CAPSTEAD MORTGAGE CORP, DEF 14A, 2000-02-29

CAPSTEAD MORTGAGE CORP
DEF 14A, 2000-02-29
REAL ESTATE INVESTMENT TRUSTS

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<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>

Capstead Mortgage Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

-----------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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<PAGE> 2

CAPSTEAD LOGO
8401 North Central Expressway
Suite 800
Dallas, Texas 75225-4410

March 6, 2000

To the Stockholders of Capstead Mortgage Corporation:

The annual meeting of the stockholders of Capstead Mortgage Corporation
will be held at 9:00 a.m., Dallas time, on April 20, 2000, at 8250 North Central
Expressway, Dallas, Texas. A notice of the annual meeting, proxy and proxy
statement containing information about the matters to be acted on at the annual
meeting are enclosed. The purposes of the annual meeting are to (i) elect seven
directors to the board of directors and (ii) approve an amendment to Capstead's
charter to effect a one-for-two reverse split of our common stock.

On December 9, 1999, Fortress Investment Corp., an affiliate of Fortress
Investment Group LLC, made a $51,200,000 investment in Capstead through the
purchase of 5,378,000 shares of our newly-created Series C Cumulative
Convertible Preferred Stock and 5,378,000 shares of our newly-created Series D
Cumulative Convertible Preferred Stock. In connection with the sale of these new
shares of preferred stock to Fortress, our board of directors (i) increased its
size from six to eight members, (ii) elected Wesley R. Edens, the chairman and
chief executive officer of Fortress, and Robert I. Kauffman, the president of
Fortress, to serve as directors and (iii) agreed to submit to our stockholders
at the annual meeting the election of Messrs. Edens and Kauffman and Paul M.
Low, Ronn K. Lytle, Michael G. O'Neil, Howard Rubin and Mark S. Whiting. Messrs.
Rubin and Whiting were recommended to the nominating committee of our board of
directors by Messrs. Edens and Kauffman. Mr. O'Neil was recommended to the
nominating committee of our board of directors by Mr. Lytle, our current
Chairman and Chief Executive Officer, and Mr. Low, a current director. If
elected, Messrs. O'Neil, Rubin and Whiting will be independent directors.

The nominees for director have informed us that, if elected and qualified,
they intend to (i) appoint Mr. Edens to the positions of Chairman and Chief
Executive Officer of Capstead and (ii) appoint Mr. Lytle to the position of Vice
Chairman of Capstead. Upon the election of the new board and Mr. Edens' becoming
the Chairman and Chief Executive Officer of Capstead, Fortress will be in a
position to significantly influence our future business policies, investment
strategy and operations.

Each of Messrs. Edens, Kauffman, Rubin and Whiting must receive the vote of
a majority of the voting shares cast in the election of directors or none of
them will qualify to serve as a director. In that case, our directors who did
not stand for re-election at the annual meeting, Bevis Longstreth, Harriet E.
Miers, William R. Smith and John C. Tolleson, will remain on the board until
their successors are duly elected and qualified. If this occurs, then Fortress
and Capstead will each have the right to cause the repurchase by Capstead of the
Series C shares and Series D shares at a 3% premium.

The board of directors has also recommended amending our charter to effect
a one-for-two reverse split of our common stock. The result of the reverse stock
split would be that each holder of common stock would receive one share of new
common stock for every two shares of common stock owned by that holder.

The board has carefully considered and unanimously approved the December 9,
1999 Fortress transaction. Furthermore, the board has carefully considered the
election of the nominated directors and the charter amendment effecting the
reverse stock split and believes that these proposals are in the best interest
of Capstead and our stockholders. The board recommends that our stockholders
vote in favor of electing each of the nominees and approving the charter
amendment effecting the reverse stock split.

The attached proxy statement provides you with background information
regarding the Fortress transaction and with detailed information about the
nominees to the board and the charter amendment effecting the reverse stock
split. We encourage you to read the entire document carefully. Regardless of
whether you plan to be present at the annual meeting, we urge you, upon
finishing your review of the proxy statement, to promptly date, mark, sign and
mail the enclosed proxy card in the envelope provided, or to submit your vote by
such other methods as described in the proxy statement. YOUR VOTE IS IMPORTANT,
REGARDLESS OF THE SIZE OF YOUR HOLDINGS.

Sincerely,

/s/ RONN K. LYTLE
Ronn K. Lytle
Chairman and Chief Executive Officer
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CAPSTEAD LOGO
8401 North Central Expressway
Suite 800
Dallas, Texas 75225-4410

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 20, 2000

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The annual meeting of stockholders of Capstead Mortgage Corporation, a
Maryland corporation, will be held at 9:00 a.m., Dallas time, on April 20, 2000,
at 8250 North Central Expressway, Dallas, Texas, for the following purposes:

1. To elect Wesley R. Edens, Robert I. Kauffman, Paul M. Low, Ronn K.
Lytle, Michael G. O'Neil, Howard Rubin and Mark S. Whiting to the board of
directors, to serve until the next annual meeting of stockholders and until
their respective successors are elected and qualified.

2. To approve an amendment to Capstead's charter to effect a one-for-two
reverse split of Capstead's common stock.

3. To transact any other business that may properly come before the meeting
or any adjournment thereof.

We have fixed the close of business on February 25, 2000 as the record date
for the determination of the stockholders entitled to notice of, and to vote at,
the annual meeting.

THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE IN FAVOR OF THE PROPOSALS
DESCRIBED ABOVE.

The election of each nominee to the board of directors requires the
affirmative vote of a plurality of the shares of common stock, Series C
Cumulative Convertible Preferred Stock and Series D Cumulative Convertible
Preferred Stock cast at the annual meeting, voting together as one class. In
addition, each of Messrs. Edens, Kauffman, Rubin and Whiting must receive the
vote of a majority of the voting shares cast in the election of directors or
none of them will qualify to serve as a director.

The approval of the reverse stock split proposal described above requires
the affirmative vote of a majority of the issued and outstanding shares of
common stock, Series C Cumulative Convertible Preferred Stock and Series D
Cumulative Convertible Preferred Stock, voting together as one class.

Jill Reed
Secretary
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CAPSTEAD LOGO
8401 North Central Expressway
Suite 800
Dallas, Texas 75225-4410
--------------------------

PROXY STATEMENT
-------------------------

FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 20, 2000

This proxy statement, together with the enclosed proxy, is solicited by and
on behalf of the board of directors of Capstead Mortgage Corporation. The board
of directors is requesting that you allow your shares to be represented and
voted at the annual meeting by the proxies named on the enclosed proxy card.
"We," "our," "us," and "Capstead" each refers to Capstead Mortgage Corporation.
This proxy statement is first being sent to stockholders on or about March 6,
2000.

QUESTIONS AND ANSWERS ABOUT THE PROPOSALS

Q: WHAT PROPOSALS WILL I BE VOTING ON AT THE ANNUAL MEETING?

A: You will be voting on the following proposals:

1. The election of Wesley R. Edens, Robert I. Kauffman, Paul M. Low, Ronn K.
Lytle, Michael G. O'Neil, Howard Rubin and Mark S. Whiting to the board
of directors, to serve until the next annual meeting of stockholders and
until their respective successors are elected and qualified. Each of the
Fortress nominees, Messrs. Edens, Kauffman, Rubin and Whiting, must
receive the vote of a majority of the voting shares cast in the election
of directors or none of them will qualify to serve as a director.

2. The approval of an amendment to our charter to effect a one-for-two
reverse split of our Common shares.

Q: HOW HAVE THE NOMINEES BEEN SELECTED?

A: In conjunction with Fortress' purchase of the Series C shares and Series D
shares, Fortress and Capstead entered into a Supplemental Agreement. The
Supplemental Agreement contemplates that seven directors will be nominated
for election at the annual meeting, as follows:

- two nominees, Messrs. Edens and Kauffman, are officers and directors of
Fortress and were elected to the board of directors in December 1999 in
connection with the purchase by Fortress of the Series C shares and
Series D shares;

- two nominees, Messrs. Rubin and Whiting, were recommended to the
nominating committee by Messrs. Edens and Kauffman;

- two nominees, Mr. Lytle, our current Chairman and Chief Executive
Officer, and Mr. Low, a current director, are continuing directors from
before the Fortress investment was made; and

- one nominee, Mr. O'Neil, was recommended to the nominating committee by
Messrs. Lytle and Low.

If elected, Messrs. O'Neil, Rubin and Whiting will be independent directors.

Q: WHAT WILL HAPPEN IF THE FORTRESS NOMINEES ARE ELECTED AT THE ANNUAL MEETING?

A: The Supplemental Agreement contemplates that:

Mr. Edens, Fortress' chairman and chief executive officer, will become
Chairman and Chief Executive Officer of Capstead and Mr. Lytle will become
Vice Chairman of Capstead.

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If all four of the Fortress nominees are elected by the stockholders and Mr.
Edens becomes our Chairman and Chief Executive Officer, Fortress will be in
a position to influence significantly our future business policies,
investment strategy and operations. In addition, if such nominees are
elected, Mr. Lytle has rights under his employment agreement which will be
triggered if certain other events occur, as described in "Election of
Directors -- Lytle Employment Agreement."

The Supplemental Agreement also provides that if all four of the Fortress
nominees are elected to the board, Fortress will, on or before six months
from the date of the annual meeting, acquire at least 5,000,000 Common
shares through, at Fortress' option, open market purchases, conversion of a
portion of its Series C shares or Series D shares, or any combination
thereof.

Q: HOW WILL I BENEFIT FROM THE ELECTION OF THE FORTRESS NOMINEES?

A: We believe that by teaming with Fortress, we have a better opportunity to
enhance stockholder value. The combination of our strong organizational
infrastructure and experience in the residential mortgage finance industry
with Fortress' experience in other facets of real estate investing will
enhance our ability to succeed over the long term. We believe that Fortress'
considerable ownership interest in us, including its contemplated ownership
of both Common shares and Series C and Series D shares, strongly aligns
Fortress' interests with the interests of our other stockholders in seeking
to enhance stockholder value.

Q: WILL CAPSTEAD'S INVESTMENT STRATEGY CHANGE IF THE FORTRESS NOMINEES ARE
ELECTED?

A: Our current investment strategy of managing a portfolio of residential
mortgage assets to achieve reasonable investment returns has proven very
difficult in today's environment. We are considering modifying our
investment strategy to replace a portion of our existing mortgage
investments with a diversified portfolio of credit-sensitive commercial and
residential mortgage-backed securities, most of which are expected to be
"investment grade" at the time of purchase as determined by national rating
agencies. Credit-sensitive mortgage securities generally earn higher yields
than those typically earned on our existing mortgage assets, due largely to
a higher risk of default by the underlying borrowers and, to a lesser
extent, reduced liquidity. These types of investments may allow for the
reduction of interest rate risk through the use of longer-term financing
that more closely matches the interest rate adjustment features and expected
life of these investments. As a result, we anticipate that we may be able to
improve our earnings prospects and provide more stability during periods of
interest rate volatility.

Fortress has advised us that its objective in investing in Capstead and
taking an active role in our management is to enhance stockholder value by
modifying our investment strategy in such manner. Fully implementing this
proposed modification of our investment strategy could necessitate a
repositioning of our existing portfolio of mortgage securities, which could
result in the recognition in operating results of a portion of the losses
currently reflected in our balance sheet and book value per Common share.

Consistent with this proposed modification of our investment strategy, since
mid-December 1999 we have acquired $76 million of investment grade
commercial mortgage-backed securities, commonly referred to as CMBS, from a
third party not affiliated with Fortress. Each security has an expected life
of less than 3 years with an interest rate that adjusts monthly based on a
spread over 30-day LIBOR, a short-term interest rate index. These securities
have been financed with obligations that have similar interest rate
adjustment features and maturities, resulting in a net investment of $13
million. Beyond these initial CMBS purchases, there can be no assurance as
to what extent, if any, this proposed strategy will be implemented, and if
implemented, whether or not it will be successful in meeting our goals.

Q: WHAT WILL HAPPEN IF THE STOCKHOLDERS DO NOT ELECT ALL FOUR OF THE FORTRESS
NOMINEES TO THE BOARD?

A: If any of the four of the Fortress nominees are not elected to the board by
our stockholders, then:

- None of the Fortress nominees will qualify to serve as a director;

- Fortress and Capstead will each have the right to cause the repurchase
by Capstead from Fortress of all, but not less than all, of the Series C
shares and Series D shares, for a price equal to 103% of the amount
which Fortress originally paid for the shares, plus all accrued and
unpaid dividends on such shares; and

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- Our directors who did not stand for re-election at the annual meeting,
Bevis Longstreth, Harriet E. Miers, William R. Smith and John C.
Tolleson, will remain on the board until their successors are duly
elected and qualified.

Q: WHY IS CAPSTEAD PROPOSING A REVERSE STOCK SPLIT? HOW WILL IT AFFECT ME?

A: On February 28, 2000, the last reported sales price for our Common shares as
reported on the New York Stock Exchange Composite Tape was $4.06 per share.
We believe that the per share price of our Common shares has affected their
marketability and increased the amount and percentage of transaction costs
paid by individual stockholders. Specifically, we believe that the
anticipated resulting price level of our Common shares from a one-for-two
reverse stock split will encourage greater interest in our Common shares by
the financial community and the investing public. In addition, the structure
of many trading commissions also tends to have an adverse impact upon
holders of lower priced stocks because the brokerage commission payable on
the sale of lower priced stock often can represent a higher percentage of
the sales price than the commission on relatively higher-priced stock.

Q: WHAT WILL HAPPEN IF THE STOCKHOLDERS DO NOT APPROVE THE REVERSE STOCK SPLIT
PROPOSAL?

A: If the reverse stock split proposal is not approved, there will be no change
in the number of outstanding Common shares or in the number of Common shares
held by each stockholder.

Q: WHEN AND WHERE IS THE ANNUAL MEETING?

A: The annual meeting will take place on April 20, 2000, at 8250 North Central
Expressway, Dallas, Texas, at 9:00 a.m., Dallas time.

Q: WHAT DO I NEED TO DO NOW?

A: Depending on how your shares are held, either mail or fax your signed proxy
card as instructed in the accompanying materials as soon as possible so that
your shares may be represented and voted at the annual meeting or authorize
the proxies to vote your shares using the telephone or the Internet
connections to Norwest Bank Minnesota, N.A., our transfer agent and proxy
tabulator. Alternatively, if you hold your shares in your own name as a
holder of record, you may attend the annual meeting to vote your shares in
person.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
FORWARD-LOOKING STATEMENTS.................................. 1
GENERAL INFORMATION ABOUT VOTING............................ 1
Who Can Vote.............................................. 1
Voting by Proxy........................................... 1
How You May Revoke Your Proxy Instructions................ 2
How Votes Are Counted..................................... 2
Costs of this Proxy Solicitation.......................... 3
ELECTION OF DIRECTORS....................................... 4
Nominees.................................................. 4
Effect of Election of Directors........................... 5
Overview of Capstead's Transactions with Fortress......... 6
Description of the Series C Shares and Series D
Shares................................................ 7
Supplemental Agreement................................. 8
Description of Fortress................................... 9
Interest of Fortress in the Election of Directors......... 9
Proposed Modification of Capstead's Investment Strategy... 10
Risks Associated With Modification of Capstead's
Investment Strategy.................................... 10
Lytle Employment Agreement................................ 11
Vote Required for Election................................ 12
REVERSE STOCK SPLIT PROPOSAL................................ 13
General................................................... 13
Reasons for the Reverse Stock Split Proposal.............. 13
Effect of the Reverse Stock Split......................... 13
Procedure for Effecting Reverse Stock Split and Exchange
of Stock Certificates.................................. 14
Federal Income Tax Consequences........................... 14
Vote Required For Approval................................ 15
MANAGEMENT.................................................. 16
Current Management........................................ 16
Board of Directors........................................ 17
Committees of the Board of Directors...................... 17
Audit Committee........................................ 17
Compensation Committee................................. 18
Executive Committee.................................... 18
Nominating Committee................................... 18
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION..... 19
Executive Compensation Program Philosophy................. 19
1999 Compensation for the Chief Executive Officer......... 20
Deductibility of Executive Compensation................... 21
Conclusion................................................ 21
PERFORMANCE GRAPH........................................... 22
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS.................................................... 23
Security Ownership of Management.......................... 23
Security Ownership of Certain Beneficial Owners........... 24
Section 16(a) Beneficial Ownership Reporting Compliance... 24
EXECUTIVE COMPENSATION...................................... 25
Option Grants............................................. 25
Option Exercises and Fiscal Year End Option Values........ 26
Employment Agreement...................................... 26
SEVERANCE AGREEMENTS........................................ 26
STOCKHOLDER PROPOSALS....................................... 27
INDEPENDENT AUDITORS........................................ 27
WHERE YOU CAN FIND ADDITIONAL INFORMATION................... 27
ANNEX A -- PaineWebber Opinion.............................. A-1
</TABLE>

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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. Our actual results and liquidity can differ materially
from those anticipated in these forward-looking statements because of changes in
the level and composition of our 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.

GENERAL INFORMATION ABOUT VOTING

WHO CAN VOTE

Holders of record of Common shares as of February 25, 2000 are entitled to
vote their Common shares at the annual meeting. At the close of business on
February 25, 2000, a total of 45,719,023 Common shares were outstanding and
entitled to vote. Each Common share has one vote. If you are a holder of Common
shares, the enclosed proxy card shows the number of Common shares that you are
entitled to vote.

As of February 25, 2000, Fortress was the holder of record of all of the
outstanding Series C shares and Series D shares. At the close of business on
February 25, 2000, a total of 5,378,000 Series C shares and 5,378,000 Series D
shares were outstanding and entitled to vote, representing approximately 19.0%
of the shares entitled to vote. Each Series C share and Series D share has one
vote, and the Series C shares and Series D shares are entitled to vote together
with the Common shares as one class.

The affirmative vote of a plurality of the Common shares, Series C shares
and Series D shares, voting together as one class, cast at the annual meeting is
required to elect each nominee to the board of directors. In addition, each of
the four Fortress nominees must receive the vote of a majority of the voting
shares cast in the election of directors or none of them will qualify to serve
as director. Fortress has informed us that it intends to vote FOR each nominee
to the board of directors.

The affirmative vote of a majority of the issued and outstanding Common
shares, Series C shares and Series D shares, voting together as one class, is
required to approve the reverse stock split proposal. Fortress has informed us
that it intends to vote FOR the reverse stock split proposal.

Under Maryland law, a plurality of the votes cast is sufficient for the
election of directors; however, our board of directors has determined (with the
agreement of Fortress) that each of the four Fortress nominees must receive the
vote of a majority of the voting shares cast in the election of directors or
none of them will qualify to serve as director. As a practical matter, unless
there are competing nominees, the plurality vote required by Maryland law will
be the same as this majority vote. In the event that the four Fortress nominees
do not receive a majority vote, the remaining incumbent directors who did not
stand for re-election will continue to serve as directors until their successors
are elected and qualify. Under Maryland law, these directors would be deemed to
be holding over, with the effect that successors could be elected by a plurality
vote and without stockholder action to remove these directors.

VOTING BY PROXY

If you hold your Common shares in your own name as a holder of record, you
may instruct the proxies to vote your Common shares through any of the following
methods:

- sign, date and mail the proxy card in the postage-paid envelope that we
have provided;

- sign, date and fax the proxy card to Norwest at 651-451-4026;

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<PAGE> 9

- using a touch-tone telephone, call Norwest at 1-800-240-6326 and follow
the prompts to enter a company number and a control number, both of which
are found on your proxy card, to authorize the proxies to vote your
Common shares; or

- using the Internet, as prompted by the menu found at
http:/www.eproxy.com/cmo/, enter a company number and control number,
both of which are found on your proxy card, to gain access to the voting
site maintained by Norwest to authorize the proxies to vote your Common
shares.

Faxed proxy cards will be accepted until 5:00 p.m., Dallas time, on April
19, 2000. Of course, you can always come to the annual meeting and vote your
Common shares in person.

Our counsel has advised us that these four voting methods are permitted
under the corporate law of Maryland, the state in which Capstead is
incorporated.

Fortress, as the holder of record of all of the outstanding Series C shares
and Series D shares, may vote the Series C shares and Series D shares through
any of the methods described above.

The proxies will vote each stockholder's shares in accordance with the
instructions provided by such stockholder on the proxy card.

If your Common shares are held on your behalf by a broker, bank or other
nominee, you will receive instructions from them that you must follow to have
your Common shares voted at the annual meeting.

HOW YOU MAY REVOKE YOUR PROXY INSTRUCTIONS

If you hold Common shares in your own name as a holder of record, you may
revoke your proxy instructions through any of the following methods:

- notify our Secretary in writing before your Common shares have been voted
at the annual meeting;

- sign, date and mail a new proxy card to Norwest;

- fax a new proxy card to Norwest at 651-451-4026

- call Norwest at 1-800-240-6326 using a touch-tone telephone and follow
the prompts described above;

- log on to http:/www.eproxy.com/cmo/ on the Internet and follow the
prompts described above; or

- attend the annual meeting and vote your Common shares in person.

Fortress, as the holder of record of all of the outstanding Series C shares
and Series D shares, may revoke its proxy instructions by taking any of the
actions described above.

If Common shares are held on your behalf by a broker, bank or other
nominee, you must contact them to receive instructions as to how you may revoke
your proxy instructions.

HOW VOTES ARE COUNTED

The annual meeting will be held if the holders of a majority of the
outstanding shares entitled to vote are present, in person or by proxy, at the
annual meeting. If you have returned valid proxy instructions or if you hold
your shares in your own name as a holder of record and attend the annual meeting
in person, your shares will be counted for the purpose of determining whether
there is a quorum, even if you wish to abstain from voting on one or both of the
proposals. If a quorum is not present, the annual meeting may be adjourned by
the vote of a majority of the shares represented at the annual meeting until a
quorum has been obtained. Abstentions will have no effect on the outcome in the
election of the board of directors and will have the effect of a vote against
the reverse stock split proposal.

If a stockholder signs and returns a proxy card without giving specific
voting instructions, such stockholder's shares will be voted FOR the nominees to
the board of directors and FOR the reverse stock split proposal.

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<PAGE> 10

Broker non-votes occur when a broker, bank or other nominee holding Common
shares in street name votes the Common shares on some matters but not others. We
will treat broker non-votes as (i) Common shares that are present and entitled
to vote for quorum purposes, (ii) votes not cast in the election of directors;
and (iii) having the effect of a vote AGAINST the reverse stock split proposal.

COSTS OF THIS PROXY SOLICITATION

The enclosed proxy is solicited by the board of directors. The expense of
soliciting proxies for the annual meeting, including the cost of mailing, will
be borne by Capstead. In addition to solicitation by mail, our officers may
solicit proxies from stockholders by telephone, facsimile or personal interview.
Such persons will receive no compensation for such services. We also intend to
request persons holding Common shares in their name or custody, or in the name
of a nominee, to send proxy materials to their principals and request authority
for the execution of the proxies, and we will reimburse such persons for their
expense in doing so. We will also use the proxy solicitation services of
Corporate Investor Communications, Inc. For such services, we will pay a fee
that is not expected to exceed $5,000 plus out-of-pocket expenses.

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<PAGE> 11

ELECTION OF DIRECTORS

NOMINEES

Wesley R. Edens, Robert I. Kauffman, Paul M. Low, Ronn K. Lytle, Michael G.
O'Neil, Howard Rubin and Mark S. Whiting are nominated for election to the board
of directors at the annual meeting to serve until the next annual meeting of the
stockholders and until their respective successors have been elected and
qualified. If for any reason any of such nominees is not available for election,
the proxies will be voted in favor of the remaining named nominee and may be
voted for a substitute nominee in place of one who is not available. We,
however, have no reason to expect that any of the nominees will be unavailable
for election.

The following information has been furnished to us by the nominees for
director:

WESLEY R. EDENS Mr. Edens has been the chairman and chief executive officer
Chairman of the Board and of Fortress Investment Corp. since its formation in April
Chief Executive Officer, 1998, has been the chief executive officer of Fortress
Fortress Investment Corp. and Impac Investment Group LLC since its formation in April 1998 and
Commercial Holdings, Inc. has been the chairman and chief executive officer of Impac
Chief Executive Officer, Commercial Holdings, Inc., a commercial mortgage real
Fortress Investment Group LLC estate investment trust, since May 1999. Previously, Mr.
Edens was head of the Global Principal Finance group at
Union Bank of Switzerland, as well as a managing director
of UBS between May 1997 and May 1998. Prior to joining UBS,
Mr. Edens was a partner and managing director of BlackRock
Financial Management, Inc., a fixed-income money manager,
and the chief operating officer of BlackRock Asset
Investors, a real estate investment fund from October 1993
Director since December 1999 to May 1997. In addition, Mr. Edens was formerly a partner
Age 38 and managing director of Lehman Brothers, an investment
banking firm.
</TABLE>

ROBERT I. KAUFFMAN Mr. Kauffman has been the president of Fortress Investment
President, Group LLC and Fortress Investment Corp. and a member of the
Fortress Investment Corp., board of directors of Fortress Investment Corp. since their
Fortress Investment Group LLC and formation in April 1998 and has been the president and a
Impac Commercial Holdings, Inc. director of Impac Commercial Holdings, Inc. since May 1999.
Previously, Mr. Kauffman was the head of the acquisitions
and risk management department of the Global Principal
Finance group at Union Bank of Switzerland, as well as a
managing director at UBS between May 1997 and May 1998.
Prior to joining UBS, Mr. Kauffman was a principal of
BlackRock Financial Management, Inc. and a managing
director of BlackRock Asset Investors from April 1994 to
May 1997. Prior to joining BlackRock, Mr. Kauffman was an
Director since December 1999 executive director of Lehman Brothers International, an
Age 36 investment banking firm.
</TABLE>

PAUL M. LOW Mr. Low has been Chief Executive Officer of Laureate Inc.,
Chief Executive Officer, a privately-held software company, since March 1997. He was
Laureate Inc. the founder of and was Chairman of the Board of New America
Financial L.P., a mortgage banking firm, from January 1992
Chairman: Executive and Nominating Committees to September 1994, when he retired. He was President of
Lomas Mortgage USA, a mortgage banking firm, from July 1987
to his retirement in December 1990, serving in various
executive positions with Lomas Mortgage USA for more than
Director since November 1990; five years prior to 1987. Mr. Low served as Senior
and April 1985 to March 1990 Executive Vice President of Capstead from April 1985 to
Age 69 January 1988.
</TABLE>

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<PAGE> 12

<TABLE>
<S> <C>
RONN K. LYTLE Mr. Lytle has been Chairman and Chief Executive Officer of
Chairman of the Board, Capstead since August 1992 and President and Chief
Chief Executive Officer and President Operating Officer since January 1989. Prior thereto, he
Capstead Mortgage Corporation served in various positions with Capstead since December
1985. Mr. Lytle also served as a director, Chairman and
Member: Executive and Nominating Committees Chief Executive Officer of Tyler Cabot Mortgage Securities
Fund, Inc. from March 1992 until its merger into Capstead
in December 1992; and, prior thereto, from Tyler Cabot's
Director since 1988 organization in August 1988 until March 1992, as a
Age 59 director, President and Chief Operating Officer.
</TABLE>

MICHAEL G. O'NEIL Mr. O'Neil has been recommended to the nominating committee
Director, Corporate and Institutional by Messrs. Lytle and Low for election to the Capstead board
Client Group, Merrill Lynch, Pierce, Fenner & of directors as an independent director. Mr. O'Neil is a
Smith Incorporated director in the Corporate and Institutional Client Group at
Merrill Lynch, Pierce, Fenner & Smith Incorporated, an
investment banking firm. Mr. O'Neil has been with Merrill
Age 57 Lynch since 1972.
</TABLE>

HOWARD RUBIN Mr. Rubin has been recommended to the nominating committee
Private Investments by Messrs. Edens and Kauffman for election to the Capstead
board of directors as an independent director. Until his
retirement in September 1999, Mr. Rubin was a senior
managing director at Bear, Stearns & Co., Inc., an
Age 44 investment banking firm, for more than 5 years.
</TABLE>

MARK S. WHITING Mr. Whiting has been recommended to the nominating
Managing Partner, committee by Messrs. Edens and Kauffman for election to the
Drawbridge Partners, LLC Capstead board of directors as an independent director. Mr.
Whiting has been the managing partner of Drawbridge
Partners, LLC, a real estate investment firm, since
September 1998. Mr. Whiting served as chief executive
officer and a director of TriNet Corporate Realty Trust,
Inc., a commercial REIT, from May 1996 through September
1998. From May 1993 to May 1996, Mr. Whiting served as
Age 43 president and a director of TriNet.
</TABLE>

EFFECT OF ELECTION OF DIRECTORS

If all four of the Fortress nominees are elected by our stockholders, the
Supplemental Agreement contemplates that the following events will then occur:

- Mr. Edens will be appointed to the positions of Chairman and Chief
Executive Officer of Capstead; and

- Mr. Lytle will be appointed to the position of Vice Chairman of Capstead
(see also "-- Lytle Employment Agreement" below).

If all four of the Fortress nominees are elected by the stockholders and
such contemplated events occur, Fortress will be in a position to influence
significantly our future business policies and operations, and we will likely
modify our investment strategy. See "-- Proposed Modification of Capstead's
Investment Strategy" below.

The Supplemental Agreement also provides that if all four of the Fortress
nominees are elected to the board, Fortress will, on or before six months from
the date of the annual meeting, acquire at least 5,000,000 Common shares
through, at Fortress' option, open market purchases, conversion of a portion of
its Series C shares or Series D shares, or any combination thereof.

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<PAGE> 13

Mr. Lytle has rights under his employment agreement which will be triggered
in the event that all four Fortress nominees are elected and certain other
events occur, as discussed under "-- Lytle Employment Agreement" below.

If any of the four Fortress nominees are not elected at the annual meeting
by a majority of the votes cast, the following events will occur:

- none of such nominees will qualify to serve as a director;

- Ms. Miers and Messrs. Longstreth, Smith and Tolleson will continue as
directors; and

- Fortress will have the right to cause us, and we will have the right, to
repurchase the Series C shares and the Series D shares from Fortress at a
3% premium.

Fortress will also have the right to cause us to repurchase the Series C
shares and Series D shares if Mr. Edens is not appointed Chairman and Chief
Executive Officer of Capstead and Mr. Lytle is not appointed Vice Chairman of
Capstead, notwithstanding the election of all four of the Fortress nominees. In
addition, the Fortress nominees have informed us that, if elected, they will
resign as directors if Mr. Edens is not appointed Chairman and Chief Executive
Officer of Capstead or if Fortress exercises its right to cause us to repurchase
the Series C shares and Series D shares at a premium. If Fortress or Capstead
exercises the repurchase right described above, Fortress will have no obligation
to acquire additional Common shares.

OVERVIEW OF CAPSTEAD'S TRANSACTIONS WITH FORTRESS

Declining long-term interest rates throughout much of 1998 contributed to
substantial liquidity issues for the mortgage finance industry. In response to
these market conditions, we reduced our mortgage asset holdings and sold our
mortgage banking operations. As a result, we entered 1999 with substantial
liquidity but diminished earnings capacity. Our business currently consists
primarily of managing a leveraged portfolio of single-family residential
mortgage-backed securities issued by governmental-sponsored entities, either
Fannie Mae, Freddie Mac or Ginnie Mae, commonly referred to as agency
securities.

Throughout 1999, the board of directors and our management continued to
evaluate a number of opportunities to acquire or make strategic investments in a
variety of real estate-related investments and entities. In the spring of 1999,
the board of directors reviewed the performance of other REITs and speciality
real estate finance companies, including the investment strategies being
implemented by these companies and their performance during and after the
adverse market conditions experienced in 1998. In addition to the strategies
being pursued by these companies, the board and our management considered other
alternative business strategies, including variations from traditional mortgage
REIT business plans. In connection with the analysis of the long-term impact on
stockholder value of these strategies, the board also considered the option of
liquidating our assets. Finally, the board reviewed the advantages and
disadvantages of maintaining our current strategy of investing primarily in
agency securities.

In late 1998, Mr. Lytle was approached by Mr. Edens concerning the
possibility of a potential transaction between Fortress and Capstead, and they
had additional discussions on this subject during 1999. In the fall of 1999, Mr.
Edens presented a formal proposal to Mr. Lytle for an equity investment in
Capstead by Fortress. Mr. Lytle presented this proposal, together with other
potential business opportunities and alternatives, to the board of directors in
September 1999. The board, after discussing the merits of these potential
opportunities and alternatives, asked Mr. Lytle to pursue further discussions
with Fortress. As discussions between Capstead and Fortress progressed, the
board engaged PaineWebber Incorporated, an investment banking firm, on November
19, 1999 to render a fairness opinion in connection with the potential
investment by Fortress in Capstead. At a meeting of the board on November 30,
1999 held to evaluate the proposed transaction with Fortress, representatives of
Fortress presented a definitive proposal regarding an equity investment by
Fortress in Capstead, and PaineWebber presented a financial analysis of the
potential investment by Fortress in Capstead.

During Fortress' presentation, representatives of Fortress discussed their
industry experience with members of the board, and also presented their proposed
modifications to our investment strategy. The board

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<PAGE> 14

of directors gave weight to the experience of Fortress and its representatives
and their ability to produce good returns in the past. The board of directors
also looked with favor upon Fortress' ability to implement the proposed
investment strategy and deemed it to be in the best interest of Capstead's
stockholders to pursue such strategy. After considering the presentation of
Fortress, the financial analysis presented by PaineWebber and other relevant
factors, the board of directors determined that the proposed transaction with
Fortress was superior to liquidation and the other potential opportunities and
alternatives which had been previously presented to the board. Accordingly, the
board of directors authorized Mr. Lytle to execute definitive documents and
consummate the proposed transaction with Fortress.

On December 9, 1999, the date on which definitive documents were executed,
PaineWebber delivered its opinion to the effect that, as of such date and based
upon and subject to the assumptions described in such opinion, the proposed
investment in Capstead by Fortress, taken as a whole, was fair to Capstead from
a financial point of view. A copy of PaineWebber's fairness opinion is included
as Annex A.

Upon execution of the definitive documents, we issued and sold to Fortress
5,378,000 Series C shares for an aggregate purchase price of $25,600,000 and
5,378,000 Series D shares for an aggregate purchase price of $25,600,000. The
Series C and Series D shares were issued for a cash purchase price of $4.76 per
share. In connection with this issuance, we entered into the Supplemental
Agreement and a registration rights agreement with Fortress. Concurrently with
this transaction, the following actions previously authorized by the board of
directors took effect:

- the number of directors comprising the board increased from six to eight;
and

- Messrs. Edens and Kauffman were elected to fill the vacancies created by
the increase in the size of the board of directors.

On January 21, 2000, Fortress Investment Corp. assigned the Series C shares
and Series D shares and its rights and obligations associated therewith to
Fortress Cap LLC, an affiliate of Fortress Investment Corp.

DESCRIPTION OF THE SERIES C SHARES AND SERIES D SHARES

The holders of Series C shares and Series D shares, respectively, are
entitled to receive cumulative preferential cash dividends at the annual rate of
$0.56 per share and $0.40 per share, payable quarterly. The Series C shares and
Series D shares rank prior to the Common shares, and on a parity with our $1.60
Cumulative Convertible Preferred Stock, Series A and $1.26 Cumulative
Convertible Preferred Stock, Series B, with respect to the payment of dividends.
The Series C shares and Series D shares were issued to yield approximately 11.76
percent and 8.40 percent, respectively. As long as these shares are not
converted to Common shares and remain outstanding and if Capstead's return on
its equity does not exceed these yields, the issuance of these shares will
reduce earnings per Common share. In addition, although Fortress paid a 29%
premium over the December 9, 1999 closing price of the Common shares ($3 11/16),
the $4.76 per share issue price represented a 27% discount to our book value per
Common share at the time of such issuance, which resulted in a decline in our
book value of $0.35 per Common share (including transaction costs and
anticipated costs associated with Mr. Lytle's employment agreement). However,
taken together with the purchase of approximately 11,137,000 Common shares in
our issuer tender offer completed in January 2000, our book value per Common
share declined by only $0.04.

The Series C shares and Series D shares rank prior to the Common shares
upon liquidation, so that in the event of our liquidation, dissolution or
winding up, the holders of Series C shares and Series D shares, respectively,
would be entitled to receive, before any distribution is made to holders of
Common shares, an amount equal to $6.89 and $4.76 per share, plus all
accumulated and unpaid dividends. The Series C shares and Series D shares rank
on a parity with the Series A shares and Series B shares upon liquidation. The
holders of Series C shares and Series D shares are entitled to vote together as
a single group with the holders of Common shares on all matters submitted to the
holders of Common shares. Each Series C share and Series D share entitles its
holder to one vote for each Common share into which such Series C share or
Series D share is convertible prior to the time of such vote. The holders of
Series C shares and Series D

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<PAGE> 15

shares, each voting separately as a class, must also approve the creation of any
stock senior to such series and certain other actions that would impair such
series' priority.

The Series C shares and Series D shares are convertible at any time into
fully paid and non-assessable Common shares, at the current conversion rate. All
Series C shares outstanding on December 31, 2009 will automatically convert into
fully paid and non-assessable Common shares and all Series D shares outstanding
on December 31, 2005 will automatically convert into fully paid and
non-assessable Common shares. The conversion rate for the Series C shares and
Series D shares is one Common share for each Series C share or Series D share
converted, such rate being subject to adjustment from time to time to prevent
dilution. If the reverse stock split is approved, the conversion rate for the
Series C shares and the Series D shares will be one-half of one Common share for
each Series C share or Series D share converted. Series C shares are redeemable
at our option at any time after December 9, 2004, in whole or in part, at a
price of $6.56 per share plus all accumulated and unpaid dividends. Series D
shares are redeemable at our option at any time after December 9, 2004, in whole
or in part, at a price of $4.76 per share plus all accumulated and unpaid
dividends.

We also entered into a registration rights agreement with Fortress which
provides that holders of Series C shares or Series D shares may, at any time
after December 8, 2000, require that we effect, at our expense, up to two
registrations under the Securities Act of 1933 of at least a majority of the
Common shares into which Series C shares and Series D shares are convertible. In
addition, if we propose to register any of our securities under the Securities
Act of 1933, other than by a registration on Form S-4 or S-8 or any successor or
similar forms, or certain other registrations, we will use our best efforts to
effect the registration under the Securities Act of all Common shares into which
Series C shares and Series D shares are convertible which we have been so
requested to register by the holders of Series C shares and Series D shares.

SUPPLEMENTAL AGREEMENT

In connection with our issuance and sale of the Series C shares and Series
D shares, we entered into the Supplemental Agreement with Fortress. The
following summarizes the material provisions of the Supplemental Agreement, as
amended.

Fortress Put/Capstead Call Rights

Pursuant to the Supplemental Agreement, if any of the four Fortress
nominees are not elected by the stockholders, then Fortress and Capstead will
each have the right, at its option, to effect the repurchase by Capstead from
Fortress of all, but not less than all, of the outstanding Series C shares and
Series D shares, for a price equal to 103% of the amount which Fortress
originally paid for those shares, plus all accrued and unpaid dividends on the
shares to be purchased. Fortress will also have the right to cause this
repurchase, even if all four of the Fortress nominees are elected, if any of the
following occur:

- the board has not adopted resolutions appointing Mr. Edens Chairman and
Chief Executive Officer of Capstead and Mr. Lytle Vice Chairman of
Capstead; or

- during the period from December 9, 1999 through the date of the annual
meeting, we fail to conduct our business, operations, activities and
practices only in the ordinary course, in accordance with prudent
practice and consistent with past practice established in 1999, other
than actions taken at the request or with the approval of Fortress, or
there is a direct or indirect change, occurrence or effect (other than as
a result of changes in general conditions, including economic or
political developments, applicable to the industry in which we operate)
on our business, operations, properties, condition, assets, obligations
or liabilities that reasonably could be expected to be materially adverse
to us.

These rights will expire 30 days after the annual meeting.

Change in Control Put

The Supplemental Agreement provides that, if at any time after election of
all four of the Fortress nominees at the annual meeting and prior to December 9,
2004, there is a change in control of Capstead, as

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<PAGE> 16

defined in the Supplemental Agreement, then Fortress can cause us to repurchase
all, but not less than all, of the Series C shares and Series D shares
outstanding at that time. Such shares would be repurchased for the original per
share purchase price of such Series C shares and Series D shares, plus all
accrued and unpaid dividends.

Acquisition of Common Shares

If all four of the Fortress nominees are elected by our stockholders, the
Supplemental Agreement provides that Fortress or an affiliate of Fortress will,
within the six-month period following the date of the annual meeting, acquire no
less than 5,000,000 Common shares. These Common shares may be acquired, at
Fortress' option, by open-market purchases of Common shares, conversion of some
portion of the Series C shares or Series D shares, or any combination thereof.
Any acquisition by Fortress or its affiliates of Common shares during the period
from December 9, 1999 through the date of the annual meeting, which may not
exceed 3,300,000 Common shares, will be considered part of the 5,000,000 Common
shares described above.

Fortress' obligation to purchase these Common shares will terminate if
either Fortress or Capstead exercises its right under the Supplemental Agreement
to cause the Series C shares and Series D shares to be repurchased from Fortress
by Capstead.

DESCRIPTION OF FORTRESS

Fortress Investment Group LLC is a real estate investment and management
company with headquarters in New York City. Fortress was founded in April 1998
by a group of senior professionals led by Mr. Edens. Fortress and its affiliates
manage approximately $800 million of private equity and invest primarily in
undervalued real estate-related assets and companies, domestically and
internationally. Fortress Investment Group is the external manager of Fortress
Investment Corp.

Fortress was formed to continue the highly successful private equity track
record of its principals. Fortress' principals have over 60 years of collective
structured finance, capital markets and real estate experience, and have worked
together for approximately 12 years. In the past five years alone, the
principals have directed the acquisition and management of approximately $11
billion of real estate-related assets in 85 transactions in North America and
Europe. The principals have financed and monetized many of these investments
through the issuance of over $9 billion (principal amount) of fixed income
securities.

The Fortress management team has experience investing in a variety of asset
types across the credit spectrum. Investments have included:

- purchases of distressed commercial and residential mortgage loans;

- opportunistic financings;

- assets acquired through bankruptcies and restructurings;

- assets acquired through government privatizations; and

- preferred equity investments in publicly traded real estate-related
companies.

Fortress and its affiliates currently have a team of over 50 professionals
with structured finance, capital markets and real estate experience. For
biographical information concerning Mr. Edens, Fortress' chairman and chief
executive officer, and Mr. Kauffman, Fortress' president, see "Election of
Directors -- Nominees" above.

INTEREST OF FORTRESS IN THE ELECTION OF DIRECTORS

Messrs. Edens and Kauffman became directors of Capstead on December 9,
1999. Neither Mr. Edens nor Mr. Kauffman directly owns any of our securities.
However, by reason of their status as directors and executive officers of
Fortress, they may be deemed to be the beneficial owners of the Series C shares
and Series D shares and any Common shares issuable upon conversion of the Series
C shares and Series D shares.

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<PAGE> 17

Mr. Edens and Mr. Kauffman, by reason of their status as directors of Capstead,
directors and executive officers of Fortress, and beneficial owners of our
securities, may have an interest in the outcome of the vote on the election of
the Fortress nominees. We have been advised that each of Mr. Edens and Mr.
Kauffman disclaims beneficial ownership of the Series C shares and Series D
shares and any Common shares that may be from time to time owned directly or
beneficially by Fortress.

PROPOSED MODIFICATION OF CAPSTEAD'S INVESTMENT STRATEGY

Our current investment strategy of managing a portfolio of residential
mortgage assets to achieve reasonable investment returns has proven very
difficult in today's environment. Our earnings currently depend, in part, on the
difference between the interest received on agency securities, and the interest
paid on related short-term borrowings. Because agency securities are considered
to have virtually no credit risk as a result of real or implied U.S. government
guarantees, yields earned on such investments are relatively low compared to
more credit-sensitive securities of equal maturity and, therefore, the resulting
spread earned by us over our borrowing costs can be relatively modest and the
opportunity to profitably finance these investments on other than a short-term
basis is generally limited. Therefore, our current strategy is relatively
sensitive to changes in interest rates, which may result in earnings volatility
and fluctuations in our book value per share as well as the market prices of our
common and preferred stock.

We are considering modifying our investment strategy to replace a portion
of our existing mortgage investments with a diversified portfolio of
credit-sensitive CMBS and residential mortgage-backed securities, most of which
are expected to be "investment grade" at the time of purchase as determined by
national rating agencies. Credit-sensitive CMBS and residential mortgage-backed
securities generally earn higher yields than those typically earned on our
existing mortgage assets, due largely to a higher risk of default by the
underlying borrowers and, to a lesser extent, reduced liquidity. These types of
investments may allow for the reduction of interest rate risk through the use of
longer-term financing that more closely matches the interest rate adjustment
features and expected life of these investments. As a result, we anticipate that
we may be able to improve our earnings prospects and provide more stability
during periods of interest rate volatility.

Consistent with this proposed modification of our investment strategy,
since mid-December 1999, with Fortress' consent, we have acquired $76 million of
investment grade CMBS from a third party not affiliated with Fortress. Each
security has an expected life of less than 3 years with an interest rate that
adjusts monthly based on a spread over 30-day LIBOR. These securities have been
financed with obligations that have similar interest rate adjustment features
and maturities, resulting in a net investment of $13 million. Beyond these
initial CMBS purchases, there can be no assurance as to what extent, if any,
this proposed strategy will be implemented, and if implemented, whether or not
it will be successful in meeting our goals.

RISKS ASSOCIATED WITH MODIFICATION OF CAPSTEAD'S INVESTMENT STRATEGY

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.

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<PAGE> 18

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 will be
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 affect the repayment of commercial
mortgages pledged to secure CMBS.

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 we may
incur losses if the proceeds from the sale of the underlying collateral, less
related foreclosure costs, are less than the unpaid principal balance of the
mortgage loan. 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 credit 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.

LYTLE EMPLOYMENT AGREEMENT

Mr. Lytle is a party to an employment agreement with Capstead executed as
of August 1, 1992 and initially expiring on December 31, 1995. The employment
agreement is subject to automatic one year extensions of the then remaining term
commencing on December 31, 1992 and on each December 31 thereafter, through
December 31, 2006 (age 65), unless at least 180 days prior to any such December
31, we give notice that we do not wish to extend. Thus, on December 31, 1999,
Mr. Lytle's employment agreement was automatically extended one additional year
and will now expire on December 31, 2003.

Mr. Lytle's employment agreement established a base salary for 1993 of
$490,000, with automatic annual increases of 6% over the base salary to which
Mr. Lytle was entitled under his employment agreement in the immediately
preceding year. In some years, Mr. Lytle has voluntarily received a base salary
below the amount to which he was otherwise entitled under his employment
agreement. In 1999, Mr. Lytle requested and received a base salary of $520,000,
although he was contractually entitled to receive a base salary of $695,074
under the terms of his employment agreement. Mr. Lytle has indicated that, for
2000, he will adhere to the terms of his employment agreement, which entitles
him to a base salary in 2000 of $736,779. The compensation committee of the
board of directors has agreed that Mr. Lytle is entitled to this base salary

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under the terms of his employment agreement. The compensation committee has also
determined not to pay a bonus to Mr. Lytle in 1999.

If Mr. Lytle terminates his employment for good reason in 2000, Mr. Lytle
will be entitled to a lump-sum severance payment equal to three times the amount
of his adjusted base salary as determined by a formula set forth in his
employment agreement (which results in an adjusted base salary of $736,779 in
2000), plus an amount equal to three times the average of the two highest of his
three most recent annual incentive compensation payments (which were $749,500 in
1997 and zero in 1998 and 1999), as well as benefits under our medical
insurance, disability and health and accident plans for three years following
such termination. "Good reason" is defined under Mr. Lytle's employment
agreement to include (i) a change in control, as defined therein, (ii) certain
changes in Mr. Lytle's duties or compensation, (iii) the failure of the board of
directors to nominate Mr. Lytle to the positions of Chairman, Chief Executive
Officer and President and (iv) action by Capstead to prevent the automatic
extension of his employment agreement.

If the Fortress proposal is adopted at the annual meeting and Mr. Edens is
made Chairman and Chief Executive Officer, Mr. Lytle will have the right to
terminate his employment agreement for good reason and is expected to do so.
Based on Mr. Lytle's base salary in the year 2000 of $736,779 and the average of
the two highest of his three most recent annual incentive compensation payments
of $374,750, Mr. Lytle would be entitled to a lump-sum severance payment in the
amount of $3,334,587 during 2000. Such severance payment will represent a
non-recurring charge against operating results when incurred.

In addition, if Fortress becomes the owner of preferred and common stock
representing more than 25% of the combined voting power of Capstead, which could
occur after the annual meeting, then Mr. Lytle can also terminate his employment
agreement for good reason resulting from a change in control. If Mr. Lytle
terminates his employment for good reason resulting from a change in control,
Mr. Lytle will be entitled to receive an additional payment of approximately
$357,665 representing Mr. Lytle's damages resulting from his loss of retirement
plan benefits under his employment agreement to which he would be entitled
through December 31, 2003.

Based upon Mr. Lytle's rights under his employment agreement, which are
expected to be triggered in the event that all four of the Fortress nominees are
elected and Mr. Edens is appointed Chairman and Chief Executive Officer of
Capstead, Mr. Lytle has an interest in the outcome of the vote on the election
of directors.

VOTE REQUIRED FOR ELECTION

The election of each nominee to the board of directors requires the
affirmative vote of a plurality of the Common shares, Series C shares and Series
D shares, voting together as a class, cast at the annual meeting. In addition,
as determined by the Board of Directors and as described above, Messrs. Edens,
Kauffman, Rubin and Whiting must receive the vote of a majority of the voting
shares cast in the election of directors or none of them will qualify to serve
as a director. Fortress, the sole holder of the Series C shares and Series D
shares, has informed us that it intends to vote FOR each nominee named above.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH OF THE NOMINEES NAMED
ABOVE.

-12-
<PAGE> 20

REVERSE STOCK SPLIT PROPOSAL

GENERAL

On February 28, 2000, the last reported sales price for our Common shares
as reported on the New York Stock Exchange Composite Tape was $4.06 per share.
We believe that the per share price of our Common shares has affected the
marketability of the existing Common shares and increased the amount and
percentage of transaction costs paid by individual stockholders. Accordingly,
our board of directors has unanimously adopted resolutions approving, and
recommending that stockholders authorize, an amendment of our charter to:

- effect a one-for-two reverse split of our outstanding Common shares; and

- provide for the payment in cash in lieu of fractional shares otherwise
issuable in connection with the reverse split.

There will be no change in the number of our authorized Common shares and
no change in the par value of our Common shares.

Approval of the amendment to our charter to effect the reverse stock split
requires the affirmative vote of a majority of the outstanding Common shares,
Series C shares, and Series D shares, voting together as a class, as of the
record date. Between the time of stockholder approval and filing of the Articles
of Amendment with the Maryland State Department of Assessments and Taxation, our
board of directors may determine, as provided by Maryland law, to abandon the
reverse stock split. Our board of directors would take this action only if it
determined that the reverse split was no longer in the best interests of our
stockholders.

REASONS FOR THE REVERSE STOCK SPLIT PROPOSAL

We believe that the anticipated price level of our Common shares from the
reverse stock split will encourage greater interest in our Common shares by the
financial community and the investing public. In addition, the structure of many
trading commissions tends to have an adverse impact upon holders of lower priced
stocks because the brokerage commission payable on the sale of lower priced
stock often can represent a higher percentage of the sales price than the
commission on relatively higher-priced stock.

Despite the anticipated benefits of the reverse stock split, it is possible
that the liquidity of our Common shares could be adversely affected by the
reduced number of shares outstanding after the reverse stock split. In addition,
there can be no assurance that the market price of the Common shares immediately
after the reverse stock split will be approximately twice the market price of
the Common shares immediately before the reverse stock split or that any
increased market price can be maintained for any period of time after the
reverse stock split.

EFFECT OF THE REVERSE STOCK SPLIT

If the reverse stock split is approved at the annual meeting and becomes
effective, the result would be that each holder of Common shares would receive
one new Common share for each two Common shares held at the effective time of
the reverse stock split, with the aggregate number of outstanding Common shares
decreasing from approximately 45.7 million Common shares to approximately 22.9
million Common shares. Beginning at the effective time, each certificate
representing old Common shares will be deemed for all corporate purposes to
evidence ownership of new Common shares.

No fractional shares or scrip would be issued in connection with the
reverse stock split. Stockholders who would otherwise be entitled to receive
fractional shares because they hold a number of Common shares not evenly
divisible by two will be entitled, upon surrender of certificates representing
such shares, to a cash payment in lieu thereof at a price equal to the fraction
to which the stockholder would otherwise be entitled multiplied by the last sale
price of the Common shares as reported on the New York Stock Exchange Composite
Tape on the last trading day prior to the effective time of the reverse stock
split. The ownership of a

-13-
<PAGE> 21

fractional interest will not give the holder thereof any voting, dividend or
other rights except to receive the fractional share payment described above.

Stockholders should be aware that, under the escheat laws of the various
jurisdictions where stockholders reside, where Capstead is domiciled and where
the funds will be deposited, sums due for fractional interests that are not
timely claimed after the effective date of the reverse stock split may be
required to be paid to the designated agent for each jurisdiction, unless we or
the exchange agent have received correspondence concerning ownership of such
funds within the time permitted in such jurisdiction. Thereafter, stockholders
otherwise entitled to receive such funds will have to seek to obtain them
directly from the state to which they were paid.

If the reverse stock split is approved at the annual meeting and becomes
effective, appropriate adjustments will be made with respect to the number of
Common shares for which outstanding employee stock options are exercisable, and
with respect to the conversion rates at which the shares of each class of our
preferred stock may be converted into Common shares.

If the reverse stock split is effected, the number of Common shares
available for issuance will increase from 28.7 million to 64.3 million. Although
not a factor in the decision of the board of directors to propose the reverse
stock split, the increased number of authorized and unissued Common shares could
be used by the board of directors as an anti-takeover defense. For example, if
we were the subject of a hostile takeover attempt, we could try to impede the
takeover by issuing available Common shares, thereby diluting the voting power
of the other outstanding Common shares and increasing the potential cost of the
takeover. Other than the change in control which might be deemed to occur if the
stockholders elect all four of the Fortress nominees, we are not aware of any
attempt, or contemplated attempt, to acquire control of Capstead, and this
proposal is not being presented with the intent that it be utilized as a type of
anti-takeover device.

PROCEDURE FOR EFFECTING REVERSE STOCK SPLIT AND EXCHANGE OF STOCK CERTIFICATES

As soon as practicable after the effective time of the reverse stock split,
we will send a letter of transmittal to each stockholder of record at the
effective time for use in transmitting certificates representing Common shares
to our transfer agent and exchange agent, Norwest Bank Minnesota, N.A. The
letter of transmittal will contain instructions for the surrender of old
certificates to the exchange agent in exchange for certificates representing the
appropriate number of whole new Common shares and a check in lieu of any
fractional interest of a new Common share. No new certificates will be issued to
a stockholder until that stockholder has surrendered all old certificates
together with a properly completed and executed letter of transmittal to the
exchange agent. Until surrendered, outstanding old certificates held by
stockholders will be deemed for all purposes to represent the number of whole
new Common shares to which such stockholders are entitled as a result of the
reverse stock split. Stockholders should not send their old certificates to the
exchange agent until they have received the letter of transmittal.
Notwithstanding whether a stockholder has failed to exchange old certificates
for new certificates, any dividends declared by us in respect of the Common
shares after the effective date of the reverse stock split will be on a per
share basis as to the number of new Common shares to which such stockholder is
entitled.

If your Common shares are held on your behalf by a broker, bank or other
nominee, the adjustment of your position will be handled in accordance with the
procedures of The Depository Trust Company.

On the record date, there were 4,772 record holders and approximately
35,000 additional beneficial stockholders of our Common shares. We believe the
reverse stock split will not effect a material reduction in the number of
holders of our Common shares.

FEDERAL INCOME TAX CONSEQUENCES

The following is a brief summary of the material federal income tax
consequences of the reverse stock split to our stockholders. This discussion is
based upon federal income tax laws as currently in effect, does not purport to
be a complete discussion of such consequences and is not intended as tax advice
to any person.

-14-
<PAGE> 22

Accordingly, the stockholders are advised to consult their own tax advisors for
more detailed information regarding the effects of the reverse stock split on
their individual tax status.

We believe that the reverse stock split will be a tax-free recapitalization
under Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended, to
the extent presently issued and outstanding common shares are exchanged solely
for new Common shares. The new Common shares issued to each stockholder will
have an aggregate basis for computing gain or loss equal to the aggregate basis
of Common shares held by such stockholder immediately prior to the reverse stock
split, less the basis allocable to any fractional interest of a new Common share
for which cash is received. A stockholder's holding period for new Common shares
should include the holding period for Common shares exchanged therefor, provided
that such Common shares were capital assets held by such stockholder at the
effective time of the reverse stock split. The Internal Revenue Service has
ruled that where a cash payment is paid in lieu of fractional interests and is
not in the nature of bargained-for-consideration, the cash will generally be
treated as a distribution in full payment in exchange for the fractional share.
Thus, if the Common shares were capital assets held by such stockholder, capital
gain or loss will be recognized measured by the difference between the cash
received and the basis allocable to the fractional interest of the new Common
share for which such cash was received. The capital gain or loss will be
long-term capital gain or loss if the old Common shares had a holding period in
excess of one year.

VOTE REQUIRED FOR APPROVAL

The approval of the amendment to our charter to effect a one-for-two
reverse split of our Common shares requires the affirmative vote of a majority
of the Common shares, Series C shares and Series D shares, voting together as a
class, outstanding as of the record date.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE REVERSE STOCK SPLIT
PROPOSAL.

-15-
<PAGE> 23

MANAGEMENT

CURRENT MANAGEMENT

The following table sets forth the names and ages of our current executive
officers and directors and the positions held with Capstead by each individual:

<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Ronn K. Lytle......................... 59 Chairman, Chief Executive Officer and
President
Andrew F. Jacobs...................... 40 Executive Vice President -- Finance
Phillip A. Reinsch.................... 39 Senior Vice President -- Control
Robert R. Spears, Jr. ................ 38 Senior Vice President -- Asset and
Liability Management
Wesley R. Edens....................... 38 Director
Robert I. Kauffman.................... 36 Director
Bevis Longstreth...................... 65 Director
Paul M. Low........................... 68 Director
Harriet E. Miers...................... 54 Director
William R. Smith...................... 59 Director
John C. Tolleson...................... 50 Director
</TABLE>

Andrew F. Jacobs has served as Executive Vice President -- Finance of
Capstead since May 1999. From August 1998 to May 1999, he served as Executive
Vice President -- Finance, Treasurer and Secretary. From March 1998 to August
1998, he served as Senior Vice President -- Asset and Liability Management.
Prior thereto, he was Senior Vice President -- Control and Treasurer of Capstead
from October 1991 to March 1998 and Secretary from August 1992 to March 1998.
From July 1989 to September 1991, Mr. Jacobs served as Vice President -- Control
and Treasurer of Capstead. Mr. Jacobs also served as Senior Vice President --
Control of Tyler Cabot Mortgage Securities Fund, Inc. from October 1991 until
its merger into Capstead in December 1992, and as Vice President -- Control of
Tyler Cabot from February 1989 to September 1991.

Phillip A. Reinsch has served as Senior Vice President -- Control of
Capstead since July 1998. From March 1993 to June 1998, he served as Vice
President -- Control. Prior thereto, Mr. Reinsch was employed by Ernst & Young
L.L.P., a national public accounting firm, from July 1984 to March 1993, last
serving as Audit Senior Manager.

Robert R. Spears, Jr. has served as Senior Vice President -- Asset and
Liability Management of Capstead since February 1999. From April 1994 to
February 1999, he served as Vice President -- Asset and Liability Management.
Prior thereto, he was employed by NationsBanc Mortgage Corporation from 1990 to
April 1994, last serving as Vice President -- Secondary Marketing Manager.

Bevis Longstreth has served as a director since 1994. Mr. Longstreth
retired in 1998 from the New York law firm of Debevoise & Plimpton, where he had
been a partner since 1970. He was an Adjunct Professor of Law at Columbia
University School of Law from 1995 until 1999. He served as Commissioner of the
Securities and Exchange Commission from 1981 to 1984. He is a member of the
board of AMVESCAP plc and of the College Retirement Equities Fund and serves as
Chairman of the Finance Committee of the Rockefeller Family Fund and Chairman of
the Investment Committee of the Nathan Cummings Foundation.

Harriet E. Miers has served as a director since 1993. Ms. Miers has served
as Co-Managing Partner of the Dallas law firm of Locke Liddell & Sapp LLP since
January 1999. Prior thereto, she served as President of the Dallas law firm of
Locke Purnell Rain Harrell from March 1996 to January 1999 and was a shareholder
in the firm from 1978 to January 1999. Ms. Miers served as a member of the
Dallas City Council from 1989 to 1991 and as President of the State Bar of Texas
from 1992 to 1993. Ms. Miers is also Chair of the Texas Lottery Commission and
serves on the Executive Board of the Southern Methodist University Law School.

-16-
<PAGE> 24

William R. Smith has served as a director since 1993. Mr. Smith has been
Chairman and Chief Executive Officer of Smith Capital Management, Inc., an asset
management firm, for more than the previous five years. He is on the Finance
Committee of the Winthrop Rockefeller Foundation, the Investment Committee of
the Navigators and is director and Chairman of the Investment Committee of the
New Horizons Foundation.

John C. Tolleson has served as a director since 1994. Mr. Tolleson is the
Chief Executive Officer of The Tolleson Group, a Dallas-based private investment
firm, and a managing director of Arena Capital Partners, LLC, a private equity
fund. Mr. Tolleson is the former Chairman and Chief Executive Officer of First
USA, Inc., which he founded in 1985. He is also a director of BankOne
Corporation, Haggar Corporation and Viad Corporation. Mr. Tolleson also serves
on the Executive Board of the Edwin L. Cox School of Business at Southern
Methodist University.

Biographical information for Wesley R. Edens, Robert I. Kauffman, Paul M.
Low and Ronn K. Lytle is set forth above under "Election of
Directors -- Nominees."

BOARD OF DIRECTORS

Ms. Miers and Messrs. Longstreth, Smith and Tolleson, who currently serve
as directors, are not standing for reelection.

During the year ended December 31, 1999, the board of directors held four
regular meetings, three dividend meetings and two special meetings. No director
attended fewer than 90 percent of all meetings of the board and the committees
on which such director served.

Directors who are not our employees or employees of our subsidiaries
receive compensation at the rate of $30,000 annually and fees of $1,250 per
meeting of the directors or of a committee and $500 for participation in
telephonic meetings to declare dividends. In addition, directors are reimbursed
for their expenses related to attending board or committee meetings.

In accordance with the terms of our 1990 Directors' Stock Option Plan, each
non-employee director (other than Messrs. Edens and Kauffman) was automatically
awarded options on each of January 1, 1999 and 2000, which were immediately
exercisable, to purchase 2,250 Common shares at an exercise price equal to the
market price of the Common shares on the date of grant. On January 1, 2000, each
non-employee director holding unexercised options also received dividend
equivalent rights, or DERs, entitling them to receive additional Common shares
at no cost upon exercise of outstanding options. Messrs. Edens and Kauffman
declined to participate in the foregoing compensation programs. Directors who
are not employees do not receive any other salaries, fees, commissions or
bonuses from us, nor do they receive any separate compensation from any of our
affiliates for their services on the board of directors or on committees of the
board.

COMMITTEES OF THE BOARD OF DIRECTORS

The board of directors has established standing committees to assist it in
the discharge of its responsibilities. The principal responsibilities of each
committee are described below. Actions taken by any committee of the board are
reported to the board of directors, usually at its next meeting. The composition
of each such committee will be changed by the new board if all four of the
Fortress nominees are elected by the stockholders.

AUDIT COMMITTEE

The audit committee, composed of three non-employee directors, met twice
during 1999. The functions of the audit committee include reviewing with
management and our independent auditors our annual results of operations, our
accounting and reporting policies and the adequacy of our internal controls. The
audit committee also recommends to the board of directors the independent
auditors to serve for the following year, approves the type and scope of
services to be performed by the auditors and reviews the related costs. Ms.
Miers chairs the audit committee, and Messrs. Longstreth and Smith are members.

-17-
<PAGE> 25

COMPENSATION COMMITTEE

The compensation committee, composed of three non-employee directors, met
three times during 1999. The board of directors has delegated the following
duties to the compensation committee:

- review of our overall compensation philosophy and compensation structure
to determine its appropriateness;

- evaluation of the performance of our chief executive officer and
recommendations with respect to base salary for the chief executive
officer to the full board of directors;

- review and approval of proposed amendments to our benefits plans;

- administration of incentive compensation plans; and

- review of the compensation arrangements of the board of directors.

Mr. Smith chairs the compensation committee, and Messrs. Longstreth and
Tolleson are members.

EXECUTIVE COMMITTEE

The executive committee, composed of three directors, did not meet during
1999. During the intervals between meetings of the board of directors, the
executive committee has all of the powers and authority of the board of
directors in the management of our business and affairs, except for those powers
which by law cannot be delegated by the board of directors. Mr. Low chairs the
executive committee, and Messrs. Lytle and Tolleson are members.

NOMINATING COMMITTEE

The nominating committee, composed of three directors, met once during
1999. The nominating committee recommends to the board a slate of directors for
election by the stockholders at each annual meeting. Stockholders wishing to
recommend candidates for consideration by the nominating committee can do so by
writing to our secretary at our offices in Dallas, Texas. Any such stockholder
recommendation should give the candidate's name, biographical data and
qualifications and should be accompanied by a written statement from the
candidate of his or her consent to be named as a candidate and, if nominated and
elected, to serve as a director. Mr. Low chairs the nominating committee, and
Mr. Lytle and Ms. Miers are members. As described above under "Election of
Directors," the nominees for election at the annual meeting were nominated as
provided in the Supplemental Agreement. Mr. O'Neil was recommended to the
nominating committee by Messrs. Lytle and Low, and Messrs. Rubin and Whiting
were recommended to the nominating committee by Messrs. Edens and Kauffman.

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<PAGE> 26

COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION

Compensation for the executive officers of Capstead is administered under
the direction of the Compensation Committee of the Board (the "Committee"),
which currently consists of three independent directors. The Committee approves
the compensation arrangements of all executive officers and the Chief Executive
Officer (other than for base salary) (together, the "Named Executives") and
submits its recommendations with respect to base salary for the Chief Executive
Officer to the full Board of Directors.

The following is the Committee's report in its role as reviewer of
Capstead's executive pay programs on 1999 compensation practices for the
executive officers of Capstead. The report and the performance graph that
appears immediately after such report shall not be deemed to be soliciting
material or to be filed with the Securities and Exchange Commission under the
Securities Act of 1933 or the Securities Exchange Act of 1934 or incorporated by
reference in any document so filed.

EXECUTIVE COMPENSATION PROGRAM PHILOSOPHY

The philosophy behind Capstead's executive compensation programs is to
attract, motivate and retain the executives needed in order to maximize the
creation of long-term stockholder value. The Committee believes that the
uniqueness of Capstead's business, its strategic direction and the required
caliber of employees needed to execute its strategy require that compensation be
determined based on the following factors:

- Responsibilities within Capstead.

- Completion of individual business objectives established prior to the
beginning of the year (which objectives may vary greatly from person to
person).

- Business unit and overall Company performance.

- Amount, form and timing of prior compensation amounts.

- Contributions toward executing the business strategy of Capstead.

The Committee believes that each of the above factors is important when
determining compensation levels. No specific weighting or formula regarding such
factors is used in determining compensation.

For 1999, the primary components of Capstead's executive's compensation
consist of: (i) base salaries; (ii) annual incentives; and (iii) other executive
programs and benefits. Each element is described in more detail below.

Base Salaries

The Chief Executive Officer reviews base salaries annually utilizing the
above factors and makes recommendations to the Committee. Any interim
modifications to salaries are also based on the above factors and
recommendations are made to the Committee.

Annual Incentives

Capstead currently maintains a Base Incentive Compensation Plan for all
employees and has created an incentive pool (the "Incentive Pool") equal to a
percentage of net income (the "Participation Percentage") above an 8 percent
return on stockholders' equity ("ROE") from which Base Incentive Compensation is
paid. The Participation Percentage for the Incentive Pool is currently set at
7.5 percent of net income above an 8 percent ROE. At the beginning of the each
year, the Chief Executive Officer recommends to the Committee a quarterly
distribution (payable April, July and October of the following year) of a
portion of the Incentive Pool to the executives, including the Chief Executive
Officer. Prior to the end of the year, the Chief Executive Officer makes his
recommendation to the Committee for the fourth quarterly distribution from the
Incentive Pool (payable in December of that year or in January of the following
year), which amount may or may not

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<PAGE> 27

exceed the previous quarterly award. Recommendations for distributions from the
Incentive Pool are based on the same factors that are used in determining other
elements of compensation as described above. Any amount remaining in the
Incentive Pool after all distributions are made is carried over and may be used
to make awards in subsequent years. The quarterly award can be terminated at any
time by the Committee.

Capstead eliminated its Profit Sharing Plan during 1999. The Profit Sharing
Plan created a profit pool ("Profit Sharing Pool") equal to a percentage of net
income above certain levels of ROE. All undistributed amounts in the Profit
Sharing Pool were transferred to the Incentive Pool during 1999.

Long-Term Incentives

The Chief Executive Officer in the past from time to time has recommended
and the Committee has granted long-term incentive grants for executive officers
to the Committee under Capstead's Flexible Long-Term Incentive Plans. While the
Committee believes that Capstead's key employees should have an ongoing stake in
the long-term success of the business, in light of Capstead's performance during
1998, no grants were made during 1999.

Other Executive Programs and Benefits

Capstead maintains employee benefit plans in which all executive officers,
including the Chief Executive Officer, participate. Capstead sponsors a 401(k)
plan and nonqualified deferred compensation plan (together the "Plans") whereby
Capstead matches employee contributions up to a preset percentage of the
participant's compensation. Capstead may also make discretionary contributions
into the Plans regardless of a participant's participation. Capstead believes
its Plans are competitive with those of other companies in the Dallas market of
comparable size and scope of business.

1999 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER

The same philosophies described above for executive compensation were used
by the Committee to set, or in the case of base salary to recommend to the
Board, the compensation of Mr. Ronn K. Lytle, Chairman, Chief Executive Officer
and President.

Base Salary

At the request of Mr. Lytle, the Committee recommended and the Board agreed
that Mr. Lytle's base salary for 1999 would be reduced from $695,074, as
provided for in his employment agreement, to $520,000. For 2000, Mr. Lytle has
indicated that he will adhere to the terms of his employment agreement, which
entitles him to a base salary of $736,779. The Committee and the board of
directors have agreed that Mr. Lytle is entitled to this base salary under the
terms of his employment agreement.

Annual Incentives

Mr. Lytle did not receive any incentive compensation for the year ended
1999.

Long-Term Incentives

Mr. Lytle did not receive any long-term incentive grants for the year ended
1999.

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<PAGE> 28

DEDUCTIBILITY OF EXECUTIVE COMPENSATION

Section 162(m) of the Code generally precludes a publicly-held corporation
from a federal income tax deduction for a taxable year for compensation in
excess of $1 million paid to the chief executive officer or any of the four most
highly compensated other executive officers. The Committee's policy on
deductibility is generally to develop compensation plans which provide for the
payment of compensation that is tax deductible to Capstead, while recognizing
that the legitimate interest of Capstead and its stockholders may at times be
better served by compensation arrangements which are not tax deductible.

Mr. Lytle's total compensation during 1999 did not exceed $1 million.

CONCLUSION

Executive compensation at Capstead is subject to considerable focus by the
Committee, the Board of Directors and senior management. The Committee believes
that Capstead's compensation programs and other benefits produces a strong
attraction and motivation for its executive officers and helps align their
interests with those of Capstead's stockholders.

William R. Smith, Chairman
Bevis Longstreth

John C. Tolleson

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<PAGE> 29

PERFORMANCE GRAPH

Set forth below is a line graph comparing the yearly percentage change in
the cumulative total stockholder return on our Common Shares, with the
cumulative total return of the S&P 500 Stock Index and the Russell 2000 Stock
Index for the five years ended December 31, 1999, assuming the investment of
$100 on December 31, 1994 and the reinvestment of dividends. The stock price
performance shown on the graph is not necessarily indicative of future price
performance.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
CAPSTEAD MORTGAGE CORPORATION COMMON STOCK AND
S&P 500 AND RUSSELL 2000 STOCK INDEX

[PERFORMANCE GRAPH]

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capstead $100.00 $222.34 $388.98 $359.07 $ 80.69 $ 92.73
S&P 500 $100.00 $134.11 $166.30 $225.49 $289.93 $350.93
Russell 2000 $100.00 $126.21 $144.84 $174.56 $168.54 $201.61
</TABLE>

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<PAGE> 30

SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS

For purposes of this proxy statement a "beneficial owner" means any person
who, directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares:

(i) Voting power which includes the power to vote, or to direct the voting
of, Common shares, Series C shares or Series D shares; and/or

(ii) Investment power which includes the power to dispose, or to direct the
disposition, of Common shares, Series C shares or Series D shares.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth the ownership of Common shares, both
beneficially and of record, both individually and in the aggregate, by each
director, director nominee and executive officer of Capstead, and by all
directors and executive officers as a group, as of the close of business on
January 31, 2000.

<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------------ ------------------ --------
<S> <C> <C>
Wesley R. Edens(1)......................................... 10,756,000 19.0
Robert I. Kauffman(1)...................................... 10,756,000 19.0
Bevis Longstreth(2)........................................ 54,398 *
Paul M. Low(3)............................................. 124,153 *
Ronn K. Lytle(4)........................................... 1,201,064 2.6
Harriet E. Miers(5)........................................ 43,822 *
William R. Smith(6)........................................ 71,572 *
John C. Tolleson(7)........................................ 29,293 *
Michael G. O'Neil(8)....................................... 3,027 *
Howard Rubin............................................... -- --
Mark S. Whiting............................................ -- --
Andrew F. Jacobs(9)........................................ 358,111 *
Phillip A. Reinsch(10)..................................... 79,288 *
Robert R. Spears, Jr(11)................................... 79,021 *
All directors and executive officers as a group (14
persons)................................................. 12,799,749 22.1
</TABLE>

- ---------------

* Denotes less than 1% of the outstanding Common shares.

(1) Neither Mr. Edens nor Mr. Kauffman directly owns any securities of
Capstead. However, by reason of their status as directors and officers of
Fortress, they may be deemed to be the beneficial owners of the Series C
shares and Series D shares and the 10,756,000 Common shares issuable upon
the conversion of the Series C shares and Series D shares. Mr. Edens and
Mr. Kauffman expressly disclaim beneficial ownership of any Common shares,
Series C shares or Series D shares.

(2) Includes (i) options to purchase 29,293 Common shares and (ii) 12,767
Common shares held in a limited partnership of which he and his wife are
the general partners and grantor trusts for his children are the limited
partners.

(3) Includes (i) options to purchase 13,816 Common shares, (ii) 18,842 Common
shares that would be received upon conversion of 25,000 Series B shares,
and (iii) 1,507 Common shares that would be received upon conversion of
2,000 Series B shares held in trust for Mr. Low's son. Mr. Low is settlor
and trustee of this trust and has voting and dispositive power over the
shares but expressly disclaims beneficial ownership.

(4) Includes (i) options to purchase 849,125 Common shares and (ii) 23,298
Common shares held in trust for Mr. Lytle's children. Mr. Lytle is settlor
and trustee of this trust and has voting and dispositive power over the
shares but expressly disclaims beneficial ownership.

(5) Includes (i) options to purchase 32,892 Common shares and (ii) 1,125 Common
shares held by Ms. Miers' mother. Ms. Miers holds her mother's power of
attorney but expressly disclaims beneficial ownership.

(6) Includes options to purchase 32,892 Common shares.

(7) Includes options to purchase 29,293 Common shares.

(8) Includes 565 Common shares that would be received upon conversion of 750
Series B shares.

(9) Includes options to purchase 308,000 Common shares.

(10) Includes options to purchase 65,936 Common shares.

(11) Includes options to purchase 58,000 Common shares.

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<PAGE> 31

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth the ownership of Common shares, Series C
shares and Series D shares, both beneficially and of record, for the persons
known by us to be beneficial owners of more than 5% of each such class of shares
outstanding, as of the close of business on January 31, 2000.

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
COMMON SERIES C NUMBER OF
SHARES PERCENT SHARES PERCENT SERIES D PERCENT
BENEFICIALLY OF BENEFICIALLY OF SHARES OF
NAME OF BENEFICIAL OWNER OWNED CLASS OWNED CLASS OWNED CLASS
- ------------------------ ------------ ------- ------------ ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Fortress Cap LLC
1301 Avenue of the Americas
42nd Floor
New York, New York 10019(1)....... 10,756,000(2) 19.0% 5,378,000 100.0% 5,378,000 100.0%
</TABLE>

- ---------------

(1) Such information is derived solely from a Schedule 13D filed with the
Securities and Exchange Commission on January 12, 2000 by Fortress Cap LLC
(the owner of record of the Series C shares and Series D shares), Fortress
Registered Investment Trust, Fortress Investment Fund LLC and Fortress
Principal Investment Holdings LLC. Fortress Cap LLC is wholly-owned by its
sole member, Fortress Registered Investment Trust. Certain additional
persons and entities named in the Schedule 13D, including Messrs. Edens and
Kauffman, may also be deemed to be beneficial owners of the Series C shares
and Series D shares (and the Common shares issuable upon the conversion of
the Series C shares and Series D shares). All such persons and entities
disclaim beneficial ownership of such shares.

(2) Consists of 10,756,000 Common shares issuable upon conversion of the Series
C and Series D shares.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

To our knowledge, based solely on review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the year ended December 31, 1999, all Section 16(a) filing requirements
were complied with, except for one transaction which was filed by amended Form 4
for Mr. Low, a director of the Company.

-24-
<PAGE> 32

EXECUTIVE COMPENSATION

Our direction and policies are established by the board of directors and
implemented by the Chief Executive Officer. The Summary Compensation Table below
shows certain compensation information for the Chief Executive Officer and the
three other most highly compensated executive officers for services rendered in
all capacities during the years ended December 31, 1999, 1998 and 1997.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------- ----------------------
OTHER TOTAL RESTRICTED
ANNUAL ANNUAL STOCK ALL OTHER
NAME AND SALARY BONUS COMPENSATION COMPENSATION AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($) (#) ($)
- ------------------ ---- ------- ------- ------------ ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronn K. Lytle.............. 1999 520,000 0 0 520,000 0 0 55,500(c)
Chairman, Chief Executive 1998 622,500 0 167,945(a) 790,445 0 400,000 116,479(c)
Officer and President 1997 620,000 749,500 148,159(a) 1,517,659 2,445,900(b) 205,107 134,176(c)
Andrew F. Jacobs........... 1999 285,500 88,000 0 373,500 0 0 17,686(c)
Executive Vice
President -- 1998 247,708 112,000 45,092(a) 404,800 0 135,000 17,150(c)
Finance 1997 190,000 176,500 41,095(a) 407,595 629,940(b) 63,652 17,255(c)
Phillip A. Reinsch......... 1999 156,000 37,600 0 193,600 0 0 10,513(c)
Senior Vice President -- 1998 135,000 42,360 14,170(a) 191,530 0 22,000 10,671(c)
Control 1997 104,042 32,380 16,191(a) 152,613 183,540(b) 17,871 7,975(c)
Robert R. Spears, Jr. ..... 1999 170,000 126,000 0 296,000 0 0 11,102(c)
Senior Vice President -- 1998 150,000 114,500 11,694(a) 276,194 0 24,000 13,856(c)
Asset and Liability 1997 142,000 138,400 20,189(a) 300,589 114,420(b) 13,966 13,384(c)
Management
</TABLE>

- ---------------

(a) Includes dividends paid on unvested shares of restricted stock. See
footnote (b). None of the dividends paid were deemed preferential.

(b) Amount includes the fair market value at the date of grant of shares of
restricted stock issued pursuant to the restructuring of long-term
incentive compensation on January 2, 1998, which was reported as a 1997
transaction. The shares were scheduled to vest 20 percent per year over
five years, provided we attained certain performance goals. As a result of
the sale of the mortgage banking operations in December 1998, which
constituted a change in control according to the terms of our 1994 Flexible
Long-Term Incentive Plan, all unvested shares vested in full on December
31, 1998. All awards of restricted stock were made pursuant to our 1994
Flexible Long-Term Incentive Plan.

(c) Amount includes matching contribution by Capstead of 50 percent of a
participant's voluntary contribution of up to a maximum of 6 percent of a
participant's compensation pursuant to the 401(k) plan adopted October
1993. Amount also includes matching contribution by Capstead of a portion
of the participant's voluntary contribution to a nonqualified deferred
compensation plan adopted July 1994. Additionally, the amount includes a
discretionary contribution made to all employees into the qualified and
nonqualified plans of 3 percent of a participant's compensation regardless
of participation in the above noted plans. All Capstead contributions are
subject to certain vesting requirements.

OPTION GRANTS

There were no grants of stock options made to the executives named above
during the fiscal year ended 1999.

-25-
<PAGE> 33

OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES

No options were exercised by the executives named above during 1999,
therefore the columns for "Shares Acquired on Exercise" and "Value Realized"
have been omitted. The columns for "Value of Unexercised In-the-Money Options at
Fiscal Year End-Exercisable and Unexercisable" have been omitted from the table
since the various exercise prices exceeded the fair market value of the
underlying stock on December 31, 1999, which was $4.1875 per share, for both
exercisable and unexercisable options.

FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS
AT FISCAL YEAR END
---------------------------
NAME EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------
<S> <C> <C>
Ronn K. Lytle............................................... 849,125 0
Andrew F. Jacobs............................................ 308,000 0
Phillip A. Reinsch.......................................... 65,936 0
Robert R. Spears, Jr. ...................................... 58,000 0
</TABLE>

EMPLOYMENT AGREEMENT

Mr. Lytle is a party to an employment agreement with Capstead executed as
of August 1, 1992. See "Election of Directors -- Lytle Employment Agreement"
above.

SEVERANCE AGREEMENTS

We have entered into a Severance Payment Agreement with each of our
employees other than Mr. Lytle as of December 9, 1999. Pursuant to these
agreements, in the event that an individual's employment with us is terminated
by us for any reason other than those described below, that employee will
receive a severance payment based upon his or her title and the number of years
of service with us at the time of termination. The severance payment will be
calculated as set forth below:

<TABLE>
<CAPTION>
TITLE YEARS OF SERVICE SEVERANCE PAY
- ----- --------------------- -------------------------------
<S> <C> <C>
Executive Vice President Five or more Two year's base annual salary
Senior Vice President and Five or more One and one-half year's base
Vice President annual salary
Assistant Vice President and Five or more One year's base annual salary
all other employees
All officers and Fewer than five years Six-month's base annual salary
all employees
</TABLE>

An employee will not be entitled to any severance payment under the
Severance Payment Agreement if:

- the employee voluntarily terminates his or her employment, other than
because of a reduction in that employee's base salary or a relocation of that
employee that requires travel from his or her primary residence to such new
location, an additional 50 or more miles each way;

- the employee fails to return to work following an approved leave of
absence; or

- we terminate the employee for cause.

-26-
<PAGE> 34

STOCKHOLDER PROPOSALS

The proxies intend to exercise their discretionary authority to vote on any
stockholder proposals submitted at the 2000 annual meeting as permitted by Rule
14a-4(c) promulgated under the Securities Exchange Act or 1934, as amended. Any
stockholder proposal to be presented at the 2001 annual meeting of stockholders
must have been received at our principal office no later than November 7, 2000
in order to be included in the proxy statement and form of proxy for such
meeting. As to any proposal that a stockholder intends to present to
stockholders other than by inclusion in our proxy statement for the 2000 annual
meeting of stockholders, the proxies named in management's proxy for that
meeting will be entitled to exercise their discretionary authority on that
proposal unless we receive notice of the matter to be proposed not later than
January 19, 2001. Even if the proper notice is received on or prior to January
19, 2001, the proxies named in management's proxy for that meeting may
nevertheless exercise their discretionary authority with respect to such matter
by advising stockholders of such proposal and how they intend to exercise their
discretion to vote on such matter, unless the stockholder making the proposal
solicits proxies with respect to the proposal to the extent required by Rule
14a-4(c)(2) under the Securities Exchange Act of 1934, as amended.

INDEPENDENT AUDITORS

During the year ended 1999, Capstead engaged Ernst & Young LLP to provide
it with audit and tax services. Services provided included the examination of
annual financial statements, limited review of unaudited quarterly financial
information, review and consultation regarding filings with the Securities and
Exchange Commission and the Internal Revenue Service, assistance with
management's evaluation of internal accounting controls, consultation on
financial and tax accounting and reporting matters, and verification procedures
as required by collateralized mortgage securities indentures. Representatives of
Ernst & Young LLP will be present at the meeting, will have the opportunity to
make a statement if they desire to do so, and will be available to respond to
appropriate questions.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information we file at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at (800) SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at www.sec.gov. You can also refer to our website at www.capstead.com

We have supplied all information contained in this proxy statement relating
to Capstead. Fortress has provided all such information relating to Fortress.
PaineWebber has provided all such information relating to the opinion which they
delivered to Capstead.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT
TO VOTE ON THE ELECTION OF DIRECTORS AND THE REVERSE STOCK SPLIT PROPOSAL. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED
MARCH 6, 2000. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND NEITHER THE
MAILING OF THIS PROXY STATEMENT TO THE STOCKHOLDERS NOR THE ELECTION OF THE
NOMINEES DESCRIBED HEREIN OR THE CONSUMMATION OF THE REVERSE STOCK SPLIT WILL
CREATE ANY IMPLICATION TO THE CONTRARY.

-27-
<PAGE> 35

ANNEX A
INVESTMENT BANKING DIVISION

PaineWebber Incorporated
1285 Avenue of the Americas
New York, NY 10019
212 713-2000

PaineWebber Logo

December 9, 1999

Board of Directors
Capstead Mortgage Corporation
8401 North Central Expressway, Suite 800
Dallas, TX 75225

Gentlemen:

Capstead Mortgage Corporation (the "Company") and Fortress Investment Group
and its affiliates ("Fortress") propose to enter into an agreement dated
December 9, 1999 (the "Agreement") pursuant to which, among other things, the
Company will issue 5,378,000 shares of its Series C Convertible Preferred Stock
and 5,378,000 shares of its Series D Convertible Preferred Stock to Fortress for
which the Company will receive cash consideration of $51.2 million (the
"Fortress Transaction"). The Fortress Transaction is expected to be consummated
in several steps beginning on December 9, 1999. The Fortress Transaction is
expected to be considered by the stockholders of the Company at a special
stockholders' meeting to be held in early 2000.

You have asked us whether or not, in our opinion, the Fortress Transaction
is fair, to the Company, from a financial point of view.

In arriving at the opinion set forth below, we have, among other things:

(1) Reviewed the Company's Annual Reports, Forms 10-K and related
financial information for the fiscal years ended December 31, 1998 and
December 31, 1997 and the Company's Form 10-Q and the related unaudited
financial information for the nine months ended September 30, 1999;

(2) Reviewed interim financial information of the Company for the
period ended November 12, 1999;

(3) Reviewed Fortress' Annual Report and related financial information
for the fiscal year ended December 31, 1998;

(4) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets and prospects of the
Company and Fortress, furnished to us by the Company and Fortress,
respectively;

(5) Conducted discussions with members of senior management of the
Company and Fortress concerning their respective businesses and prospects;

(6) Reviewed the historical market prices and trading activity for the
Company's shares and compared them with that of certain publicly traded
companies which we deemed to be relevant;

(7) Compared the financial performance and results of operations of
the Company with those of certain companies which we deemed to be relevant;

(8) Considered the pro forma effect of the Fortress Transaction on the
Company's earnings and book value per share;

(9) Reviewed the following documents related to the Agreement: the
Series C and Series D Convertible Preferred Stock Purchase Agreement, the
Supplemental Agreement to the Stock Purchase

A-1
<PAGE> 36

Agreement, the Registration Rights Agreement and the Articles Supplementary
for the Series C and Series D Convertible Preferred Stock; and

(10) Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market and
monetary conditions.

In preparing our opinion, we have relied on the accuracy and completeness
of all information publicly available, supplied or otherwise communicated to us
by the Company and Fortress, and we have not assumed any responsibility to
independently verify such information. With respect to the financial forecasts
examined by us, we have assumed that they were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
the management of the Company and Fortress as to the future performance of the
Company and Fortress, respectively. We have also relied upon assurances of the
management of the Company and Fortress, that they are unaware of any facts that
would make the information or financial forecasts provided to us incomplete or
misleading. We have not made any independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of the Company or Fortress, nor
have we been furnished with any such evaluations or appraisals. We have also
assumed, with your consent, that any material liabilities (contingent or
otherwise, known or unknown) of the Company and Fortress are as set forth in the
consolidated financial statements of the Company and Fortress, respectively.

This opinion is directed to the Board of Directors of the Company and does
not constitute a recommendation to any shareholder of the Company as to how any
such shareholder should vote on the Fortress Transaction. This opinion does not
address the relative merits of the Fortress Transaction and any other
transactions or business strategies discussed by the Board of Directors of the
Company as alternatives to the Fortress Transaction or the decision of the Board
of Directors of the Company to proceed with the Fortress Transaction. No opinion
is expressed herein as to the price at which the securities to be issued in the
Fortress Transaction may trade at any time. Our opinion is based on economic,
monetary and market conditions existing on the date hereof.

In the ordinary course of business, PaineWebber Incorporated may trade in
the securities of the Company and Fortress for our own account and for the
accounts of our customers and, accordingly, may at any time hold long or short
positions in such securities.

PaineWebber Incorporated will be receiving a fee in connection with the
rendering of this opinion. In the past, PaineWebber Incorporated and its
affiliates have provided investment banking and other financial services to the
Company and have received fees for rendering these services. PaineWebber has
also been engaged by the Company to act as a Dealer-Manager for a proposed
self-tender offer which is expected to commence upon announcement of the
Fortress Transaction.

On the basis of, and subject to the foregoing, we are of the opinion that
the Fortress Transaction, taken as a whole, is fair to the Company from a
financial point of view.

This opinion has been prepared for the information of the Board of
Directors of the Company in connection with the Fortress Transaction and shall
not be reproduced, summarized, described or referred to, provided to any person
or otherwise made public or used for any other purpose without the prior written
consent of PaineWebber Incorporated; provided, however, that this letter may be
reproduced in full in the Proxy Statement related to the Fortress Transaction.

Very truly yours,

PAINEWEBBER INCORPORATED

A-2
<PAGE> 37

[MAP]

CAPSTEAD MORTGAGE CORPORATION

ANNUAL MEETING OF STOCKHOLDERS
THURSDAY, APRIL 20, 2000
9:00 A.M.

DOUBLE TREE HOTEL
8250 N. CENTRAL EXPRESSWAY
DALLAS, TEXAS 75206

CAPSTEAD MORTGAGE CORPORATION
[CAPSTEAD LOGO] 8401 N. CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75225 PROXY

- ------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY AND ON BEHALF OF THE BOARD OF DIRECTORS
OF CAPSTEAD MORTGAGE CORPORATION

Proxy for Annual Meeting of Stockholders to be held April 20, 2000

The undersigned, a stockholder of Capstead Mortgage Corporation, a Maryland
corporation, hereby appoints Ronn K. Lytle and Andrew F. Jacobs, as Proxies,
each with the power of substitution to vote the shares of common stock, $0.56
Cumulative Convertible Preferred Stock, Series C, and/or $0.40 Cumulative
Convertible Preferred Stock, Series D, which the undersigned would be entitled
to vote if personally present at the annual meeting of stockholders of Capstead
Mortgage Corporation to be held at 9:00 a.m., Dallas time, on April 20, 2000 at
8250 North Central Expressway, Dallas, Texas and at any adjournment thereof. I
hereby acknowledge receipt of the Notice of Annual Meeting and Proxy Statement
dated March 6, 2000.

This proxy, when properly completed and returned, will be voted in the manner
directed herein by the undersigned stockholder. IF NO DIRECTION IS GIVEN, THIS
PROXY WILL BE VOTED "FOR" THE NOMINEES FOR DIRECTOR NAMED HEREIN, "FOR" THE
AMENDMENT TO CAPSTEAD'S CHARTER TO EFFECT A ONE-FOR-TWO REVERSE STOCK SPLIT AND,
IN THE DISCRETION OF THE PROXYHOLDER, ON SUCH OTHER BUSINESS AS MAY PROPERLY
COME BEFORE THE ANNUAL MEETING, OR ANY ADJOURNMENTS THEREOF.

DO NOT FOLD, STAPLE OR MUTILATE

PLEASE RETURN PROMPTLY IN THE ENCLOSED ENVELOPE,
WHICH REQUIRES NO POSTAGE IF MAILED IN THE U.S.A.

PLEASE VOTE YOUR PROXY PROMPTLY

(continued and to be signed and dated on reverse side)

<PAGE> 38

COMPANY #

CONTROL #

THERE ARE THREE WAYS TO VOTE YOUR PROXY
NOTE - IF VOTING BY TELEPHONE OR INTERNET

YOUR TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES
IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED THE PROXY CARD. THE
DEADLINE FOR TELEPHONE OR INTERNET VOTING IS 1:00 P.M. EST, ON APRIL 19, 2000.

VOTE BY TELEPHONE - TOLL FREE - 1-800-240-6326 - QUICK *** EASY *** IMMEDIATE

o Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week.
o Have your proxy card in hand when you call.
o You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number, which are located in the upper right hand corner of this
card.
o Follow the simple instructions given over the telephone.

VOTE BY INTERNET - http://www.eproxy.com/cmo/ - QUICK *** EASY *** IMMEDIATE

o Use the Internet to vote your proxy 24 hours a day, 7 days a week.
o Have your proxy card in hand when you access the web site.
o You will be prompted to enter your 3-digit Company Number and 7-digit
Control Number, which are located in the upper right hand corner of this
card.

VOTE BY MAIL - POSTAGE-PAID ENVELOPE PROVIDED

Mark, sign, and date your proxy card and return it in the postage-paid envelope
we have provided.

[CAPSTEAD LOGO]

IF YOU VOTE BY TELEPHONE OR INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD
*PLEASE DETACH HERE*

<TABLE>
<S> <C> <C> <C> <C>
1. The election of 01 Wesley R. Edens 05 Michael G. O'Neil [ ] FOR [ ] WITHHOLD AUTHORITY
02 Robert I. Kauffman 06 Howard Rubin all nominees listed for all nominees listed
03 Paul M. Low 07 Mark S. Whiting (except as marked)
04 Ronn K. Lytle
</TABLE>
to the board of directors, to serve until the next annual meeting of
stockholders and until their respective successors are elected and qualified.

TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE OR NOMINEES, WRITE
THE APPROPRIATE NUMBER OR NUMBERS IN THE SPACE PROVIDED HERE.

2. Approval of an amendment to Capstead's charter to effect a one-for-two
reverse split of Capstead's common stock.

[ ] FOR [ ] AGAINST [ ] ABSTAIN

In the discretion of such Proxies, upon such other business as may properly come
before the annual meeting or any adjournments thereof, including any matter of
which Capstead did not receive timely notice as provided by Rule 14a-4(c)
promulgated under the Securities Exchange Act of 1934, as amended.

CAPSTEAD BELIEVES THAT PROPOSALS 1. AND 2. ARE IN THE BEST INTERESTS OF THE
CORPORATION AND ITS STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF
PROPOSALS 1. AND 2.

Address Change? Mark Box [ ] [ ] I plan to attend the meeting.
Indicate changes below: Dated: ,2000
-------------------------------

------------------------------------

(Signature of Stockholder(s))

(NOTE: If voting by mail, please
sign exactly as your name(s) appear
on the label. If more than one name
appears, all persons so designated
should sign. When signing in a
representative capacity, please give
your full title.)