ITEM 1. BUSINESS.
Capstead Mortgage Corporation ("Capstead," the "Company" or the "Registrant") was incorporated on April 15, 1985 in Maryland and commenced operations in September 1985. Capstead is a mortgage investment firm operating as a real estate investment trust ("REIT") that earns income from investing in mortgage assets on a leveraged basis and other investment strategies.
Initially, the Company structured and managed residential mortgage investments. From 1992 through 1998 the Company also operated a residential mortgage servicing operation that was sold in December 1998. During 1999 the Company's primary focus consisted of managing a portfolio of single-family residential mortgage-backed securities issued by government-sponsored entities, either Fannie Mae, Freddie Mac or Ginnie Mae ("Agency Securities").
With the election of a new Board of Directors in April 2000, the Company modified its investment strategy to focus on adjustable-rate and short-maturity assets, including, but not limited to, adjustable-rate Agency Securities and credit-sensitive commercial and residential mortgage assets. By focusing on investments that adjust to a more current interest rate within one to twelve months, this investment strategy is intended to help preserve capital and stabilize earnings prospects over the long term.
For further discussion of the Company's business, see the Registrant's Annual Report to Stockholders for the year ended December 31, 2000 on pages 27 through 32.
EFFECTS OF INTEREST RATE CHANGES AND INTEREST RATE SENSITIVITY
For discussion of effects of interest rate changes on the Company's mortgage asset portfolios, see the Registrant's Annual Report to Stockholders for the year ended December 31, 2000 on pages 36 through 38.
RISKS ASSOCIATED WITH CREDIT-SENSITIVE INVESTMENTS
For discussion of risks associated with credit-sensitive investments, see the Registrant's Annual Report to Stockholders for the year ended December 31, 2000 on pages 38 and 39.
OTHER INVESTMENT STRATEGIES
The Company may enter into other short- or long-term investment strategies as the opportunities arise.
COMPETITION
In purchasing mortgage assets, the Company competes with savings banks, commercial banks, mortgage and investment bankers, conduits, insurance companies, other lenders and mutual funds.
REGULATION AND RELATED MATTERS
Prior to its sale December 31, 1998, the Company's mortgage banking operations were subject to the rules and regulations of Fannie Mae and Freddie Mac with respect to servicing and originating mortgage loans. In addition, there are other federal and state statutes and regulations affecting such activities. Many of the these regulatory requirements are designed to protect the interests of consumers, while others protect the owners or insurers of mortgage loans. Failure to have complied with these requirements could lead to demands for indemnification or loan repurchases from the buyers of the mortgage banking operations or Fannie Mae or Freddie Mac, class action lawsuits and administrative enforcement actions.
EMPLOYEES
As of December 31, 2000, the Company had 17 full-time employees.
TAX STATUS
As used herein, "Capstead REIT" refers to Capstead and the entities that are consolidated with Capstead for federal income tax purposes. Capstead REIT has elected to be taxed as a REIT for federal income tax purposes and intends to continue to do so. As a result of this election, Capstead REIT will not be taxed at the corporate level on taxable income distributed to stockholders, provided that certain requirements concerning the nature and composition of its income and assets are met and that at least 95% (90% for years after 2000) of its REIT taxable income is distributed.
If Capstead REIT fails to qualify as a REIT in any taxable year, it would be subject to federal income tax at regular corporate rates and would not receive a deduction for dividends paid to stockholders. If this were the case, the amount of after-tax earnings available for distribution to stockholders would decrease substantially.
As long as Capstead REIT qualifies as a REIT, it will generally be taxable only on its undistributed taxable income. Distributions out of current or accumulated earnings and profits will be taxed to stockholders as ordinary income or capital gain, as the case may be. Distributions in excess of Capstead REIT's accumulated and current earnings and profits will constitute a non-taxable return of capital to the stockholders (except insofar as such distributions exceed the cost basis of the shares of stock) resulting in a corresponding reduction in the cost basis of the shares of stock. The Company notifies its stockholders of the proportion of distributions made during the taxable year that constitutes ordinary income, return of capital or capital gains.
For 2000, 70.4% and 29.6% of the common stock distributions were characterized as ordinary income and nontaxable return of capital, respectively, while 100% of the preferred stock distributions were characterized as ordinary income.
For 1999, 100% of the common and preferred stock distributions were characterized as ordinary income; no distributions were characterized as capital gains due to the utilization of capital loss carryforwards. Capstead REIT realized substantial capital losses on the sale of mortgage assets in 1998 and 2000. The resulting unused capital loss carryforwards of $331 million as of December 31, 2000, will in all likelihood eliminate the potential for capital gain distributions through the year 2005 when these carryforwards expire. During 1998, 92.0% and 8.0% of the common stock distributions were characterized as ordinary income and nontaxable return of capital, respectively, while 100% of the preferred stock distributions were characterized as ordinary income. Distributions by the Company will not be eligible for the dividends received deduction for corporations. Should the Company incur losses, stockholders will not be entitled to include such losses in their individual income tax returns.
All taxable income of Capstead Holdings, Inc., and its primary subsidiary Capstead Inc. (which held the mortgage banking operations prior to their sale in December 1998), is subject to federal and state income taxes, where applicable. These non-REIT subsidiaries had net operating loss carryforwards of $7.1 million as of December 31, 2000 and sufficient alternative minimum tax credit carryforwards to offset the payment of federal income taxes on $5.0 million of future taxable income, if any, earned by these subsidiaries. Capstead REIT's taxable income will include earnings of these subsidiaries only upon payment to Capstead REIT by distribution of such earnings, and only if these distributions are made out of current earnings and profits.
The foregoing is general in character. Reference should be made to pertinent Internal Revenue Code sections and the Regulations issued thereunder for a comprehensive statement of applicable federal income tax consequences.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's operations are conducted in Dallas, Texas in an office leased by the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
During 1998 twenty-four purported class action lawsuits were filed against the Company and certain of its officers alleging, among other things, that the defendants violated federal securities laws by publicly issuing false and misleading statements and omitting disclosure of material adverse information regarding the Company's business during various periods between January 28, 1997 and July 24, 1998. The complaints claim that as a result of such alleged improper actions, the market price of the Company's equity securities were artificially inflated during that time period. The complaints seek monetary damages in an undetermined amount. In March 1999, these actions were consolidated and in July 2000, a lead plaintiff group was appointed by the court. An amended complaint was filed October 20, 2000. On February 20, 2001 the Company responded to this amended complaint. The Company believes it has meritorious defenses to the claims and intends to vigorously defend the actions. Based on available information, management believes the resolution of these suits will not have a material adverse effect on the financial position of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None. PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item regarding the December 1999 issuance of preferred shares in an unregistered private placement to Fortress pursuant to Section 4(2) of the Securities Act of 1933 is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 2000 on pages 19 and 20 under the caption "Note 11 - Stockholders' Equity and Preferred Stock Subject to Repurchase," and page 27 under the caption "Election of New Leadership and Relationship with Fortress Investment Group LLC," and is incorporated herein by reference, pursuant to General Instruction G(2).
The information required by this item regarding the market price of, dividends on, and number of holders of the Registrant's common shares is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 2000 on page 25 under the caption "Note 17 - Market and Dividend Information," and is incorporated herein by reference, pursuant to General Instruction G(2).
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 2000 on page 26 under the caption "Selected Financial Data," and is incorporated herein by reference, pursuant to General Instruction G(2).
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 2000 on pages 27 through 39 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is incorporated herein by reference, pursuant to General Instruction G(2).
ITEM 7.a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS.
The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 2000 on pages 27 through 39 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is incorporated herein by reference, pursuant to General Instruction G(2).
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 2000 on pages 3 through 25, and is incorporated herein by reference, pursuant to General Instruction G(2).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None. PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included in the Registrant's 2001 definitive Proxy Statement on pages 4 through 6 under the captions "Election of Directors," on page 9 under the caption "Executive Officers," and on page 19 under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934," all of which are incorporated herein by reference pursuant to General Instruction G(3).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Registrant's 2001 definitive Proxy Statement on pages 10 through 12 under the caption "Executive Compensation," which is incorporated herein by reference pursuant to General Instruction G(3).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS.
The information required by this item is included in the Registrant's 2001 definitive Proxy Statement on pages 18 and 19 under the caption "Security Ownership of Management and Certain Beneficial Owners," which is incorporated herein by reference pursuant to General Instruction G(3).
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included in the Registrant's 2001 definitive Proxy Statement on page 20 under the caption "Certain Relationships and Related Transactions," which is incorporated herein by reference pursuant to General Instruction G(3).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. The following consolidated financial statements of the Company, included in the 2000 Annual Report to Stockholders, are incorporated herein by reference:
2. Financial Statement Schedules - All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
* Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 2000, filed herewith as Exhibit 13.
3. Exhibits:
PART IV
ITEM 14. -- CONTINUED
3. Exhibits (continued):
(1) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-40016) dated April 29, 1991
(2) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-40017) dated April 29, 1991
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992
(4) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 33-62212) dated May 6, 1993
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994
(6) Incorporated by reference to the Company's 10-Q for the quarterly period ended March 31, 1996
(7) Incorporated by reference to the Company's 10-Q for the quarterly period ended March 31, 1997
(8) Incorporated by reference to the Company's Current Report of Form 8-K dated December 31, 1998
(9) Incorporated by reference to the Company's Current Report of Form 8-K dated December 15, 1999
(10) Incorporated by reference to the Company's Current Report of Form 8-K dated February 2, 2000
* Filed herewith
(b) Reports on Form 8-K: None.
(c) Exhibits - The response to this section of ITEM 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules - The response to this section of ITEM 14 is submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAPSTEAD MORTGAGE CORPORATION REGISTRANT
Date: March 15, 2001 By: /s/ ANDREW F. JACOBS ----------------------------------- Andrew F. Jacobs Executive Vice President - Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated below and on the dates indicated.
INDEX TO EXHIBITS
(1) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-40016) dated April 29, 1991 (2) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-40017) dated April 29, 1991 (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (4) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 33-62212) dated May 6, 1993 (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (6) Incorporated by reference to the Company's 10-Q for the quarterly period ended March 31, 1996 (7) Incorporated by reference to the Company's 10-Q for the quarterly period ended March 31, 1997 (8) Incorporated by reference to the Company's Current Report of Form 8-K dated December 31, 1998 (9) Incorporated by reference to the Company's Current Report of Form 8-K dated December 15, 1999 (10) Incorporated by reference to the Company's Current Report of Form 8-K dated February 2, 2000
* Filed herewith