<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )*
Capstead Mortgage Corporation
-----------------------------
(Name of Issuer)
Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class of Securities)
14067 E 10 0
------------
(CUSIP Number)
With a copy to:
Ms. Nancy G. Zimmerman Scott M. Zimmerman, Esq.
Fixed Income Associates, Inc. Swidler Berlin Shereff Friedman, LLP
1000 Massachusetts Avenue 405 Lexington Avenue
Cambridge, Massachusetts 02138 New York, New York 10174
(617) 349-2000 (212) 973-0111
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications)
December 10, 1999
---------------------------------------
(Date of Event which Requires Filing of
this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
statement because of (Section) 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check
the following box:[ ]
NOTE: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See (Section) 240.13d-7(b) for
other parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
<PAGE>
SCHEDULE 13D
- --------------------------------------------------------------------------------
CUSIP No. 14067 E 10 0 Page 2 of 12 Pages
------------ --- ----
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Fixed Income Associates, Inc.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [X]
(b) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY ----------------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH 3,399,889
REPORTING ----------------------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
3,399,889
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
3,399,889
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
CO
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING
EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
<PAGE>
SCHEDULE 13D
- --------------------------------------------------------------------------------
CUSIP No. 14067 E 10 0 Page 3 of 12 Pages
------------ --- ----
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Bracebridge Capital, L.P.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [X]
(b) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY ----------------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH 3,399,889
REPORTING ----------------------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
3,399,889
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
3,399,889
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING
EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
<PAGE>
SCHEDULE 13D
- --------------------------------------------------------------------------------
CUSIP No. 14067 E 10 0 Page 4 of 12 Pages
------------ --- ----
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Bracebridge Capital LLC
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [X]
(b) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Massachusetts
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY ----------------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH 1,356,250
REPORTING ----------------------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
1,356,250
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
1,356,250
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
2.4%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
00
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING
EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
<PAGE>
SCHEDULE 13D
- --------------------------------------------------------------------------------
CUSIP No. 14067 E 10 0 Page 5 of 12 Pages
------------ --- ----
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Nancy G. Zimmerman
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [X]
(b) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY ----------------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH 3,399,889
REPORTING ----------------------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
3,399,889
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
3,399,889
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING
EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
<PAGE>
SCHEDULE 13D
ITEM 1. SECURITY AND ISSUER
Securities acquired: Common stock, par value $.01 per share ("Common
Stock")
Issuer: Capstead Mortgage Corporation
8401 North Central Expressway, Suite 800
Dallas, Texas 75225
ITEM 2. IDENTITY AND BACKGROUND
(a), (b), (c) and (f) This Schedule 13D is being filed jointly by Fixed
Income Associates, Inc., a Delaware corporation ("FIA"), Bracebridge Capital,
L.P. ("BCLP"), a Delaware limited partnership of which FIA is the general
partner, Bracebridge Capital LLC ("BCLLC"), a Massachusetts limited liability
company of which FIA is the managing member, and Nancy G. Zimmerman, the sole
shareholder of FIA ("Zimmerman" and together with FIA, BCLP and BCLLC, the
"Reporting Persons"). The business address of each FIA, BCLP, BCLLC and
Zimmerman is 1000 Massachusetts Avenue, Cambridge, MA 02138.
BCLP and BCLLC are private investment managers.
Zimmerman is a United States citizen.
See Item 5 for information regarding ownership of Common Stock.
(d) and (e). During the past five years, none of the Reporting Persons
has been convicted in any criminal proceeding (excluding traffic violations or
similar misdemeanors) or been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to, federal or
state securities laws or finding any violation with respect to such laws.
ITEM 3. SOURCE AND AMOUNT OF FUNDS
FIFI II L.P. ("FIFI"), a Delaware limited partnership of which BCLP is
the general partner, purchased an aggregate of 1,623,150 shares of Common Stock
at an aggregate cost of $7,294,020 using its own funds. In addition, FIFI
purchased an aggregate of 557,900 shares (the "Series B Shares") of Cumulative
Convertible Preferred Stock, Series B of the Company at an aggregate cost of
$6,580,596 using its own funds. The Series B Shares are convertible into
420,489 shares of Common Stock. FFI Fund Ltd. ("FFI"), a Cayman Islands company
whose sole directors are BCLP and BCLLC, purchased an aggregate of 1,356,250
shares of Common Stock at an aggregate cost of $5,918,344 using its own
funds. See Item 5.
Page 6
<PAGE>
ITEM 4. PURPOSE OF THE TRANSACTION
Except as noted below, all of the shares of Common Stock reported
herein were acquired for investment purposes. Each of the Reporting Persons may
acquire or dispose of securities of the Issuer, including shares of Common
Stock, directly or indirectly, in open-market or privately negotiated
transactions, depending upon the evaluation of the performance and prospects of
the Issuer by the Reporting Persons, and upon other developments and
circumstances, including, but not limited to, the Company's responses to the
issues addressed in the letter to the Company referenced below, general economic
and business conditions and stock market conditions.
Attached hereto as Exhibit B are certain letters from Bracebridge
Capital to the Chairman of the Board of Directors of the Company addressing
certain concerns and requesting certain additional information with respect to
the recently announced series of transactions between the Company and an
affiliate of Fortress Investment Group LLC. Except for the foregoing, no
Reporting Person has any present plans or proposals which relate to or would
result in any of the actions or events described in paragraphs (a) through (j)
of Item 4 of Schedule 13D. However, the Reporting Persons retain their
respective rights to modify their plans with respect to the transactions
described in this Item 4, to acquire or dispose of securities of the Company and
to formulate plans and proposals that could result in the occurrence of any such
events, subject to applicable laws and regulations.
ITEM 5. INTEREST IN SECURITIES OF THE ISSUER
(a) and (b)
BCLP, as the general partner of FIFI, has the power to vote and to
direct the voting of and the power to dispose and direct the disposition of the
2,043,639 shares of Common Stock deemed to be owned by FIFI. Accordingly, BCLP
may be deemed to be the beneficial owner of 2,043,639 shares of Common Stock, or
3.6% of the outstanding shares of Common Stock.
BCLP and BCLLC, as the sole directors of FFI, have the power to vote
and direct the voting of and power to dispose and direct the disposition of the
1,356,250 shares of Common Stock deemed to be owned by FFI. Accordingly, BCLP
and BCLLC may together be deemed to be the beneficial owner of 1,356,250 shares
of Common Stock, or 2.4% of the outstanding shares of Common Stock.
As the General Partner of BCLP, FIA has the power to vote and to direct
the voting of and the power to dispose and direct the disposition of the
2,043,639 shares of Common Stock deemed to be owned by FIFI. As the General
Partner of BCLP and the managing member of BCLLC, FIA has the power to vote and
to direct the disposition of the 1,356,250 shares of Common Stock held by FFI.
As the sole shareholder of FIA, Zimmerman may be deemed to have the
power to vote and to direct the voting of and power to dispose and direct the
disposition of the 2,043,639 shares of Common Stock deemed to be owned by FIFI
and the 1,356,250 shares of Common Stock
Page 7
<PAGE>
held by FIFI. Accordingly, Zimmerman may be deemed to be the beneficial owner of
3,399,889 shares of Common Stock, or 5.9% of the outstanding shares of Common
Stock.
The number of shares beneficially owned by each of the Reporting
Persons and the percentage of outstanding shares represented thereby, have been
computed in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended. The percentage ownership of the Reporting Persons is based on
57,274,894 outstanding shares of Common Stock, such amount representing the sum
of (i) 56,854,405 outstanding shares of Common Stock as of December 7, 1999, as
reported in the Company's Schedule 13E-4 Issuer Tender Offer Statement filed
with the Commission on December 10, 1999 and (ii) 420,489 shares of Common Stock
issuable upon conversion of the Series B Shares.
(c) The transactions in the Common Stock by the Reporting Persons
during the past 60 days are set forth on Annex A hereto.
(d) Not Applicable.
(e) Not Applicable.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONS WITH RESPECT TO
SECURITIES OF THE ISSUER
Not Applicable
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS
Exhibit A. Agreement of Joint Filing.
Exhibit B. Letters to the Chairman of the Board of Directors of
Capstead Mortgage Corporation.
Page 8
<PAGE>
SIGNATURE
- ---------
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: December 17, 1999
FIXED INCOME ASSOCIATES, INC.
By: /s/ Nancy G. Zimmerman
-------------------------------
Name: Nancy G. Zimmerman
Title: President
Page 9
<PAGE>
SIGNATURE
- ---------
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: December 17, 1999
BRACEBRIDGE CAPITAL, L.P.
By: FIXED INCOME ASSOCIATES, INC.,
its General Partner
By: /s/ Nancy G. Zimmerman
-------------------------------
Name: Nancy G. Zimmerman
Title: President
Page 10
<PAGE>
SIGNATURE
- ---------
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: December 17, 1999
BRACEBRIDGE CAPITAL LLC
By: FIXED INCOME ASSOCIATES, INC.,
its Managing Member
By: /s/ Nancy G. Zimmerman
-------------------------------
Name: Nancy G. Zimmerman
Title: President
Page 11
<PAGE>
SIGNATURE
- ---------
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: December 17, 1999
/s/ Nancy G. Zimmerman
------------------------
NANCY G. ZIMMERMAN
Page 12
<PAGE>
ANNEX A
Transactions in Shares of Common Stock and Series B
Preferred Stock within the Last 60 Days (1)
<TABLE>
<CAPTION>
Number of Common Shares, on an
------------------------------
as-converted basis (2)
----------------------
Aggregate Aggregate
--------- ---------
Price Per Common Share Preferred Share
--------- ------------ ---------------
Date Share Amount Amount FIFI II L.P. FFI Fund Ltd.
- ---- ----- ------ ------ ------------ -------------
<S> <C> <C> <C> <C> <C>
10/11/99 $3.88 8,700 8,700
10/28/99 9.50 2,200 1,658
11/15/99 3.94 31,300 15,000 16,300
11/16/99 3.94 28,600 14,000 14,600
11/17/99 3.86 30,100 15,000 15,100
11/18/99 3.81 10,000 10,000
12/6/99 9.69 800 602
12/6/99 3.75 12,200 12,200
12/7/99 9.61 30,200 22,761
12/7/99 3.75 25,000 25,000
12/8/99 9.25 10,000 7,537
12/8/99 3.75 25,000 25,000
12/9/99 3.75 25,000 25,000
12/10/99 9.25 2,200 1,658
12/10/99 3.98 75,000 50,000 25,000
12/13/99 4.26 161,500 80,750 80,750
12/14/99 4.25 62,400 32,400 30,000
12/15/99 4.29 253,900 100,000 153,900
12/16/99 4.25 27,800 13,800 14,000
</TABLE>
- --------
(1) All transactions in shares of Common Stock, as well as Series B Preferred
Stock, that were effected during the past sixty days have been open market
purchases.
(2) The Series B Preferred Stock is convertible into shares of Common Stock at
a conversion rate of 0.7537.
<PAGE>
EXHIBIT A
AGREEMENT OF JOINT FILING
In accordance with Rule 13d-1(k) under the Securities Exchange Act of
1934, as amended, the undersigned hereby agree to the joint filing with all
other Reporting Persons (as such term is defined in the Schedule 13D referred to
below) of a statement on Schedule 13D or any amendments thereto, with respect to
the Common Stock of Capstead Mortgage Corporation and that this Agreement be
included as an Exhibit to such filing.
This Agreement may be executed in any number of counterparts each of
which shall be deemed to be an original and all of which together shall be
deemed to constitute one and the same Agreement.
IN WITNESS WHEREOF, the undersigned hereby execute this Agreement on
December 17, 1999.
FIXED INCOME ASSOCIATES, INC.
By: /s/ Nancy G. Zimmerman
---------------------------------
Name: Nancy G. Zimmerman
Title: President
BRACEBRIDGE CAPITAL, L.P.
By: FIXED INCOME ASSOCIATES, INC.,
its General Partner
By: /s/ Nancy G. Zimmerman
---------------------------------
Name: Nancy G. Zimmerman
Title: President
BRACEBRIDGE CAPITAL LLC
By: FIXED INCOME ASSOCIATES, INC.,
its Managing Member
By: /s/ Nancy G. Zimmerman
---------------------------------
Name: Nancy G. Zimmerman
Title: President
/s/ Nancy G. Zimmerman
------------------------------
NANCY G. ZIMMERMAN
<PAGE>
EXHIBIT B
Bracebridge Capital
1000 Massachusetts Avenue
Cambridge, MA 02138
October 11, 1999
Mr. Ronn K. Lytle, Chairman
Capstead Mortgage Corporation
2711 North Haskell Avenue
Suite 900
Dallas, TX 75204-2915
Dear Mr. Lytle:
Over the past year Bracebridge and its associated funds have become a
significant shareholder of Capstead Mortgage Corporation, with a position of
over two million common shares and five hundred thousand class B preferred
shares as of September 30, 1999. We have great respect for the
shareholder-oriented management of your company, as evidenced by your attempts
to realize shareholder value through open-market share repurchases.
Unfortunately, the financial markets have not accorded Capstead a
market capitalization commensurate with the value of the company's underlying
assets. We estimate that the company's shares are currently trading at a
discount of approximately 40% to their book value. We had hoped that the
company's buyback program, announced on February 4, 1999, would convince the
market of the great value of the company's shares. In the subsequent months,
however, we have witnessed only an increased discounting of the company's shares
on the New York Stock Exchange. As a result, we write to implore you to take
such other action as is necessary to allow shareholders to realize the true
value of their shareholdings.
Given the negative market sentiment surrounding Capstead's shares and
the negligible chance that the company's market valuation will be appropriately
enhanced in the foreseeable future, Bracebridge suggests and believes it is
incumbent upon management to consider and pursue initiatives, including
transactions such as a sale to a strategic acquirer or a liquidation, that would
allow shareholders to realize the full value of their holdings.
We welcome the opportunity to discuss Bracebridge's concerns.
Sincerely,
Gabriel Sunshine
Michael Rashes
<PAGE>
December 16, 1999
Mr. Ronn K. Lytle, Chairman
Capstead Mortgage Corporation
2711 North Haskell Avenue
Suite 900
Dallas, TX 75204-2915
Dear Mr. Lytle:
A few days ago, we finally received your response to our letter of
October 11, 1999. We have been carefully following the developments surrounding
the self-tender offer and the Fortress Investment Group LLC's recent and
proposed investment as detailed in the press release that you enclosed with your
response and the recently filed Schedule 13E4 and Form 8-K. However, the
transactions detailed in the press release seem to raise more questions than
they address, and we are troubled by some of the specific provisions contained
within the agreement with Fortress.
We want to ascertain that the process that culminated in Fortress
Investment Group LLC's purchase of preferred shares was conducted in a manner
that properly protected the value of shareholders' investments in Capstead
Mortgage Corporation. Did Capstead or its board of directors seek independent
expert financial advice or a fairness opinion with respect to the Fortress
purchase and related transactions? If so, who provided this advice or opinion?
Could you furnish this written opinion and all other documents you deem relevant
to the shareholders and the public? Did the board solicit or consider
alternative proposals to the Fortress purchase? If so, what proposals were
rejected? As an existing large shareholder, we are surprised that we were not
contacted before December 9, 1999 as we may well have been willing to make an
investment similar to that of Fortress on terms that would have been more
beneficial for existing Capstead shareholders. We are still willing to consider
such an opportunity.
To the best of our knowledge, the only investment bank involved in the
process has been PaineWebber, the dealer-manager for the proposed self-tender
offer. In its own research note dated December 13, 1999, the PaineWebber
Specialty Finance analyst, Gary Gordon, casts doubt on the logic of the
transactions, stating "... we are uncertain whether CMO's planned new strategy
will yield a materially greater risk-adjusted return to shareholders than its
current strategy...". On what basis does the Capstead board justify selling
control of the company to Fortress on terms that are so advantageous to that
party without a clear corresponding benefit to the shareholders? Have all
necessary government approvals for the Fortress transaction been obtained?
We also would like to know why certain elements of the Supplemental
Agreement between Capstead and Fortress are subject to the completion of a
merger agreement between Impac Commercial Holdings, Inc. and AMRESCO Capital
Trust, two REITs that are currently unaffiliated with Capstead. Why is Capstead
becoming a service provider to these other two REITs? What is the relationship
amongst Fortress, Impac Commercial Holdings, Inc., AMRESCO Capital Trust and
their respective officials?
With its purchase and the other contemplated related transactions,
Fortress would effectively gain a controlling stake in Capstead. They will have
a majority of board seats; the CEO and Chairman positions; and potential
ownership of over 25% of outstanding shares through a combination of the
purchase of the Series C and Series D Preferred shares, the self-tender and
possible open-market purchases of common shares as contemplated in the press
release. This ownership stake would effectively preclude any other party from
acquiring a larger position than Fortress, since the REIT status of Capstead
would be jeopardized if 5
<PAGE>
or fewer shareholders held more than 50% of the company's stock. Fortress is in
a "win-win" situation, because if stockholder approval of the board
reconfiguration is not received, there is a provision for Fortress to sell its
investment back to Capstead at 103% of their purchase price. This would result
in a loss to Capstead shareholders in excess of $1.5 million.
A most troubling aspect is the dilution of current shareholders due to
the favorable terms under which Fortress is investing in Capstead. This action
is potentially very dilutive since the conversion price of the Series C
Preferred Stock and Series D Preferred Stock is significantly below Capstead's
book value. According to Capstead's Schedule 13E4 filing, this dilution would
amount to 35 cents per common share, or a total book loss to shareholders of
almost $20 million. We think that the book value is a fair indication of the
minimum value of the company, since the current holdings are easily-valued,
liquid securities and the book value would therefore be easy to realize. We
understand that the self-tender offer proposed by Capstead may mitigate the
dilution resulting from the issuance of the Series C and D Preferred shares.
However, there is no assurance that the self-tender will be fully subscribed and
there is no obvious reason why the Fortress purchase would have been a
prerequisite to conducting a self-tender. Indeed, given the highly liquid nature
of Capstead's portfolio, we see no compelling justification for a $51.2 million
cash infusion, especially one that dilutes existing shareholders by 35 cents a
share.
If Fortress would like to acquire nearly 20% of the company, they
should do so on a competitive basis designed to maximize value to Capstead's
shareholders. We do not think that the self-tender in any way justifies the
favorable terms offered to Fortress nor does it guarantee that there will
ultimately be no net dilution of current shareholders. To be clear, we do not
object to the self-tender in and of itself. In fact, we think that a company
such as Capstead, which purports to own liquid and marketable agency securities
that are marked-to-market, has a very powerful method of achieving value for the
shareholders through on-going share repurchases and periodic self-tenders. Such
corporate actions allow existing investors a voluntary opportunity to vote with
their feet or to hold on to their shares. By contrast, the issuance of preferred
shares to Fortress misappropriates portfolio value by diluting existing
shareholders and giving control of the company to a third party at a discount to
book, without shareholder consent. Issuing new equity in the firm to Fortress on
such favorable terms injures all existing shareholders.
An additional concern of ours is that you, as Chairman of Capstead,
could terminate your Employment Agreement for "Good Reason" (as defined in your
Employment Agreement) as a result of having to step down as Chairman of the
Board and Chief Executive Officer of Capstead as required by the
Capstead-Fortress agreement. This would entitle you to reap a significant
personal windfall to the detriment of the company's shareholders, and
potentially rendered you an interested party in considering and approving the
Fortress deal.
We are also concerned with the potential change in Capstead's
investment policies as noted in the Company's Schedule 13E4 filed on December
10, 1999. We would be interested in getting more information regarding your
plans for the degree of leverage that Capstead intends to utilize going forward
and what specific changes the company intends to make.
We believe the Capstead board of directors is obligated to conduct an
open process and hire an investment bank to explore all options for maximizing
shareholder value. This process would ensure that whatever path Capstead
ultimately follows is fair and in the best interest of existing shareholders. If
the board concludes that hiring an outside manager and changing investment
strategy are the best methods for increasing the value of the company, we think
that there are less expensive ways than selling a controlling stake in the
company to such a manager at a large discount to book value and thereby
materially diluting existing shareholders and reducing the value of the company
for all current shareholders.
<PAGE>
As we have detailed in our previous letter, Bracebridge and its
associated funds are significant shareholders of Capstead Mortgage Corporation,
with holdings of nearly three million common shares and over five hundred
thousand Series B Preferred shares as of December 15, 1999. In connection with
writing this letter to express our concerns about the agreement between Capstead
and Fortress, we are filing a Schedule 13D with the United States Securities and
Exchange Commission detailing our dispositive power of over 5% of Capstead's
outstanding shares. This and our previous letter will be filed as exhibits to
our Schedule 13D filing. We are also sending copies of this letter to other
directors of Capstead Mortgage Corporation.
We welcome the earliest possible opportunity to discuss Bracebridge's
concerns.
Sincerely,
Gabriel Sunshine
Principal
cc:
Bevis Longstreth
John Tolleson
Harriet Miers
William Smith
Paul Low
