "Series B
Conversion Rate") of .7246 shares of the Company's Common Stock for each share
of Series B Preferred Stock converted. The Series A and Series B Conversion
Rates are subject to adjustment in certain circumstances.
PLAN OF DISTRIBUTION
The Company may sell Common Stock and Series B Preferred Stock (1)
through arrangements with underwriters or dealers, (2) directly to one or more
purchasers, or (3) through agents. The Company is a party to the Sales Agency
Agreements and may from time to time enter into sales agreements with sales
agents or underwriters other than PaineWebber or Merrill Lynch. The Company
expects the sales methods under such agreements to be substantially similar to
those under the Sales Agency Agreements.
In connection with the sale of the Common Stock and the Series B
Preferred Stock on behalf of the Company, PaineWebber and Merrill Lynch may
each be deemed to be an "underwriter" within the meaning of the Act, and the
compensation of PaineWebber or Merrill Lynch may be deemed to be underwriting
commissions or discounts. The Company has separately agreed to provide
indemnification and contribution to each of PaineWebber and Merrill Lynch
against certain civil liabilities, including liabilities under the Securities
Act. PaineWebber and Merrill Lynch may engage in transactions with, or perform
services for, the Company in the ordinary course of business.
SALES PURSUANT TO THE SALES AGENCY AGREEMENTS
Sales pursuant to the Sales Agency Agreements may be effected on a
daily basis, and may occur concurrently under the PaineWebber Agreements and
the Merrill Lynch Agreement. If the Company fails to meet the exemptive
provisions set forth in Rule 101(c)(1) of Regulation M of the Exchange Act,
with respect to the Common Stock or the Series B Preferred Stock, the number of
shares of Common Stock or Series B Preferred Stock, respectively, that may be
sold on any day, including shares sold pursuant to the Sales Agency Agreements
and any other sales agreements on such day, shall not exceed 10% of the average
daily trading volume of the Common Stock or the Series B Preferred Stock, as
the case may be, for the 60 days prior to such date.
The compensation to PaineWebber or Merrill Lynch, as the case may be,
for sales of Common Stock and Series B Preferred Stock will equal a fixed
percentage of the gross sales price of any shares sold, in the form of a
commission, as will be set forth in the applicable Prospectus Supplement. The
remaining sales proceeds, after deducting any transaction fees imposed by any
governmental or self-regulatory organization in respect of such sales, shall
constitute the net proceeds to the Company for the sale of such shares. Unless
otherwise indicated in a further Prospectus Supplement, PaineWebber and Merrill
Lynch, as sales agents, will act on a reasonable efforts basis.
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Settlements of sales of shares of Common Stock and Series B Preferred
Stock will occur on the third business day following the date on which any such
sales are made. Purchases of Common Stock or Series B Preferred Stock from
PaineWebber or Merrill Lynch, as the case may be, as sales agent for the
Company, will settle the regular way on the national securities exchange where
such purchases were executed.
On or prior to the second business day after the end of each calendar week
during which sales of Common Stock or Series B Preferred Stock are made
pursuant to a Sales Agency Agreement (each such week a "Reporting Period"), the
Company will file a Prospectus Supplement under the applicable paragraph of
Rule 424(b) promulgated under the Securities Act, which Prospectus Supplement
will set forth, with regard to such Reporting Period, the dates included within
the Reporting Period, the number of shares of Common Stock and Series B
Preferred Stock, respectively, sold through PaineWebber or Merrill Lynch, as
the case may be, as sales agent, the net proceeds to the Company and the
compensation payable by the Company to PaineWebber or Merrill Lynch, as the
case may be, with respect to sales of Common Stock and Series B Preferred
Stock, respectively.
The offering of Common Stock and Series B Preferred Stock pursuant to
each respective Sales Agency Agreement will terminate upon the earlier of (i)
the sale of all shares of Common Stock and/or Series B Preferred Stock subject
thereto or (ii) termination of such Sales Agency Agreement. The PaineWebber
Agreements may be terminated by the Company or by PaineWebber upon thirty days
prior written notice and in certain other circumstances specified therein. The
Merrill Lynch Agreement may be terminated upon thirty days prior written notice
by the Company or Merrill Lynch on or after the first anniversary of the
Merrill Lynch Agreement, and in certain other circumstances specified therein.
TAXATION
The applicable provisions of the Code are highly technical and
complex. This summary is not intended as a detailed discussion of all
applicable provisions of the Code, the rules and regulations promulgated
thereunder, or the administrative and judicial interpretations thereof. For the
particular provisions that govern the federal income tax treatment of the
Company and its stockholders, reference is made generally to Sections 856 and
860 of the Code and the treasury regulations promulgated thereunder. The
Company has not obtained rulings from the Internal Revenue Service with respect
to any tax considerations relevant to its organization or operations or to an
investment in its securities. This summary is not intended to substitute for
prudent tax planning and stockholders are urged to consult their own tax
advisors with respect to these and other federal, state and local tax
consequences of the ownership and disposition of any of the Company's
Securities and any potential changes in applicable law. Nonresident aliens,
foreign corporations, tax-exempt organizations, life insurance companies,
cooperatives and certain other categories of investors may be subject to
special tax rules that are not discussed below and that could affect an
investment in any of the Company's Securities.
FEDERAL INCOME TAXATION OF CAPSTEAD MORTGAGE CORPORATION
As used herein, "Capstead REIT" refers to Capstead Mortgage
Corporation and the entities that are effectively consolidated with Capstead
Mortgage Corporation for federal income tax purposes. Certain of the Company's
subsidiaries (the "Non-REIT subsidiaries") are consolidated with the Company
for financial reporting purposes but are not consolidated for federal income
tax purposes. All of the Non-REIT subsidiaries' taxable income is subject to
federal and state income taxes. The Company may form additional Non-REIT
subsidiaries.
Capstead REIT believes that it has operated, and Capstead REIT intends
to continue to operate, in such a manner so as to qualify as a REIT under the
Code, but no assurance can be given that it will at all times so qualify.
So long as a company such as Capstead REIT qualifies as a REIT and
distributes at least 95% of its REIT taxable income to stockholders, it will
not be subject to federal corporate income taxes on such income distributed to
stockholders, with limited exceptions discussed below. Under certain
circumstances, such a company may be subject to the corporate minimum tax or
certain other special taxes. However, Capstead REIT does not anticipate
generating material items of income or deductions that would cause it to be
subject to the minimum tax or any such special tax.
To qualify for treatment as a REIT for a taxable year, a company must
have elected to be so treated (which Capstead REIT has done) and must meet
certain organizational, asset, income, distribution and record-keeping
requirements.
TAXATION OF STOCKHOLDERS
So long as a corporation qualifies as a REIT, distributions to
stockholders (other than dividends properly designated as "capital gain
dividends") will constitute ordinary income to the extent of current and
accumulated earnings and profits of the REIT.
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Capital gain dividends will be taxable as long-term capital gains.
Distributions in excess of the REIT's current and accumulated earnings and
profits will constitute a non-taxable return of capital, except to the extent
that the amount of such distributions received by any stockholder exceeds the
basis of the stockholder's shares, in which case such excess will be taxable as
capital gain, provided such shares are held as a capital asset. Dividends
received from a REIT are ineligible for the 70% dividends received deduction.
If a capital gain dividend is received with respect to shares which are sold
for a loss before being held for a period of six months, such loss will be
characterized as long term capital loss to the extent of the capital gain
dividend. Potential Capstead Mortgage Corporation stockholders should be aware
that for federal income tax purposes any dividend paid by a REIT in January of
any given calendar year will be deemed to have been paid during the preceding
calendar year if it was declared by the REIT in October, November or December
of such preceding year and was payable to the shareholders of record on a
specified date in the month in which it was declared.
Under the Code and the related regulations, a change in the conversion
ratio for convertible preferred stock may be treated as a taxable distribution
of the stock of such corporation with respect to any shareholder whose
proportionate interest in the earnings and profits or assets of the corporation
is increased by such change. A change in a conversion ratio or conversion price
of convertible preferred stock pursuant to a bonafide, reasonable adjustment
formula which has the effect of preventing dilution of the interest of the
holders of such stock will not be considered to result in a deemed distribution
of stock. However, generally an adjustment in the conversion ratio to
compensate for a taxable cash distribution to other shareholders will not be
considered as made pursuant to a bonafide adjustment formula. For example, in
the case of the Series B Preferred Stock, the conversion rate may be adjusted
if the Company distributes to holders of its Common Stock cash or other assets
(excluding regular quarterly cash dividends payable out of consolidated
earnings or earned surplus or dividends payable in shares of Common Stock).
Under the above described federal income tax provisions, such an adjustment may
result in a taxable distribution to the Series B Preferred stockholders.
Specific tax rules of a complex nature not summarized herein apply to
foreign investors in REITs. Accordingly, foreign stockholders should consult
their own tax advisers concerning the federal income and withholding tax
consequences and the state, local and foreign tax consequences of an investment
in Capstead REIT.
1997 TAX LEGISLATION
The recently enacted Tax Relief Act of 1997 (the "1997 Tax Act")
reduces the maximum rate of tax on net capital gains for individuals on sales
of certain assets (including stocks and securities) and increases the time
period for which an asset must be held for the gain from its sale to be
eligible for the lowest rate. The holding period is increased from 12 to 18
months with a further rate reduction scheduled to take effect after the year
2000 for the sale of certain assets that have been held at least five years.
The Treasury Department is to issue regulations coordinating the capital gain
provisions with other rules involving the treatment of sales and exchanges by
pass-through entities such as REITs.
With regard to the taxation of REITs, effective for taxable years
beginning after the enactment the 1997 Tax Act, the requirement that the REIT
derive less than 30% of its gross income from gain on the sale or other
disposition of stock or securities held for less than one year, certain real
property held less than four years and property sold or disposed of in a
"prohibited transaction" is repealed. In addition, a REIT may elect to retain
and pay income tax on net long term capital gains it received during a tax
year. If a REIT makes such election, its stockholders would include in their
income as long term capital gains their proportionate share of the
undistributed long term capital gains as designated by the REIT. A stockholder
would be deemed to have paid the stockholder's share of tax, which would be
credited or refunded to the stockholder. Also, the basis of the stockholder's
shares in the REIT would be increased by the amount of the undistributed long
term capital gains (less the amount of capital gains tax paid by the REIT)
included in the stockholder's long term capital gains.
SPECIAL CONSIDERATIONS--TAX-EXEMPT AND CERTAIN OTHER INVESTORS
For CMOs issued after December 31, 1991, pursuant to regulations not
yet published, the portion of any dividend paid to stockholders attributable to
"excess inclusion income" on the retained residual interests in such CMOs would
be subject to certain rules. Such rules include (i) the characterization of
excess inclusion income as unrelated business income for tax-exempt
stockholders (including employee benefit plans and individual retirement
accounts) and (ii) the inability of a stockholder to offset excess inclusion
income with net operating losses (subject to certain exceptions applicable to
thrift institutions). Generally, tax-exempt entities are subject to federal
income tax on excess inclusion income and other unrelated business income in
excess of $1,000 per year. Excess inclusion income is generally taxable income
with respect to a residual interest in excess of a specified return on
investment in the residual interest. In some cases, all taxable income with
respect to a residual interest may be considered excess inclusion income. Until
regulations or other guidance is issued, Capstead REIT will use methods it
believes are appropriate for calculating the amount of excess inclusion income,
if any, it recognizes from CMOs issued after December 31, 1991, and
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allocating any excess inclusion income to its stockholders. Excess inclusion
rules will most likely not apply to any CMO issued by any subsidiary of the
Company on or before December 31, 1991.
In addition, the Company will be taxable on the portion of any excess
inclusion income allocable to any stockholder which is a "disqualified
organization." If the ownership of any shares by a disqualified organization
would subject the Company to tax, such shares shall be immediately redeemable
at the option of the Company. See "Description of Securities--Redemption or
Repurchase of Capital Stock to Maintain the Company's Status as a REIT."
Tax-exempt and other investors are urged to consult their own tax
advisors with respect to the tax consequences arising under federal law and the
law of any state, municipality or other taxing jurisdiction. Final regulations
dealing with withholding tax on income paid to foreign persons and related
matters (the "New Withholding Regulations") were issued by the Treasury
Department on October 6, 1997. The New Withholding Regulations will generally
be effective for payments made after December 31, 1999, subject to certain
transition rules. Foreign investors should consult their own tax advisors
concerning the tax consequences of an investment in the Company, including the
possibility of United States withholding tax on Company dividends.
FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST
If Capstead REIT fails to qualify for taxation as a REIT in any
taxable year, distributions to its stockholders for such year and future years
would not be deductible by Capstead REIT and Capstead REIT would be subject to
tax on its income at regular corporate rates. In such event, all distributions
to stockholders would be taxable as ordinary income to the extent of current
and accumulated earnings and profits and would be eligible for the 70%
dividends received deduction for corporations. If Capstead REIT fails to
qualify as a REIT for even one year, it could be required to incur substantial
indebtedness (to the extent borrowings are feasible) or liquidate substantial
investments in order to pay the resulting taxes. Thus, if Capstead REIT fails
to qualify for taxation as a REIT, there can be no assurance that any
distribution to its stockholders could be made. Unless entitled to relief under
specific statutory provisions, such company would also be disqualified from
treatment as a REIT for the next four taxable years. It is not possible to
state whether in all circumstances such company would be entitled to statutory
relief. While the Board of Directors of the Company presently intends to cause
Capstead REIT to operate in a manner that will enable it to qualify as a REIT
in all future taxable years, there can be no certainty that such intention will
be realized because, among other things, qualification hinges on the conduct of
the business of Capstead REIT.
STATE AND LOCAL TAXES
State or local income tax treatment of Capstead REIT or holders of any
of its Securities may differ from the federal income tax treatment described
above. As a result, prospective stockholders should consult their own tax
advisers for an explanation of how state and local tax laws may affect their
investment in Capstead REIT.
LEGAL MATTERS
Certain legal matters with respect to the securities offered hereby
will be passed on for the Company and the Selling Stockholders by Andrews &
Kurth L.L.P., Dallas, Texas, and for the underwriters or agents by counsel to
be identified in the Prospectus Supplement. Andrews & Kurth L.L.P. will rely as
to all matters of Maryland law on Piper & Marbury L.L.P., Baltimore, Maryland.
Attorneys at Andrews & Kurth L.L.P. beneficially own approximately
53,994 shares of Common Stock of the Company and 10,509 shares of Series B
Preferred Stock of the Company.
EXPERTS
The consolidated financial statements and schedule of Capstead
Mortgage Corporation and subsidiaries incorporated by reference or appearing in
Capstead Mortgage Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon included or incorporated by
reference therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
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