<PAGE> 1
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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: JUNE 30, 2000
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.)
8401 NORTH CENTRAL EXPRESSWAY, SUITE 800, DALLAS, TX 75225
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 874-2323
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) 22,590,431 as of August 10, 2000
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CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
PART I. -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 ................. 3
Consolidated Statements of Operations - Quarter and Six Months Ended
June 30, 2000 and 1999 .......................................................... 4
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999 ... 5
Notes to Consolidated Financial Statements ........................................ 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................. 15
ITEM 3. Qualitative and Quantitative Disclosure of Market Risk ....................... 26
ITEM 4. Submission of Matters to a Vote of Security Holders .......................... 26
PART II. - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ............................................ 26
SIGNATURES ........................................................................... 27
</TABLE>
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PART I. -- FINANCIAL INFORMATION
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31,
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage securities and other investments $ 4,852,532 $ 5,408,714
CMO collateral and investments 3,341,119 3,318,886
----------- -----------
8,193,651 8,727,600
Prepaids, receivables and other 54,223 48,451
Restricted cash and cash equivalents -- 2,500
Cash and cash equivalents 11,411 28,488
----------- -----------
$ 8,259,285 $ 8,807,039
=========== ===========
LIABILITIES
Borrowings under repurchase arrangements $ 4,394,727 $ 4,872,392
Collateralized mortgage obligations 3,315,301 3,289,584
Accounts payable and accrued expenses 17,311 30,673
----------- -----------
7,727,339 8,192,649
----------- -----------
PREFERRED STOCK SUBJECT TO REPURCHASE
$0.10 par value; 10,756 shares authorized, issued and
outstanding ($52,735 aggregate repurchase amount) 50,421 50,584
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock - $0.10 par value;
89,244 shares authorized:
$1.60 Cumulative Preferred Stock, Series A,
374 shares issued and outstanding
($6,134 aggregate liquidation preference) 5,228 5,228
$1.26 Cumulative Convertible Preferred Stock, Series B,
15,977 and 16,673 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively
($181,822 aggregate liquidation preference) 178,466 186,248
Common stock - $0.01 par value; 100,000 shares authorized;
22,590 and 28,428 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 226 284
Paid-in capital 715,357 769,902
Accumulated deficit (394,127) (304,568)
Accumulated other comprehensive loss (23,625) (93,288)
----------- -----------
481,525 563,806
----------- -----------
$ 8,259,285 $ 8,807,039
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- ------------------------
2000 1999 2000 1999
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Mortgage securities and other investments $ 85,058 $ 78,150 $ 169,958 $ 125,462
CMO collateral and investments 61,739 68,041 119,667 145,071
--------- --------- --------- ---------
Total interest income 146,797 146,191 289,625 270,533
--------- --------- --------- ---------
INTEREST AND RELATED EXPENSE:
Borrowings under repurchase arrangements 74,300 60,327 146,208 94,241
Collateralized mortgage obligations 62,054 67,915 119,957 145,432
Mortgage insurance and other 417 522 819 1,149
--------- --------- --------- ---------
Total interest and related expense 136,771 128,764 266,984 240,822
--------- --------- --------- ---------
Net margin on mortgage assets and other investments 10,026 17,427 22,641 29,711
--------- --------- --------- ---------
OTHER REVENUE (EXPENSE):
Loss on portfolio restructuring (88,528) -- (88,528) --
Loss on mortgage securities held-for-sale (1,480) -- (1,480) --
Severance costs (3,607) -- (3,607) --
CMO administration and other 893 903 1,677 4,111
Other operating expense (1,556) (1,647) (3,285) (3,232)
--------- --------- --------- ---------
Total other revenue (expense) (94,278) (744) (95,223) 879
--------- --------- --------- ---------
NET INCOME (LOSS) $ (84,252) $ 16,683 $ (72,582) $ 30,590
========= ========= ========= =========
Net income (loss) $ (84,252) $ 16,683 $ (72,582) $ 30,590
Less cash dividends on preferred shares (5,723) (5,725) (11,995) (11,409)
--------- --------- --------- ---------
Net income (loss) available to common stockholders $ (89,975) $ 10,958 $ (84,577) $ 19,181
========= ========= ========= =========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (3.98) $ 0.38 $ (3.61) $ 0.65
CASH DIVIDENDS DECLARED PER SHARE:
Common $ 0.160 $ 0.360 $ 0.380 $ 0.640
Series A preferred 0.400 0.400 0.800 0.800
Series B preferred 0.315 0.315 0.630 0.630
Series C preferred 0.140 -- 0.280 --
Series D preferred 0.100 -- 0.200 --
</TABLE>
See accompanying notes to consolidated financial statements.
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CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (72,582) $ 30,590
Noncash items:
Amortization of discount and premium 9,861 23,177
Depreciation and other amortization 467 531
Loss on portfolio restructuring 88,528 --
Loss on mortgage securities held-for-sale 1,480 --
Gain on sale of mortgage assets and derivative financial instruments -- (1,738)
Net change in prepaids, receivables, other assets,
accounts payable and accrued expenses (9,590) (16,983)
----------- -----------
Net cash provided by operating activities 18,164 35,577
----------- -----------
INVESTING ACTIVITIES:
Purchases of mortgage securities and other investments (1,203,840) (3,937,696)
Purchases of CMO collateral (235,999) --
Principal collections on mortgage investments 426,278 677,723
Proceeds from sale of mortgage assets 1,303,638 114,763
Proceeds from sale and settlement of derivative financial instruments -- 12,595
CMO collateral:
Principal collections 210,956 747,542
Decrease in accrued interest receivable 1,407 5,790
Decrease in short-term investments 64 13,171
----------- -----------
Net cash provided by (used in) investing activities 502,504 (2,366,112)
----------- -----------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings (477,665) 3,205,740
Collateralized mortgage obligations:
Issuance of securities 235,999 --
Principal payments on securities (215,273) (888,747)
Decrease in accrued interest payable (1,248) (5,716)
Capital stock transactions (62,594) (15,562)
Dividends paid (16,964) (19,276)
----------- -----------
Net cash provided by (used in) financing activities (537,745) 2,276,439
----------- -----------
Net change in cash and cash equivalents (17,077) (54,096)
Cash and cash equivalents at beginning of period 28,488 73,385
----------- -----------
Cash and cash equivalents at end of period $ 11,411 $ 19,289
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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CAPSTEAD MORTGAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 1 - BUSINESS
Capstead Mortgage Corporation, a mortgage investment firm, earns income from
investing in mortgage assets on a leveraged basis and from other investment
strategies.
Election of New Leadership. At the Company's Annual Meeting of Stockholders held
April 20, 2000 (the "Annual Meeting"), stockholders elected a new Board of
Directors including Wesley R. Edens, chairman of the board of Fortress
Investment Group LLC ("Fortress"). An affiliate of Fortress acquired the
Company's Series C and D preferred shares in December 1999 and on July 1, 2000
completed a tender offer acquiring 2.9 million common shares. Together, these
investments represent 30% of the voting shares of Capstead. The composition of
the new Board of Directors includes four members designated by Fortress and
three members designated by Capstead, two of whom are continuing directors from
the previous Board. In addition, the Board announced the appointment of Mr.
Edens to the positions of Chairman of the Board and Chief Executive Officer of
the Company and Ronn K. Lytle, the Company's previous chairman and chief
executive, to the position of Vice Chairman of the Board.
Adoption of New Investment Strategy. During 1999 the Company's primary focus
consisted of managing a portfolio of single-family residential mortgage-backed
securities issued by government-sponsored entities, either Fannie Mae, Freddie
Mac or Ginnie Mae ("Agency Securities"). On April 20, 2000 the Board approved
modifying the Company's investment strategy to focus on short maturity and
adjustable-rate assets, including but not limited to, credit-sensitive
commercial and residential mortgage-backed securities and ARM Agency Securities.
In connection with this modification, during the second quarter the Company sold
$1.4 billion of fixed-rate and medium-term mortgage investments and designated
for sale nearly $700 million of primarily medium-term securities, incurring a
charge to operating results of $88.5 million consisting of realized losses of
$70.9 million and a $17.6 million reduction in the Company's basis in securities
now classified as held-for-sale. With the capital made available from these
sales, the Company acquired $1.1 billion of ARM Agency Securities during the
second quarter and will continue to redeploy its capital into suitable
investments in keeping with the new investment strategy. The Company currently
expects to complete the portfolio restructuring over the next 12 months.
NOTE 2 - BASIS OF PRESENTATION AND 1-FOR-2 REVERSE COMMON STOCK SPLIT
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
June 30, 2000 are not necessarily indicative of the results that may be expected
for the calendar year ending December 31, 2000. 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, 1999.
1-For-2 Reverse Common Stock Split. At the Company's Annual Meeting,
stockholders approved a 1-for-2 reverse common stock split. Accordingly, the
Board of Directors established the close of business
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<PAGE> 7
on May 8, 2000 as the effective date for the reverse split. The first day the
common shares traded post-split was May 9, 2000. The reverse split reduced the
number of outstanding common shares to approximately 22.6 million. All share and
per share information presented has been restated to reflect the reverse common
stock split.
NOTE 3 - SHARE REPURCHASES AND DECLARATION OF COMMON STOCK DIVIDEND
During the six months ended June 30, 2000, the Company acquired, through open
market purchases, 376,950 common shares at an average price of $7.77 (including
transaction costs) and 694,100 shares of its Series B preferred shares at an
average price of $9.44 (including transaction costs). On January 25, 2000 the
Company purchased 5,568,500 common shares at a price of $9.27 per share
(including transaction costs) pursuant to a tender offer that closed on January
14, 2000. Since share repurchases began in December 1998 through July 31, 2000,
the Company has repurchased 26.9% of its outstanding common shares and 7.8% of
its Series B preferred shares. As of July 31, 2000, the Company had remaining
authorization to repurchase 819,300 common shares and 648,300 Series B preferred
shares.
On July 27, 2000 the Board of Directors declared a second quarter dividend of
$0.16 per common share, payable August 18 to stockholders of record as of August
2, 2000.
NOTE 4 - NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net income
(loss) after deducting preferred share dividends* by the weighted average number
of common shares outstanding. Diluted net income (loss) per common share is
computed by dividing net income (loss), after deducting preferred share
dividends for antidilutive convertible preferred shares, by the weighted average
number of common shares, dilutive stock options and dilutive convertible
preferred shares outstanding. The components of the computation of basic and
diluted net income (loss) per share for the periods indicated are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 SIX MONTHS ENDED
---------------------- -----------------------
2000 1999 2000 1999
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Numerator for basic net income (loss) per common share:
Net income (loss) $(84,252) $ 16,683 $(72,582) $ 30,590
Less all preferred share dividends* (5,723) (5,725) (11,995) (11,409)
-------- -------- -------- --------
Net income (loss) available to common
stockholders $(89,975) $ 10,958 $(84,577) $ 19,181
======== ======== ======== ========
Weighted average common shares outstanding 22,588 29,194 23,452 29,629
Basic net income (loss) per common share $ (3.98) $ 0.38 $ (3.61) $ 0.65
Numerator for diluted net income (loss) per
common share:
Net income (loss) $(84,252) $ 16,683 $(72,582) $ 30,590
Less cash dividends paid on antidilutive
convertible preferred shares:
Series A (150) (150) (299) (299)
Series B (5,093) (5,378) (10,315) (10,816)
Series B repurchase amounts less than
(in excess of) book value* 811 (197) 1,200 (294)
Series C (753) ** (1,506) **
Series D (538) ** (1,075) **
-------- -------- -------- --------
$(89,975) $ 10,958 $(84,577) $ 19,181
======== ======== ======== ========
</TABLE>
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<PAGE> 8
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 SIX MONTHS ENDED
--------------------- --------------------
2000 1999 2000 1999
------- ------- ------ -------
<S> <C> <C> <C> <C>
Denominator for diluted net income (loss) per common share:
Weighted average common shares outstanding 22,588 29,194 23,452 29,629
Net effect of dilutive stock options -- 10 -- 11
Net effect of dilutive preferred shares -- -- -- --
------- ------- ------- -------
22,588 29,204 23,452 29,640
======= ======= ======= =======
Diluted net income (loss) per common share $ (3.98) $ 0.38 $ (3.61) $ 0.65
</TABLE>
* Included as a component of the Series B preferred share dividends in the
calculation of both basic and diluted net income (loss) per common share,
is the difference between repurchase amounts and the Series B preferred
shares book value of $11.17 per share.
** Not applicable.
NOTE 5 - MORTGAGE SECURITIES AND OTHER INVESTMENTS
Mortgage securities investments and the related average effective interest rates
(calculated for the quarter then ended including mortgage insurance costs on
non-agency securities and excluding unrealized gains and losses) were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
AVERAGE
PRINCIPAL PREMIUMS CARRYING AVERAGE EFFECTIVE
BALANCE (DISCOUNTS) BASIS AMOUNT COUPON RATE
----------- ----------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 2000 * ** **
Mortgage securities held-for-sale $ 696,289 $ (14,560) $ 681,729 $ 681,729 6.13% 6.53%
----------- ----------- ----------- ----------- ----- -----
Mortgage securities portfolio:
Agency Securities:
FNMA/FHLMC:
Fixed-rate 3,790 18 3,808 4,047 10.00 9.67
Medium-term 221,180 1,220 222,400 217,452 6.48 6.25
ARMs 1,275,499 22,763 1,298,262 1,298,712 7.51 6.52
GNMA ARMs 2,400,838 18,484 2,419,322 2,397,974 6.65 6.35
----------- ----------- ----------- ----------- ----- -----
3,901,307 42,485 3,943,792 3,918,185 6.92 6.40
Non-agency securities 175,220 341 175,561 176,721 8.09 7.88
CMBS - adjustable-rate 75,913 (887) 75,026 75,897 8.67 8.90
----------- ----------- ----------- ----------- ----- -----
4,152,440 41,939 4,194,379 4,170,803 7.01 6.52
----------- ----------- ----------- ----------- ----- -----
$ 4,848,729 $ 27,379 $ 4,876,108 $ 4,852,532 6.88% 6.52%
=========== =========== =========== =========== ===== =====
DECEMBER 31, 1999
Agency Securities:
FNMA/FHLMC:
Fixed-rate $ 1,063,822 $ (2,924) $ 1,060,898 $ 1,009,577 6.18% 6.23%
Medium-term 1,123,984 4,516 1,128,500 1,103,704 6.15 5.89
ARMs 1,153,835 22,394 1,176,229 1,173,012 6.78 5.63
GNMA ARMs 1,924,659 26,083 1,950,742 1,936,032 6.29 5.65
----------- ----------- ----------- ----------- ----- -----
5,266,300 50,069 5,316,369 5,222,325 6.35 5.81
Non-agency securities 126,431 385 126,816 127,059 8.34 8.06
CMBS - adjustable-rate 60,182 (852) 59,330 59,330 7.54 8.53
----------- ----------- ----------- ----------- ----- -----
$ 5,452,913 $ 49,602 $ 5,502,515 $ 5,408,714 6.41% 5.87%
=========== =========== =========== =========== ===== =====
</TABLE>
* Includes unrealized gains and losses as of the indicated balance sheet
date, if applicable (see NOTE 9).
** Average Coupon is calculated as of the indicated balance sheet date.
Average Effective Rate is calculated for the quarter then ended.
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<PAGE> 9
The Company classifies its Agency Securities and non-agency securities by
interest rate characteristics of the underlying single-family residential
mortgage loans. Commercial mortgage-backed securities ("CMBS") are classified in
a similar fashion. Fixed-rate mortgage securities either (i) have fixed rates of
interest for their entire terms, (ii) have 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"), or (iii) were
previously classified as medium-term and have adjusted to a fixed rate for the
remainder of their terms. Medium-term mortgage securities either (i) have 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, (ii) have initial
interest rates that adjust one time, approximately 5 years following origination
of the mortgage loan, based on a specified margin over Fannie Mae yields for
30-year, fixed-rate commitments at the time of adjustment, or (iii) are
fixed-rate mortgage securities that have expected weighted average lives of 5
years or less. Adjustable-rate mortgage ("ARM") securities either (i) adjust
semiannually based on a specified margin over the 6-month London Interbank
Offered Rate ("LIBOR"), (ii) adjust annually based on a specified margin over
1-year Treasuries ("CMT"), (iii) adjust monthly based on a specific margin over
the Cost of Funds Index as published by the Eleventh District Federal Reserve
Bank ("COFI"), (iv) were previously classified as medium-term and have begun
adjusting annually based on a specified margin over 1-year Treasuries, or (v) in
the case of CMBS held as of June 30, 2000, adjust monthly based on a specified
margin over 30-day LIBOR.
Agency Securities are currently AAA-rated and have no direct foreclosure risk.
Non-agency securities consist of private mortgage pass-through securities backed
primarily by single-family jumbo-sized residential mortgage loans whereby the
related credit risk of the underlying loans is borne by AAA-rated private
mortgage insurers, and other AAA-rated private mortgage securities (together,
"Non-agency Securities"). Although currently investment grade, CMBS held by the
Company at June 30, 2000 carry credit risk associated with the underlying
commercial mortgage loans. Features of the related CMBS issuance, including
subordinated securities held by other investors, help mitigate this risk. The
maturity of mortgage-backed securities is directly affected by the rate of
principal prepayments on the underlying loans.
NOTE 6 - CMO COLLATERAL AND INVESTMENTS
CMO collateral consists of fixed-rate, medium-term and adjustable-rate mortgage
securities collateralized by single-family residential mortgage loans and
related short-term investments, both pledged to secure CMO borrowings ("Pledged
CMO Collateral"). All principal and interest on pledged mortgage securities is
remitted directly to collection accounts maintained by a trustee. The trustee is
responsible for reinvesting those funds in short-term investments. All
collections on the pledged mortgage securities and the reinvestment income
earned thereon are available for the payment of principal and interest on CMO
borrowings. Pledged mortgage securities are private mortgage pass-through
securities whereby the related credit risk of the underlying loans is borne by
AAA-rated private mortgage insurers or subordinated bonds within the related CMO
series to which the collateral is pledged. The Company has retained $927,000 of
credit risk in the form of subordinated bonds associated with approximately $543
million of Pledged CMO Collateral remaining outstanding as of June 30, 2000. The
weighted average effective interest rate for total Pledged CMO Collateral was
7.38% during the quarter ended June 30, 2000.
CMO investments currently consist of reserve funds retained by the Company in
connection with two 1993 mortgage loan sales. These reserve funds are available
to pay special hazard (e.g. earthquake or mudslide-related losses) or certain
bankruptcy costs associated with approximately $137 million of loans remaining
outstanding as of June 30, 2000 from the related securitizations.
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<PAGE> 10
The components of CMO collateral and investments are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Pledged CMO Collateral:
Pledged mortgage securities $3,301,187 $3,283,848
Short-term investments 696 760
Accrued interest receivable 19,971 19,461
---------- ----------
3,321,854 3,304,069
Unamortized premium 16,039 11,633
---------- ----------
3,337,893 3,315,702
CMO investments 3,226 3,184
---------- ----------
$3,341,119 $3,318,886
========== ==========
</TABLE>
NOTE 7 - BORROWINGS UNDER REPURCHASE ARRANGEMENTS
Borrowings made under uncommitted repurchase arrangements with investment
banking firms pursuant to which the Company pledges residential mortgage assets
as collateral generally have maturities of less than 31 days. Repurchase
arrangements with CMBS pledged as collateral generally have maturities similar
to the expected maturities of the related collateral. The terms and conditions
of these arrangements, including interest rates, are negotiated on a
transaction-by-transaction basis. Repurchase arrangements and related average
effective interest rates are classified by type of collateral and maturities as
follows as of the indicated balance sheet date (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------- --------------------------
WEIGHTED WEIGHTED
BORROWINGS AVERAGE BORROWINGS AVERAGE
OUTSTANDING RATE OUTSTANDING RATE
------------- -------- ------------- ----------
<S> <C> <C> <C> <C>
Agency Securities (less than 31 days) $ 4,126,274 6.56% $ 2,405,436 5.81%
Agency Securities (31 to 90 days) 97,229 6.57 2,012,810 6.38
Agency Securities (over 90 days) -- -- 280,347 6.41
Non-agency Securities (less than 31 days) 108,868 6.82 -- --
Non-agency Securities (over 90 days) -- -- 124,361 6.62
CMBS (over 1 year) 62,356 7.18 49,438 7.01
------------ -----------
$ 4,394,727 $ 4,872,392
============ ===========
</TABLE>
The weighted average effective interest rate on borrowings under repurchase
arrangements was 6.26% during the quarter ended June 30, 2000. As of June 30,
2000, $4.6 billion of mortgage securities were pledged as collateral under
repurchase arrangements.
NOTE 8 - COLLATERALIZED MORTGAGE OBLIGATIONS
Each series of CMOs issued consists of various classes of bonds, most of which
have fixed rates of interest. Interest is payable monthly or quarterly at
specified rates for all classes. Typically, principal payments on each series
are made to each class in the order of their stated maturities so that no
payment of principal will be made on any class of bonds until all classes having
an earlier stated maturity have been paid in full.
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<PAGE> 11
The components of CMOs along with selected other information are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
CMOs $ 3,299,643 $ 3,281,464
Accrued interest payable 18,765 18,096
----------- -----------
Total obligation 3,318,408 3,299,560
Unamortized discount (3,107) (9,976)
----------- -----------
$ 3,315,301 $ 3,289,584
=========== ===========
Range of average interest rates 5.03% to 9.45% 5.13% to 9.45%
Range of stated maturities 2008 to 2030 2008 to 2028
Number of series 25 24
</TABLE>
The maturity of each CMO series is directly affected by the rate of principal
prepayments on the related Pledged CMO Collateral. Each series is also subject
to redemption, generally at the Company's option, provided that certain
requirements specified in the related indenture have been met (referred to as
"Clean-up Calls"); therefore, the actual maturity of any series is likely to
occur earlier than its stated maturity. The average effective interest rate for
all CMOs was 7.47% during the quarter ended June 30, 2000.
NOTE 9 - 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
assumptions and/or estimation methodologies may have a material effect on
estimated fair values.
The fair value of Agency Securities, Non-agency Securities, CMBS and CMO
investments were estimated using either (i) quoted market prices when available,
including quotes made by lenders in connection with designating collateral for
repurchase arrangements, or (ii) offer prices for similar assets or market
positions. The fair value of Pledged CMO Collateral was based on projected cash
flows, after payment on the related CMOs, determined using market discount rates
and prepayment assumptions. The maturity of mortgage assets is directly affected
by the rate of principal payments on the underlying mortgage loans and, for
Pledged CMO Collateral, Clean-up Calls of the remaining CMOs outstanding. The
following table summarizes fair value disclosures for available-for-sale debt
securities (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
BASIS GAINS LOSSES VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AS OF JUNE 30, 2000
Agency Securities:
Fixed-rate $ 3,808 $ 239 $ -- $ 4,047
Medium-term 222,400 -- 4,948 217,452
ARMs 3,717,584 3,932 24,830 3,696,686
Non-agency Securities 89,013 1,179 19 90,173
CMBS - adjustable-rate 75,026 871 -- 75,897
CMO collateral and investments 86,654 270 319 86,605
----------- ----------- ----------- -----------
$ 4,194,485 $ 6,491 $ 30,116 $4,170,860
=========== =========== =========== ===========
</TABLE>
-11-
<PAGE> 12
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
BASIS GAINS LOSSES VALUE
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999
Agency Securities:
Fixed-rate $ 1,060,898 $ 268 $ 51,589 $1,009,577
Medium-term 1,128,500 39 24,835 1,103,704
ARMs 3,126,971 4,659 22,586 3,109,044
Non-agency Securities 28,817 249 6 29,060
CMBS - adjustable-rate 59,330 -- -- 59,330
CMO collateral and investments 103,142 697 184 103,655
----------- ---------- ---------- ----------
$ 5,507,658 $ 5,912 $ 99,200 $5,414,370
=========== ========== ========== ==========
</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 Non-agency Securities. The following table summarizes fair value
disclosures for debt securities held-to-maturity (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
BASIS GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AS OF JUNE 30, 2000
Non-agency Securities $ 86,548 $ 875 $ -- $ 87,423
Pledged CMO Collateral 3,254,514 1,418 16,222 3,239,710
---------- ---------- ---------- ----------
$3,341,062 $ 2,293 $ 16,222 $3,327,133
========== ========== ========== ==========
AS OF DECEMBER 31, 1999
Non-agency Securities $ 97,999 $ 1,277 $ -- $ 99,276
Pledged CMO Collateral 3,215,231 1,620 18,183 3,198,668
---------- ---------- ---------- ----------
$3,313,230 $ 2,897 $ 18,183 $3,297,944
========== ========== ========== ==========
</TABLE>
Sales of released CMO collateral occasionally occur provided the collateral has
paid down to within 15% of its original issuance amounts. The following table
summarizes disclosures related to dispositions of debt securities (in
thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------ ----------------------------
2000 1999 2000 1999
----------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Sale of securities held available-for-sale:
Amortized cost $ 1,374,558 $ -- $ 1,374,558 $ 7,573
Gains (losses) (70,920) -- (70,920) 1,761
</TABLE>
-12-
<PAGE> 13
NOTE 10 -- COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is net income (loss) plus other comprehensive income
(loss), which, for the periods presented, consists of the change in unrealized
gain (loss) on debt securities classified as available-for-sale. The following
table provides information regarding comprehensive income (loss) for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ (84,252) $ 16,683 $ (72,582) $ 30,590
--------- --------- --------- ---------
Other comprehensive income (loss):
Unrealized gain (loss) on debt securities:
Change in unrealized gain (loss) during period (7,156) (48,096) (18,865) (35,550)
Reclassification adjustment for (gain) loss
included in net income (loss) 88,528 -- 88,528 (1,761)
--------- --------- --------- ---------
Other comprehensive income (loss) 81,372 (48,096) 69,663 (37,311)
--------- --------- --------- ---------
Comprehensive loss $ (2,880) $ (31,413) $ (2,919) $ (6,721)
========= ========= ========= =========
</TABLE>
NOTE 11 -- NET INTEREST INCOME ANALYSIS
The following tables summarize interest income and interest expense and average
effective interest rates for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30
------------------------------------------------------
2000 1999
----------------------- -----------------------
AMOUNT AVERAGE AMOUNT AVERAGE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Mortgage securities and other investments $ 85,058 6.52% $ 78,150 5.70%
CMO collateral and investments 61,739 7.37 68,041 7.12
--------- ---------
Total interest income 146,797 146,191
--------- ---------
Interest expense:
Short-term borrowings 74,300 6.26 60,327 4.87
CMOs 62,054 7.47 67,915 7.16
--------- ---------
Total interest expense 136,354 128,242
--------- ---------
Net interest $ 10,443 $ 17,949
========= =========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------------------------------------
2000 1999
----------------------- -----------------------
AMOUNT AVERAGE AMOUNT AVERAGE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Mortgage securities and other investments $ 169,958 6.37% $ 125,462 5.74%
CMO collateral and investments 119,667 7.23 145,071 7.15
--------- ---------
Total interest income 289,625 270,533
--------- ---------
Interest expense:
Short-term borrowings 146,208 6.05 94,241 4.90
CMOs 119,957 7.30 145,432 7.23
--------- ---------
Total interest expense 266,165 239,673
--------- ---------
Net interest $ 23,460 $ 30,860
========= =========
</TABLE>
-13-
<PAGE> 14
The following tables summarize increases (decreases) in interest income and
interest expense due to changes in interest rates versus changes in volume for
the periods indicated (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 2000
-------------------------------------
RATE* VOLUME* TOTAL
------- --------- --------
<S> <C> <C> <C>
Interest income:
Mortgage securities and other investments $ 10,876 $ (3,968) $ 6,908
CMO collateral and investments 2,314 (8,616) (6,302)
-------- --------- --------
Total interest income 13,190 (12,584) 606
-------- ---------- --------
Interest expense:
Short-term borrowings 16,627 (2,654) 13,973
CMOs 2,810 (8,671) (5,861)
-------- ---------- --------
Total interest expense 19,437 (11,325) 8,112
-------- ---------- --------
Net interest $ (6,247) $ (1,259) $ (7,506)
======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------
RATE* VOLUME* TOTAL
-------- --------- ---------
<S> <C> <C> <C>
Interest income:
Mortgage securities and other investments $ 14,816 $ 29,680 $ 44,496
CMO collateral and investments 1,446 (26,850) (25,404)
--------- ---------- ---------
Total interest income 16,262 2,830 19,092
--------- ---------- ---------
Interest expense:
Short-term borrowings 24,994 26,973 51,967
CMOs 1,395 (26,870) (25,475)
--------- ---------- ---------
Total interest expense 26,389 103 26,492
--------- ---------- ---------
Net interest $ (10,127) $ 2,727 $ (7,400)
========= ========== =========
</TABLE>
* The change in interest due to both volume and rate has been
allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in
each.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Stockholder Litigation. During 1998 twenty-four purported class action lawsuits
were filed against the Company and certain of its officers alleging, among other
things, that the defendants violated federal securities laws by publicly issuing
false and misleading statements and omitting disclosure of material adverse
information regarding the Company's business during various periods between
January 28, 1997 and July 24, 1998. The complaints claim that as a result of
such alleged improper actions, the market price of the Company's equity
securities were artificially inflated during that time period. The complaints
seek monetary damages in an undetermined amount. In March 1999 these actions
were consolidated and in July 2000 a lead plaintiff group was appointed by the
court. It is expected that an amended complaint will be filed by early September
2000 and that the Company will respond to this amended complaint by early
November 2000. The Company believes it has meritorious defenses to the claims
and intends to vigorously defend the actions. Based on available information,
management believes the resolution of these suits will not have a material
adverse effect on the financial position of the Company.
Severance Costs. At the Annual Meeting of the Board of Directors in April, a new
Chairman of the Board of Directors and Chief Executive Officer ("CEO") was
appointed, and Ronn K. Lytle, the Company's former chairman and CEO, terminated
his employment with the Company. Non-recurring severance payments of
approximately $3.4 million related to the settlement of obligations to Mr. Lytle
under the terms of a 1992 Employment Agreement and $225,000 related to the
termination of several other employees of the Company were charged to expense in
the second quarter of 2000.
-14-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Capstead Mortgage Corporation ("Capstead" or the "Company"), a mortgage
investment firm, earns income from investing in mortgage assets on a leveraged
basis and from other investment strategies.
ELECTION OF NEW LEADERSHIP
At the Company's Annual Meeting of Stockholders held April 20, 2000,
stockholders elected a new Board of Directors including Wesley R. Edens,
chairman of the board of Fortress Investment Group LLC ("Fortress"). An
affiliate of Fortress acquired the Company's Series C and D preferred shares in
December 1999 and on July 1, 2000 completed a tender offer acquiring 2.9 million
common shares. Together, these investments represent 30% of the voting shares of
Capstead. The composition of the new Board of Directors includes four members
designated by Fortress and three members designated by Capstead, two of whom are
continuing directors from the previous Board. In addition, the Board announced
the appointment of Mr. Edens to the positions of Chairman of the Board and Chief
Executive Officer of the Company and Ronn K. Lytle, the Company's previous
chairman and chief executive, to the position of Vice Chairman of the Board.
Non-recurring severance payments of approximately $3.4 million related to the
settlement of obligations to Mr. Lytle under the terms of a 1992 employment
agreement and $225,000 related to the termination of several other employees of
the Company were charged to expense in the second quarter of 2000.
ADOPTION OF NEW INVESTMENT STRATEGY
During 1999 the Company's primary focus consisted of managing a portfolio of
single-family residential mortgage-backed securities issued by
government-sponsored entities, either Fannie Mae, Freddie Mac or Ginnie Mae
("Agency Securities"). On April 20, 2000 the Board approved modifying the
Company's investment strategy to focus on short maturity and adjustable-rate
assets, including but not limited to, credit-sensitive commercial and
residential mortgage-backed securities and ARM Agency Securities. By focusing
the Company's investments on assets that adjust to a more current interest rate
within 1- to 12-months, Capstead's new investment strategy is intended to help
preserve capital over the long term and improve earnings prospects once interest
rates stabilize. In addition, investments in credit-sensitive commercial
mortgage-backed securities ("CMBS"), when available at attractive prices, may
improve earnings stability during periods of increased interest rate volatility.
It will take several quarters to completely transition to the new investment
strategy and its benefits may not be fully evident until sometime in 2001.
In connection with this modification, during the second quarter Capstead sold
$1.4 billion in fixed-rate and medium-term mortgage investments and designated
for sale nearly $700 million of primarily medium-term securities, incurring a
charge to operating results of $88.5 million consisting of realized losses of
$70.9 million and a $17.6 million reduction in the Company's basis in securities
now classified as held-for-sale. With the capital made available from these
sales, the Company acquired $1.1 billion of ARM Agency Securities during the
second quarter and will continue to redeploy its capital into suitable
investments in keeping with the new investment strategy. The Company currently
expects to complete the portfolio restructuring over the next 12 months.
-15-
<PAGE> 16
MORTGAGE SECURITIES AND OTHER INVESTMENTS
Mortgage securities and other investments consist primarily of high quality
single-family residential mortgage-backed securities, most of which are Agency
Securities. Agency Securities are currently AAA-rated and have no direct
foreclosure risk; however, Capstead is subject to reduced net interest margins
during periods of rising short-term interest rates or increasing prepayment
rates (see "Effects of Interest Rate Changes"). Non-agency securities consist of
private mortgage pass-through securities whereby the related credit risk of the
underlying loans is borne by AAA-rated private mortgage insurers and other
AAA-rated private mortgage securities (together, "Non-agency Securities").
Although currently investment grade, CMBS held by the Company carry credit risk
associated with the underlying commercial mortgage loans. Features of the
related CMBS issuances, including subordinated securities held by other
investors, helps mitigate this risk (see "Risks Associated With Credit-Sensitive
Investments"). The Company classifies its mortgage securities and other
investments by interest rate characteristics of the underlying loans or the
securities themselves (see "NOTE 5" to the accompanying consolidated financial
statements). Mortgage securities and other investments are financed under
repurchase arrangements with investment banking firms pursuant to which the
portfolios are pledged as collateral (see "Liquidity and Capital Resources").
The following yield and cost analysis illustrates results achieved during the
most recent quarter for each component of the Company's mortgage securities
portfolio and its currently projected third quarter 2000 earnings capacity:
<TABLE>
<CAPTION>
2ND QUARTER AVERAGE AS OF JUNE 30, 2000
---------------------------------- ------------------------- PROJECTED LIFETIME
ACTUAL ACTUAL PREMIUMS 3RD QUARTER PREPAYMENT
BASIS YIELD/COST RUNOFF (DISCOUNTS) BASIS YIELD/COST ASSUMPTIONS
------------ ---------- ------ ----------- ----------- ------------ ------------
* * **
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage securities
held-for-sale $ 1,389,128 6.53% 12% $ (14,560) $ 681,729 7.25% 17%
----------- ---- --- --------- ----------- ---- ---
Mortgage securities
portfolio:
Agency Securities:
FNMA/FHLMC:
Fixed-rate 3,924 9.67 25 18 3,808 9.72 25
Medium-term 228,847 6.25 17 1,220 222,400 6.31 18
ARMs 1,102,704 6.52 22 22,763 1,298,262 6.90 40
GNMA ARMs 2,222,766 6.35 17 18,484 2,419,322 6.70 24
----------- ---- --- --------- ----------- ---- ---
3,558,241 6.40 18 42,485 3,943,792 6.75 29
Non-agency Securities 183,208 7.88 23 341 175,561 8.08 35
CMBS -- adjustable-rate 75,103 8.90 1 (887) 75,026 9.22 -
----------- ---- --- --------- ----------- ---- ---
3,816,552 6.52 18 41,939 4,194,379 6.85 29
----------- ---- --- --------- ----------- ---- ---
5,205,680 6.52 16% $ 27,379 4,876,108 6.90 27%
=== ========= ===
Less:
Mark-to-market (44,113) (23,576)
Borrowings*** (4,698,491) 6.26 (4,394,727) 6.61
----------- ---- ------------ ----
Capital employed/
financing spread $ 463,076 0.26% $ 457,805 0.29%
=========== ==== ============ ====
Return on assets**** 0.81% 0.76%
==== ====
</TABLE>
* Basis represents market value for investments held-for-sale and the
Company's investment before mark-to-market for its remaining mortgage
investments.
** Projected yields reflect ARM security coupon resets and lifetime
prepayment assumptions as adjusted for expected prepayments over the next
3 months. Actual yields realized in future periods will largely depend
upon (i) changes in portfolio composition, (ii) ARM security coupon
resets, (iii) actual prepayments and (iv) any changes in lifetime
prepayment assumptions.
*** Projected borrowing rates reflect the full impact of the May 2000 Federal
Reserve 50 basis point rate increase. Borrowing rates may increase
further depending largely upon future actions by the Federal Reserve to
increase short-term interest rates.
**** The Company uses its liquidity to pay down borrowings. Return on assets
is calculated assuming the use of this liquidity to reduce borrowing
costs.
-16-
<PAGE> 17
As previously mentioned, in connection with modifying its investment strategy,
the Company sold $1.4 billion of fixed-rate and medium-term mortgage investments
and acquired approximately $1.1 billion of ARM Agency Securities during the
second quarter. First quarter activity was largely limited to acquiring $50
million in ARM securities and redeeming 3 series of off-balance sheet
collateralized mortgage obligations ("CMOs") previously issued by the Company
adding $70 million to the Non-agency Securities portfolio. Consistent with the
Company's new investment strategy, in December 1999 Capstead acquired $59
million of adjustable-rate CMBS. However, because of recent market conditions,
the pricing for these securities has been less attractive on a risk-adjusted
return basis than other suitable investments. Consequently, only $17 million has
been added to the CMBS portfolio during 2000. Runoff on mortgage investments
totaled approximately $426 million during the six months ended June 30, 2000.
The unamortized net premium paid for these portfolios (referred to as "premiums
(discounts)") was $27.4 million at June 30, 2000, representing 0.56% of related
unpaid principal balances, after having been reduced a total of $19.1 million as
a result of designating assets for sale in connection with the portfolio
restructuring. Premiums (discounts) are amortized to income as yield adjustments
based on both actual prepayments and lifetime prepayment assumptions.
Prepayments on Agency Securities, although higher than in the first quarter due
primarily to seasonal factors, remained relatively low during the second quarter
because of continued high mortgage interest rates. Lower prepayment levels
improve yields on the Company's mortgage assets by allowing related purchase
premiums to be recognized in operating results over a longer period of time.
Annualized prepayments on Fannie Mae and Freddie Mac ARM securities averaged
21.9% for the second quarter, higher than the 18.3% annualized rate for the
first quarter but still low relative to the 36.3% level experienced in the
second quarter of 1999. Similarly, annualized prepayments on Ginnie Mae ARM
securities averaged 16.9% in the second quarter of 2000, compared to 14.9% the
prior quarter and 29.1% for the same period of 1999.
The average yield on the Company's mortgage investments for the second quarter
was 6.52% while the average borrowing rate was 6.26%, resulting in a financing
spread of 0.26%. Overall portfolio yields continue to benefit from increases in
yields on the Company's ARM securities as interest rates on the underlying
mortgage loans reset to levels more reflective of the current interest rate
environment. In addition, second quarter yields benefited from higher yields
earned on newly acquired ARM securities and on mortgage securities designated
for sale in connection with the portfolio restructuring. Yields on the Company's
ARM securities are expected to continue to improve in future quarters. For
example, if interest rates stabilize at current levels, yields on the Company's
current investment in ARM securities could improve as much as 70 basis points
over the next 12 months. Conversely, if interest rates decline from current
levels, such a yield improvement will likely not be achieved (see "Effects of
Interest Rate Changes").
The Company currently anticipates average yields on its ARM securities to
improve approximately 36 basis points during the third quarter of 2000,
contributing significantly to an anticipated overall third quarter yield
increase of 38 basis points. However, taking into consideration the full impact
of the 50 basis point increase in short-term interest rates by the Federal
Reserve in May, the Company currently expects its borrowing rates to average
approximately 35 basis points higher during the third quarter. Actual borrowing
rates will be largely dependent upon future actions by the Federal Reserve to
change short-term interest rates. In addition, Capstead ended the quarter with a
smaller portfolio than was carried during the first six months of the year.
There can be no assurance that the Company will continue to be as successful as
it was in the second quarter in redeploying its capital into suitable
investments in keeping with its new investment strategy.
-17-
<PAGE> 18
CMO COLLATERAL AND INVESTMENTS
Since exiting the residential mortgage loan conduit business in 1995, the
Company has maintained finance subsidiaries with remaining capacity to issue
CMOs and other securitizations backed by single-family residential mortgage
loans ("securitization shelves"). In an effort to recover costs associated with
these securitization shelves, and to potentially add to its CMO administration
activities, the Company from time to time purchases mortgage loans from
originators or conduits and issues CMOs or other securities backed by these
loans. The Company may or may not retain a significant residual economic
interest in these securitizations. During the first quarter of 2000, Capstead
issued one such CMO totaling $236 million. The Company did not retain any
significant residual economic interest in this issuance.
To date, the related credit risk of the mortgage loans collateralizing CMOs
issued by Capstead is borne by AAA-rated private mortgage insurers or by
subordinated bonds within the related CMO series to which the collateral is
pledged. The Company has retained $927,000 of credit risk in the form of
subordinated bonds associated with approximately $543 million of these
securities remaining outstanding as of June 30, 2000. The Company also retained
residual interests in certain of these securitizations primarily with the
characteristics of interest-only mortgage securities. Interest-only mortgage
securities are entitled to receive all or some portion of the interest stripped
from the mortgage loans underlying the securities. In addition, Capstead has
retained $3.4 million of reserve funds in connection with two 1993 mortgage loan
sales. These reserve funds are available to pay special hazard costs (e.g.
earthquake or mudslide-related losses) or certain bankruptcy costs associated
with approximately $137 million of loans remaining outstanding as of June 30,
2000 from the related securitizations. CMO collateral and investments, net of
related bonds had been reduced to $25.8 million at quarter-end, down from $29.3
million at December 31, 1999. Included in this net investment are $16 million
and $3 million of the remaining CMO collateral premiums and bond discounts,
respectively. Similar to premiums on the Company's mortgage investments, CMO
collateral premiums and bond discounts, along with most of remaining CMO
investments, are amortized to income as CMO collateral yield or bond expense
adjustments based on both actual prepayments and lifetime prepayment assumptions
(see "Effects of Interest Rate Changes").
UTILIZATION OF CAPITAL AND POTENTIAL LIQUIDITY
The following table summarizes the Company's utilization of capital and
potential liquidity as of June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
CAPITAL
ASSETS BORROWINGS EMPLOYED LIQUIDITY*
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Investments held-for-sale $ 681,729 $ 619,847 $ 61,882 $ 79,117
----------- ----------- ---------- ----------
Mortgage investment portfolio:
Agency Securities:
FNMA/FHLMC:
Fixed-rate and medium-term 221,499 147,524 73,975 29,643
ARMs 1,298,712 1,141,860 156,852 117,890
GNMA ARMs 2,397,974 2,314,272 83,702 11,762
Non-agency Securities 176,721 108,868 67,853 59,848
CMBS - adjustable-rate 75,897 62,356 13,541 328
----------- ----------- ---------- ----------
4,170,803 3,774,880 395,923 219,471
CMO collateral and investments 3,341,119 3,315,301 25,818 --
----------- ----------- ---------- ----------
$ 8,193,651 $ 7,710,028 483,623 298,588
=========== =========== ========== ==========
Other assets, net of other liabilities 48,323 11,411**
---------- ----------
$ 531,946 $ 309,999
========== ==========
</TABLE>
* Based on maximum borrowings available under existing uncommitted
repurchase arrangements considering the fair value of related
collateral as of June 30, 2000 (see "Liquidity and Capital
Resources").
** Represents unrestricted cash and cash equivalents.
-18-
<PAGE> 19
1-FOR-2 REVERSE COMMON STOCK SPLIT
At the Company's Annual Meeting, stockholders approved a 1-for-2 reverse common
stock split. Accordingly, the Board of Directors established the close of
business on May 8, 2000 as the effective date for the reverse split. The first
day the common shares traded post-split was May 9, 2000. The reverse split
reduced the number of outstanding common shares to approximately 22.6 million.
Concurrent with the reverse split the conversion ratio for each series of
preferred shares was adjusted accordingly.
All share and per share information presented has been restated to reflect the
reverse common stock split.
SECOND QUARTER COMMON DIVIDEND
On July 27, 2000 the Board of Directors declared a second quarter dividend of
$0.16 per common share, payable August 18 to stockholders of record as of August
2, 2000.
STOCK REPURCHASES AND BOOK VALUES PER COMMON SHARE
During the six months ended June 30, 2000, the Company, through open market
purchases, acquired 376,950 common shares at an average price of $7.77
(including transaction costs) and 694,100 shares of its $1.26 Cumulative
Convertible Preferred Stock, Series B ("Series B preferred shares") at an
average price of $9.44 (including transaction costs). On January 25, 2000 the
Company purchased 5,568,500 common shares at a price of $9.27 per share
(including transaction costs) pursuant to a tender offer that closed on January
14, 2000. Since share repurchases began in December 1998 through July 31, 2000,
the Company has repurchased 26.9% of its outstanding common shares and 7.8% of
its Series B preferred shares. As of July 31, 2000, the Company had remaining
authorization to repurchase 819,300 common shares and 648,300 Series B preferred
shares.
At June 30, 2000 the Company's book value per common share was $11.66, compared
to $11.83 per common share at December 31, 1999 (calculated assuming redemption
of the Series A and B preferred shares and conversion of the Series C and D
preferred shares). The decline in book value per common share reflects the
reduction in market value of the mortgage investments caused by higher mortgage
interest rates, net of the positive affects of share repurchases. The market
value of the Company's mortgage investments will continue to fluctuate with
changes in mortgage interest rates and market liquidity, and such changes will
be reflected in book value per common share.
-19-
<PAGE> 20
RESULTS OF OPERATIONS
Comparative net operating results (interest income or fee revenue, net of
related interest expense and, in the case of CMO administration, related direct
and indirect operating expense) by source were as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Agency Securities $ 8,217 $ 15,100 $ 19,137 $ 26,917
Non-agency Securities 1,792 2,612 3,182 4,141
CMBS 587 -- 1,129 --
CMO collateral and investments (570) (285) (807) (1,347)
--------- -------- --------- --------
Net margin on mortgage assets 10,026 17,427 22,641 29,711
Other revenue (expense):
Loss on portfolio restructuring (88,528) -- (88,528) --
Loss on mortgage securities held-for-sale (1,480) -- (1,480) --
Severance charges (3,607) -- (3,607) --
CMO administration and other 893 903 1,677 4,111
Other operating expense (1,556) (1,647) (3,285) (3,232)
--------- -------- --------- --------
Net income (loss) $ (84,252) $ 16,683 $ (72,582) $ 30,590
========= ======== ========= ========
Net income (loss) per common share --
Basic and diluted $ (3.98) $ 0.38 $ (3.61) $ 0.65
</TABLE>
The earning capacity of Capstead's mortgage asset portfolios is largely
dependent on the overall size and composition of the portfolios, the
relationship between short- and long-term interest rates (the "yield curve") and
the extent the Company continues to invest its liquidity in these portfolios.
Lower net margins on mortgage assets for the quarter and six months ended June
30, 2000 compared to the same periods in 1999 reflect higher borrowing costs
incurred financing the Company's mortgage investments. Borrowing costs were
higher primarily because of continued actions taken by the Federal Reserve to
increase short-term interest rates by 50 basis points during the first quarter
of 2000 and another 50 basis points on May 16, 2000, for a total of 175 basis
points since June 1999. As a result, the Company's borrowing rates averaged 139
and 115 basis points higher during the quarter and six months ended June 30,
2000 than during the same periods in 1999. These higher borrowing rates were
only partially offset by the benefits of improving yields on ARM securities, the
restructuring of the Company's mortgage investment portfolio as a result of
modifying its investment strategy (see above, "Financial Condition -- Adoption
of New Investment Strategy") and relatively low mortgage asset prepayment
levels.
In connection with the portfolio restructuring, in April the Company incurred a
$88.5 million charge to operating results for the sale or designation for sale
of most of its fixed-rate and medium-term securities. This charge consisted of
realized losses of $70.9 million and a $17.6 million reduction in the Company's
basis in securities now classified as held-for-sale. An additional $1.5 million
loss on securities held-for-sale was recorded reflecting the decrease in fair
value of these securities at quarter-end. Also during the second quarter the
Company incurred severance charges of $3.6 million, related primarily to the
resignation of its former chief executive (see above, "Financial Condition --
Election of New Leadership").
Before portfolio restructuring and severance charges, the Company earned
$9,363,000, or $0.16 per common share for the second quarter, down from net
income of $11,670,000 or $0.22 per common share for the first quarter of 2000
because of the higher borrowing costs and lower average outstanding
-20-
<PAGE> 21
investment portfolios. Although the overall yield on mortgage assets is
currently anticipated to increase in future quarters with the acquisition of
higher yielding assets in connection with the new investment strategy and the
reset of interest rates on ARM securities to levels more reflective of the
current interest rate environment, borrowing rates may also continue to
increase, which may further reduce net interest margins. In addition, the
Company ended the quarter with a smaller portfolio than was carried during the
first six months of the year. Consequently, the remainder of the year will
likely be very difficult for the Company from a net income and dividend
perspective, particularly should the Federal Reserve continue to increase
interest rates. Depending on the timing and extent of any future increases in
interest rates and portfolio acquisitions over the next several quarters, it may
be necessary to again reduce the dividend on the Company's common stock.
Agency Securities contributed less to operating results during the quarter and
six months ended June 30, 2000 than during the same periods in 1999 because of
higher borrowing costs, despite higher average yields. Yields for this portfolio
were 6.44% and 6.27% during the quarter and six months ended June 30, 2000,
respectively, compared to 5.65% and 5.67% during the same periods in 1999, while
average borrowing rates were 6.24% and 6.04%, respectively, compared to 4.87%
and 4.90% during the same periods in 1999. Yields benefited as interest rates on
mortgage loans underlying ARM securities continued to reset to levels more
reflective of the current interest rate environment and prepayments rates
remained at relatively low levels. In addition, second quarter yields benefited
from higher yields on newly-acquired ARM securities and on mortgage securities
designated for sale in connection with the portfolio restructuring. The average
outstanding portfolio was $4.9 billion and $5.1 billion during the quarter and
six months ended June 30, 2000, respectively, compared to $5.3 billion and $4.3
billion for the same periods in 1999.
Non-agency Securities contributed less to operating results during the quarter
and six months ended June 30, 2000 primarily because of higher borrowing costs.
The average outstanding portfolio was $183 million and $173 million during the
quarter and six months ended June 30, 2000, respectively, financed with average
borrowings of $111 million and $115 million, respectively, compared to an
average portfolio of $131 million and $107 million for the same periods in 1999
funded almost entirely with equity. Average yields for this portfolio
(calculated including mortgage insurance costs) were 7.88% and 7.89% during the
quarter and six months ended June 30, 2000, respectively, compared to 7.95% and
7.99% during the same periods in 1999.
Consistent with the Company's new investment strategy, in December 1999 Capstead
made its first acquisitions of credit sensitive CMBS. The portfolio currently
consists of $76 million of adjustable-rate CMBS financed by longer-term
repurchase arrangements. Because of recent market conditions, the pricing for
these securities has been less attractive on a risk-adjusted return basis than
other suitable investments that are in keeping with the Company's new investment
strategy. As a result, the Company has focused on redeploying capital made
available by runoff and the portfolio restructuring into acquisitions of ARM
Agency Securities and, up to this point, has limited the growth of this
portfolio.
CMO collateral and investments results continue to benefit from relatively low
prepayment rates allowing remaining collateral premiums and bond discounts to be
amortized to earnings over a longer time frame. In addition, results for the six
months ended June 30, 1999 included the write-off of bond discounts related to
the redemption of CMO bonds. Without growth of this portfolio either through the
issuance of CMOs in which the Company retains residual interests, or the
acquisition of other CMO investments, this portfolio is not expected to provide
a positive return on capital employed in future periods.
CMO administration and other revenue was lower for the six months ended June 30,
2000 primarily because of mortgage asset sales in early 1999, which resulted in
gains of $1.8 million.
-21-
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds include borrowings under repurchase
arrangements, monthly principal and interest payments on mortgage securities and
other investments, excess cash flows on CMO collateral and investments and
proceeds from sales of mortgage assets (see "Financial Condition -- Utilization
of Capital and Liquidity"). The Company currently believes that these funds are
sufficient for the acquisition of mortgage assets, repayments on borrowings, the
payment of cash dividends as required for Capstead's continued qualification as
a Real Estate Investment Trust ("REIT") and common and preferred share
repurchases as described above. It is the Company's policy to remain strongly
capitalized and conservatively leveraged.
Borrowings under repurchase arrangements secured by Agency Securities and
Non-agency Securities generally have maturities of less than 31 days. The
Company has uncommitted repurchase facilities with investment banking firms to
finance these mortgage assets, subject to certain conditions. Interest rates on
borrowings under these facilities are generally 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. Amounts available to be borrowed under these
arrangements are dependent upon the fair value of the securities pledged as
collateral, which fluctuates with changes in interest rates and the securities'
credit quality.
Borrowings under repurchase arrangements secured by purchases of adjustable-rate
CMBS more closely match the interest rate adjustment features and expected life
of these investments such that the Company anticipates it can earn more
consistent net interest spreads on these investments and, as a result,
experience less interest rate volatility than experienced with the Company's
other mortgage investments. Should Capstead make significant additional
investments in credit-sensitive mortgage securities, it is anticipated that the
Company will attempt to lessen interest rate volatility in a similar fashion or
through the use of derivative financial instruments ("Derivatives") such as
interest rate swaps (see "Effects of Interest Rate Changes" and "Risks
Associated With Credit-Sensitive Investments").
EFFECTS OF INTEREST RATE CHANGES
INTEREST RATE SENSITIVITY ON OPERATING RESULTS
The Company performs earnings sensitivity analysis using an income simulation
model to estimate the effects that specific interest rate changes will have on
future earnings. All mortgage assets and Derivatives held, if any, are included
in this analysis. In addition, the sensitivity of CMO administration fee income
to market interest rate levels is included as well. However, given that the
Company has modified its investment strategy to focus on short maturity and
adjustable-rate assets during the current quarter, for this presentation $682
million of mortgage securities designated for sale are excluded from the June
30, 2000 estimated earnings sensitivity profile. The model incorporates
management assumptions regarding the level of prepayments on mortgage assets for
a given level of market rate changes using industry estimates of prepayment
speeds for various coupon segments. These assumptions are developed through a
combination of historical analysis and future expected pricing behavior.
-22-
<PAGE> 23
Primarily because of the new investment strategy described above, earnings are
less sensitive to changes in interest rates at June 30, 2000 than at December
31, 1999, as indicated in the following table:
<TABLE>
<CAPTION>
IMMEDIATE CHANGE IN:
(RATES IN BASIS POINTS, DOLLARS IN THOUSANDS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
30-day LIBOR rate Down 100 Down 100 Flat Up 100
10-year U.S. Treasury rate Down 100 Flat Up 100 Up 100
Projected 12-month earnings change:*
As of June 30, 2000 $ 16,188 $ 21,626 $ 4,906 $ (25,338)
As of December 31, 1999 31,160 36,190 5,044 (37,821)
</TABLE>
* Note that the impact of actual or planned acquisitions of mortgage
assets subsequent to the indicated period-end (beyond acquisitions
necessary to replace runoff) were not factored into the simulation
model for purposes of this disclosure.
Income simulation modeling is a primary tool used to assess the direction and
magnitude of changes in net margins on mortgage assets resulting from changes in
interest rates. Key assumptions in the model include prepayment rates on
mortgage assets, changes in market conditions, and management's financial
capital plans. These assumptions are inherently uncertain and, as a result, the
model cannot precisely estimate net margins or precisely predict the impact of
higher or lower interest rates on net margins. Actual results will differ from
simulated results due to timing, magnitude and frequency of interest rate
changes and other changes in market conditions, management strategies and other
factors.
GENERAL DISCUSSION OF EFFECTS OF INTEREST RATE CHANGES
Changes in interest rates may impact the Company's earnings in various ways. The
Company's earnings currently depend, in part, on the difference between the
interest received on mortgage securities and other investments, and the interest
paid on related borrowings, which are generally based on 30-day LIBOR. The
resulting spread may be reduced or even turn negative in a rising short-term
interest rate environment. Because a substantial portion of the Company's
mortgage investments are ARM mortgage securities, the risk of rising short-term
interest rates is generally offset to some extent by increases in the rates of
interest earned on the underlying ARM loans, which reset periodically based on
underlying indices (generally 6-month LIBOR and 1-year U.S. Treasury rates).
Since ARM loans generally limit the amount of such increases 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 loans contributing to lower or even negative financing spreads. At
other times, as seen in 1998, declines in these indices may be greater than
declines in the Company's borrowing rates, contributing to lower or even
negative financing spreads. The Company may invest in Derivatives from time to
time as a hedge against rising interest rates on a portion of its short-term
borrowings. At June 30, 2000 the Company did not own any Derivatives as a hedge
against rising interest rates.
Another effect of changes in interest rates is that as long-term interest rates
decrease the rate of principal prepayments on 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. As seen in 1998 prolonged periods of high prepayments can
significantly reduce the expected life of mortgage investments; therefore, 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 short-term interest rates as the
underlying ARM loans reset at lower rates.
-23-
<PAGE> 24
Changes in interest rates also impact earnings recognized from CMO investments,
which have consisted primarily of interest-only mortgage securities and
fixed-rate CMO residuals (see "Financial Condition"). The amount of income that
may be generated from interest-only mortgage securities 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 may increase, reducing or even turning negative the
overall return on these investments. As seen in 1998 sustained periods of high
prepayments can result in losses. Conversely, if mortgage interest rates rise,
interest-only mortgage securities tend to perform favorably because underlying
mortgage loans will generally prepay at slower rates, thereby increasing overall
returns. The Company sold its investments in interest-only mortgage securities
in connection with the 1998 restructuring of its mortgage asset portfolios.
CMO residuals behave similarly to interest-only mortgage securities. As seen in
1998 if mortgage interest rates fall, prepayments on the underlying mortgage
loans generally will be higher, thereby reducing or even turning negative the
overall returns on these investments. This is due primarily to the acceleration
of the amortization of bond discounts 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 investment in a
fixed-rate CMO residual because of an increase in time over which the Company
receives the larger positive interest spread.
Capstead periodically sells mortgage assets, which may increase income
volatility because of the recognition of transactional gains or losses. Such
sales may become attractive as values of mortgage assets fluctuate with changes
in interest rates. At other times, such as in 1998, it may become prudent to
significantly downsize the mortgage asset portfolios to mitigate exposure to
further declines in mortgage interest rates or, as in the current quarter, to
shift the Company's investment focus to short maturity and adjustable-rate
assets (see "Financial Condition - Adoption of New Investment Strategy").
RISKS ASSOCIATED WITH CREDIT-SENSITIVE INVESTMENTS
CMBS are generally viewed as exposing an investor to greater risk of loss than
residential mortgage-backed securities since such securities are typically
secured by larger loans to fewer obligors than residential mortgage-backed
securities. Commercial property values and net operating income are subject to
volatility, and net operating income may be sufficient or insufficient to cover
debt service on the related mortgage loan at any given time. The repayment of
loans secured by income-producing properties is typically dependent upon the
successful operation of the related real estate project and the ability of the
applicable property to produce net operating income rather than upon the
liquidation value of the underlying real estate. Even when the current net
operating income is sufficient to cover debt service, there can be no assurance
that this will continue to be the case in the future.
Additionally, commercial properties may not readily be convertible to
alternative uses if such properties were to become unprofitable due to
competition, age of improvements, decreased demand, regulatory changes or other
factors. The conversion of commercial properties to alternate uses generally
requires substantial capital expenditures, which may or may not be available.
The availability of credit for commercial mortgage loans is significantly
dependent upon economic conditions in the markets where such properties are
located, as well as the willingness and ability of lenders to make such loans.
The availability of funds in the credit markets fluctuates and there can be no
assurance that the availability of such funds will increase above, or will not
contract below current levels. In addition, the availability of similar
commercial properties, and the competition for available credit, may affect the
ability of potential purchasers to obtain financing for the acquisition of
properties. This could effect the repayment of commercial mortgages pledged to
secure CMBS.
-24-
<PAGE> 25
Credit-sensitive residential mortgage-backed securities differ from CMBS in
several important ways, yet can still carry substantial credit risk. Residential
mortgage securities typically are secured by smaller loans to more obligors than
CMBS, thus spreading the risk of mortgagor default. However, most of the
mortgages supporting these securities are made to homeowners that do not qualify
for Agency loan programs for reasons including loan size, financial condition,
or work or credit history that may be indicative of higher risk of default than
loans qualifying for such programs. As with CMBS, in instances of default the
Company may incur losses if proceeds from sales of the underlying collateral are
less than the unpaid principal balances of the mortgage loans and related
foreclosure costs. However, with residential mortgage-backed securities, this
risk may be mitigated by various forms of credit enhancements including, but not
limited to, primary mortgage insurance.
Through the process of securitizing both commercial and residential mortgages,
credit risk can be heightened or minimized. Senior classes in multi-class
securitizations generally have first priority over cash flows from a pool of
mortgages and, as a result, carry the least risk, highest investment ratings and
the lowest yields. Typically a securitization will also have mezzanine classes
and subordinated classes. Mezzanine classes will generally have somewhat lower
credit ratings and may have average lives that are longer than the senior
classes. Subordinate classes are junior in the right to receive cash flow from
the underlying mortgages, thus providing credit enhancement to the senior and
mezzanine classes. As a result, subordinated securities will have lower credit
ratings because of the elevated risk of credit loss inherent in these
securities.
The availability of capital from external sources to finance investments in
credit-sensitive CMBS and residential mortgage-backed securities that are not
financed to maturity at acquisition may be diminished during periods of mortgage
finance market illiquidity, such as was experienced in 1998. Additionally, if
market conditions deteriorate resulting in substantial declines in value of
these securities, sufficient capital may not be available to support the
continued ownership of such investments, requiring these securities to be sold
at a loss.
OTHER
FORWARD LOOKING STATEMENTS
This document contains "forward-looking statements" (within the meaning of the
Private Securities Litigation Reform Act of 1995) that inherently involve risks
and uncertainties. The Company's actual results and liquidity can differ
materially from those anticipated in these forward-looking statements because of
changes in the level and composition of the Company's investments and unforeseen
factors. These factors may include, but are not limited to, changes in general
economic conditions, the availability of suitable investments, fluctuations in
and market expectations for fluctuations in interest rates and levels of
mortgage prepayments, deterioration in credit quality and ratings, the
effectiveness of risk management strategies, the impact of leverage, liquidity
of secondary markets and credit markets, increases in costs and other general
competitive factors.
-25-
<PAGE> 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
The information required by this Item is incorporated by reference to the
information included in Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on April 20, 2000.
(b) The following Directors were elected to Board of Directors (constituting
the entire Board of Directors):
Wesley R. Edens Ronn K. Lytle Mark S. Whiting
Robert I. Kauffman Michael G. O'Neil
Paul M. Low Howard Rubin
(c) The following items were voted on at the Annual Meeting:
<TABLE>
<CAPTION>
VOTES
-----------------------------------------------
WITHHELD/ BROKER
FOR ABSTENTIONS NON-VOTES
---------- ----------- -----------
<S> <C> <C> <C>
Election of Board Members:
Wesley R. Edens....................... 24,935,011 1,665,548 --
Robert I. Kauffman.................... 24,931,000 1,669,559 --
Paul M. Low........................... 25,008,480 1,592,079 --
Ronn K. Lytle......................... 24,521,482 2,079,077 --
Michael G. O'Neil..................... 24,974,633 1,625,926 --
Howard Rubin.......................... 24,887,492 1,713,067 --
Mark S. Whiting....................... 24,889,789 1,710,770 --
</TABLE>
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
------------ ----------- -------------
<S> <C> <C> <C>
Amend Capstead's Charter to effect a
1-for-2 reverse common stock split: 23,299,264 3,091,098 210,197
</TABLE>
Other matters (no other matters).
PART II. -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following Exhibits are presented herewith:
Exhibit 12 - Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
Exhibit 27 - Financial Data Schedule for June 30, 2000
(electronic filing only).
Exhibit 27.1 - Restated Financial Data Schedule for December 31, 1999,
for reverse common stock split (electronic filing only).
(b) Reports on Form 8-K: None.
-26-
<PAGE> 27
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: August 10, 2000 By: /s/ ANDREW F. JACOBS
-----------------------------------
Andrew F. Jacobs
Executive Vice President - Finance
Date: August 10, 2000 By: /s/ PHILLIP A. REINSCH
-----------------------------------
Phillip A. Reinsch
Senior Vice President - Control
-27-
<PAGE> 28
EXHIBIT INDEX
<TABLE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
12 - Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
27 - Financial Data Schedule for June 30, 2000
(electronic filing only).
27.1 - Restated Financial Data Schedule for December 31, 1999,
for reverse common stock split (electronic filing only).
</TABLE>
