EXHIBIT 10.02 CAPSTEAD MORTGAGE CORPORATION SECOND AMENDED AND RESTATED 1994 FLEXIBLE LONG TERM INCENTIVE PLAN RECITALS A. The Board of Directors (the "Board") of Capstead Mortgage Corporation (the "Company") deems it to be in the best interest of the Company to amend the Company's Amended and Restated 1994 Flexible Long Term Incentive Plan to increase the number of shares that may be issued under such plan and expand the eligibility for awards granted thereunder to directors of the Company. B. The Amended and Restated 1994 Flexible Long Term Incentive Plan is hereby amended and restated in its entirety by this Second Amended and Restated 1994 Flexible Long Term Incentive Plan. PLAN 1. PURPOSES The purposes of the Company's Second Amended and Restated 1994 Flexible Long Term Incentive Plan (the "Plan") are to promote the interests of the Company and its stockholders by enabling the Company to attract, motivate, reward and retain key officers, employees and directors and to encourage the holding of proprietary interests in the Company by persons who occupy key positions in the Company or its Affiliates by enabling the Company to offer such key officers, employees and directors performance-based stock incentives and other equity interests in the Company and other incentive awards that recognize the creation of value for the stockholders of the Company and promote the Company's long-term growth and success. To achieve this purpose, eligible persons may receive stock options, Stock Appreciation Rights, Restricted Stock, Performance Awards, performance stock, Dividend Equivalent Rights and any other Awards, or any combination thereof. 2. DEFINITIONS As used in this Plan, the following terms shall have the meanings set forth below unless the content otherwise requires: 2.1 "Affiliate" shall mean (i) any corporation, partnership or other entity that, directly or indirectly, is controlled by the Company (ii) any entity in which the Company has a significant equity interest and (iii) any entity that provides substantial management advisory services for the Company, in each case as determined by the Committee. 2.2 "Award" shall mean a stock option, Stock Appreciation Right, Restricted Stock, Performance Award, performance stock, Dividend Equivalent Right or any other Award under the Plan.
2.3 "Board" shall mean the Board of Directors of the Company, as the same may be constituted from time to time. 2.4 "Change in Control" shall mean, after the effective date of this Plan, (i) the occurrence of an event of a nature that would be required to be reported in response to Item 1 or Item 2 of a Form 8-K Current Report of the Company promulgated pursuant to Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership
2.3 "Board" shall mean the Board of Directors of the Company, as the same may be constituted from time to time. 2.4 "Change in Control" shall mean, after the effective date of this Plan, (i) the occurrence of an event of a nature that would be required to be reported in response to Item 1 or Item 2 of a Form 8-K Current Report of the Company promulgated pursuant to Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities or (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election by the Board or the nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved; (ii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than eighty percent (80%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a reorganization or recapitalization of the Company, or a similar transaction (collectively, a "Reorganization"), in which no "person" acquires more than twenty percent (20%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (iii) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 2.5 "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 2.6 "Committee" shall mean a committee of the Board, which shall consist solely of not less than two (2) members of the Board who are appointed by, and serve at the pleasure of, the Board and who are (i) "disinterested" within the meaning of Rule 16b-3 of the General Rules and Regulations of the Exchange Act and (ii) "outside directors," as required under Section 162(m) of the Code and such Treasury Regulations as may be promulgated thereunder. The Plan shall be administered and interpreted by the -2-
Committee, which Committee meets the requirements for "disinterested administration" within the requirements of Rule 16b-3 and any future rule promulgated therefor during the duration of the Plan. The Board may amend the Plan to modify the definition of Committee within the limits of Rule 16b-3 to assure that the Plan is administered by "disinterested" directors. 2.7 "Common Stock" shall mean the Common Stock, par value $.01 per share, of the Company. 2.8 "Company" shall mean Capstead Mortgage Corporation, a Maryland corporation. 2.9 "Disability" shall mean permanent and total inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months, as determined in the sole and absolute discretion of the Committee. 2.10 "Dividend Equivalent Right" shall mean the right of the holder thereof to receive credits based on the cash dividends that would have been paid on the Shares specified in the Award if the Shares were held by the holder to whom the Award is made.
Committee, which Committee meets the requirements for "disinterested administration" within the requirements of Rule 16b-3 and any future rule promulgated therefor during the duration of the Plan. The Board may amend the Plan to modify the definition of Committee within the limits of Rule 16b-3 to assure that the Plan is administered by "disinterested" directors. 2.7 "Common Stock" shall mean the Common Stock, par value $.01 per share, of the Company. 2.8 "Company" shall mean Capstead Mortgage Corporation, a Maryland corporation. 2.9 "Disability" shall mean permanent and total inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months, as determined in the sole and absolute discretion of the Committee. 2.10 "Dividend Equivalent Right" shall mean the right of the holder thereof to receive credits based on the cash dividends that would have been paid on the Shares specified in the Award if the Shares were held by the holder to whom the Award is made. 2.11 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. 2.12 "Fair Market Value" shall mean with respect to the Shares, as of any date, (i) the last reported sales price regular way on the New York Stock Exchange or, if not reported for the New York Stock Exchange, on the Composite Tape, or, in case no such sale takes place on such day, the average of the reported closing bid and asked quotations on the New York Stock Exchange; (ii) if the Shares are not listed on the New York Stock Exchange or no such quotations are available, the closing price of the Shares as reported by the National Market System, or similar organization, or, if no such quotations are available, the average of the high bid and low asked quotations in the over-the-counter market as reported by the National Quotation Bureau Incorporated, or similar organization; or (iii) in the event that there shall be no public market for the Shares, the fair market value of the Shares as determined (which determination shall be conclusive) in good faith by the Committee, based upon the value of the Company as a going concern, as if such Shares were publicly owned stock, but without any discount with respect to minority ownership. 2.13 "Incentive Stock Option" shall mean any stock option awarded under this Plan intended to be and designated as an "Incentive Stock Option" under Section 422 of the Code or any successor provision. 2.14 "Non-Tandem Stock Appreciation Right" shall mean any Stock Appreciation Right granted alone and not in connection with an Award which is a stock option. -3-
2.15 "Non-Qualified Stock Option" shall mean any stock option awarded under this Plan that is not an Incentive Stock Option. 2.16 "Optionee" shall mean any person who has been granted a stock option under this Plan and who has executed a written stock option agreement with the Company reflecting the terms of such grant. 2.17 "Performance Award" shall mean any Award hereunder of Shares, units or rights based upon, payable in, or otherwise related to, Shares (including Restricted Stock), or cash of an equivalent value, as the Committee may determine, at the end of a specified performance period established by the Committee. 2.18 "Plan" shall mean this Second Amended and Restated 1994 Flexible Long Term Incentive Plan of Capstead Mortgage Corporation. 2.19 "Reload Option" shall mean a stock option as defined in subsection 6.7(b) herein. 2.20 "Restricted Stock" shall mean any Award of Shares under this Plan that are subject to restrictions or risk of forfeiture.
2.15 "Non-Qualified Stock Option" shall mean any stock option awarded under this Plan that is not an Incentive Stock Option. 2.16 "Optionee" shall mean any person who has been granted a stock option under this Plan and who has executed a written stock option agreement with the Company reflecting the terms of such grant. 2.17 "Performance Award" shall mean any Award hereunder of Shares, units or rights based upon, payable in, or otherwise related to, Shares (including Restricted Stock), or cash of an equivalent value, as the Committee may determine, at the end of a specified performance period established by the Committee. 2.18 "Plan" shall mean this Second Amended and Restated 1994 Flexible Long Term Incentive Plan of Capstead Mortgage Corporation. 2.19 "Reload Option" shall mean a stock option as defined in subsection 6.7(b) herein. 2.20 "Restricted Stock" shall mean any Award of Shares under this Plan that are subject to restrictions or risk of forfeiture. 2.21 "Retirement" shall mean, with respect to an employee of the Company, termination of employment, other than discharge for cause, after age 65 or on or before age 65 if pursuant to the terms of any retirement plan maintained by the Company or any of its Affiliates in which such person participates. With respect to a director of the Company, "Retirement" shall mean the earlier of (a) the removal of such director from the Board for other than cause, and (b) the expiration of such director's term on the Board. 2.22 "Senior Officers" shall mean the Senior Officers of the Company as set forth in subsection 6.5(e) herein. 2.23 "Shares" shall mean shares of the Company's Common Stock and any shares of capital stock or other securities of the Company hereafter issued or issuable upon, in respect of or in substitution or exchange for such Shares. 2.24 "Stock Appreciation Right" shall mean the right of the holder thereof to receive an amount in cash or Shares equal to the excess of the Fair Market Value of a Share on the date of exercise over the Fair Market Value of a Share on the date of the grant (or such other value as may be specified in the agreement granting the Stock Appreciation Right). 2.25 "Tandem Stock Appreciation Right" shall mean a Stock Appreciation Right granted in connection with an Award which is a stock option. -4-
3. ADMINISTRATION OF THE PLAN 3.1 Committee. The Plan shall be administered and interpreted by the Committee. 3.2 Awards. Subject to the provisions of the Plan and directions from the Board, the Committee is authorized to: (a) determine the persons to whom Awards are to be granted; (b) determine the types and combinations of Awards to be granted, the number of Shares to be covered by the Award, the pricing of the Award, the time or times when the Award shall be granted and may be exercised, the terms, performance criteria or other conditions, vesting periods or any restrictions for an Award, any restrictions on Shares acquired pursuant to the exercise of an Award and any other terms and conditions of an Award; (c) conclusively interpret the Plan provisions; (d) prescribe, amend and rescind rules and regulations relating to the Plan or make individual decisions as questions arise, or both;
3. ADMINISTRATION OF THE PLAN 3.1 Committee. The Plan shall be administered and interpreted by the Committee. 3.2 Awards. Subject to the provisions of the Plan and directions from the Board, the Committee is authorized to: (a) determine the persons to whom Awards are to be granted; (b) determine the types and combinations of Awards to be granted, the number of Shares to be covered by the Award, the pricing of the Award, the time or times when the Award shall be granted and may be exercised, the terms, performance criteria or other conditions, vesting periods or any restrictions for an Award, any restrictions on Shares acquired pursuant to the exercise of an Award and any other terms and conditions of an Award; (c) conclusively interpret the Plan provisions; (d) prescribe, amend and rescind rules and regulations relating to the Plan or make individual decisions as questions arise, or both; (e) determine whether, to what extent and under what circumstances to provide loans from the Company to participants in order to purchase Shares subject to Awards under the Plan, and the terms and conditions of such loans; (f) rely upon employees of the Company for such clerical and record-keeping duties as may be necessary in connection with the administration of the Plan; and (g) make all other determinations and take all other actions necessary or advisable for the administration of the Plan. 3.3 Procedures. A majority of the Committee members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. All questions of interpretation and application of the Plan or pertaining to any question of fact or Award granted hereunder shall be decided by the Committee, whose decision shall be final, conclusive and binding upon the Company and each other affected party. 4. SHARES SUBJECT TO PLAN 4.1 Limitations. The maximum number of Shares that may be issued with respect to Awards under the Plan shall not exceed 1,111,297 unless such maximum shall be increased or decreased by reasons of changes in capitalization of the Company as hereinafter provided. The maximum number of Shares with respect to which Awards may be granted in any fiscal year to any participant in the Plan shall not exceed 168,750. -5-
The Shares issued pursuant to the Plan may be authorized but unissued Shares, or may be issued Shares which have been reacquired by the Company. The above limitations take into account the 3-for-2 stock splits that occurred on November 15, 1995 and August 15, 1996 and the 1-for-2 reverse stock splits that occurred on May 8, 2000 and June 29, 2001, as summarized on the attached Exhibit A. 4.2 Changes. To the extent that any Award under the Plan, or any stock option or performance award granted under any prior incentive plan of the Company, shall be forfeited, shall expire or shall be canceled, in whole or in part, then the number of Shares covered by the Award or stock option so forfeited, expired or canceled may again be awarded pursuant to the provisions of this Plan. In the event that Shares are delivered to the Company in full or partial payment of the exercise price for the exercise of a stock option granted under the Plan or any prior incentive plan of the Company, the number of Shares available for future Awards under the Plan shall be reduced only by the net number of Shares issued upon the exercise of the option. Awards that may be satisfied either by the issuance of Shares or by cash or other consideration shall be counted against the maximum number of Shares that may be issued under the Plan, even though the Award is ultimately satisfied by the payment of consideration other than Shares, as, for example, a stock option granted in tandem with a Stock Appreciation
The Shares issued pursuant to the Plan may be authorized but unissued Shares, or may be issued Shares which have been reacquired by the Company. The above limitations take into account the 3-for-2 stock splits that occurred on November 15, 1995 and August 15, 1996 and the 1-for-2 reverse stock splits that occurred on May 8, 2000 and June 29, 2001, as summarized on the attached Exhibit A. 4.2 Changes. To the extent that any Award under the Plan, or any stock option or performance award granted under any prior incentive plan of the Company, shall be forfeited, shall expire or shall be canceled, in whole or in part, then the number of Shares covered by the Award or stock option so forfeited, expired or canceled may again be awarded pursuant to the provisions of this Plan. In the event that Shares are delivered to the Company in full or partial payment of the exercise price for the exercise of a stock option granted under the Plan or any prior incentive plan of the Company, the number of Shares available for future Awards under the Plan shall be reduced only by the net number of Shares issued upon the exercise of the option. Awards that may be satisfied either by the issuance of Shares or by cash or other consideration shall be counted against the maximum number of Shares that may be issued under the Plan, even though the Award is ultimately satisfied by the payment of consideration other than Shares, as, for example, a stock option granted in tandem with a Stock Appreciation Right that is settled by a cash payment of the stock appreciation. However, Awards will not reduce the number of Shares that may be issued pursuant to the Plan if the settlement of the Award will not require the issuance of Shares, as, for example, a Stock Appreciation Right that can be satisfied only by the payment of cash. 5. ELIGIBILITY Except with respect to Awards that are to be qualified under Section 422, Section 423 or other relevant Section of the Code ("Qualified Awards"), eligibility for participation under the Plan shall be open to all officers, employees and directors of the Company and its Affiliates. With respect to Qualified Awards, eligibility for participation in the Plan shall be confined to employees of the Company and its Subsidiaries, as such term is defined under Section 424 of the Code. 6. STOCK OPTIONS 6.1 Grants. The Committee may grant stock options alone or in addition to other Awards granted under this Plan to any eligible officer, employee or director. Each person so selected shall be offered an option to purchase the number of Shares determined by the Committee; provided, however, that the maximum number of shares for which stock options may be granted during any calendar year may not exceed 168,750 Shares for any eligible officer, employee or director. The Committee shall specify whether such option is an Incentive Stock Option or Non-Qualified Stock Option and any other terms or conditions relating to such Award. To the extent that any stock option does not qualify as an Incentive Stock Option (whether because of its provisions or the time or manner of its exercise or otherwise), such stock option or the portion thereof which does not qualify, -6-
shall constitute a separate Non-Qualified Stock Option. Each such person so selected shall have a reasonable period of time within which to accept or reject the offered option. Failure to accept within the period so fixed by the Committee may be treated as a rejection. Each person who accepts an option shall enter into a written agreement with the Company, in such form as the Committee may prescribe, setting forth the terms and conditions of the option, consistent with the provisions of the Plan. The Optionee and the Company shall enter into option agreements for Incentive Stock Options and Non-Qualified Stock Options. At any time and from time to time, the Optionee and the Company may agree to modify an option agreement in order that an Incentive Stock Option may be converted to a Non-Qualified Stock Option. The Committee may require than an Optionee meet certain conditions before the option or a portion thereof may vest or be exercised, as, for example, that the Optionee remain in the employ of the Company or one of its Affiliates for a stated period or periods of time before the option, or stated portions thereof, may vest or be exercised; provided, however, that nothing in the Plan or in any option agreement shall confer upon any Optionee any right to remain in the employ of the Company or one of its Affiliates, and nothing herein shall be construed in any manner to interfere in any way with the right of the Company or its Affiliates to terminate such Optionee's employment at any time.
shall constitute a separate Non-Qualified Stock Option. Each such person so selected shall have a reasonable period of time within which to accept or reject the offered option. Failure to accept within the period so fixed by the Committee may be treated as a rejection. Each person who accepts an option shall enter into a written agreement with the Company, in such form as the Committee may prescribe, setting forth the terms and conditions of the option, consistent with the provisions of the Plan. The Optionee and the Company shall enter into option agreements for Incentive Stock Options and Non-Qualified Stock Options. At any time and from time to time, the Optionee and the Company may agree to modify an option agreement in order that an Incentive Stock Option may be converted to a Non-Qualified Stock Option. The Committee may require than an Optionee meet certain conditions before the option or a portion thereof may vest or be exercised, as, for example, that the Optionee remain in the employ of the Company or one of its Affiliates for a stated period or periods of time before the option, or stated portions thereof, may vest or be exercised; provided, however, that nothing in the Plan or in any option agreement shall confer upon any Optionee any right to remain in the employ of the Company or one of its Affiliates, and nothing herein shall be construed in any manner to interfere in any way with the right of the Company or its Affiliates to terminate such Optionee's employment at any time. 6.2 Option Price. The option exercise price of the Shares covered by each stock option shall be determined by the Committee; provided, however, that the option exercise price of an Incentive Stock Option or, with respect to the Chief Executive Officer of the Company only, a Non-Qualified Stock Option shall not be less than one hundred percent (100%) of the Fair Market Value of Shares on the date of the grant of such Incentive Stock Option. 6.3 Incentive Stock Options Limitations. (a) In no event shall any person be granted Incentive Stock Options so that the Shares covered by any Incentive Stock Options that may be exercised for the first time by such person in any calendar year have an aggregate Fair Market Value in excess of $100,000. For this purpose, the Fair Market Value of the Shares shall be determined as of the dates on which the Incentive Stock Options are granted. It is intended that the limitation on Incentive Stock Options provided in this paragraph be the maximum limitation on options which may be considered Incentive Stock Options under the Code. (b) Notwithstanding anything herein to the contrary, in no event shall any officer, employee or director owning more than ten percent (10%) of the total combined voting power of the Company or any Affiliate corporation be granted an Incentive Stock Option hereunder unless: the option exercise price shall be at least one hundred ten percent (110%) of the Fair Market Value of the Shares at the time that the option is granted and the term of the option shall not exceed five (5) years. -7-
6.4 Option Term. The term of a stock option shall be for such period of months or years from the date of its grant as may be determined by the Committee; provided, however, that no Incentive Stock Option shall be exercisable later than ten (10) years from the date of its grant. Each option shall be subject to earlier termination as hereinafter provided (unless the Committee has provided otherwise): (a) If the Optionee ceases to be an officer, employee or director of the Company or any Affiliate by reason of the Optionee's discharge for cause, as determined solely and exclusively by the Committee, all rights of the Optionee to exercise an option shall terminate, lapse and be forfeited immediately at the time of the Optionee's discharge for cause. (b) If the Optionee ceases to be an officer, employee or director of the Company or any Affiliate by reason of the Optionee's resignation, all rights of the Optionee to exercise an option shall terminate, lapse and be forfeited immediately upon the date of such resignation by the Optionee. (c) If the Optionee ceases to be an officer, employee or director of the Company or any Affiliate by reason of death, the personal representatives, heirs, legatees or distributees of the Optionee, as appropriate, shall have the right up to the earlier of (i) two (2) years from the Optionee's death or
6.4 Option Term. The term of a stock option shall be for such period of months or years from the date of its grant as may be determined by the Committee; provided, however, that no Incentive Stock Option shall be exercisable later than ten (10) years from the date of its grant. Each option shall be subject to earlier termination as hereinafter provided (unless the Committee has provided otherwise): (a) If the Optionee ceases to be an officer, employee or director of the Company or any Affiliate by reason of the Optionee's discharge for cause, as determined solely and exclusively by the Committee, all rights of the Optionee to exercise an option shall terminate, lapse and be forfeited immediately at the time of the Optionee's discharge for cause. (b) If the Optionee ceases to be an officer, employee or director of the Company or any Affiliate by reason of the Optionee's resignation, all rights of the Optionee to exercise an option shall terminate, lapse and be forfeited immediately upon the date of such resignation by the Optionee. (c) If the Optionee ceases to be an officer, employee or director of the Company or any Affiliate by reason of death, the personal representatives, heirs, legatees or distributees of the Optionee, as appropriate, shall have the right up to the earlier of (i) two (2) years from the Optionee's death or (ii) the remaining term of the option to exercise any such option. (d) If the Optionee ceases to be an officer, employee or director of the Company or any Affiliate by reason of the Optionee's Retirement, Disability or for any reason other than the Optionee's discharge for cause, resignation or death, all rights of the Optionee to exercise an option shall terminate, lapse, and be forfeited upon the earlier of (i) two (2) years after the date of the Optionee's termination of employment by reason of such Optionee's Retirement, Disability or such other reason or (ii) the remaining term of the option, except that in case the Optionee shall die within two (2) years after the date of termination of employment by reason of such Optionee's Retirement, Disability or such other reason, the personal representatives, heirs, legatees or distributees of the Optionee, as appropriate, shall have the right up to an additional twelve (12) months from the date of the Optionee's death to exercise any such option. (e) Despite the provisions of paragraphs (b), (c) and (d) of this subsection, no Incentive Stock Option shall be exercisable after the expiration of the earlier of: (i) the ten (10) year period beginning on the date of its grant, (ii) the three (3) month period beginning on the date of the Optionee's termination of employment for any reason other than death or Disability, or (iii) the one (1) year period beginning on the date of the Optionee's termination of employment by reason of Disability. -8-
6.5 Vesting of Stock Options. (a) Each stock option granted hereunder may only be exercised to the extent that the Optionee is vested in such option. Each stock option shall vest separately in accordance with the option vesting schedule, if any, determined by the Committee in its sole discretion, which will be incorporated in the stock option agreement entered into between the Company and each Optionee. The option vesting schedule will be accelerated in the event the provisions of paragraphs (b), (c), (d) or (e) of this subsection apply; or if, in the sole discretion of the Committee, the Committee determines that acceleration of the option vesting schedule would be desirable for the Company. (b) If an Optionee ceases to be an officer, employee or director of the Company or any Affiliate by reason of death, Disability or Retirement or for any reason other than the Optionee's resignation or discharge for cause, the Optionee or the personal representatives, heirs, legatees or distributees of the Optionee, as appropriate, shall become fully vested in each stock option granted to the Optionee, effective on the date of the Optionee's death or on the date that the Optionee ceases to be an officer, employee or director, as appropriate, and shall have the immediate right to exercise any such option to the extent not previously exercised. (c) In the event of the dissolution or liquidation of the Company, each stock option granted under the Plan shall terminate as of a date to be fixed by the Board; provided, however, that not less than thirty (30) days' written notice of the date so fixed shall be given to each Optionee and each such Optionee shall be fully vested in and shall have the right during such period to exercise the option, even though such option would not otherwise be
6.5 Vesting of Stock Options. (a) Each stock option granted hereunder may only be exercised to the extent that the Optionee is vested in such option. Each stock option shall vest separately in accordance with the option vesting schedule, if any, determined by the Committee in its sole discretion, which will be incorporated in the stock option agreement entered into between the Company and each Optionee. The option vesting schedule will be accelerated in the event the provisions of paragraphs (b), (c), (d) or (e) of this subsection apply; or if, in the sole discretion of the Committee, the Committee determines that acceleration of the option vesting schedule would be desirable for the Company. (b) If an Optionee ceases to be an officer, employee or director of the Company or any Affiliate by reason of death, Disability or Retirement or for any reason other than the Optionee's resignation or discharge for cause, the Optionee or the personal representatives, heirs, legatees or distributees of the Optionee, as appropriate, shall become fully vested in each stock option granted to the Optionee, effective on the date of the Optionee's death or on the date that the Optionee ceases to be an officer, employee or director, as appropriate, and shall have the immediate right to exercise any such option to the extent not previously exercised. (c) In the event of the dissolution or liquidation of the Company, each stock option granted under the Plan shall terminate as of a date to be fixed by the Board; provided, however, that not less than thirty (30) days' written notice of the date so fixed shall be given to each Optionee and each such Optionee shall be fully vested in and shall have the right during such period to exercise the option, even though such option would not otherwise be exercisable under the option vesting schedule. At the end of such period, any unexercised option shall terminate and be of no further effect. (d) In the event of a Reorganization: (1) If there is no plan or agreement respecting the Reorganization, or if such plan or agreement does not specifically provide for the change, conversion or exchange of the Shares under outstanding and unexercised stock options for other securities then the provisions of the above paragraph (c) of this subsection shall apply as if the Company had dissolved or been liquidated on the effective date of the Reorganization; or (2) If there is a plan or agreement respecting the Reorganization, and if such plan or agreement specifically provides for the change, conversion or exchange of the Shares under outstanding and unexercised stock options for securities of another corporation, then the Board shall adjust the Shares under such outstanding and unexercised stock options (and shall adjust the -9-
Shares remaining under the Plan which are then available to be awarded under the Plan, if such plan or agreement makes no specific provision therefor) in a manner not inconsistent with the provisions of such plan or agreement for the adjustment, change, conversion or exchange of such Shares and such options. (e) In the event of a Change in Control of the Company, with respect to the directors of the Company and only certain senior executive officers of the Company (the number of which shall include no more than ten (10) persons; provided, that a limited number of additional senior executive officers shall also be included if each such additional person is approved by the Committee and the Board (collectively, the ten senior executive officers plus any additional, approved senior executive officers shall be referred to herein as the "Senior Officers")), all stock options and any associated Stock Appreciation Rights shall become fully vested and immediately exercisable and the vesting of all performance-based stock options shall be determined as if the performance period or cycle applicable to such stock options had ended immediately upon such Change in Control. 6.6 Exercise of Stock Options. (a) Stock options may be exercised as to Shares only in amounts and at intervals of time specified in the written option agreement between the Company and the Optionee. Each exercise of a stock option, or any part thereof, shall be evidenced by a notice in writing to the Company. The purchase price of the Shares as to which an option shall be exercised shall be paid in full at the time of exercise, and may be paid to the Company either:
Shares remaining under the Plan which are then available to be awarded under the Plan, if such plan or agreement makes no specific provision therefor) in a manner not inconsistent with the provisions of such plan or agreement for the adjustment, change, conversion or exchange of such Shares and such options. (e) In the event of a Change in Control of the Company, with respect to the directors of the Company and only certain senior executive officers of the Company (the number of which shall include no more than ten (10) persons; provided, that a limited number of additional senior executive officers shall also be included if each such additional person is approved by the Committee and the Board (collectively, the ten senior executive officers plus any additional, approved senior executive officers shall be referred to herein as the "Senior Officers")), all stock options and any associated Stock Appreciation Rights shall become fully vested and immediately exercisable and the vesting of all performance-based stock options shall be determined as if the performance period or cycle applicable to such stock options had ended immediately upon such Change in Control. 6.6 Exercise of Stock Options. (a) Stock options may be exercised as to Shares only in amounts and at intervals of time specified in the written option agreement between the Company and the Optionee. Each exercise of a stock option, or any part thereof, shall be evidenced by a notice in writing to the Company. The purchase price of the Shares as to which an option shall be exercised shall be paid in full at the time of exercise, and may be paid to the Company either: (1) in cash (including check, bank draft or money order); (2) by the delivery of Shares having a Fair Market Value equal to the aggregate option price; (3) by a combination of cash and Shares; or (4) by arrangement with a broker acceptable to the Committee in which payment of the exercise price is made pursuant to an irrevocable direction from the Optionee to the broker to deliver the Company proceeds from the sale of the option Shares in an amount equal to the exercise price of the Shares. (b) If an Optionee delivers Shares (including Shares of Restricted Stock) already owned by him or her in full or partial payment of the exercise price for any stock option granted under the Plan or any prior incentive plan of the Company, or if the Optionee elects to have the Company retain that number of Shares out of the Shares being acquired through the exercise of the option having -10-
a Fair Market Value equal to the exercise price of the stock option being exercised, the Committee may authorize the automatic grant of a new option (a "Reload Option") for that number of Shares as shall equal the number of already owned Shares surrendered (including Shares of Restricted Stock) or newly acquired Shares being retained in payment of the option exercise price of the underlying stock option being exercised. The grant of a Reload Option will become effective upon the exercise of the underlying stock option. The option exercise price of the Reload Option shall be the Fair Market Value of a Share on the effective date of the grant of the Reload Option. Each Reload Option shall be exercisable no earlier than six (6) months from the date of its grant and no later than the time when the underlying stock option being exercised could be last exercised. The Committee may also specify additional terms, conditions and restrictions for the Reload Option and the Shares to be acquired upon the exercise thereof. (c) The amount, as determined by the Committee, of any federal, state or local tax required to be withheld by the Company due to the exercise of a stock option shall be satisfied, at the election of the Optionee, either (a) by payment by the Optionee to the Company of the amount of such withholding obligation in cash (the "Cash Method"), (b) through either the retention by the Company of a number of Shares out of the Shares being acquired through the exercise of the option or the delivery of already owned Shares having a Fair Market Value equal to the amount of the withholding obligation (the "Share Retention Method"), or (c) by a combination of the Cash Method and the Share Retention Method. If an Optionee elects to use the Share Retention Method in full or partial satisfaction for any tax liability resulting from the exercise of a stock option, the Committee may authorize the grant of a Reload Option for that number of Shares as shall equal the number of Shares used to
a Fair Market Value equal to the exercise price of the stock option being exercised, the Committee may authorize the automatic grant of a new option (a "Reload Option") for that number of Shares as shall equal the number of already owned Shares surrendered (including Shares of Restricted Stock) or newly acquired Shares being retained in payment of the option exercise price of the underlying stock option being exercised. The grant of a Reload Option will become effective upon the exercise of the underlying stock option. The option exercise price of the Reload Option shall be the Fair Market Value of a Share on the effective date of the grant of the Reload Option. Each Reload Option shall be exercisable no earlier than six (6) months from the date of its grant and no later than the time when the underlying stock option being exercised could be last exercised. The Committee may also specify additional terms, conditions and restrictions for the Reload Option and the Shares to be acquired upon the exercise thereof. (c) The amount, as determined by the Committee, of any federal, state or local tax required to be withheld by the Company due to the exercise of a stock option shall be satisfied, at the election of the Optionee, either (a) by payment by the Optionee to the Company of the amount of such withholding obligation in cash (the "Cash Method"), (b) through either the retention by the Company of a number of Shares out of the Shares being acquired through the exercise of the option or the delivery of already owned Shares having a Fair Market Value equal to the amount of the withholding obligation (the "Share Retention Method"), or (c) by a combination of the Cash Method and the Share Retention Method. If an Optionee elects to use the Share Retention Method in full or partial satisfaction for any tax liability resulting from the exercise of a stock option, the Committee may authorize the grant of a Reload Option for that number of Shares as shall equal the number of Shares used to satisfy the tax liabilities of the stock option being exercised on the price and terms set forth in subsection (b) above. The cash payment or the amount equal to the Fair Market Value of the Shares so withheld, as the case may be, shall be remitted by the Company to the appropriate taxing authorities. The Committee shall determine the time and manner in which an Optionee may elect to satisfy a withholding obligation by either the Cash Method or the Share Retention Method. (d) An Optionee shall not have any of the rights of a stockholder of the Company with respect to the Shares covered by a stock option except to the extent that one or more certificates of such Shares shall have been delivered to the Optionee, or the Optionee has been determined to be a stockholder of record by the Company's Transfer Agent, upon due exercise of the option. 6.7 Date of a Stock Option Grant. The granting of a stock option shall take place only when the Committee approves the granting of such option. Neither any action taken by the Board nor anything contained in the Plan or in any resolution adopted or to be -11-
adopted by the Board or the stockholders of the Company shall constitute the granting of a stock option under the Plan. 7. STOCK APPRECIATION RIGHTS 7.1 Grants. The Committee may grant to any eligible officer, employee or director either Non-Tandem Stock Appreciation Rights or Tandem Stock Appreciation Rights. Stock Appreciation Rights shall be subject to such terms and conditions as the Committee shall impose; provided, however, that the maximum number of shares (or cash equivalent value) with respect to which Stock Appreciation Rights may be granted during any calendar year may not exceed 168,750 Shares for any eligible officer, employee or director. The grant of the Stock Appreciation Right may provide that the holder may be paid for the value of the Stock Appreciation Right either in cash or in Shares, or a combination thereof, at the discretion of the Committee. In the event of the exercise of a Stock Appreciation Right payable in Shares, the holder of the Stock Appreciation Right shall receive that number of whole Shares of stock of the Company having an aggregate Fair Market Value on the date of exercise equal to the value obtained by multiplying (i) either (a) in the case of a Tandem Stock Appreciation Right, the difference between the Fair Market Value of a Share on the date of exercise over the per share exercise price of the related option, or (b) in the case of a NonTandem Stock Appreciation Right, the difference between the Fair Market Value of a Share on the date of exercise over the Fair Market Value on the date of the grant by (ii) the number of Shares as to which the Stock Appreciation Right is exercised. However, notwithstanding the foregoing, the Committee, in its sole discretion,
adopted by the Board or the stockholders of the Company shall constitute the granting of a stock option under the Plan. 7. STOCK APPRECIATION RIGHTS 7.1 Grants. The Committee may grant to any eligible officer, employee or director either Non-Tandem Stock Appreciation Rights or Tandem Stock Appreciation Rights. Stock Appreciation Rights shall be subject to such terms and conditions as the Committee shall impose; provided, however, that the maximum number of shares (or cash equivalent value) with respect to which Stock Appreciation Rights may be granted during any calendar year may not exceed 168,750 Shares for any eligible officer, employee or director. The grant of the Stock Appreciation Right may provide that the holder may be paid for the value of the Stock Appreciation Right either in cash or in Shares, or a combination thereof, at the discretion of the Committee. In the event of the exercise of a Stock Appreciation Right payable in Shares, the holder of the Stock Appreciation Right shall receive that number of whole Shares of stock of the Company having an aggregate Fair Market Value on the date of exercise equal to the value obtained by multiplying (i) either (a) in the case of a Tandem Stock Appreciation Right, the difference between the Fair Market Value of a Share on the date of exercise over the per share exercise price of the related option, or (b) in the case of a NonTandem Stock Appreciation Right, the difference between the Fair Market Value of a Share on the date of exercise over the Fair Market Value on the date of the grant by (ii) the number of Shares as to which the Stock Appreciation Right is exercised. However, notwithstanding the foregoing, the Committee, in its sole discretion, may place a ceiling on the amount payable upon exercise of a Stock Appreciation Right, but any such limitation shall be specified at the time that the Stock Appreciation Right is granted. 7.2 Exercisability. A Tandem Stock Appreciation Right may be granted at the time of the grant of the related stock option or, if the related stock option is a Non-Qualified Stock Option, at any time thereafter during the term of the stock option. A Tandem Stock Appreciation Right granted in connection with an Incentive Stock Option (i) generally may be exercised at, and only at, the times and to the extent the related stock option is exercisable, (ii) expires upon the termination of the related stock option, (iii) may not exceed 100% of the difference between the exercise price of the related stock option and the market price of the Shares subject to the related stock option at the time the Tandem Stock Appreciation Right is exercised and (iv) may be exercised at, and only at, such times as the market price of the Shares subject to the related stock option exceeds the exercise price of the related stock option. The Tandem Stock Appreciation Right may be transferred at, and only at, the times and to the extent the related stock option is transferable. If a Tandem Stock Appreciation Right is granted, there shall be surrendered and canceled from the option at the time of exercise of the Tandem Stock Appreciation Right, in lieu of exercise under the option, that number of Shares as shall equal the number of Shares as to which the Tandem Stock Appreciation Right shall have been exercised. -12-
7.3 Certain Limitations on Non-Tandem Stock Appreciation Rights. A Non-Tandem Stock Appreciation Right will be exercisable as provided by the Committee and will have such other terms and conditions as the Committee may determine. A Non-Tandem Stock Appreciation Right is subject to acceleration of vesting or immediate termination in certain circumstances in the same manner as stock options pursuant to subsections 6.4 and 6.5 of this Plan. 7.4 Limited Stock Appreciation Rights. The Committee is also authorized to grant "limited stock appreciation rights," either as Tandem Stock Appreciation Rights or Non-Tandem Stock Appreciation Rights. Limited stock appreciation rights would become exercisable only upon the occurrence of a Change in Control or such other event as the Committee may designate at the time of grant or thereafter. 8. RESTRICTED STOCK 8.1 Grants. The Committee may grant Awards of Restricted Stock for no cash consideration, for such minimum consideration as may be required by applicable law, or for such other consideration as may be specified by the grant. The terms and conditions of the Restricted Stock shall be specified by the grant agreement. The Committee, in its sole discretion, shall determine what rights, if any, the person to whom an Award of Restricted Stock is made shall have in the Restricted Stock during the restriction period and the restrictions applicable to the
7.3 Certain Limitations on Non-Tandem Stock Appreciation Rights. A Non-Tandem Stock Appreciation Right will be exercisable as provided by the Committee and will have such other terms and conditions as the Committee may determine. A Non-Tandem Stock Appreciation Right is subject to acceleration of vesting or immediate termination in certain circumstances in the same manner as stock options pursuant to subsections 6.4 and 6.5 of this Plan. 7.4 Limited Stock Appreciation Rights. The Committee is also authorized to grant "limited stock appreciation rights," either as Tandem Stock Appreciation Rights or Non-Tandem Stock Appreciation Rights. Limited stock appreciation rights would become exercisable only upon the occurrence of a Change in Control or such other event as the Committee may designate at the time of grant or thereafter. 8. RESTRICTED STOCK 8.1 Grants. The Committee may grant Awards of Restricted Stock for no cash consideration, for such minimum consideration as may be required by applicable law, or for such other consideration as may be specified by the grant. The terms and conditions of the Restricted Stock shall be specified by the grant agreement. The Committee, in its sole discretion, shall determine what rights, if any, the person to whom an Award of Restricted Stock is made shall have in the Restricted Stock during the restriction period and the restrictions applicable to the particular Award, including, without limitation, whether the holder of the Restricted Stock shall have the right to vote the Shares and receive Dividend Equivalent Rights and other distributions applicable to the Shares, the vesting schedule (which may be based on service, performance or other factors) and rights to acceleration of vesting (including, without limitation, whether non-vested Shares are forfeited or vested upon termination of employment). Further, the Committee may award performance-based Restricted Stock by conditioning the grant, or vesting or such other factors, such as the release, expiration or lapse of restrictions upon any such Award (including the acceleration of any such conditions or terms) of such Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine; provided, however, that notwithstanding the foregoing, and with respect to the Senior Officers only, upon a Change in Control, the amount of granting or vesting, as the case may be, for all performance-based Restricted Stock, shall be determined as if the performance period or cycle applicable to such Restricted Stock had terminated immediately upon such Change in Control; provided, however, that to the extent that any such performance period or cycle is shortened adversely to the Senior Officers by virtue of the Change in Control, such Restricted Stock shall be prorated accordingly. The Committee shall also determine when the restrictions shall lapse or expire and the conditions, if any, under which the Restricted Stock will be forfeited or sold back to the Company, provided, however, that notwithstanding the foregoing, and with respect to the Senior Officers only, upon a Change in Control, all restrictions applicable to Restricted Stock shall lapse and expire and Shares of Restricted Stock with vesting provisions shall become fully vested. Each Award of Restricted Stock may have different restrictions and conditions. The Committee, in its discretion, may prospectively -13-
change the restriction period and the restrictions applicable to any particular Award of Restricted Stock. Unless otherwise set forth in the Plan, Restricted Stock may not be disposed of by the recipient until the restrictions specified in the Award expire. Subject to certain exceptions, the aggregate number of nonperformance-based Shares of Restricted Stock that may be awarded is limited to three percent (3%) of the aggregate number of outstanding Shares of the Company's Common Stock; otherwise, the Committee is not limited in the total number of Shares of Restricted Stock that may be awarded under the Plan. 8.2 Awards and Certificates. Any Restricted Stock issued hereunder may be evidenced in such manner as the Committee, in its sole discretion, shall deem appropriate including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of Shares of Restricted Stock awarded hereunder, such certificate shall bear an appropriate legend with respect to the restrictions applicable to such Award. The Company may retain, at its option, the physical custody of any stock certificate representing any awards of Restricted Stock during the restriction period or require that the Restricted Stock be placed in escrow or trust, along with a stock power endorsed in blank, until all restrictions are removed or expire. 9. PERFORMANCE AWARDS
change the restriction period and the restrictions applicable to any particular Award of Restricted Stock. Unless otherwise set forth in the Plan, Restricted Stock may not be disposed of by the recipient until the restrictions specified in the Award expire. Subject to certain exceptions, the aggregate number of nonperformance-based Shares of Restricted Stock that may be awarded is limited to three percent (3%) of the aggregate number of outstanding Shares of the Company's Common Stock; otherwise, the Committee is not limited in the total number of Shares of Restricted Stock that may be awarded under the Plan. 8.2 Awards and Certificates. Any Restricted Stock issued hereunder may be evidenced in such manner as the Committee, in its sole discretion, shall deem appropriate including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of Shares of Restricted Stock awarded hereunder, such certificate shall bear an appropriate legend with respect to the restrictions applicable to such Award. The Company may retain, at its option, the physical custody of any stock certificate representing any awards of Restricted Stock during the restriction period or require that the Restricted Stock be placed in escrow or trust, along with a stock power endorsed in blank, until all restrictions are removed or expire. 9. PERFORMANCE AWARDS 9.1 Grants. A Performance Award may consist of either or both, as the Committee may determine, of (i) "Performance Shares" or the right to receive Shares, Restricted Stock or cash of an equivalent value, or any combination thereof as the Committee may determine, or (ii) "Performance Units," or the right to receive a fixed dollar amount payable in cash, Common Stock, Restricted Stock or any combination thereof, as the Committee may determine. The Committee may grant Performance Awards to any eligible officer, employee or director for no cash consideration, for such minimum consideration as may be required by applicable law or for such other consideration as may be specified at the time of the grant. The terms and conditions of Performance Awards shall be specified at the time of the grant and may include provisions establishing the performance period, the performance criteria to be achieved during a performance period, the criteria used to determine vesting (including the acceleration thereof), whether Performance Awards are forfeited or vest upon termination of employment during a performance period and the maximum or minimum settlement values; provided, however, that notwithstanding the foregoing, and with respect to the Senior Officers only, upon a Change in Control, the vesting, if any, and the determination of the amount earned of a Performance Award shall be determined as if the performance period or cycle applicable to such Performance Award had terminated immediately upon such Change in Control; provided, however, that to the extent that any such performance period or cycle is shortened adversely to the Senior Officers by virtue of the Change in Control, such Performance Award shall be prorated accordingly. Each Performance Award shall have its own terms and conditions, which shall be determined in the discretion of the Committee. If the Committee determines, in its sole discretion, that the established -14-
performance measures or objectives are no longer suitable because of a change in the Company's business, operations, corporate structure or for other reasons that the Committee deems satisfactory, the Committee may modify the performance measures or objectives and/or the performance period. 9.2 Terms and Conditions. Performance Awards may be valued by reference to the Fair Market Value of a Share or according to any formula or method deemed appropriate by the Committee, in its sole discretion, including, but not limited to, achievement of specific financial, production, sales, cost or earnings performance objectives that the Committee believes to be relevant to the Company's business and for remaining in the employ of the Company for a specified period of time, or the Company's performance or the performance of its Common Stock measured against the performance of the market, the Company's industry segment or its direct competitors. Performance Awards may be paid in cash, Shares (including Restricted Stock) or other consideration, or any combination thereof. If payable in Shares, the consideration for the issuance of the Shares may be the achievement of the performance objective established at the time of the grant of the Performance Award. Performance Awards may be payable in a single payment or in installments and may be payable at a specified date or dates or upon attaining the performance objective, all at the Committee's discretion. The extent to which any applicable performance objective has been achieved shall be conclusively determined by the Committee.
performance measures or objectives are no longer suitable because of a change in the Company's business, operations, corporate structure or for other reasons that the Committee deems satisfactory, the Committee may modify the performance measures or objectives and/or the performance period. 9.2 Terms and Conditions. Performance Awards may be valued by reference to the Fair Market Value of a Share or according to any formula or method deemed appropriate by the Committee, in its sole discretion, including, but not limited to, achievement of specific financial, production, sales, cost or earnings performance objectives that the Committee believes to be relevant to the Company's business and for remaining in the employ of the Company for a specified period of time, or the Company's performance or the performance of its Common Stock measured against the performance of the market, the Company's industry segment or its direct competitors. Performance Awards may be paid in cash, Shares (including Restricted Stock) or other consideration, or any combination thereof. If payable in Shares, the consideration for the issuance of the Shares may be the achievement of the performance objective established at the time of the grant of the Performance Award. Performance Awards may be payable in a single payment or in installments and may be payable at a specified date or dates or upon attaining the performance objective, all at the Committee's discretion. The extent to which any applicable performance objective has been achieved shall be conclusively determined by the Committee. 10. DIVIDEND EQUIVALENT RIGHTS The Committee may grant a Dividend Equivalent Right, either as a component of another Award or as a separate Award, and, in general, each such holder of a Dividend Equivalent Right that is outstanding on a dividend record date for the Company's Common Stock shall be credited with an amount equal to the cash or stock dividends or other distributions that would have been received had the Shares covered by the Award been issued and outstanding on the dividend record date. The terms and conditions of the Dividend Equivalent Right shall be specified by the grant. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be reinvested in additional Shares (which may thereafter accrue additional Dividend Equivalent Rights). Any such reinvestment shall be at the Fair Market Value at the time thereof. Dividend Equivalent Rights may be settled in cash or Shares, or a combination thereof, in a single Payment or in installments. A Dividend Equivalent Right granted as a component of another Award may provide that such Dividend Equivalent Right shall be settled upon exercise, settlement or payment for or lapse of restrictions on such other Award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other Award. A Dividend Equivalent Right granted as a component of another Award may also contain terms and conditions different from such other Award. 11. OTHER AWARDS The Committee may grant to any eligible officer, employee or director other forms of Awards based upon, payable in or otherwise related to, in whole or in part, Shares if the -15-
Committee, in its sole discretion. determines that such other form of Award is consistent with the purposes and restrictions of the Plan. The terms and conditions of such other form of Award shall be specified by the grant, including, but not limited to, the price, if any, and the vesting schedule, if any. Such Awards may be granted for no cash consideration, for such minimum consideration as may be required by applicable law or for such other consideration as may be specified by the grant. 12. NON-TRANSFERABILITY OF AWARDS. A stock option shall not be transferable otherwise than by will or the laws of descent and distribution, and a stock option may be exercised, during the lifetime of the Optionee, only by the Optionee; provided, however, that with the approval of the Committee, the agreement relating to any Award (including, without limitation, a stock option) may provide that such Award may be transferred to one or more members of the immediate family of the grantee of the Award or to a trust for the benefit of such person or as directed under a qualified domestic relations order. Any attempted assignment, transfer, pledge, hypothecation or other disposition of a stock option or other Award contrary to the provisions hereof, or the levy of any execution, attachment or similar process upon a stock option
Committee, in its sole discretion. determines that such other form of Award is consistent with the purposes and restrictions of the Plan. The terms and conditions of such other form of Award shall be specified by the grant, including, but not limited to, the price, if any, and the vesting schedule, if any. Such Awards may be granted for no cash consideration, for such minimum consideration as may be required by applicable law or for such other consideration as may be specified by the grant. 12. NON-TRANSFERABILITY OF AWARDS. A stock option shall not be transferable otherwise than by will or the laws of descent and distribution, and a stock option may be exercised, during the lifetime of the Optionee, only by the Optionee; provided, however, that with the approval of the Committee, the agreement relating to any Award (including, without limitation, a stock option) may provide that such Award may be transferred to one or more members of the immediate family of the grantee of the Award or to a trust for the benefit of such person or as directed under a qualified domestic relations order. Any attempted assignment, transfer, pledge, hypothecation or other disposition of a stock option or other Award contrary to the provisions hereof, or the levy of any execution, attachment or similar process upon a stock option or other Award shall be null and void and without effect. 13. COMPLIANCE WITH SECURITIES AND OTHER LAWS In no event shall the Company be required to sell or issue Shares under any Award if the sale or issuance thereof would constitute a violation of applicable federal or state securities laws or regulations or a violation of any other law or regulation of any governmental or regulatory agency or authority or any national securities exchange. As a condition to any sale or issuance of Shares, the Company may place legends on Shares, issue stop transfer orders and require such agreements or undertakings as the Company may deem necessary or advisable to assure compliance with any such laws or regulations, including, if the Company or its counsel deems it appropriate, representations from the person to whom an Award is granted that he or she is acquiring the Shares solely for investment and not with a view to distribution and that no distribution of the Shares will be made unless registered pursuant to applicable federal and state securities laws, or in the opinion of counsel of the Company, such registration is unnecessary. 14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR REORGANIZATION The value of an Award in Shares shall be adjusted from time to time as follows: (a) Subject to any required action by stockholders, the number of Shares covered by each outstanding Award, and the exercise price, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of the Company resulting from a subdivision or consolidation of Shares or the payment of a stock dividend (but only in Shares) or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company. -16-
(b) Subject to any required action by stockholders, if the Company shall be the surviving corporation in any Reorganization, merger or consolidation, each outstanding Award shall pertain to and apply to the securities to which a holder of the number of Shares subject to the Award would have been entitled, and if a plan or agreement reflecting any such event is in effect that specifically provides for the change, conversion or exchange of Shares, then any adjustment to Shares relating to an Award hereunder shall not be inconsistent with the terms of any such plan or agreement. (c) In the event of a change in the Shares of the Company as presently constituted, which is limited to a change of par value into the same number of Shares with a different par value or without par value, the Shares resulting from any such change shall be deemed to be the Shares within the meaning of the Plan. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Board, whose determination shall be final, binding and conclusive. Except as hereinbefore expressly provided in the Plan, any person to whom an Award is granted shall have no
(b) Subject to any required action by stockholders, if the Company shall be the surviving corporation in any Reorganization, merger or consolidation, each outstanding Award shall pertain to and apply to the securities to which a holder of the number of Shares subject to the Award would have been entitled, and if a plan or agreement reflecting any such event is in effect that specifically provides for the change, conversion or exchange of Shares, then any adjustment to Shares relating to an Award hereunder shall not be inconsistent with the terms of any such plan or agreement. (c) In the event of a change in the Shares of the Company as presently constituted, which is limited to a change of par value into the same number of Shares with a different par value or without par value, the Shares resulting from any such change shall be deemed to be the Shares within the meaning of the Plan. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Board, whose determination shall be final, binding and conclusive. Except as hereinbefore expressly provided in the Plan, any person to whom an Award is granted shall have no rights by reason of any subdivision or consolidation of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, reorganization, merger or consolidation or spinoff of assets or stock of another corporation, and any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or exercise price of Shares subject to an Award. The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, Reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell or transfer all or any part of its business or assets. 15. AMENDMENT OR TERMINATION OF THE PLAN 15.1 Amendment of the Plan. Notwithstanding anything contained in the Plan to the contrary, all provisions of the Plan may at any time or from time to time be modified or amended by the Board; provided, however, that no Award at any time outstanding under the Plan may be modified, impaired or canceled adversely to the holder of the Award without the consent of such holder; and provided, further, that the Plan may not be amended without approval by the holders of a majority of the Shares of the Company represented and voted at a meeting of the stockholders (a) to increase the maximum number of Shares subject to the Plan, (b) to materially modify the requirements as to eligibility for participation in the Plan, (c) to decrease the minimum exercise price for -17-
options, (d) to otherwise materially increase the benefits accruing to persons to whom Awards may be made under the Plan, as amended, or (e) if such approval is otherwise necessary, to comply with Rule 16b-3 promulgated under the Exchange Act, as amended, or to comply with any other applicable laws, regulations or listing requirements, or to qualify, for an exemption or characterization that is deemed desirable by the Board. 15.2 Termination of the Plan. The Board may suspend or terminate the Plan at any time, and such suspension or termination may be retroactive or prospective. However, no Award may be granted on or after April 22, 2004, the tenth anniversary of the adoption of the Plan. Termination of the Plan shall not impair or affect any Award previously granted hereunder and the rights of the holder of the Award shall remain in effect until the Award has been exercised in its entirety or has expired or otherwise has been terminated by the terms of such Award. 16. AMENDMENTS AND ADJUSTMENTS TO AWARDS The Committee may amend, modify or terminate any outstanding Award with the Participant's consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan, including, without limitation, (i) to change the date or dates as of which (A) an option becomes exercisable or (B) a performancebased Award is deemed earned or (ii) to cancel an Award and grant a new Award in substitution therefor under such different terms and conditions as it determines in its sole and complete discretion to be appropriate. The Committee is also authorized to make adjustments in the terms and conditions of, and the criteria included in,
options, (d) to otherwise materially increase the benefits accruing to persons to whom Awards may be made under the Plan, as amended, or (e) if such approval is otherwise necessary, to comply with Rule 16b-3 promulgated under the Exchange Act, as amended, or to comply with any other applicable laws, regulations or listing requirements, or to qualify, for an exemption or characterization that is deemed desirable by the Board. 15.2 Termination of the Plan. The Board may suspend or terminate the Plan at any time, and such suspension or termination may be retroactive or prospective. However, no Award may be granted on or after April 22, 2004, the tenth anniversary of the adoption of the Plan. Termination of the Plan shall not impair or affect any Award previously granted hereunder and the rights of the holder of the Award shall remain in effect until the Award has been exercised in its entirety or has expired or otherwise has been terminated by the terms of such Award. 16. AMENDMENTS AND ADJUSTMENTS TO AWARDS The Committee may amend, modify or terminate any outstanding Award with the Participant's consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan, including, without limitation, (i) to change the date or dates as of which (A) an option becomes exercisable or (B) a performancebased Award is deemed earned or (ii) to cancel an Award and grant a new Award in substitution therefor under such different terms and conditions as it determines in its sole and complete discretion to be appropriate. The Committee is also authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 14 hereof) affecting the Company, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent reduction or enlargement of the benefits or potential benefits intended to be made available under the Plan. Any provision of the Plan or any agreement regarding an Award to the contrary notwithstanding, the Committee may cause any Award granted to be canceled in consideration of a cash payment or alternative Award made to the holder of such canceled Award equal in value to the Fair Market Value of such canceled Award. The determinations of value under this Section 16 shall be made by the Committee in its sole discretion. 17. GENERAL PROVISIONS 17.1 No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company from adopting or continuing in effect other compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. 17.2 No Right to Employment. The grant of an Award shall not be construed as giving the recipient thereof the right to be retained in the employ of the Company. Further, the Company may at any time dismiss a participant in the Plan from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan -18-
or in any Award agreement. No officer, employee, director, participant or other person shall have any claim to be granted any Award, and there is no obligation for uniformity or treatment of officers, employees, directors, participants or holders or beneficiaries of Awards. 17.3 GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND EFFECT OF THE PLAN AND ANY RULES AND REGULATIONS RELATING TO THE PLAN SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND. 17.4 Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or as to any person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be construed or deemed amended without, in the sole determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award and the remainder of the Plan and any such Award shall remain in full force and effect.
or in any Award agreement. No officer, employee, director, participant or other person shall have any claim to be granted any Award, and there is no obligation for uniformity or treatment of officers, employees, directors, participants or holders or beneficiaries of Awards. 17.3 GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND EFFECT OF THE PLAN AND ANY RULES AND REGULATIONS RELATING TO THE PLAN SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND. 17.4 Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or as to any person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be construed or deemed amended without, in the sole determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. 17.5 No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated. 17.6 Headings. Headings are given to the subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. 17.7 Effective Date. The 1994 Flexible Long Term Incentive Plan originally became effective as of April 22, 1994, the date of its approval by the holders of a majority of the Shares of common stock of the Company represented and voting at the 1994 Annual Meeting of Stockholders. The 1994 Flexible Long Term Incentive Plan was amended and restated in its entirety by an Amended and Restated 1994 Flexible Long Term Incentive Plan which became effective on December 1, 1996. This Plan became effective as of February 7, 2001, the date it was adopted by the Board, and was approved by the Company's Stockholders on April 19, 2001, and is dated as of June 29, 2001. -19-
EXHIBIT A CAPSTEAD MORTGAGE CORPORATION 1994 FLEXIBLE LONG TERM INCENTIVE PLAN SHARE PROGRESSION
Initial Shares Approved April 22, 1994 Adjustment for 3-for-2 Stock Split (November 15, Adjusted Balance Additional Shares Approved April 19, 1996 Adjusted Balance Adjustment for 3-for-2 Stock Split (August 15, 1996) Adjusted Balance Adjustment for 1-for-2 Reverse Split (May 8, 2000) Adjusted Balance Additional Shares Approved April 19, 2001 Adjusted Balance Adjustment for 1-for-2 Reverse Split (June 29, 2001) Adjusted Balance 1,250,000 625,000 ----------1,875,000 1,200,000 ----------3,075,000 1,537,500 ----------4,612,500 (2,306,250) ----------2,306,250 1,000,000 ----------3,305,250 (1,653,125) ----------1,653,126
1995)
EXHIBIT A CAPSTEAD MORTGAGE CORPORATION 1994 FLEXIBLE LONG TERM INCENTIVE PLAN SHARE PROGRESSION
Initial Shares Approved April 22, 1994 Adjustment for 3-for-2 Stock Split (November 15, Adjusted Balance Additional Shares Approved April 19, 1996 Adjusted Balance Adjustment for 3-for-2 Stock Split (August 15, 1996) Adjusted Balance Adjustment for 1-for-2 Reverse Split (May 8, 2000) Adjusted Balance Additional Shares Approved April 19, 2001 Adjusted Balance Adjustment for 1-for-2 Reverse Split (June 29, 2001) Adjusted Balance 1,250,000 625,000 ----------1,875,000 1,200,000 ----------3,075,000 1,537,500 ----------4,612,500 (2,306,250) ----------2,306,250 1,000,000 ----------3,305,250 (1,653,125) ----------1,653,126
1995)
AS OF APRIL 19, 2001 Beginning Available Exercised Outstanding
1,653,125 236,767 207,099 ---------1,209,258 ==========
Total Available for Grant
AS OF JUNE 30, 2001 Beginning Available Exercised Outstanding
1,653,125 280,721 261,107 ---------1,111,297 ==========
Total Available for Grant
EXHIBIT 10.08 AMENDED AND RESTATED MANAGEMENT CONTRACT THIS AMENDED AND RESTATED MANAGEMENT CONTRACT (this "Contract"), dated as of January 30, 2002, is entered into by and between Capstead Mortgage Corporation, a Maryland corporation (the "Company"), and Fortress Registered Investment Trust, a Delaware business trust (the "Trust"). WITNESSETH: WHEREAS, pursuant to that certain Management Contract effective April 20, 2000 (the "Original Contract"), the Company retained the Trust to provide or cause to be provided (i) an individual to perform services similar to that of chairman of the Company's Board of Directors and chief executive officer of the Company (the "Chairman and CEO") and (ii) such other individuals as necessary to perform support services for the Chairman and CEO
EXHIBIT 10.08 AMENDED AND RESTATED MANAGEMENT CONTRACT THIS AMENDED AND RESTATED MANAGEMENT CONTRACT (this "Contract"), dated as of January 30, 2002, is entered into by and between Capstead Mortgage Corporation, a Maryland corporation (the "Company"), and Fortress Registered Investment Trust, a Delaware business trust (the "Trust"). WITNESSETH: WHEREAS, pursuant to that certain Management Contract effective April 20, 2000 (the "Original Contract"), the Company retained the Trust to provide or cause to be provided (i) an individual to perform services similar to that of chairman of the Company's Board of Directors and chief executive officer of the Company (the "Chairman and CEO") and (ii) such other individuals as necessary to perform support services for the Chairman and CEO (the "Contract Employees", and together with the Chairman and CEO, the "Contract Personnel"), to the extent the Company does not have employees available to perform such services; and WHEREAS, the Company and the Trust now desire to amend and restate the Original Contract in its entirety to provide for the modification of certain matters regarding the administration and determination of the compensation of the Trust for services provided to the Company in accordance with the terms hereof. NOW THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: 1. General Services and Duties. (a) Subject to the supervision of the Company's Board of Directors, the Chairman and CEO shall perform the services and duties of the office of chairman and chief executive officer set forth in the Charter and Bylaws of the Company, including, without limitation, the general and active management of the business of the Company; implementation of the general directives, plans and policies formulated by the Board of Directors of the Company; and such duties, responsibilities and authorities as may be assigned to the office of chairman and chief executive officer by the Board of Directors of the Company. (b) Subject to the supervision of the Chairman and CEO and the other appropriate officers and employees of the Company and to the extent the Company does not have the necessary employees available, the Contract Employees shall perform those services necessary to support the services and duties of the Chairman and CEO. 2. Relationship of Contract Personnel and the Company. Notwithstanding anything herein to the contrary, nothing in this Contract shall cause or be deemed to cause an employer/employee relationship between any of the Contract Personnel and the Company. 3. Appointment of Contract Personnel. Throughout the term of this Contract, the Trust shall provide or cause to be provided to the Company (i) an individual to perform the services and duties of the Chairman and CEO, provided that such individual is approved by a majority
of the members of the Board of Directors of the Company who are not Affiliates (defined below) of the Trust or any of its Affiliates (the "Independent Directors"), and (ii) such other Contract Employees as necessary to perform support services for the Chairman and CEO, to the extent that the Company does not have employees available to perform such services and the Trust does have such employees. The Company and the Trust hereby agree that initially the individual to be provided to the Company to perform the services and duties of Chairman and CEO shall be Mr. Wesley Edens ("Mr. Edens"), a member of an Affiliate of the Trust. "Affiliate" of another person shall mean any person directly or indirectly owning, controlling or holding with power to vote, 5% or more of the outstanding voting securities of such other person; any person 5% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote by such other person; any person directly or indirectly controlling, controlled by or under common control with, such other person; and any officer, director, partner or employee of such other person. The term "person" includes a natural
of the members of the Board of Directors of the Company who are not Affiliates (defined below) of the Trust or any of its Affiliates (the "Independent Directors"), and (ii) such other Contract Employees as necessary to perform support services for the Chairman and CEO, to the extent that the Company does not have employees available to perform such services and the Trust does have such employees. The Company and the Trust hereby agree that initially the individual to be provided to the Company to perform the services and duties of Chairman and CEO shall be Mr. Wesley Edens ("Mr. Edens"), a member of an Affiliate of the Trust. "Affiliate" of another person shall mean any person directly or indirectly owning, controlling or holding with power to vote, 5% or more of the outstanding voting securities of such other person; any person 5% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote by such other person; any person directly or indirectly controlling, controlled by or under common control with, such other person; and any officer, director, partner or employee of such other person. The term "person" includes a natural person, corporation, partnership, trust, company or other entity. 4. Confidentiality; Records. The Trust agrees to keep confidential and shall cause all the Contract Personnel to keep confidential any and all information obtained from time to time in connection with the services rendered hereunder and shall not disclose any portion thereof to third parties who are not officers, directors or partners of the Trust or any Affiliate of the Trust except with the prior written consent of a majority of the Independent Directors. Upon any termination of this Contract, the Trust shall deliver and shall cause all Contract Personnel to deliver to the Company all information, property, records and documents of the Company, confidential or otherwise, then in the custody or control of the Trust or any of the Contract Personnel. 5. Compensation. (a) For the period from April 20, 2000 through December 31, 2000, the Trust shall be entitled to receive, for services provided by Contract Personnel under this Contract, (i) a fee of $260,416.67 (a prorated amount based on an annual fee at $375,000) and (ii) a cash incentive bonus of $130,208.33 based on the Company's performance with respect to the 2000 calendar year. (b) For the period January 1, 2001 through December 31, 2001, the Trust shall be entitled to receive, for services rendered by Contract Personnel under this Contract, (i) an annual fee of $375,000 and (ii) an annual cash incentive bonus based on a predetermined formula established by the Independent Directors. For the period January 1, 2002 through December 31, 2002, and during each subsequent calendar year of this Contract, the Trust shall be entitled to receive, for services rendered by Contract Personnel under this Contract, (i) an annual fee of $375,000 and (ii) an annual cash incentive bonus based on a predetermined formula established by a majority of the Independent Directors at the beginning of each year (the "Incentive Pool"), less amounts allocated by the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") out of the Incentive Pool to officers and employees of the Company. The Compensation Committee may also provide, in its sole discretion, long-2-
term, non-cash incentive compensation, which may be in the form of stock options and/or stock grants. (c) Any increase in the bonus compensation payable under Section 5(b) must be approved by the affirmative vote of a majority of the Independent Directors. (d) The Trust and the Company hereby agree that any and all compensation payable to the Trust hereunder shall be payable only as provided in clause (e) of this Section 5 and under no circumstance shall any of the Contract Personnel be entitled to any fee, bonus or other compensation (including director fees) for services rendered under this Contract. The parties acknowledge that each of the Contract Personnel will be compensated by the Trust or an Affiliate of the Trust for the services provided hereunder. (e) Notwithstanding anything herein to the contrary, the Trust and the Company hereby agree, and the Trust hereby directs, that all compensation due and owing to the Trust hereunder shall be paid on behalf of the Trust to Fortress Capital Finance LLC, a Delaware limited liability company and an Affiliate of the Trust. (f) Notwithstanding anything herein to the contrary, from and after the effective date of any termination of this Contract pursuant to the terms hereof, the Trust shall not be entitled to any compensation for further services
term, non-cash incentive compensation, which may be in the form of stock options and/or stock grants. (c) Any increase in the bonus compensation payable under Section 5(b) must be approved by the affirmative vote of a majority of the Independent Directors. (d) The Trust and the Company hereby agree that any and all compensation payable to the Trust hereunder shall be payable only as provided in clause (e) of this Section 5 and under no circumstance shall any of the Contract Personnel be entitled to any fee, bonus or other compensation (including director fees) for services rendered under this Contract. The parties acknowledge that each of the Contract Personnel will be compensated by the Trust or an Affiliate of the Trust for the services provided hereunder. (e) Notwithstanding anything herein to the contrary, the Trust and the Company hereby agree, and the Trust hereby directs, that all compensation due and owing to the Trust hereunder shall be paid on behalf of the Trust to Fortress Capital Finance LLC, a Delaware limited liability company and an Affiliate of the Trust. (f) Notwithstanding anything herein to the contrary, from and after the effective date of any termination of this Contract pursuant to the terms hereof, the Trust shall not be entitled to any compensation for further services rendered hereunder but shall be entitled to receive all compensation accruing to the effective date of such termination. 6. Expenses. The Trust shall be responsible for all expenses related to the execution, delivery and performance of this Contract by the Trust, and the Company shall be responsible for all expenses related to the execution, delivery and performance of this Contract by the Company. 7. Term; Termination. (a) This Contract shall continue in force until December 31, 2000, and thereafter it shall automatically renew on an annual basis unless the Company, by the affirmative vote of a majority of the Independent Directors, or the Trust terminate this Contract in accordance with clause (b) of this Section 7. (b) Notwithstanding any other provision herein to the contrary, this Contract, or any extension hereof, may be terminated (i) immediately for cause, by either the Company (by an affirmative vote of a majority of the Independent Directors) or the Trust or, (ii) without cause by either the Company (by an affirmative vote of a majority of the Independent Directors) or the Trust, upon 30 days' written notice. Cause as provided in (i) above shall include the termination by the Company if a majority of the Independent Directors do not approve the individual provided to act as Chairman and CEO pursuant to Section 3 hereof. 8. Assignment. This Contract shall not be assignable by either party hereto. -3-
9. Notices. Any notice, report or other communication required or permitted to be given hereunder shall be in writing, unless some other method of giving such notice, report or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses of the parties hereto: To the Company: Capstead Mortgage Corporation 8401 N. Central Expressway One Lincoln Park, Suite 800 Dallas, Texas 75225-4410 Attn: Andrew F. Jacobs, Executive Vice President - Finance To the Trust: Fortress Registered Investment Trust 1301 Avenue of the Americas, 42nd Floor New York, New York 10019 Attn: Randal A. Nardone, Chief Operating Officer Any party may at any time give notice in writing to the other parties of a change of its address for the purpose of
9. Notices. Any notice, report or other communication required or permitted to be given hereunder shall be in writing, unless some other method of giving such notice, report or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses of the parties hereto: To the Company: Capstead Mortgage Corporation 8401 N. Central Expressway One Lincoln Park, Suite 800 Dallas, Texas 75225-4410 Attn: Andrew F. Jacobs, Executive Vice President - Finance To the Trust: Fortress Registered Investment Trust 1301 Avenue of the Americas, 42nd Floor New York, New York 10019 Attn: Randal A. Nardone, Chief Operating Officer Any party may at any time give notice in writing to the other parties of a change of its address for the purpose of this Section 9. 10. Amendments. This Contract shall not be amended, changed, modified, terminated or discharged in whole or in part, and the performance of any obligation hereunder may not be waived, except upon prior written consent of a majority of the Independent Directors. 11. Governing Law. The provisions of this Contract shall be governed by, construed under and interpreted in accordance with the laws of the State of Texas as at the time in effect. 12. Headings. The section headings hereof have been inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Contract. 13. Counterparts. This Contract may be executed in any number of counterparts with the same effect as if all signing parties had signed the same document. All counterparts shall be construed together and constitute the same instrument. 14. Entire Agreement; Superseding Effect. This Contract constitutes the entire agreement of the parties hereto relating to this Contract and the services contemplated hereby and supersedes all provisions and concepts contained in all prior contracts or agreements between the parties hereto with respect to this Contract and the transactions contemplated hereby, whether oral or written. -4-
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be executed by their duly authorized officers as of the day and year first above written. CAPSTEAD MORTGAGE CORPORATION
By: /s/ Andrew F. Jacobs -------------------------------------Name: Andrew F. Jacobs Title: Executive Vice President
FORTRESS REGISTERED INVESTMENT TRUST
By: /s/ Randal A. Nardone -------------------------------------Name: Randal A. Nardone Title: Chief Operating Officer
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be executed by their duly authorized officers as of the day and year first above written. CAPSTEAD MORTGAGE CORPORATION
By: /s/ Andrew F. Jacobs -------------------------------------Name: Andrew F. Jacobs Title: Executive Vice President
FORTRESS REGISTERED INVESTMENT TRUST
By: /s/ Randal A. Nardone -------------------------------------Name: Randal A. Nardone Title: Chief Operating Officer
-5-
EXHIBIT 12 CAPSTEAD MORTGAGE CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED) (a) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (including CMO debt):
YEAR ENDED DECEMBER 31 -------------------------------------------------------------2001 2000 1999 1998 --------------------------------Fixed charges Preferred stock dividends Combined fixed charges and preferred stock dividends $ 362,327 20,446 --------$ 382,773 ========= $ 362,327 106,276 --------$ 468,603 ========= $ 540,605 24,260 --------$ 564,865 ========= $ 540,605 (51,486) --------$ 489,119 ========= $ 502,933 22,556 --------$ 525,489 ========= $ 502,933 57,909 --------$ 560,842 ========= $ 673,233 22,342 --------$ 695,575 ========= $ 673,233 (234,764) --------$ 438,469 =========
Fixed charges Net income (loss)
Ratio of earnings to combined fixed charges and preferred stock dividends
1.22:1 =========
0.87:1 =========
1.07:1 =========
0.63:1 =========
(b) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (excluding CMO debt):
YEAR ENDED DECEMBER 31 -------------------------------------------------------------2001 2000 1999 1998 ---------------------------------
EXHIBIT 12 CAPSTEAD MORTGAGE CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED) (a) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (including CMO debt):
YEAR ENDED DECEMBER 31 -------------------------------------------------------------2001 2000 1999 1998 --------------------------------Fixed charges Preferred stock dividends Combined fixed charges and preferred stock dividends $ 362,327 20,446 --------$ 382,773 ========= $ 362,327 106,276 --------$ 468,603 ========= $ 540,605 24,260 --------$ 564,865 ========= $ 540,605 (51,486) --------$ 489,119 ========= $ 502,933 22,556 --------$ 525,489 ========= $ 502,933 57,909 --------$ 560,842 ========= $ 673,233 22,342 --------$ 695,575 ========= $ 673,233 (234,764) --------$ 438,469 =========
Fixed charges Net income (loss)
Ratio of earnings to combined fixed charges and preferred stock dividends
1.22:1 =========
0.87:1 =========
1.07:1 =========
0.63:1 =========
(b) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (excluding CMO debt):
YEAR ENDED DECEMBER 31 -------------------------------------------------------------2001 2000 1999 1998 --------------------------------Fixed charges Preferred stock dividends Combined fixed charges and preferred stock dividends $ 164,422 20,446 --------$ 184,868 ========= $ 164,422 106,276 --------$ 270,698 ========= Ratio of earnings to combined fixed charges and preferred stock dividends $ 303,126 24,260 --------$ 327,386 ========= $ 303,126 (51,486) --------$ 251,640 ========= $ 232,852 22,556 --------$ 255,408 ========= $ 232,852 57,909 --------$ 290,761 ========= $ 332,985 22,342 --------$ 355,327 ========= $ 332,985 (234,764) --------$ 98,221 =========
Fixed charges Net income (loss)
1.46:1 =========
0.77:1 =========
1.14:1 =========
0.28:1 =========
EXHIBIT 13 CAPSTEAD MORTGAGE CORPORATION PORTIONS OF THE
EXHIBIT 13 CAPSTEAD MORTGAGE CORPORATION PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2001
REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Capstead Mortgage Corporation We have audited the accompanying consolidated balance sheets of Capstead Mortgage Corporation as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and preferred stock subject to repurchase, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capstead Mortgage Corporation at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Dallas, Texas January 25, 2002
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
YEAR ENDED DECEMBER 31 ---------------------------------------2001 2000 1999 -------------------------INTEREST INCOME: Mortgage securities and other investments CMO collateral and investments Total interest income 274,480 198,216 ---------472,696 ---------$ 349,533 237,052 ---------586,585 ---------$ 293,8 269,3 -------563,1 -------$
INTEREST AND RELATED EXPENSE: Borrowings under repurchase arrangements
164,422
303,126
232,8
REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Capstead Mortgage Corporation We have audited the accompanying consolidated balance sheets of Capstead Mortgage Corporation as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and preferred stock subject to repurchase, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capstead Mortgage Corporation at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Dallas, Texas January 25, 2002
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
YEAR ENDED DECEMBER 31 ---------------------------------------2001 2000 1999 -------------------------INTEREST INCOME: Mortgage securities and other investments CMO collateral and investments Total interest income 274,480 198,216 ---------472,696 ---------$ 349,533 237,052 ---------586,585 ---------$ 293,8 269,3 -------563,1 -------$
INTEREST AND RELATED EXPENSE: Borrowings under repurchase arrangements CMO borrowings Mortgage insurance and other Total interest and related expense Net margin on mortgage assets and other investments
164,422 197,905 990 ---------363,317 ---------109,379 ----------
303,126 237,479 1,545 ---------542,150 ---------44,435 ----------
232,8 270,0 2,0 -------504,9 -------58,2 --------
OTHER REVENUE (EXPENSE): Gain (loss) on sale of mortgage assets Impairment on mortgage assets Severance costs CMO administration and other Management and affiliate incentive fee Other operating expense
7,956 --3,705 (9,422) (5,342) ----------
(70,173) (19,088) (3,607) 3,484 (389) (6,148) ----------
1,7
4,0 (2 (5,8 --------
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
YEAR ENDED DECEMBER 31 ---------------------------------------2001 2000 1999 -------------------------INTEREST INCOME: Mortgage securities and other investments CMO collateral and investments Total interest income 274,480 198,216 ---------472,696 ---------$ 349,533 237,052 ---------586,585 ---------$ 293,8 269,3 -------563,1 -------$
INTEREST AND RELATED EXPENSE: Borrowings under repurchase arrangements CMO borrowings Mortgage insurance and other Total interest and related expense Net margin on mortgage assets and other investments
164,422 197,905 990 ---------363,317 ---------109,379 ----------
303,126 237,479 1,545 ---------542,150 ---------44,435 ----------
232,8 270,0 2,0 -------504,9 -------58,2 --------
OTHER REVENUE (EXPENSE): Gain (loss) on sale of mortgage assets Impairment on mortgage assets Severance costs CMO administration and other Management and affiliate incentive fee Other operating expense Total other revenue (expense)
7,956 --3,705 (9,422) (5,342) ---------(3,103) ---------$ 106,276 ========== 106,276 (20,446) ---------$ 85,830 ========== $
(70,173) (19,088) (3,607) 3,484 (389) (6,148) ---------(95,921) ---------$ (51,486) ========== (51,486) (24,260) ---------$ (75,746) ========== $
1,7
4,0 (2 (5,8 -------(3 -------$ 57,9 ======== 57,9 (22,5 -------$ 35,3 ======== $
NET INCOME (LOSS)
Net income (loss) Less preferred share dividends
Net income (loss) available to common stockholders
Net income (loss) per common share: Basic Diluted
$
6.43 5.68
$
(6.59) (6.59)
$
2. 2.
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
DECEMBER 31 -------------------------2001 2000 ------------------ASSETS Mortgage securities and other investments ($3.3 billion pledged under repurchase arrangements) CMO collateral and investments
3,455,219 2,262,305 -----------5,717,524 54,381 123,520 ------------
$
5,394 3,126 -------8,521 67 21 --------
$
Prepaids, receivables and other Cash and cash equivalents
CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
DECEMBER 31 -------------------------2001 2000 ------------------ASSETS Mortgage securities and other investments ($3.3 billion pledged under repurchase arrangements) CMO collateral and investments
3,455,219 2,262,305 -----------5,717,524 54,381 123,520 -----------$ 5,895,425 ============
$
5,394 3,126 -------8,521 67 21 -------$ 8,610 ========
$
Prepaids, receivables and other Cash and cash equivalents
LIABILITIES Borrowings under repurchase arrangements Collateralized mortgage obligations ("CMOs") Incentive fee payable to management and affiliate Accounts payable and accrued expenses
3,207,068 2,245,015 9,422 29,192 -----------5,490,697 ------------
$
$
4,904 3,103
31 -------8,039 --------
PREFERRED STOCK SUBJECT TO REPURCHASE $0.56 Cumulative Convertible Preferred Stock, Series C, $0.10 par value; -0- and 5,378 shares authorized, issued and outstanding at December 31, 2001 and 2000, respectively (converted to common shares May 4, 2001)
-------------
25 --------
STOCKHOLDERS' EQUITY Preferred stock - $0.10 par value; 100,000 and 94,622 shares authorized, respectively: $1.60 Cumulative Preferred Stock, Series A, 273 and 374 shares issued and outstanding at December 31, 2001 and 2000, respectively ($4,481 aggregate liquidation preference) $1.26 Cumulative Convertible Preferred Stock, Series B, 15,842 and 15,845 shares issued and outstanding at December 31, 2001 and 2000, respectively ($180,283 aggregate liquidation preference) Common stock - $0.01 par value; 100,000 shares authorized; 13,862 and 12,641 shares issued and outstanding at December 31, 2001 and 2000, respectively Paid-in capital Accumulated deficit Accumulated other comprehensive income
3,821
5
176,961
177
139 559,571 (387,718) 51,954 -----------404,728 -----------$ 5,895,425 ============
740 (396 19 -------545 -------$ 8,610 ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PREFERRED STOCK SUBJECT TO REPURCHASE (In thousands, except per share amounts)
PREFERRED STOCK SUBJECT TO ACCUM OT COMPRE
PREFERRED
COMMON
PAID-IN
ACCUMULATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PREFERRED STOCK SUBJECT TO REPURCHASE (In thousands, except per share amounts)
PREFERRED STOCK SUBJECT TO REPURCHASE ---------$ -----50,584 ----------50,584 --ACCUM OT COMPRE INCOME -----$
BALANCE AT JANUARY 1, 1999 Net income Other comprehensive loss Cash dividends: Common ($2.40 per share) Preferred Additions to capital Capital stock repurchases BALANCE AT DECEMBER 31, 1999 Net loss Other comprehensive income Cash dividends: Common ($1.42 per share) Preferred Conversion of preferred stock Additions to capital Capital stock repurchases BALANCE AT DECEMBER 31, 2000 Net income Other comprehensive income: Unrealized gain on cash flow hedges, net Unrealized gain on debt securities, net Total comprehensive income Cash dividends: Common - regular ($5.54 per share) Common - special ($14.60 per share) Preferred Conversion of preferred stock Additions to capital Capital stock repurchases BALANCE AT DECEMBER 31, 2001
PREFERRED STOCK --------$ 198,424 -----(6,948) --------191,476 ---
COMMON STOCK -----$ 151 -----(9) -----142 ----13 1 (30) -----126 --
PAID-IN CAPITAL --------$ 788,131 -----(18,087) --------770,044 ----25,197 144 (54,645) --------740,740 --
ACCUMULATED DEFICIT ----------$ (305,287) 57,909 -(34,634) (22,305) -(251) ----------(304,568) (51,486) -(16,568) (25,546) --1,286 ----------(396,882) 106,276
------
----(25,210) -(164) --(9,236) ---------- --------25,210 182,240 ---
------
---
---
---
---
---
--
--
---14 1 (2) -----$ 139 ======
-(201,236) -26,654 731 (7,318) --------$ 559,571 =========
(76,666) -(20,446) -------------$ (387,718) ===========
----(25,210) (1,458) -------------- --------$ -- $ 180,782 ========== =========
-----$ ======
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DEC --------------------------2001 2000 -------------------OPERATING ACTIVITIES: Net income (loss) Noncash items: Amortization of discount and premium Depreciation and other amortization Impairment on mortgage assets Loss (gain) on sale of mortgage assets Change in incentive fee payable to management and affiliate Net change in prepaids, receivables, other assets, accounts payable $ 106,276 31,263 1,223 -(7,956) 9,422 $ (51, 17, 19, 70,
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DEC --------------------------2001 2000 -------------------OPERATING ACTIVITIES: Net income (loss) Noncash items: Amortization of discount and premium Depreciation and other amortization Impairment on mortgage assets Loss (gain) on sale of mortgage assets Change in incentive fee payable to management and affiliate Net change in prepaids, receivables, other assets, accounts payable and accrued expenses Net cash provided by operating activities INVESTING ACTIVITIES: Purchases of mortgage securities and other investments Purchases of CMO collateral and investments Principal collections on mortgage investments Proceeds from sales of mortgage assets CMO collateral: Principal collections Decrease in accrued interest receivable Decrease in short-term investments Net cash provided by (used in) investing activities FINANCING ACTIVITIES: Increase (decrease) in short-term borrowings CMO borrowings: Issuance of securities Principal payments on securities Decrease in accrued interest payable Capital stock transactions Dividends paid Net cash provided by (used in) financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ 106,276 31,263 1,223 -(7,956) 9,422 11,872 -----------152,100 -----------(226,557) -1,705,893 576,554 758,423 5,347 461 -----------2,820,121 -----------(1,697,564) -(862,311) (5,515) (207,960) (97,112) -----------(2,870,462) -----------101,759 21,761 -----------$ 123,520 ============ $ (51, 17, 19, 70,
(3, --------52, --------(2,366, (235, 982, 1,404, 423, 2, --------209, --------32, 235, (430, (2, (62, (42, --------(269, --------(6, 28, --------$ 21, =========
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE 1 -- BUSINESS Capstead Mortgage Corporation operates as a real estate investment trust ("REIT") earning income from investing in real estate-related assets on a leveraged basis and from other investment strategies. These investments currently include, but are not limited to, adjustable-rate single-family residential mortgage-backed securities issued by government-sponsored entities, either Fannie Mae, Freddie Mac or Ginnie Mae ("Agency Securities"). Capstead has also made limited investments in credit-sensitive commercial mortgage assets. The Company continues to evaluate suitable real estate-related investments, which may include more credit-sensitive assets that can earn attractive returns due largely to a higher risk of default and reduced liquidity compared to Agency Securities. Capstead believes that such investments, when combined with the prudent use of leverage, can
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE 1 -- BUSINESS Capstead Mortgage Corporation operates as a real estate investment trust ("REIT") earning income from investing in real estate-related assets on a leveraged basis and from other investment strategies. These investments currently include, but are not limited to, adjustable-rate single-family residential mortgage-backed securities issued by government-sponsored entities, either Fannie Mae, Freddie Mac or Ginnie Mae ("Agency Securities"). Capstead has also made limited investments in credit-sensitive commercial mortgage assets. The Company continues to evaluate suitable real estate-related investments, which may include more credit-sensitive assets that can earn attractive returns due largely to a higher risk of default and reduced liquidity compared to Agency Securities. Capstead believes that such investments, when combined with the prudent use of leverage, can provide attractive returns over the long term with less sensitivity to changes in interest rates. Capstead's portfolios declined during 2001 primarily because of high levels of mortgage prepayments. To the extent proceeds of runoff or asset sales are not reinvested, or cannot be reinvested, at a rate of return at least equal to the rate previously earned on that capital, earnings may decline. The future size and composition of Capstead's investment portfolios will depend on market conditions, including levels of mortgage prepayments and the availability on a timely basis of suitable investments at attractive pricing. NOTE 2 -- ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Capstead Mortgage Corporation ("Capstead"), its special-purpose finance subsidiaries and certain other entities (collectively, the "Company"). Intercompany balances and transactions have been eliminated. Substantially all of the assets of the special-purpose finance subsidiaries are pledged to secure collateralized mortgage obligations ("CMOs") and are not available for the satisfaction of general claims of Capstead. Capstead has no responsibility for CMOs beyond the assets pledged as collateral. USE OF ESTIMATES The use of estimates is inherent in the preparation of financial statements in conformity with accounting principles generally accepted in the United States. The amortization of premiums and discounts on mortgage assets and CMOs is based on estimates of future prepayments on underlying mortgage loans, which are impacted by future changes in interest rates and other factors beyond the control of management. Actual results could differ from those estimates, which could adversely affect profitability.
Estimated fair values of debt securities have been determined using available market information and appropriate valuation methodologies; however, considerable judgment is required in interpreting market data to develop these estimates. In addition, fair values fluctuate on a daily basis. Accordingly, estimates of fair value as of the balance sheet dates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair values, which would affect Accumulated other comprehensive income (loss) in stockholders' equity and the calculation of the Management and affiliate incentive fee. MORTGAGE ASSETS Mortgage assets held in the form of mortgage-backed securities are debt securities. Management determines the appropriate classification of debt securities at the time of purchase and periodically reevaluates such designation. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value with unrealized gains (losses) reported as a separate component of Accumulated other comprehensive income (loss) in
Estimated fair values of debt securities have been determined using available market information and appropriate valuation methodologies; however, considerable judgment is required in interpreting market data to develop these estimates. In addition, fair values fluctuate on a daily basis. Accordingly, estimates of fair value as of the balance sheet dates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair values, which would affect Accumulated other comprehensive income (loss) in stockholders' equity and the calculation of the Management and affiliate incentive fee. MORTGAGE ASSETS Mortgage assets held in the form of mortgage-backed securities are debt securities. Management determines the appropriate classification of debt securities at the time of purchase and periodically reevaluates such designation. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value with unrealized gains (losses) reported as a separate component of Accumulated other comprehensive income (loss) in stockholders' equity. Interest is recorded as income when earned. Any premium or discount is recognized as an adjustment to interest income by the interest method over the life of the related asset. Realized gains (losses) are included in Other revenue (expense). The cost of assets sold is based on the specific identification method. Unrealized gains (losses) are not amortized to income; however, if a decline in fair value of an individual asset below amortized cost basis occurs that is determined to be other than temporary, the difference between amortized cost and fair value is included in Other revenue (expense) as an impairment charge. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less when purchased. DERIVATIVE FINANCIAL INSTRUMENTS The Company may from time to time acquire derivative financial instruments ("Derivatives") for risk management purposes. These may include interest rate floors, swaps and caps, U.S. Treasury futures contracts and options, written options on mortgage assets or various other Derivatives available in the marketplace that are compatible with the Company's risk management objectives. The Company has made limited use of Derivatives during the three years ended December 31, 2001. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") established new accounting and reporting standards for Derivatives and hedging activities. This includes the recognition of all Derivatives, including certain Derivatives not previously afforded accounting recognition, as either assets or liabilities on the balance sheets and measurement of those instruments at fair value. The Company adopted this statement January 1, 2001 and recognized in Other
comprehensive income as cash flow hedge instruments certain call rights on securitizations previously issued by the Company that were originally accounted for as sales. These call rights allow Capstead to acquire, at its option, a modest amount of adjustable-rate mortgage-backed securities at par value, provided certain requirements specified in the related indentures have been met. The fair value of these call rights is based on the discounted fair value of the underlying loans in excess of par, less transaction costs. As such, changes in the value of the call rights are 100% correlated to changes in value of the underlying loans, excluding the effects of time value. Changes in time value are recorded in Other revenue. Upon exercise, the underlying loans are recorded at par. The remaining value of the related call right is reclassified as a loan premium and is subsequently amortized to Interest income as a yield adjustment. The related amount recorded in Other comprehensive income is also amortized to Interest income concurrently with the loan premium resulting in a zero net effect on income. Similarly, if the underlying loans are subsequently sold, these amounts
comprehensive income as cash flow hedge instruments certain call rights on securitizations previously issued by the Company that were originally accounted for as sales. These call rights allow Capstead to acquire, at its option, a modest amount of adjustable-rate mortgage-backed securities at par value, provided certain requirements specified in the related indentures have been met. The fair value of these call rights is based on the discounted fair value of the underlying loans in excess of par, less transaction costs. As such, changes in the value of the call rights are 100% correlated to changes in value of the underlying loans, excluding the effects of time value. Changes in time value are recorded in Other revenue. Upon exercise, the underlying loans are recorded at par. The remaining value of the related call right is reclassified as a loan premium and is subsequently amortized to Interest income as a yield adjustment. The related amount recorded in Other comprehensive income is also amortized to Interest income concurrently with the loan premium resulting in a zero net effect on income. Similarly, if the underlying loans are subsequently sold, these amounts would be factored into the resulting gain or loss. If it is concluded that exercise of a call right is not likely to occur, the related amount carried in Other comprehensive income would be written off in Other revenue. BORROWINGS CMOs, borrowings under repurchase arrangements and other borrowings, if any, are carried at their unpaid principal balances, net of unamortized discount or premium. Any discount or premium is recognized as an adjustment to Interest and related expense by the interest method over the expected term of the related borrowings. INCOME TAXES Income taxes are accounted for using the liability method, and deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Capstead and its qualified REIT subsidiaries have elected to be taxed as a REIT and intend to continue to do so. As a result of this election, the Company is not taxed on taxable income distributed to stockholders if certain REIT qualification tests are met. It is Capstead's policy to distribute 100% of taxable income of the REIT within the time limits prescribed by the Internal Revenue Code (the "Code"), which may extend into the subsequent taxable year. Accordingly, no provision has been made for income taxes for Capstead and its qualified REIT subsidiaries. Capstead's non-REIT subsidiaries file a separate consolidated federal income tax return and are subject to income taxes. MANAGEMENT AND AFFILIATE INCENTIVE FEE Members of management, employees and an affiliate of Fortress Investment Group LLC participate in an incentive compensation program established by the members of the Board of Directors that are independent of Fortress Investment Group LLC and its affiliates (together, referred to as "Fortress"). Fortress is the Company's controlling stockholder, and its chairman of the board is also Capstead's Chairman of the Board and Chief Executive Officer. Under the terms of the program, incentive fee amounts are determined based on a 10%
participation in the `modified total return' of Capstead in excess of a 10% benchmark return, multiplied by the Company's beginning `modified common book value.' Modified total return under the program is measured as the change in modified common book value per share during the year, together with common dividends per share. Modified common book value is determined by deducting from total equity the recorded value of preferred equity and unrealized losses on assets classified as held-to-maturity, and adding back incentive fee accruals. STOCK-BASED COMPENSATION Compensation cost for stock-based awards for employees and directors is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount to be paid to acquire the stock and is recognized in Other operating expense as the awards vest and restrictions lapse.
participation in the `modified total return' of Capstead in excess of a 10% benchmark return, multiplied by the Company's beginning `modified common book value.' Modified total return under the program is measured as the change in modified common book value per share during the year, together with common dividends per share. Modified common book value is determined by deducting from total equity the recorded value of preferred equity and unrealized losses on assets classified as held-to-maturity, and adding back incentive fee accruals. STOCK-BASED COMPENSATION Compensation cost for stock-based awards for employees and directors is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount to be paid to acquire the stock and is recognized in Other operating expense as the awards vest and restrictions lapse. RECLASSIFICATIONS, REVERSE COMMON STOCK SPLIT AND SPECIAL COMMON DIVIDEND Certain amounts for prior years have been reclassified to conform to the current year presentation. All references to common shares and per common share amounts have been adjusted to reflect a 1-for-2 reverse common stock split, which was approved at a special meeting of stockholders held June 15, 2001. The common shares commenced trading on a post-reverse split basis on July 2, 2001, coinciding with the first day the common shares traded ex-dividend for a $14.60 special common dividend paid June 29, 2001. The special common dividend, which significantly reduced common equity capital relative to total equity capital, was recorded as a reduction in Paid-in capital. As a consequence of the special common dividend and the reverse split, the conversion ratio for each series of preferred shares was adjusted July 2, 2001 in accordance with the terms of the governing Articles Supplementary, as follows:
PREFERRED SHARES ---------------Series A Series B PRIOR RATES ----------1.1049 0.3844 CURRENT RATES ------------0.9657 0.3559
NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per common share is computed by dividing net income (loss) after deducting preferred share dividends, as herein defined, by the weighted average number of common shares outstanding. Diluted net income (loss) per common share is computed by dividing net income (loss), after deducting preferred share dividends for antidilutive convertible preferred shares, by the weighted average number of common shares and common share equivalents outstanding, giving effect to dilutive stock options and dilutive convertible preferred shares. For dilutive net income per share purposes, the Series A and B preferred shares are considered dilutive whenever annualized basic net income per share exceeds each Series' annualized dividend divided by the conversion rate applicable for that period. The Series A preferred shares were dilutive throughout 2001. The Series B preferred shares were dilutive after the new conversion rate went into effect, even though few actual Series B conversions occurred because it was uneconomical to convert at the market prices of both the common shares and Series B preferred shares in effect during the year.
NOTE 3 -- CALCULATION OF NET INCOME (LOSS) PER COMMON SHARE The components of the computation of basic and diluted net income (loss) per share were as follows (in thousands, except per share data):
YEAR ENDED DECEMBER ------------------------------
NOTE 3 -- CALCULATION OF NET INCOME (LOSS) PER COMMON SHARE The components of the computation of basic and diluted net income (loss) per share were as follows (in thousands, except per share data):
YEAR ENDED DECEMBER -----------------------------2001 2000 ------------------NUMERATOR FOR BASIC NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) Less preferred share dividends: Series A Series B Series B repurchase amount less than (in excess of) book value* Series C and D $ 106,276 $ (51,486)
(485) (19,961) -----------$ 85,830 ========== 13,351 ========== $ 6.43 ==========
(598) (20,322) 1,286 (4,626) ---------$ (75,746) ========== 11,487 ========== $ (6.59) ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC NET INCOME (LOSS) PER COMMON SHARE
NUMERATOR FOR DILUTED NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) Less cash dividends paid on antidilutive convertible preferred shares: Series A Series B ** Series B repurchase amount less than (in excess of) book value* Series C (converted into common shares May 4, 2001) Series D (converted into common shares December 28, 2000)
$
106,276
$
(51,486)
-(9,981) ------------$ 96,295 ==========
(598) (20,322) 1,286 (3,012) (1,614) ---------$ (75,746) ==========
DENOMINATOR FOR DILUTED NET INCOME (LOSS) PER COMMON SHARE: Weighted average common shares outstanding Net effect of dilutive stock options Net effect of dilutive convertible preferred shares: Series A Series B ** Series C and D
13,351 84 241 2,827 453 ---------16,956 ========== $ 5.68 ==========
11,487 -------------11,487 ========== $ (6.59) ==========
DILUTED NET INCOME (LOSS) PER COMMON SHARE
* Included as a component of the Series B preferred share dividends in the calculation of both basic and diluted net income (loss) per common share is the difference between repurchase amounts and the Series B preferred shares book value of $11.17 per share. ** Reflects the Series B preferred shares as antidilutive prior to the July 2, 2001 change in conversion rates.
NOTE 4 -- MORTGAGE SECURITIES AND OTHER INVESTMENTS Mortgage securities and other investments and the related weighted average interest rates were as follows (dollars in thousands):
PRINCIPAL BALANCE ---------PREMIUMS (DISCOUNTS) ----------CARRYING AMOUNT ----------AVERAGE COUPON RATE ------AVER EFFEC RAT -----
BASIS -----------
NOTE 4 -- MORTGAGE SECURITIES AND OTHER INVESTMENTS Mortgage securities and other investments and the related weighted average interest rates were as follows (dollars in thousands):
PRINCIPAL BALANCE ---------DECEMBER 31, 2001 Agency Securities: Fannie Mae/Freddie Mac: Fixed-rate Medium-term LIBOR/CMT ARMs COFI ARMs Ginnie Mae ARMs PREMIUMS (DISCOUNTS) ----------CARRYING AMOUNT ----------* AVERAGE COUPON RATE ------** AVER EFFEC RAT ----*
BASIS -----------
Non-agency securities CMBS - adjustable-rate
5,706 40,559 1,543,867 167,080 1,368,551 ---------3,125,763 73,040 172,071 ---------$3,370,874 ==========
$
34 (149) 25,286 (4,839) 14,460 ----------34,792 373 (380) ----------$ 34,785 ===========
$
5,740 40,410 1,569,153 162,241 1,383,011 ----------3,160,555 73,413 171,691 ----------$ 3,405,659 ===========
$
5,981 41,544 1,593,115 168,856 1,398,908 ----------3,208,404 74,839 171,976 ----------$ 3,455,219 ===========
$
10.00% 6.19 6.88 5.31 6.37 6.57 6.94 3.69 6.43
9. 6. 6. 6. 6. 6. 7. 6. 6.
DECEMBER 31, 2000 Agency Securities: Fannie Mae/Freddie Mac: Fixed-rate Medium-term LIBOR/CMT ARMs COFI ARMs Ginnie Mae ARMs
Non-agency securities CMBS - adjustable-rate
3,411 586,954 2,176,060 209,721 2,181,958 ---------5,158,104 94,538 74,920 ---------$5,327,562 ==========
$
16 (5,357) 40,140 (4,957) 18,323 ----------48,165 -(688) ----------$ 47,477 ===========
$
3,427 581,597 2,216,200 204,764 2,200,281 ----------5,206,269 94,538 74,232 ----------$5,375,039 ===========
$
3,646 585,756 2,225,118 208,672 2,199,649 ----------5,222,841 96,390 75,228 ----------$ 5,394,459 ===========
$
10.00% 6.19 8.19 6.78 7.07 7.43 8.44 8.68 7.47
6. 6. 6. 6. 6. 6. 7. 9. 6.
* Includes unrealized gains and losses for securities classified as available-for-sale, if applicable (see NOTE 8). ** Average Coupon Rate is presented as of the indicated balance sheet date. Average Effective Rate is presented for the year then ended, calculated including the amortization of premiums and discounts, mortgage insurance costs on non-agency securities and excluding unrealized gains and losses. The Company classifies its Agency Securities and non-agency securities by interest rate characteristics of the underlying single-family residential mortgage loans. Commercial mortgage-backed securities ("CMBS") are classified in a similar fashion. Fixed-rate mortgage securities have fixed rates of interest for their entire terms. Medium-term mortgage securities either (i) have an initial fixed-rate period of 3 or 5 years after origination and then adjust annually based on a specified margin over the 1-year Constant Maturity U.S. Treasury Note Rate ("1-year CMT"), (ii) have initial interest rates that adjust one time, approximately 3 or 5 years after origination, based on a specified margin over Fannie Mae yields for 30-year, fixed-rate commitments at the time of adjustment, or (iii) are fixed-rate
mortgage securities that have initial expected weighted average lives of 5 years or less. Adjustable-rate mortgage ("ARM") securities either (i) adjust annually based on a specified margin over 1-year CMT, (ii) adjust semiannually based on a specified margin over the 6-month London Interbank Offered Rate ("LIBOR"), (iii) adjust monthly based on a specific margin over an index such as LIBOR or the Cost of Funds Index as published by the Eleventh District Federal Reserve Bank ("COFI"), or (iv) were previously classified as medium-term and have begun adjusting annually based on a specified margin over 1-year CMT. CMBS held as of December 31, 2001 adjust monthly based on a specified margin over 30-day LIBOR. Agency Securities are AAA-rated and are considered to have limited credit risk. Non-agency securities consist
mortgage securities that have initial expected weighted average lives of 5 years or less. Adjustable-rate mortgage ("ARM") securities either (i) adjust annually based on a specified margin over 1-year CMT, (ii) adjust semiannually based on a specified margin over the 6-month London Interbank Offered Rate ("LIBOR"), (iii) adjust monthly based on a specific margin over an index such as LIBOR or the Cost of Funds Index as published by the Eleventh District Federal Reserve Bank ("COFI"), or (iv) were previously classified as medium-term and have begun adjusting annually based on a specified margin over 1-year CMT. CMBS held as of December 31, 2001 adjust monthly based on a specified margin over 30-day LIBOR. Agency Securities are AAA-rated and are considered to have limited credit risk. Non-agency securities consist of (i) private mortgage pass-through securities backed primarily by single-family non-conforming residential mortgage loans whereby the related credit risk of the underlying loans is borne by AAA-rated private mortgage insurers and (ii) other AAA-rated private mortgage securities (together, "Non-agency Securities"). Commercial mortgage securitizations generally have senior, mezzanine and subordinate classes of bonds with the lower bond classes providing credit enhancement to the more senior classes. CMBS held by the Company at December 31, 2001 are mezzanine classes and therefore carry credit risk associated with the underlying pools of commercial mortgage loans that is mitigated by subordinate bonds held by other investors. The maturity of mortgage-backed securities is directly affected by the rate of principal prepayments on the underlying loans. In connection with modifying its investment strategy in April 2000, the Company sold $1.4 billion of fixed-rate and medium-term mortgage investments and designated for sale another $700 million of primarily medium-term securities, incurring charges of $70.9 million included in Gain (loss) on sale of mortgage assets, and $19.1 million included in Impairment on mortgage assets. During 2001, $451 million of medium-term securities previously written down as impaired were sold for a gain of $5.9 million. Remaining securities written down in 2000 were carried at an unrealized gain of $6.6 million at December 31, 2001. NOTE 5 -- CMO COLLATERAL AND INVESTMENTS CMO collateral consists of primarily fixed-rate mortgage securities collateralized by single-family residential mortgage loans and related short-term investments, both pledged to secure CMO borrowings ("Pledged CMO Collateral"). All principal and interest on pledged mortgage securities is remitted directly to collection accounts maintained by a trustee. The trustee is responsible for reinvesting those funds in short-term investments. All collections on the pledged mortgage securities and the reinvestment income earned thereon are available for the payment of principal and interest on CMO borrowings. Pledged mortgage securities are primarily private mortgage pass-through securities whereby the related credit risk of the underlying loans is borne by AAA-rated private mortgage insurers or subordinated bonds within the related CMO series to which the collateral is pledged. The Company has retained $478,000 of credit risk held in the form of subordinated bonds associated with $238 million of Pledged CMO Collateral outstanding at December 31, 2001. The weighted average effective interest rate for total Pledged CMO Collateral was 7.24% and 7.28% during 2001 and 2000, respectively. CMO investments currently consist of reserve funds retained by the
Company in connection with two 1993 mortgage loan sales. These reserve funds are available to pay special hazard (e.g. earthquake or mudslide-related losses) or certain bankruptcy costs associated with $96 million of loans outstanding as of December 31, 2001 from the related securitizations. The components of CMO collateral and investments were as follows (in thousands):
DECEMBER 31 ------------------------2001 2000 ------------------Pledged CMO Collateral: Pledged mortgage securities Short-term investments Accrued interest receivable $2,231,324 30 13,329 ---------2,244,683 14,860 ---------2,259,543 2,762 $3,088,579 491 18,675 ---------3,107,745 16,322 ---------3,124,067 2,811
Unamortized premium
CMO investments
Company in connection with two 1993 mortgage loan sales. These reserve funds are available to pay special hazard (e.g. earthquake or mudslide-related losses) or certain bankruptcy costs associated with $96 million of loans outstanding as of December 31, 2001 from the related securitizations. The components of CMO collateral and investments were as follows (in thousands):
DECEMBER 31 ------------------------2001 2000 ------------------Pledged CMO Collateral: Pledged mortgage securities Short-term investments Accrued interest receivable $2,231,324 30 13,329 ---------2,244,683 14,860 ---------2,259,543 2,762 ---------$2,262,305 ========== $3,088,579 491 18,675 ---------3,107,745 16,322 ---------3,124,067 2,811 ---------$3,126,878 ==========
Unamortized premium
CMO investments
NOTE 6 -- BORROWINGS UNDER REPURCHASE ARRANGEMENTS Borrowings made under uncommitted repurchase arrangements with investment banking firms pursuant to which the Company pledges mortgage securities as collateral generally have maturities of less than 31 days. Repurchase arrangements with CMBS pledged as collateral generally have longer initial maturities and may feature renewal options. The terms and conditions of these arrangements are negotiated on a transaction-by-transaction basis. Repurchase arrangements and related weighted average interest rates for the dates indicated, classified by type of collateral and maturities, were as follows (dollars in thousands):
DECEMBER 31, 2001 ----------------------BORROWINGS AVERAGE OUTSTANDING RATE -----------------$ 2,999,860 1.88% --55,602 2.05 151,606 2.23 ------------$ 3,207,068 1.90 =========== DECEMBER 31, 2000 ---------------------BORROWINGS AVERAGE OUTSTANDING RATE ----------------$ 4,616,784 6.58% 218,104 6.55 6,947 6.90 49,145 7.25 13,652 7.25 ----------$ 4,904,632 6.59 ===========
Agency Securities (less than 31 days) Agency Securities (31 to 90 days) Non-agency Securities (less than 31 days) CMBS (less than 1 year) CMBS (over 1 year)
The weighted average effective interest rate on borrowings under repurchase arrangements was 4.18% and 6.31% during 2001 and 2000, respectively. Interest paid on borrowings totaled $180.7 million, $301.1 million and $221.4 million during 2001, 2000 and 1999, respectively.
NOTE 7 -- CMO BORROWINGS Each series of CMOs issued consists of various classes of bonds, most of which have fixed rates of interest. Interest is payable monthly or quarterly at specified rates for all classes. Typically, principal payments on each series are made to each class in the order of their stated maturities so that no payment of principal will be made on any class of bonds until all classes having an earlier stated maturity have been paid in full. The components of CMOs along with selected other information were as follows (dollars in thousands):
DECEMBER 31 -----------------------------
NOTE 7 -- CMO BORROWINGS Each series of CMOs issued consists of various classes of bonds, most of which have fixed rates of interest. Interest is payable monthly or quarterly at specified rates for all classes. Typically, principal payments on each series are made to each class in the order of their stated maturities so that no payment of principal will be made on any class of bonds until all classes having an earlier stated maturity have been paid in full. The components of CMOs along with selected other information were as follows (dollars in thousands):
DECEMBER 31 ----------------------------2001 2000 ------------------------$ 2,228,091 $ 3,087,167 12,253 17,768 ------------------------2,240,344 3,104,935 4,671 (1,061) ------------------------$ 2,245,015 $ 3,103,874 ============= ============= 2.29% to 9.45% 2008 to 2030 19 4.95% to 9.45% 2008 to 2030 26
CMOs Accrued interest payable Total obligation Unamortized premium (discount)
Range of average interest rates Range of stated maturities Number of series
The maturity of each CMO series is directly affected by the rate of principal prepayments on the related Pledged CMO Collateral. Each series is also subject to redemption, generally at the Company's option, provided that certain requirements specified in the related indenture have been met (referred to as "Clean-up Calls"); therefore, the actual maturity of any series is likely to occur earlier than its stated maturity. The weighted average effective interest rate for all CMOs was 7.27% and 7.35% during 2001 and 2000, respectively. Interest paid on CMOs totaled $194.5 million, $226.6 million and $260.2 million during 2001, 2000 and 1999, respectively. NOTE 8 -- DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, receivables, payables and borrowings under repurchase arrangements approximate fair value. The fair value of Agency Securities, Non-agency Securities, CMBS and CMO investments were estimated using either (i) quoted market prices when available, including quotes made by lenders in connection with designating collateral for repurchase arrangements, or (ii) offer prices for similar assets or market positions. The fair value of Pledged CMO Collateral was based on projected cash flows, after payment on the related CMOs, determined using market discount rates and prepayment assumptions. The fair value of CMOs was based on the same method for determining fair value of Pledged CMO Collateral adjusted for credit enhancements. The maturity of mortgage assets is directly affected by the rate of principal payments on the
underlying mortgage loans and, for Pledged CMO Collateral, Clean-up Calls of the remaining CMOs outstanding. Fair value disclosures for financial instruments were as follows (in thousands):
DECEMBER 31, 2001 ------------------------CARRYING FAIR AMOUNT VALUE ------------------ASSETS: Cash and cash equivalents Receivables Call right Derivatives Mortgage securities and other investments $ 123,520 49,283 709 3,455,219 $ 123,520 49,283 709 3,455,592 DECEMBER 31, 2000 -----------------------CARRYING FAIR AMOUNT VALUE -----------------$ 21,761 61,587 -5,394,459 $ 21,76 61,58 5,394,45
underlying mortgage loans and, for Pledged CMO Collateral, Clean-up Calls of the remaining CMOs outstanding. Fair value disclosures for financial instruments were as follows (in thousands):
DECEMBER 31, 2001 ------------------------CARRYING FAIR AMOUNT VALUE ------------------ASSETS: Cash and cash equivalents Receivables Call right Derivatives Mortgage securities and other investments CMO collateral and investments LIABILITIES: Payables Borrowings under repurchase arrangements CMOs $ 123,520 49,283 709 3,455,219 2,262,305 38,614 3,207,068 2,245,015 $ 123,520 49,283 709 3,455,592 2,250,433 38,614 3,207,068 2,241,772 DECEMBER 31, 2000 -----------------------CARRYING FAIR AMOUNT VALUE -----------------$ 21,761 61,587 -5,394,459 3,126,878 31,112 4,904,632 3,103,874 $ 21,76 61,58 5,394,45 3,084,15 31,11 4,904,63 3,074,27
Fair value disclosures for available-for-sale debt securities were as follows (in thousands):
GROSS UNREALIZED GAINS ---------GROSS UNREALIZED LOSSES ----------
COST BASIS ---------AS OF DECEMBER 31, 2001 Agency Securities: Fixed-rate Medium-term ARMs
FAIR VALUE ----------
$
Non-agency Securities CMBS - adjustable-rate CMO collateral and investments
2,596 40,410 3,114,405 ---------3,157,411 72,458 171,691 44,644 ---------$3,446,204 ==========
$
241 1,134 46,680 ---------48,055 1,426 285 1,491 ---------$ 51,257 ==========
$
--206 ---------206 --38 ---------$ 244 ==========
2,837 41,544 3,160,879 ---------3,205,260 73,884 171,976 46,097 ---------$3,497,217 ==========
$
AS OF DECEMBER 31, 2000 Agency Securities: Fixed-rate Medium-term ARMs
$
Non-agency Securities CMBS - adjustable-rate CMO collateral and investments
3,427 581,597 4,621,245 ---------5,206,269 94,538 74,232 74,648 ---------$5,449,687 ==========
$
219 5,176 20,165 ---------25,560 1,852 996 196 ---------$ 28,604 ==========
$
-1,017 7,971 ---------8,988 --171 ---------$ 9,159 ==========
3,646 585,756 4,633,439 ---------5,222,841 96,390 75,228 74,673 ---------$5,469,132 ==========
$
Held-to-maturity debt securities consist of Pledged CMO Collateral and collateral released from the related CMO indentures pursuant to Clean-up Calls and held as Non-agency Securities. Fair value disclosures for debt securities held-to-maturity were as follows (in thousands):
GROSS UNREALIZED GAINS ---------GROSS UNREALIZED LOSSES ----------
COST BASIS ---------AS OF DECEMBER 31, 2001 Released CMO collateral: Agency Securities Non-agency Securities Pledged CMO Collateral
FAIR VALUE ----------
$
3,144 955 2,216,208
$
285 88 1,455
$
--10,084
$
3,429 1,043 2,207,579
Held-to-maturity debt securities consist of Pledged CMO Collateral and collateral released from the related CMO indentures pursuant to Clean-up Calls and held as Non-agency Securities. Fair value disclosures for debt securities held-to-maturity were as follows (in thousands):
GROSS UNREALIZED GAINS ---------GROSS UNREALIZED LOSSES ----------
COST BASIS ---------AS OF DECEMBER 31, 2001 Released CMO collateral: Agency Securities Non-agency Securities Pledged CMO Collateral
FAIR VALUE ----------
$
3,144 955 2,216,208 ---------$2,220,307 ==========
$
285 88 1,455 ---------$ 1,828 ==========
$
--10,084 ---------$ 10,084 ==========
3,429 1,043 2,207,579 ---------$2,212,051 ==========
$
AS OF DECEMBER 31, 2000 Pledged CMO Collateral
$3,052,205 ==========
$ 1,204 ==========
$ 14,326 ==========
$3,039,083 ==========
Sales of released CMO collateral occasionally occur provided the collateral has paid down to within 15% of its original issuance amounts. Dispositions of debt securities were as follows (in thousands):
YEAR ENDED DECEMBER 31 ----------------------------------------------2001 2000 1999 ---------------------------------Sale of securities held available-for-sale: Amortized cost Gain Loss Sale of released CMO collateral held-to-maturity: Amortized cost Gain $ 474,441 6,210 -94,157 1,746 $ 1,389,947 -(70,989) 84,547 816 $ 7,573 1,761 ----
NOTE 9 -- INCOME TAXES Capstead and its qualified REIT subsidiaries ("Capstead REIT") file a separate federal income tax return that does not include the operations of the Company's non-REIT subsidiaries. Provided all taxable income of Capstead REIT is distributed to stockholders within time limits prescribed by the Code, no income taxes are due on this income. Taxable income, if any, of the non-REIT subsidiaries is fully taxable. In connection with utilizing operating loss carryforwards at the non-REIT subsidiaries, alternative minimum taxes of $2,000 were paid during 2000. No income taxes were paid during 2001 or 1999.
Effective tax rates differed substantially from statutory federal income tax rates because of the effect of the following items (in thousands):
YEAR ENDED DECEMBER 31 -------------------------------------------2001 2000 1999 ------------------------------$ 37,197 $ (18,020) $ 20, (970) (262) (3, 609 25,041 (39,163) (6,820) (16, ------------------------------(2,327) (61) 2,570 (235) (243) 298 ( ------------------------------$ -$ 2 $ ============ ============ =========
Income taxes computed at the federal statutory rate Capital gain generated by Capstead REIT Capital loss generated by Capstead REIT Benefit of REIT status Income taxes computed on income of non-REIT subsidiaries Change in unrecognized deferred income tax asset Other
Effective tax rates differed substantially from statutory federal income tax rates because of the effect of the following items (in thousands):
YEAR ENDED DECEMBER 31 -------------------------------------------2001 2000 1999 ------------------------------$ 37,197 $ (18,020) $ 20, (970) (262) (3, 609 25,041 (39,163) (6,820) (16, ------------------------------(2,327) (61) 2,570 (235) (243) 298 ( ------------------------------$ -$ 2 $ ============ ============ =========
Income taxes computed at the federal statutory rate Capital gain generated by Capstead REIT Capital loss generated by Capstead REIT Benefit of REIT status Income taxes computed on income of non-REIT subsidiaries Change in unrecognized deferred income tax asset Other
At December 31, 2001 Capstead REIT had capital loss carryforwards for tax purposes of $330 million, of which $260 million expires after 2003, and $70 million expires after 2005. At December 31, 2001 the non-REIT subsidiaries had net operating loss carryforwards for tax purposes of $6.6 million ($3.1 million expires after 2012 and $3.5 million expires after 2019) and capital loss carryforwards of $4.6 million, which expire after 2006. In addition, the non-REIT subsidiaries have sufficient alternative minimum tax credit carryforwards to offset the payment of federal income taxes on $5.0 million of future alternative minimum taxable income, if any, earned by these subsidiaries. Significant components of the non-REIT subsidiaries deferred income tax assets and liabilities were as follows (in thousands):
DECEMBER 31 -------------------------2001 2000 ------------------Deferred income tax assets: Alternative minimum tax credit Capital loss carryforwards Net operating loss carryforwards Other $ 1,751 1,606 994 1,259 ---------5,610 $ 1,753 -1,149 668 ---------3,570
Deferred income tax liabilities Net deferred tax assets
(14) ---------$ 5,596 ========== $ 5,596 ==========
(544) ---------$ 3,026 ========== $ 3,026 ==========
Valuation allowance
NOTE 10 -- STOCKHOLDERS' EQUITY AND PREFERRED STOCK SUBJECT TO REPURCHASE As of December 31, 2001, the Company had two series of convertible preferred stock outstanding, ranking on parity with each other and ahead of the common shares in the event of liquidation. These shares are currently redeemable at the Company's option. Dividends are payable quarterly for the Series A shares and monthly for the Series B shares.
Capstead's preferred shares are each entitled to cumulative fixed dividends with conversion rates and redemption and liquidation preferences as indicated below:
PER SHARE -----------------------------------------------ANNUALIZED CONVERSION REDEMPTION LIQUIDATION
PREFERRED
Capstead's preferred shares are each entitled to cumulative fixed dividends with conversion rates and redemption and liquidation preferences as indicated below:
PER SHARE -----------------------------------------------ANNUALIZED CONVERSION REDEMPTION LIQUIDATION DIVIDEND RATE PRICE PREFERENCE ---------- ---------- ---------- ----------* $1.60 0.9657 $16.40 $16.40 1.26 0.3559 12.50 11.38
PREFERRED SERIES --------A B
* Reflects number of common shares to be received for each preferred share converted effective July 2, 2001 (see NOTE 2). During 2001, 100,600 Series A shares and 2,473 Series B shares were converted into 80,763 and 550 common shares, respectively. On December 9, 1999 Capstead issued 5,378,000 of Series C preferred shares and 5,378,000 of Series D preferred shares to Fortress that were converted on May 4, 2001 and on December 28, 2000, respectively, into an aggregate of 2,689,000 common shares. In addition, during 2000 Fortress acquired an aggregate of 1,960,359 Capstead common shares through open market purchases and a May 2000 tender offer, bringing its holdings to 4,649,359 common shares. In November 2001, Fortress sold one million of these shares in an underwritten offering. As of December 31, 2001, Fortress was Capstead's largest stockholder, owning 3,649,359 common shares, or 26% of the Company's outstanding common shares (see NOTE 13). In February 1999, the Board of Directors authorized the repurchase of up to 1.5 million common shares and up to 2 million Series B shares. Pursuant to this repurchase program, the Company repurchased 188,475 and 901,875 common shares during 2000 and 1999, respectively, at an average price of $15.53 and $19.67 per share. Also pursuant to this program, the Company repurchased 826,900 and 622,000 Series B shares during 2000 and 1999, respectively, at an average price of $9.61 and $11.57 per share. No shares were repurchased during 2001 pursuant to this repurchase program. On January 25, 2000 the Company repurchased 2,784,250 common shares at a price of $18.54 per share pursuant to a tender offer. On March 22, 2001 the Company repurchased 275,845 common shares at a price of $26.50 per share pursuant to a tender offer. All of the above per share prices include transaction costs. All repurchased shares have been cancelled. Option exercises by directors resulted in net additions to capital of $419,000, $37,000 and $-0- during 2001, 2000 and 1999, respectively. Option exercises by officers resulted in net additions to capital of $747,000 during 2001. No options were exercised by officers in 2000 or 1999. Capstead's Charter provides that if the Board determines in good faith that the direct or indirect ownership of the common shares has become concentrated to an extent which would cause Capstead to fail to qualify as a REIT, the Company may redeem or repurchase, at fair market value, any number of common and/or preferred shares sufficient to maintain or bring such ownership into conformity with the Code. In addition, the Company may refuse to transfer or issue common and/or preferred shares to any person whose acquisition would result in Capstead being unable to comply with the requirements of the Code. Finally, the Charter provides that the Company may redeem or refuse to transfer any capital shares of Capstead necessary to prevent the imposition of a penalty tax as a result of ownership of such shares by certain disqualified organizations, including governmental bodies and tax-exempt entities that are not subject to tax on unrelated business taxable income.
The following provides information regarding comprehensive income (loss) (in thousands):
YEAR ENDED DECEMBER 31 -----------------------------------------------2001 2000 1999 ---------------------------------$ 106,276 $ (51,486) $ 57,909 ----------------------------------
Net income (loss) Other comprehensive income (loss): Unrealized gain on cash flow hedges:
The following provides information regarding comprehensive income (loss) (in thousands):
YEAR ENDED DECEMBER 31 -----------------------------------------------2001 2000 1999 ---------------------------------$ 106,276 $ (51,486) $ 57,909 ----------------------------------
Net income (loss) Other comprehensive income (loss): Unrealized gain on cash flow hedges: Initial gain upon adoption of SFAS 133 Change in unrealized gain during period Reclassification adjustment for amounts included in net income Unrealized gain (loss) on debt securities: Change in unrealized gain (loss) during period Reclassification adjustment for amounts included in net income (loss) Other comprehensive income (loss) Comprehensive income (loss)
1,365 (354) (70) 37,778 (6,210) -----------32,509 -----------$ 138,785 ============
---22,656 90,077 -----------112,733 -----------$ 61,247 ============
---(93,831) 1,761 -----------(92,070) -----------$ (34,161) ============
NOTE 11 -- EMPLOYEE AND DIRECTOR BENEFIT PLANS The Company sponsors stock plans for directors and employees to provide for the issuance of nonvested stock, stock options and other incentive-based stock awards (collectively, the "Plans"). The Plans provide for the issuance of up to an aggregate of 1,878,125 common shares. Nonvested stock grants for 53,577 common shares were issued to employees other than the chairman on April 20, 2000 (grant date fair value $14.25 per share). These grants are subject to certain restrictions, including continuous employment, which generally lapse over five years. Costs associated with nonvested stock grants (measured by the fair value of the common shares on the date of grant multiplied by the number of shares granted) are recognized as compensation expense over the vesting period. Stock options granted have terms and vesting requirements at the grant date of up to 10 years. Certain outstanding stock options previously granted to directors provide for the annual granting of dividend equivalent rights ("DERs") that permit the optionholder to obtain additional common shares based upon formulas set forth in the Plans. The following tables provide information regarding option grants outstanding as of December 31, 2001 and stock option activity for the periods indicated:
RANGE OF ------------------------------EXERCISE REMAINING PRICES LIFE (YEARS) --------------------------* * $ 8.26 to $20.99 3 to 10 $30.28 to $53.37 1 to 6
ORIGINAL GRANT DATE ---------------------------After December 1998 January 1998 and prior
OPTIONS OUTSTANDING ----------117,938 213,369 -------331,307 ========
OPTIONS EXERCISABLE ----------28,589 213,369 ----------241,958 ===========
* Weighted average exercise prices and weighted average lives of these significant option grants were $10.20 and 8 years, and $43.21 and 5 years, respectively.
As of January 1, 1999 (987,186 exercisable) Canceled
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- ---------------987,186 $71.48 (615,613) 71.24
As of January 1, 1999 (987,186 exercisable) Canceled Granted (average fair value: $2.78 per share) As of December 31, 1999 (374,386 exercisable) Canceled Exercised Granted (average fair value: $1.92 per share) DERs granted (average fair value: $16.76 per share) As of December 31, 2000 (162,486 exercisable) Canceled * Exercised Granted in connection with recapitalization * Ordinary grants (average fair value: $1.87 per share) As of December 31, 2001 (241,958 exercisable)
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- ---------------987,186 $71.48 (615,613) 71.24 2,813 16.50 --------374,386 71.42 (248,518) 70.80 (2,295) 16.30 116,671 14.30 1,307 ---------241,551 44.62 (189,941) 52.94 (76,337) 15.33 321,971 31.23 34,063 21.05 --------331,307 31.46 =========
* In connection with the payment of the special common dividend on June 29, 2001, all existing options were canceled and replaced with new option grants. Each canceled grant was replaced with a new grant for an increased number of shares at a reduced exercise price that retained the same vesting and expiration characteristics as the canceled grants such that the optionholder's economic position remained unchanged subsequent to the recapitalization. The new grants are accounted for as non-compensatory because they were issued in connection with this recapitalization of the Company. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock awards. Accordingly, no compensation expense has been recognized for stock awards other than for DERs and nonvested stock grants. Related compensation costs totaled $136,000 and $108,000 in 2001 and 2000, respectively. There were no related compensation costs during 1999. The effect of determining compensation cost for stock options granted since the beginning of 1995, based upon the estimated fair value at the grant date consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," would have been $0.03 per share or less on diluted net income (loss) per common share for each of the last 3 years. This was determined using a Black-Scholes option pricing model and, depending upon each individual option grant during the last three years, dividend yields of 10% to 15%, volatility factors of 30% to 53%, expected life assumptions of 1 to 5 years and risk-free rates of between 4.4% and 6.3%. This effect may not be representative of the pro forma effect on future operating results. The Company also sponsors a qualified defined contribution retirement plan for all employees. The Company matches up to 50% of a participant's voluntary contribution up to a maximum of 6% of a participant's compensation and may make additional contributions of up to another 3% of a participant's compensation. All Company contributions are subject to certain vesting requirements. Contribution expenses were $47,000, $161,000 and $113,000 in 2001, 2000 and 1999, respectively.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES 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. In March 1999, these actions were consolidated and in July 2000, the court appointed a lead plaintiff group. An amended complaint was filed in October 2000. The amended complaint claims that as a result of alleged improper actions, the market prices of the Company's equity securities were artificially inflated during the period between April 17, 1997 and June 26, 1998. The amended complaint seeks monetary damages in an undetermined amount. In February 2001 the Company responded to this amended complaint with a motion to dismiss all allegations against the Company and the named officers. In April 2001 the plaintiffs responded to the Company's motion to dismiss and the Company filed its reply to the plaintiffs' response in May 2001. The
NOTE 12 -- COMMITMENTS AND CONTINGENCIES 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. In March 1999, these actions were consolidated and in July 2000, the court appointed a lead plaintiff group. An amended complaint was filed in October 2000. The amended complaint claims that as a result of alleged improper actions, the market prices of the Company's equity securities were artificially inflated during the period between April 17, 1997 and June 26, 1998. The amended complaint seeks monetary damages in an undetermined amount. In February 2001 the Company responded to this amended complaint with a motion to dismiss all allegations against the Company and the named officers. In April 2001 the plaintiffs responded to the Company's motion to dismiss and the Company filed its reply to the plaintiffs' response in May 2001. 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. NOTE 13 -- TRANSACTIONS WITH FORTRESS The Company entered into a management contract with Fortress with an effective date of April 20, 2000, pursuant to which Fortress provides the services of Wesley R. Edens as Capstead's Chairman of the Board and Chief Executive Officer and of other individuals as necessary to perform support services for Mr. Edens. This contract renews annually on December 31 unless terminated by Fortress or by majority vote of the members of the Board of Directors that are independent of Fortress. Mr. Edens is also the chairman of the board of Fortress. Under the terms of this contract, Fortress is entitled to receive a base annual fee of $375,000 and a cash management incentive fee (see NOTE 2). In addition, Fortress may be awarded long-term noncash incentive compensation, which may be in the form of stock options or grants. Included in Other operating expense is $375,000 and $260,417 of base fees paid to Fortress for services rendered during 2001 and from April 20, 2000 through December 31, 2000, respectively. Included in Management and affiliate incentive fee is $8,133,150 and $130,208 of cash management incentive fees payable to Fortress for these periods, respectively. No long-term noncash compensation has been awarded. Under a separate arrangement, which terminated in early 2001, the Company provided accounting and cash management services to Fortress for one of its affiliates. Included in Other revenue is $33,000 and $160,000 Capstead received pursuant to this arrangement for services rendered in 2001 and 2000, respectively.
NOTE 14 -- NET INTEREST INCOME ANALYSIS (UNAUDITED) The following summarizes interest income and interest expense and weighted average interest rates (dollars in thousands):
2001 -----------------AVERAGE EFFECTIVE AMOUNT RATE -------- --------Interest income: Mortgage securities and other investments CMO collateral and investments Total interest income Interest expense: Borrowings under repurchase arrangements CMOs Total interest expense 2000 -----------------AVERAGE EFFECTIVE AMOUNT RATE -------- --------1999 -----------------AVERAGE EFFECTIVE AMOUNT RATE -------- ---------
$274,480 198,216 -------472,696 --------
6.52% 7.24
$349,533 237,052 -------586,585 --------
6.68% 7.28
$293,841 269,318 -------563,159 --------
5.87% 7.16
164,422 197,905 -------362,327
4.18 7.27
303,126 237,479 -------540,605
6.31 7.35
232,852 270,081 -------502,933
5.16 7.24
NOTE 14 -- NET INTEREST INCOME ANALYSIS (UNAUDITED) The following summarizes interest income and interest expense and weighted average interest rates (dollars in thousands):
2001 -----------------AVERAGE EFFECTIVE AMOUNT RATE -------- --------Interest income: Mortgage securities and other investments CMO collateral and investments Total interest income Interest expense: Borrowings under repurchase arrangements CMOs Total interest expense 2000 -----------------AVERAGE EFFECTIVE AMOUNT RATE -------- --------1999 -----------------AVERAGE EFFECTIVE AMOUNT RATE -------- ---------
$274,480 198,216 -------472,696 --------
6.52% 7.24
$349,533 237,052 -------586,585 --------
6.68% 7.28
$293,841 269,318 -------563,159 --------
5.87% 7.16
164,422 197,905 -------362,327 -------$110,369 ========
4.18 7.27
303,126 237,479 -------540,605 -------$ 45,980 ========
6.31 7.35
232,852 270,081 -------502,933 -------$ 60,226 ========
5.16 7.24
Changes in interest income and interest expense due to changes in interest rates versus changes in volume were as follows (in thousands):
RATE ---------* 2001/2000 Interest income: Mortgage securities and other investments CMO collateral and investments Total interest income Interest expense: Borrowings under repurchase arrangements CMOs Total interest expense VOLUME ---------* TOTAL ---------*
$
(7,746) (1,167) ---------(8,913) ----------
$
(67,307) (37,669) ---------(104,976) ----------
$
(75,053) (38,836) ---------(113,889) ----------
(89,930) (2,528) ---------(92,458) ---------$ 83,545 ==========
(48,774) (37,046) ---------(85,820) ---------$ (19,156) ==========
(138,704) (39,574) ---------(178,278) ---------$ 64,389 ==========
2000/1999 Interest income: Mortgage securities and other investments CMO collateral and investments Total interest income Interest expense: Borrowings under repurchase arrangements CMOs Total interest expense
$
41,680 4,225 ---------45,905 ----------
$
14,012 (36,491) ---------(22,479) ----------
$
55,692 (32,266) ---------23,426 ----------
54,327 3,828 ---------58,155 ---------$ (12,250) ==========
15,947 (36,430) ---------(20,483) ---------$ (1,996) ==========
70,274 (32,602) ---------37,672 ---------$ (14,246) ==========
* The change in interest income and interest expense due to both volume and rate has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
NOTE 15 -- QUARTERLY RESULTS (UNAUDITED) Summarized quarterly results of operations were as follows (in thousands, except percentages and per share amounts).
1ST QUARTER ----------YEAR ENDED DECEMBER 31, 2001 Interest income Interest and related expenses Net margin on mortgage assets and other investments Other revenue (expense) 143,327 121,105 ----------22,222 2,427 ----------$ 24,649 =========== $ 2ND QUARTER ----------126,465 98,287 ----------28,178 (409) ----------$ 27,769 =========== $ 3RD QUARTER ----------108,193 81,414 ----------26,779 (1,703) ----------$ 25,076 =========== $
Net income per common share: Basic Diluted
$
1.49 1.39
$
1.77 1.63
$
1.45 1.27
1ST QUARTER ----------YEAR ENDED DECEMBER 31, 2000 Interest income Interest and related expenses Net margin on mortgage assets and other investments Other revenue (expense) 142,829 130,214 ----------12,615 (945) ----------$ 11,670 =========== $ 0.44 0.44 $
2ND QUARTER ----------146,797 136,771 ----------10,026 (94,278) ----------$ (84,252) =========== $ (7.97) (7.97) $
3RD QUARTER ----------145,980 136,317 ----------9,663 104 ----------$ 9,767 =========== $ 0.30 0.30 $
Net income per common share: Basic Diluted
NOTE 16 -- MARKET AND DIVIDEND INFORMATION (UNAUDITED) The New York Stock Exchange trading symbol for Capstead's common shares is CMO. There were 2,825 common stockholders of record at December 31, 2001. In addition, depository companies held common shares for 20,706 beneficial owners. The high and low sales prices and dividends declared on the common shares were as follows:
YEAR ENDED DECEMBER 31, 2001 ---------------------------SALES PRICES ----------------- DIVIDENDS HIGH LOW DECLARED -------- ------- --------$26.90 $ 21.50 $0.98 36.40 26.20 1.56 28.49 19.01 1.50 29.50 23.50 1.50 YEAR ENDED DECEMBER 31, 2000 ---------------------------SALES PRICES ----------------- DIVIDENDS HIGH LOW DECLARED -------- ------- --------$18.25 $ 14.50 $0.44 17.75 12.00 0.32 19.38 15.75 0.24 24.00 17.88 0.42
First quarter Second quarter Third quarter Fourth quarter
SELECTED FINANCIAL DATA (In thousands, except per share amounts)
YEAR ENDED DECEMBER 31
NOTE 15 -- QUARTERLY RESULTS (UNAUDITED) Summarized quarterly results of operations were as follows (in thousands, except percentages and per share amounts).
1ST QUARTER ----------YEAR ENDED DECEMBER 31, 2001 Interest income Interest and related expenses Net margin on mortgage assets and other investments Other revenue (expense) 143,327 121,105 ----------22,222 2,427 ----------$ 24,649 =========== $ 2ND QUARTER ----------126,465 98,287 ----------28,178 (409) ----------$ 27,769 =========== $ 3RD QUARTER ----------108,193 81,414 ----------26,779 (1,703) ----------$ 25,076 =========== $
Net income per common share: Basic Diluted
$
1.49 1.39
$
1.77 1.63
$
1.45 1.27
1ST QUARTER ----------YEAR ENDED DECEMBER 31, 2000 Interest income Interest and related expenses Net margin on mortgage assets and other investments Other revenue (expense) 142,829 130,214 ----------12,615 (945) ----------$ 11,670 =========== $ 0.44 0.44 $
2ND QUARTER ----------146,797 136,771 ----------10,026 (94,278) ----------$ (84,252) =========== $ (7.97) (7.97) $
3RD QUARTER ----------145,980 136,317 ----------9,663 104 ----------$ 9,767 =========== $ 0.30 0.30 $
Net income per common share: Basic Diluted
NOTE 16 -- MARKET AND DIVIDEND INFORMATION (UNAUDITED) The New York Stock Exchange trading symbol for Capstead's common shares is CMO. There were 2,825 common stockholders of record at December 31, 2001. In addition, depository companies held common shares for 20,706 beneficial owners. The high and low sales prices and dividends declared on the common shares were as follows:
YEAR ENDED DECEMBER 31, 2001 ---------------------------SALES PRICES ----------------- DIVIDENDS HIGH LOW DECLARED -------- ------- --------$26.90 $ 21.50 $0.98 36.40 26.20 1.56 28.49 19.01 1.50 29.50 23.50 1.50 YEAR ENDED DECEMBER 31, 2000 ---------------------------SALES PRICES ----------------- DIVIDENDS HIGH LOW DECLARED -------- ------- --------$18.25 $ 14.50 $0.44 17.75 12.00 0.32 19.38 15.75 0.24 24.00 17.88 0.42
First quarter Second quarter Third quarter Fourth quarter
SELECTED FINANCIAL DATA (In thousands, except per share amounts)
YEAR ENDED DECEMBER 31 -------------------------------------------------------2001 2000 1999 19 ----------------------------------SELECTED CONSOLIDATED STATEMENT
SELECTED FINANCIAL DATA (In thousands, except per share amounts)
YEAR ENDED DECEMBER 31 -------------------------------------------------------2001 2000 1999 19 ----------------------------------SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA: Interest income Interest and related expense Net margin on mortgage assets and other investments Net margin on mortgage banking operations (a) Other revenue (expense) (b) Net income (loss) Net income (loss) per common share: (c) Basic Diluted Cash dividends paid per share: (c) Common - regular Common - special (d) $1.60 Series A Preferred $1.26 Series B Preferred $0.56 Series C Preferred (e) $0.40 Series D Preferred (e) Average number of common shares outstanding: (c) Basic Diluted SELECTED CONSOLIDATED BALANCE SHEET DATA: Mortgage securities and other investments CMO collateral and investments Mortgage servicing rights (a) Total assets Borrowings under repurchase arrangements Collateralized mortgage obligations Preferred stock subject to repurchase (e) Stockholders' equity
472,696 363,317 ----------109,379 -(3,103) ----------$ 106,276 =========== $ 6.43 5.68 5.54 14.60 1.60 1.26 ---
$
586,585 542,150 ----------44,435 -(95,921) ----------$ (51,486) =========== $ (6.59) (6.59) 1.42 -1.60 1.26 0.56 0.30
$
563,159 504,947 ----------58,212 -(303) ----------$ 57,909 =========== $ 2.42 2.42 2.40 -1.60 1.26 0.03 0.02
$
6 6 -----
$
(2 ----$ (2 ===== $
13,351 16,956 $ 3,455,219 2,262,305 -5,895,425 3,207,068 2,245,015 -404,728
11,487 11,487 $ 5,394,459 3,126,878 -8,610,497 4,904,632 3,103,874 25,210 545,669
14,587 14,762 $ 5,408,714 3,318,886 -8,807,039 4,872,392 3,289,584 50,584 563,806 $ 2,3 4,5 7,1 1,8 4,5 6
NOTE: See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements" for discussion of changes to the Company's operations that are expected to impact future operating results. (a) The mortgage banking operations, including related mortgage servicing rights, were sold in December 1998. (b) Results in 2000 include losses on the sale of mortgage assets incurred with the modification of the Company's investment strategy to focus on adjustable-rate mortgage assets. Results in 1998 include losses from the sale of mortgage assets, principally interest-only mortgage securities. (c) Amounts have been adjusted for two 1-for-2 reverse common stock splits effective July 2, 2001 and May 8, 2000, respectively. (d) On June 29, 2001 the Company paid a $14.60 special common dividend aggregating $201 million that was recorded as a reduction of Paid-in-capital. (e) The Series C and D preferred shares were converted into common shares on May 4, 2001 and December 28, 2000, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION OVERVIEW Capstead Mortgage Corporation ("Capstead" or the "Company") operates as a real estate investment trust ("REIT") earning income from investing in real estate-related assets on a leveraged basis and from other investment strategies. These investments currently include, but are not limited to, adjustable-rate single-family residential mortgage-backed securities issued by government-sponsored entities, either Fannie Mae, Freddie Mac or Ginnie Mae ("Agency Securities"). The Company has also made limited investments in credit-sensitive, commercial mortgage assets and has made changes in its capital structure designed to enhance its capability to generate attractive returns to common stockholders. As existing investments prepay or mature, Capstead has the opportunity to reinvest a portion of its equity capital into investments that can produce attractive returns over the long term, with less sensitivity to changes in interest rates than Agency Securities. To this end, the Company continues to actively evaluate suitable real estate-related investments, which may include more credit-sensitive assets that can earn attractive returns due largely to a higher risk of default and reduced liquidity compared to Agency Securities. There can be no assurance that suitable investments at attractive pricing will be available on a timely basis to replace portfolio runoff as it occurs (see "Effects of Interest Rate Changes" and "Risks Associated with Credit-Sensitive Investments"). CHANGES IN CAPITAL STRUCTURE Between December 1998 and March 2001, Capstead repurchased nearly 29% of its common shares at prices below prevailing book value. Net of conversions of preferred shares, these repurchases reduced common equity by over $32 million. On June 29, 2001 Capstead further reduced common equity by returning over $201 million to its common stockholders in the form of a special dividend distribution of $14.60 per common share. This special dividend distribution reduced common book value per share by nearly 50% and, together with the earlier share repurchases, created a capital structure capable of generating attractive returns to common stockholders by significantly reducing common equity capital relative to total equity capital. Of course, while the new capital structure can produce higher percentage returns on common equity under favorable conditions than before the capital reductions, declines in earnings or book value can also have a more pronounced impact on these returns. In conjunction with the special dividend, on June 15, 2001 stockholders approved a 1-for-2 reverse common stock split. The common shares began trading on a post-reverse split basis on July 2, 2001, which coincided with the first day the common shares traded ex-special dividend. All references to common shares and per common share amounts have been adjusted to reflect the reverse split.
The Company's book value per common share was $14.59 at December 31, 2001 (calculated assuming the redemption of the Series A and B preferred shares). Adding back the $14.60 special dividend, this represents an improvement in book value of $2.97 per common share during 2001, from $26.22 at December 31, 2000. This increase is largely attributable to the positive impact on the market value of the mortgage investment portfolio from lower prevailing interest rates, offset by portfolio runoff. Book value also benefited during 2001 from $8.0 million of undistributed gain on mortgage asset sales and, to a lesser extent, a March tender for 275,845 common shares at a price of $26.50 per share (including transaction costs). The market value of Capstead's mortgage assets will continue to fluctuate with changes in interest rates and market liquidity, and such changes will generally be reflected in book value per common share. Book value will also be affected by other factors, including the level of dividend distributions and the size and composition of the Company's investment portfolios. On May 4, 2001 Fortress Investment Group LLC ("Fortress"), Capstead's largest stockholder, converted the Series C preferred shares it acquired through its affiliate in December 1999 into 1,344,500 common shares. In November 2001 Fortress reduced its control of Capstead's voting shares from 34% to 26% through the sale of one million Capstead common shares in an underwritten offering. Wesley R. Edens, Capstead's Chairman of the Board and Chief Executive Officer, is also chairman of the board of Fortress.
The Company's book value per common share was $14.59 at December 31, 2001 (calculated assuming the redemption of the Series A and B preferred shares). Adding back the $14.60 special dividend, this represents an improvement in book value of $2.97 per common share during 2001, from $26.22 at December 31, 2000. This increase is largely attributable to the positive impact on the market value of the mortgage investment portfolio from lower prevailing interest rates, offset by portfolio runoff. Book value also benefited during 2001 from $8.0 million of undistributed gain on mortgage asset sales and, to a lesser extent, a March tender for 275,845 common shares at a price of $26.50 per share (including transaction costs). The market value of Capstead's mortgage assets will continue to fluctuate with changes in interest rates and market liquidity, and such changes will generally be reflected in book value per common share. Book value will also be affected by other factors, including the level of dividend distributions and the size and composition of the Company's investment portfolios. On May 4, 2001 Fortress Investment Group LLC ("Fortress"), Capstead's largest stockholder, converted the Series C preferred shares it acquired through its affiliate in December 1999 into 1,344,500 common shares. In November 2001 Fortress reduced its control of Capstead's voting shares from 34% to 26% through the sale of one million Capstead common shares in an underwritten offering. Wesley R. Edens, Capstead's Chairman of the Board and Chief Executive Officer, is also chairman of the board of Fortress. MORTGAGE SECURITIES AND OTHER INVESTMENTS As of December 31, 2001, mortgage securities and other investments consisted primarily of high quality singlefamily residential mortgage-backed securities, most of which are adjustable-rate mortgage ("ARM") Agency Securities (see "NOTE 4" to the accompanying consolidated financial statements for further discussion of how the Company classifies its mortgage securities and other investments). Agency Securities are AAA-rated and are considered to have limited credit risk. Non-agency securities consist of (i) private mortgage pass-through securities whereby the related credit risk of the underlying loans is borne by AAA-rated private mortgage insurers and (ii) other AAA-rated private mortgage securities (together, "Non-agency Securities"). Commercial mortgagebacked securitizations ("CMBS") generally have senior, mezzanine and subordinate classes of bonds with the lower classes providing credit enhancement to the more senior classes. CMBS held by the Company at December 31, 2001 are mezzanine classes and therefore carry credit risk associated with the underlying pools of commercial mortgage loans that is mitigated by subordinate bonds held by other investors (see "Risks Associated With Credit-Sensitive Investments"). Mortgage securities are financed under repurchase arrangements with investment banking firms pursuant to which the portfolios are pledged as collateral. Should the Company acquire other investments that are not mortgage-backed securities, financing arrangements with other parties, such as commercial banks, may be employed (see "Liquidity and Capital Resources"). The Company's mortgage investment portfolio declined during 2001 to less than $3.5 billion from $5.4 billion at December 31, 2000 as a result of portfolio runoff and the first quarter sale of $451 million of medium-term securities. Additions to the portfolio during 2001 have been limited to $102 million of ARM securities and $101 million of
adjustable-rate CMBS. To the extent proceeds of runoff or asset sales are not reinvested or cannot be reinvested at a rate of return at least equal to the rate previously earned on that capital, earnings may decline. The Company continues to evaluate suitable real estate-related investments, which may include credit-sensitive assets that can earn attractive returns due largely to a higher risk of default and reduced liquidity compared to Agency Securities. Capstead believes that such investments, when combined with the prudent use of leverage, can provide attractive returns over the long term with less sensitivity to changes in interest rates. The future size and composition of Capstead's investment portfolios will depend on market conditions, including levels of mortgage prepayments and the availability of suitable investments on a timely basis at attractive pricing (see "Effects of Interest Rate Changes"). The following yield and cost analysis illustrates fourth quarter 2001 results by investment classification and anticipated first quarter 2002 financing spreads (the difference between yields earned on mortgage investments and rates paid on related borrowings) as first projected by the Company on January 30, 2002 (the date the Company released its fourth quarter 2001 results and based on interest rates in effect at that date) (dollars in thousands):
adjustable-rate CMBS. To the extent proceeds of runoff or asset sales are not reinvested or cannot be reinvested at a rate of return at least equal to the rate previously earned on that capital, earnings may decline. The Company continues to evaluate suitable real estate-related investments, which may include credit-sensitive assets that can earn attractive returns due largely to a higher risk of default and reduced liquidity compared to Agency Securities. Capstead believes that such investments, when combined with the prudent use of leverage, can provide attractive returns over the long term with less sensitivity to changes in interest rates. The future size and composition of Capstead's investment portfolios will depend on market conditions, including levels of mortgage prepayments and the availability of suitable investments on a timely basis at attractive pricing (see "Effects of Interest Rate Changes"). The following yield and cost analysis illustrates fourth quarter 2001 results by investment classification and anticipated first quarter 2002 financing spreads (the difference between yields earned on mortgage investments and rates paid on related borrowings) as first projected by the Company on January 30, 2002 (the date the Company released its fourth quarter 2001 results and based on interest rates in effect at that date) (dollars in thousands):
4TH QUARTER 2001 AVERAGE ------------------------------ACTUAL ACTUAL BASIS YIELD/COST RUNOFF ---------- --------------(a) (a) (a) Agency Securities: FNMA/FHLMC: Fixed-rate Medium-term ARMs: LIBOR/CMT COFI GNMA ARMs AS OF DECEMBER 31, 2001 ----------------------PREMIUMS (DISCOUNTS) BASIS ------------------(a) PROJECTED 1ST QUARTER YIELD/COST ----------(b) LIFETI PREPAYM ASSUMPT ------(b)
$
10,446 64,900
8.85% 6.00 5.96 5.71 5.77 5.87 6.74 4.67 5.86
22% 33 33 23 38 35 37 1 34
$
34 (149)
$
5,740 40,410
9.54% 6.19 5.52 5.76 5.58 5.57 6.27 3.91 5.50
25% 30 40 18 26 33 35 -31
1,640,018 168,951 1,478,502 ---------3,362,817 78,463 91,051 ---------3,532,331
25,286 (4,839) 14,460 ------34,792 373 (380) ------$34,785 =======
1,569,153 162,241 1,383,011 ----------3,160,555 73,413 171,691 ----------3,405,659
Non-agency Securities CMBS - adjustable-rate
Borrowings
3,315,265 ----------
2.31
3,207,068 -----------
1.84
Capital employed/ financing spread
$ 217,066 ==========
3.55
$ 198,591 ===========
3.66
Return on assets (c)
3.64
3.83
(a) Basis represents the Company's investment before unrealized gains and losses. Actual asset yields, runoff rates, borrowing rates and resulting financing spread are presented on an annualized basis. (b) Projected annualized yields reflect ARM coupon resets and lifetime prepayment assumptions as adjusted for expected annualized prepayments over the next three months, as of January 30, 2002 (the date the Company released its fourth quarter 2001 results and based on interest rates in effect at that date). Actual yields realized in future periods will largely depend upon (i) changes in portfolio composition, (ii) ARM coupon resets, (iii) actual prepayments and (iv) any changes in lifetime prepayment assumptions. (c) The Company uses its liquidity to pay down borrowings. Return on assets is calculated on an annualized basis assuming the use of this liquidity to reduce borrowing costs (see "Utilization of Capital and Liquidity").
Yields on ARM securities peaked during the first quarter of 2001 and then began declining, reflecting the trend of declining interest rates that has been evident since the Federal Reserve began lowering short-term interest rates in
Yields on ARM securities peaked during the first quarter of 2001 and then began declining, reflecting the trend of declining interest rates that has been evident since the Federal Reserve began lowering short-term interest rates in January 2001. Yields on ARM securities fluctuate as coupon interest rates on the underlying mortgage loans reset to reflect current interest rates and are expected to continue to decline in 2002. For example, if interest rates stabilize at rates in effect January 30, 2002, average quarterly yields on the Company's current holdings of mortgage investments could decline a total of 134 basis points by the fourth quarter of 2002 from yields achieved the fourth quarter of 2001. Actual yields will depend on fluctuations in, and market expectations for fluctuations in, interest rates and levels of mortgage prepayments (see "Effects of Interest Rate Changes"). Mortgage prepayment rates were relatively high during 2001 as many homeowners took advantage of the lower interest rate environment to refinance their mortgage loans. A substantial portion of the mortgage loans underlying the Company's ARM securities have interest rates that have already reset to levels at or below most current mortgage rates, reducing or eliminating the advantage for these homeowners to refinance. Prepayments began to moderate the second half of 2001 and may slow further in 2002 as the remaining loans reset to lower levels. Annualized prepayment rates on Ginnie Mae ARM securities averaged 38.1% during the fourth quarter of 2001, compared to a 40.3% annualized rate during the third quarter of 2001 and the 18.4% level experienced during the fourth quarter of 2000. Annualized prepayment rates on Fannie Mae and Freddie Mac ARM securities averaged 32.8% during the fourth quarter of 2001 compared to 38.6% during the prior quarter and 23.5% for the same period of 2000. While lower prepayment levels improve mortgage investment yields by allowing related purchase premiums to be recognized in operating results over a longer period, higher prepayment levels shorten the period over which premiums are amortized thus reducing investment yields. More importantly, high prepayment levels can lead to lower portfolio balances as discussed above. Actions taken by the Federal Reserve during 2001 to aggressively reduce short-term interest rates resulted in significantly lower interest rates on the Company's borrowings. The Federal Reserve reduced the Federal Funds Rate by a total of 475 basis points during 2001, which contributed to a 426 basis point decline in the Company's average borrowing rates from the fourth quarter of 2000 to 2.31% during the fourth quarter 2001. The Company's average borrowing rates are expected to decline another 47 basis points during the first quarter of 2002 as the full effect of fourth quarter 2001 interest rate reductions are realized. Any further changes in borrowing rates will depend primarily on future actions by the Federal Reserve to change short-term interest rates, market expectations of future changes in short-term interest rates and the extent of changes in financial market liquidity. CMO COLLATERAL AND INVESTMENTS Since exiting the residential mortgage loan conduit business in 1995, Capstead has maintained finance subsidiaries with capacity to issue CMOs and other securitizations backed by single-family residential mortgage loans. From time to time the Company purchases mortgage loans from originators or conduits, places these loans into private mortgage pass-through securities and issues CMOs or other securities backed by these securities. The Company may or may not retain a significant residual economic interest in these
securitizations. Most of the Company's securitizations have been afforded financing accounting treatment with the related collateral recorded as pledged CMO collateral and the outstanding bonds recorded as CMO liabilities (referred to as "financed CMOs"). Other securitizations issued by the Company in 1993 and prior were treated as sales transactions (referred to as "sold CMOs"). During 2001, the Company did not issue any CMOs. From time to time, the Company exercises its right to redeem previously issued CMOs (referred to as "clean-up calls") and either sell or hold the released collateral for investment. During 2001, the Company exercised clean-up calls related to seven financed and three sold CMOs acquiring $122 million of fixed-rate and $15 million of adjustable-rate securities released from the related indentures. The Company sold $117 million of the fixed-rate securities for a gain of $2.1 million. Credit risk associated with CMO collateral is borne by AAA-rated private mortgage insurers or by subordinated bonds usually sold to investors. As of December 31, 2001, the Company had $478,000 of credit risk held in the form of subordinated bonds retained by the Company associated with $238 million of outstanding pledged CMO collateral. In connection with two 1993 sold CMOs, Capstead retained $2.8 million of reserve funds that are available to pay special hazard costs (e.g. earthquake or mudslide-related losses) or certain bankruptcy costs
securitizations. Most of the Company's securitizations have been afforded financing accounting treatment with the related collateral recorded as pledged CMO collateral and the outstanding bonds recorded as CMO liabilities (referred to as "financed CMOs"). Other securitizations issued by the Company in 1993 and prior were treated as sales transactions (referred to as "sold CMOs"). During 2001, the Company did not issue any CMOs. From time to time, the Company exercises its right to redeem previously issued CMOs (referred to as "clean-up calls") and either sell or hold the released collateral for investment. During 2001, the Company exercised clean-up calls related to seven financed and three sold CMOs acquiring $122 million of fixed-rate and $15 million of adjustable-rate securities released from the related indentures. The Company sold $117 million of the fixed-rate securities for a gain of $2.1 million. Credit risk associated with CMO collateral is borne by AAA-rated private mortgage insurers or by subordinated bonds usually sold to investors. As of December 31, 2001, the Company had $478,000 of credit risk held in the form of subordinated bonds retained by the Company associated with $238 million of outstanding pledged CMO collateral. In connection with two 1993 sold CMOs, Capstead retained $2.8 million of reserve funds that are available to pay special hazard costs (e.g. earthquake or mudslide-related losses) or certain bankruptcy costs associated with $96 million of loans outstanding as of December 31, 2001. Other than clean-up call rights, the Company does not hold any other interests in sold CMOs. CMO collateral and investments, net of related bonds, was $17.3 million at December 31, 2001, down from $23.0 million at year-end 2000. Included in this net investment are $10.2 million of the remaining CMO collateral premiums and bond discounts. Similar to premiums on the Company's mortgage investments, CMO collateral premiums and bond discounts are amortized to income as CMO collateral yield or bond expense adjustments based on both actual prepayments and lifetime prepayment assumptions (see "Effects of Interest Rate Changes"). UTILIZATION OF CAPITAL AND POTENTIAL LIQUIDITY The Company's utilization of capital and potential liquidity as of December 31, 2001 were as follows (in thousands):
CAPITAL EMPLOYED ---------POTENTIAL LIQUIDITY ---------* $ 114,847 18,837 1,990 ---------135,674 ----------135,674
ASSETS ---------Mortgage Investments: Agency Securities Non-agency Securities CMBS
BORROWINGS ----------
CMO collateral and investments
$3,208,404 74,839 171,976 ---------3,455,219 2,262,305 ---------$5,717,524 ==========
$2,999,860 55,602 151,606 ---------3,207,068 2,245,015 ---------$5,452,083 ==========
$
208,544 19,237 20,370 ---------248,151 17,290 ---------265,441
Other assets, net of other liabilities
139,287 ---------$ 404,728 ==========
123,520** ---------$ 259,194 ==========
* Based on maximum borrowings available under existing uncommitted repurchase arrangements considering the fair value of related collateral as of December 31, 2001 (see "Liquidity and Capital Resources"). ** Represents cash and cash equivalents.
The Company generally finances its mortgage investments with investment banking firms under repurchase arrangements (see "Liquidity and Capital Resources"). CMO collateral and investments are generally pledged to secure CMO bonds. Liquidity is affected by, among other things, changes in market value of assets pledged under borrowing arrangements, principal prepayments and general conditions in the investment banking, mortgage finance and real estate industries. Future levels of financial leverage will be dependent upon many factors,
The Company generally finances its mortgage investments with investment banking firms under repurchase arrangements (see "Liquidity and Capital Resources"). CMO collateral and investments are generally pledged to secure CMO bonds. Liquidity is affected by, among other things, changes in market value of assets pledged under borrowing arrangements, principal prepayments and general conditions in the investment banking, mortgage finance and real estate industries. Future levels of financial leverage will be dependent upon many factors, including the size and composition of the Company's investment portfolios (see "Liquidity and Capital Resources" and "Effects of Interest Rate Changes"). TAX CONSIDERATIONS OF COMMON DIVIDENDS, INCLUDING THE SPECIAL COMMON DIVIDEND Each common dividend distribution applicable to the 2001 tax year (including the special common dividend) consists of 28.9% ordinary taxable income and 71.1% return of capital. This has been determined based on the ratio of Capstead's taxable income for the year, less preferred dividend distributions, to total common share distributions made for the year, applied to each common dividend distribution, including the $14.60 special common dividend paid in June, and the $1.50 fourth quarter regular dividend paid January 18, 2002. Common stockholders receiving all four regular quarterly dividends for 2001, as well as the special common dividend, received taxable income per common share of $5.82 and return of capital per common share of $14.32. Common stockholders should reduce the tax cost basis of their shares by the amount of return of capital distributions received in 2001 and in prior years, if applicable. Return of capital distributions received in excess of tax cost basis should be reported as capital gain. Due to the complex nature of the applicable tax rules, it is recommended that stockholders consult their tax advisors to ensure proper tax treatment of common dividends received. The following table provides the tax characteristics of Capstead's common dividend distributions for the last five years:
COMMON DIVIDEND DISTRIBUTIONS ------------$20.14 1.42 2.40 4.00 9.60 RETURN OF CAPITAL ------* 71.1% 29.6 -8.0 7.5
TAX YEAR ---------2001 2000 1999 1998 1997
CAPITAL GAIN ------* --% ---8.8
ORDINARY INCOME -------* 28.9% 70.4 100.0 92.0 83.7
* The indicated characterization percentage is applicable to each quarterly or special common dividend received with respect to a given tax year.
RESULTS OF OPERATIONS Comparative net operating results (interest income or fee revenue, net of related interest expense and, in the case of CMO administration, related direct and indirect operating expense) by source were as follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31 -----------------------------------------2001 2000 1999 ---------------------------$ 102,181 $ 36,626 $ 52,514 5,458 6,900 8,043 2,106 2,350 37 (366) (1,441) (2,382) ---------------------------109,379 44,435 58,212 7,956 --3,705 (70,173) (19,088) (3,607) 3,484 1,738 --4,083
Agency Securities Non-agency Securities CMBS CMO collateral and investments Net margin on mortgage Other revenue (expense): Gain (loss) on sale of Impairment on mortgage Severance charges CMO administration and assets mortgage assets assets other
RESULTS OF OPERATIONS Comparative net operating results (interest income or fee revenue, net of related interest expense and, in the case of CMO administration, related direct and indirect operating expense) by source were as follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31 -----------------------------------------2001 2000 1999 ---------------------------$ 102,181 $ 36,626 $ 52,514 5,458 6,900 8,043 2,106 2,350 37 (366) (1,441) (2,382) ---------------------------109,379 44,435 58,212 7,956 --3,705 (9,422) (5,342) ---------$ 106,276 ========== (70,173) (19,088) (3,607) 3,484 (389) (6,148) ---------$ (51,486) ========== 1,738 --4,083 (295) (5,829) ---------$ 57,909 ==========
Agency Securities Non-agency Securities CMBS CMO collateral and investments Net margin on mortgage assets Other revenue (expense): Gain (loss) on sale of mortgage assets Impairment on mortgage assets Severance charges CMO administration and other Management and affiliate incentive fee Other operating expense Net income (loss)
Net income (loss) per share: Basic Diluted Operating *
$
6.43 5.68 5.55
$
(6.59) (6.59) 1.46
$
2.42 2.42 2.30
* Operating income per common share is calculated excluding gain (loss) on sale of mortgage assets, impairment and severance charges incurred in June 2000 and the dilutive effects of the Series B preferred shares. See NOTE 2 to the accompanying financial statements for discussion regarding the impact on the calculation of diluted net income per share of adjustments to preferred share conversion rates resulting from the June 29, 2001 special common dividend payment. 2001 COMPARED TO 2000 The earning capacity of Capstead's mortgage asset portfolios is largely dependent on the overall size and composition of the portfolios, the relationship between short- and long-term interest rates (the "yield curve") and the extent the Company continues to invest its liquidity in these portfolios. Net margins on mortgage assets and financing spreads benefited from actions taken by the Federal Reserve during 2001 to aggressively lower shortterm interest rates, which resulted in lower interest rates on the Company's borrowings. Yields on ARM securities steadily increased during 2000 and peaked in early 2001 before beginning to reset lower. Yields also benefited from the sale or designation for sale of nearly all of the Company's fixed-rate and medium-term securities during 2000 and the acquisition of over $2.3 billion of ARM Agency Securities with the proceeds from these sales. Financing spreads are expected to peak during the first quarter of 2002 before beginning to decline as yields on ARM securities continue to reset lower. In addition, lower interest rates have spurred higher levels of mortgage prepayments, reducing the overall size of the Company's mortgage investment portfolios. See "Financial Condition - Mortgage Securities
and Other Investments" for further discussion of the effects on ARM yields and borrowing rates of actions taken by the Federal Reserve to lower short-term interest rates and the Company's goals regarding redeploying capital made available by portfolio runoff. Agency Securities contributed more to operating results during 2001 than in 2000 because of improvements in
and Other Investments" for further discussion of the effects on ARM yields and borrowing rates of actions taken by the Federal Reserve to lower short-term interest rates and the Company's goals regarding redeploying capital made available by portfolio runoff. Agency Securities contributed more to operating results during 2001 than in 2000 because of improvements in financing spreads as discussed above, despite a smaller average outstanding portfolio in 2001. Yields for this portfolio averaged 6.49% during the year, compared to 6.59% in 2000, while average borrowing rates were 4.18% compared to 6.30% in 2000. Average yields peaked during the first quarter of 2001 at 7.02% then declined to 5.87% by the fourth quarter. The Agency Securities portfolio averaged $4.0 billion in size during 2001, compared to $5.0 billion in 2000. Non-agency Securities contributed less to operating results during 2001 primarily as a result of a lower average outstanding portfolio. This portfolio averaged $87 million in size during 2001 compared to $152 million in 2000. Average yields for this portfolio (calculated including mortgage insurance costs) were 7.58% during 2001, compared to 7.98% in 2000. The CMBS portfolio contribution to operating results was relatively stable year to year reflecting the benefit of pairing investments with borrowings that have nearly matching interest rate adjustment features. These investments yielded 6.46% during 2001 while borrowing rates averaged 4.47% producing a financing spread of 1.99%. This compares with yields of 9.07% and borrowing rates of 6.94% for a spread of 2.13% during 2000. An additional $101 million of adjustable-rate CMBS was acquired in December 2001 bringing this portfolio to $172 million at year-end. CMO collateral and investments results continue to diminish as the related CMO securitizations continue to runoff or are redeemed pursuant to clean-up calls (see "Financial Condition - CMO Collateral and Investments"). Without the issuance of CMOs in which the Company retains residual interests, or the acquisition of other CMO investments, this portfolio is not expected to provide a positive return on capital employed in future periods. Gain on sale of mortgage assets reflects sales of $117 million of fixed-rate released CMO collateral and the sale of $451 million of medium-term Agency Securities. CMO administration revenue was lower in 2001 primarily because a declining portfolio of CMOs for which Capstead provides administrative services. Other revenue benefited from investing excess liquidity in short-term investments to take advantage of positive spreads between interest rates on overnight investments and short-term borrowing rates. The management and affiliate incentive fee for 2001 reflects the Company's performance against predetermined benchmarks established by members of the Board of Directors that are independent of Fortress (see "NOTE 2" to the accompanying consolidated financial statements). Other operating expenses were less in 2001 reflecting fewer employees and lower administrative and systems-related costs. 2000 COMPARED TO 1999 Lower overall net margins on mortgage assets and financing spreads in 2000 compared to 1999 reflected higher borrowing rates primarily because of actions taken by the Federal Reserve to increase short-term interest rates by a total of 175 basis points between June 1999 and May 2000. As a result, borrowing rates averaged 115 basis points higher in 2000
compared to 1999 which were only partially offset by the benefits of improving yields on ARM securities, the restructuring of the Company's mortgage investment portfolio and relatively low mortgage asset prepayment levels. Agency Securities contributed less to operating results during 2000 than in 1999 because of the higher borrowing costs, despite higher average yields. Yields for this portfolio averaged 6.59% during 2000, compared to 5.81% in 1999, while borrowing rates averaged 6.30% compared to 5.16% in 1999. Yields benefited from the sale of relatively low-coupon fixed-rate and medium-term securities, and higher yields on newly acquired ARM securities and securities written down in connection with the portfolio restructuring. In addition, yields benefited as interest rates on mortgage loans underlying ARM securities reset higher (reflecting higher interest rates resulting
compared to 1999 which were only partially offset by the benefits of improving yields on ARM securities, the restructuring of the Company's mortgage investment portfolio and relatively low mortgage asset prepayment levels. Agency Securities contributed less to operating results during 2000 than in 1999 because of the higher borrowing costs, despite higher average yields. Yields for this portfolio averaged 6.59% during 2000, compared to 5.81% in 1999, while borrowing rates averaged 6.30% compared to 5.16% in 1999. Yields benefited from the sale of relatively low-coupon fixed-rate and medium-term securities, and higher yields on newly acquired ARM securities and securities written down in connection with the portfolio restructuring. In addition, yields benefited as interest rates on mortgage loans underlying ARM securities reset higher (reflecting higher interest rates resulting from the Federal Reserve rate increases discussed above) and prepayment rates remained at relatively low levels. The Agency Securities portfolio averaged $5.0 billion in size during 2000, compared to $4.9 billion in 1999. Non-agency Securities contributed less to operating results during 2000 despite a higher average outstanding portfolio because of higher borrowing costs. The portfolio averaged $152 million in size during 2000 compared to $120 million in 1999. Average borrowings during 2000 were $80 million, while in 1999 the portfolio was funded almost entirely with equity. Yields for this portfolio (calculated including mortgage insurance costs) averaged 7.98% during 2000, compared to 8.06% in 1999. Capstead made its first acquisitions of CMBS in December 1999 and made only modest additions to this portfolio in early 2000. These investments yielded 9.07% during the year while borrowing rates averaged 6.94% for a financing spread of 2.13%. CMO collateral and investments results benefited from lower prepayment rates during 2000 than in 1999 allowing remaining collateral premiums and bond discounts to be amortized to earnings over a longer period. In addition, results for the prior year included the write-off of bond discounts related to 1999 redemptions of CMO bonds. In April 2000, the Company realized losses of $70.9 million and recorded impairment charges of $19.1 million for the sale, or designation for sale, of most of its fixed-rate and medium-term securities. In addition, the Company incurred severance charges of $3.6 million, related primarily to the resignation of its former chief executive officer. CMO administration results and other revenue were lower in 2000 primarily because a declining portfolio of CMOs for which the Company provides administrative services. Other operating expenses were fairly stable year to year. LIQUIDITY AND CAPITAL RESOURCES Capstead's primary sources of funds include borrowings under repurchase arrangements, monthly principal and interest payments on mortgage securities and other investments, excess cash flows on CMO collateral and investments, and proceeds from sales of mortgage assets (see "Financial Condition - Utilization of Capital and Potential Liquidity"). The Company currently believes that these funds are sufficient for the acquisition of real estate-related investments, repayments on borrowings and the payment of cash dividends as required for Capstead's continued qualification as a REIT. It is the Company's policy to remain strongly capitalized and conservatively leveraged.
Borrowings under repurchase arrangements secured by Agency Securities and Non-agency Securities generally have maturities of less than 31 days. These borrowings totaled approximately $3.1 billion at December 31, 2001. Capstead has uncommitted repurchase facilities with investment banking firms to finance these investments, subject to certain conditions. Interest rates on these borrowings are generally based on overnight to 30-day London Interbank Offered Rate ("LIBOR") rates and related terms and conditions are negotiated on a transaction-by-transaction basis. Amounts available to be borrowed under these arrangements are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries (see "Effects of Interest Rate Changes").
Borrowings under repurchase arrangements secured by Agency Securities and Non-agency Securities generally have maturities of less than 31 days. These borrowings totaled approximately $3.1 billion at December 31, 2001. Capstead has uncommitted repurchase facilities with investment banking firms to finance these investments, subject to certain conditions. Interest rates on these borrowings are generally based on overnight to 30-day London Interbank Offered Rate ("LIBOR") rates and related terms and conditions are negotiated on a transaction-by-transaction basis. Amounts available to be borrowed under these arrangements are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries (see "Effects of Interest Rate Changes"). Borrowings secured by purchases of adjustable-rate commercial mortgage assets more closely match the interest rate adjustment features of these investments such that the Company anticipates it can earn more consistent financing spreads and, as a result, experience less interest rate volatility than experienced with the Company's other mortgage investments. These borrowings, which generally have longer initial maturities than borrowings secured by Agency Securities and may feature renewal options, totaled approximately $152 million at December 31, 2001. Should Capstead make significant additional investments in credit-sensitive real estate-related assets, it is anticipated that it will attempt to lessen interest rate volatility in a similar fashion or through the use of derivative financial instruments ("Derivatives") such as interest rate swaps (see "Effects of Interest Rate Changes" and "Risks Associated With Credit-Sensitive Investments"). CMO borrowings totaled approximately $2.2 billion at December 31, 2001 and are secured by CMO collateral pledged to the related indentures. As such, recourse is limited to this collateral and therefore has a limited impact on Capstead's liquidity and capital resources. The maturity of each CMO series is affected by mortgage prepayments and clean-up calls. Borrowings from sources such as commercial banks may be used to finance other real estate-related investments the Company may make in 2002. The terms and conditions of such borrowings will be negotiated on a transaction-by-transaction basis and can be expected to be similar to the terms and conditions on the Company's borrowings secured by commercial mortgage assets. EFFECTS OF INTEREST RATE CHANGES INTEREST RATE SENSITIVITY ON OPERATING RESULTS The Company performs earnings sensitivity analysis using an income simulation model to estimate the effects that specific interest rate changes can reasonably be expected to have on future earnings. All mortgage assets and Derivatives held, if any, are included in this analysis. The sensitivity of Other revenue (expense) to changes in interest rates is included as well, although no asset sales are assumed. The model incorporates management assumptions regarding the level of mortgage prepayments for a given interest rate change using market-based estimates of prepayment speeds for purposes of amortizing purchase premiums and CMO bond discounts. These assumptions are developed through a combination of historical analysis and future expected pricing behavior. This analysis
illustrates that at December 31, 2001, Capstead's earnings were less sensitive to changes in interest rates than as of the previous year-end. This is primarily the result of runoff of the Company's investment portfolios experienced during 2001. As of December 31, 2001, Capstead had the following estimated earnings sensitivity profile (dollars in thousands):
10-YEAR U.S. TREASURY RATE --------
30-DAY LIBOR RATE -----30-day LIBOR rate 10-year U.S. Treasury rate Projected 12-month earnings change:** December 31, 2001
IMMEDIATE CHANGE IN:* --------------------------------------------Down 1.00% Down 1.00% Flat Up 1.00% Down 1.00% Flat Up 1.00% Up 1.00%
1.87%
5.05%
$12,380
$18,023
$3,196
$(14,771)
illustrates that at December 31, 2001, Capstead's earnings were less sensitive to changes in interest rates than as of the previous year-end. This is primarily the result of runoff of the Company's investment portfolios experienced during 2001. As of December 31, 2001, Capstead had the following estimated earnings sensitivity profile (dollars in thousands):
10-YEAR U.S. TREASURY RATE --------
30-DAY LIBOR RATE -----30-day LIBOR rate 10-year U.S. Treasury rate Projected 12-month earnings change:** December 31, 2001 December 31, 2000
IMMEDIATE CHANGE IN:* --------------------------------------------Down 1.00% Down 1.00% Flat Up 1.00% Down 1.00% Flat Up 1.00% Up 1.00%
1.87% 6.56
5.05% 5.12
$12,380 18,344
$18,023 23,447
$3,196 4,145
$(14,771) (22,665)
* Sensitivity of earnings to changes in interest rates is determined relative to the actual rates at the applicable date. ** Note that the projected 12-month earnings change is predicated on acquisitions of similar assets sufficient to replace runoff. There can be no assurance that suitable investments will be available for purchase at attractive prices or if investments made will behave in the same fashion as assets currently held. Income simulation modeling is the primary tool used to assess the direction and magnitude of changes in net margins on mortgage assets resulting from changes in interest rates. Key assumptions in the model include mortgage prepayment rates, changes in market conditions, and management's financial capital plans. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net margins or precisely predict the impact of higher or lower interest rates on net margins. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and other changes in market conditions, management strategies and other factors. GENERAL DISCUSSION OF EFFECTS OF INTEREST RATE CHANGES Changes in interest rates may affect the Company's earnings in various ways. Earnings currently depend, in part, on the difference between the interest received on mortgage investments, and the interest paid on related borrowings, which are generally based on 30-day LIBOR. The resulting spread may be reduced or even turn negative in a rising short-term interest rate environment. Because the mortgage investment portfolio consists primarily of ARM securities, the risk of rising short-term interest rates is offset to some extent by increases in the rates of interest earned on the underlying ARM loans, which reset periodically based on underlying indices (generally 1-year CMT rates). Since only a portion of the ARM loans underlying the Company's securities reset each month, and the terms of an ARM loan generally limit the amount of such increases during any single interest rate adjustment period and over the life of the loan, interest rates on borrowings can rise to levels that may exceed the interest rates on the underlying loans contributing to lower or even negative financing spreads. At other times, as seen in 2001, and as is currently anticipated in 2002, declines in these indices during periods of relatively low short-term interest rates will negatively effect yields on ARM securities as the underlying ARM loans reset at lower rates. If declines in these indices exceed declines in the Company's borrowing rates, earnings could
be adversely affected. The Company may invest in Derivatives from time to time as a hedge against rising interest rates on a portion of its short-term borrowings. At December 31, 2001 the Company did not own any Derivatives as a hedge against rising short-term interest rates. Another effect of changes in interest rates is that as long-term interest rates decrease, the rate of principal prepayments on mortgage loans underlying mortgage investments generally increases. As seen in 2001, and to some extent is expected in 2002, prolonged periods of high prepayments can significantly reduce the expected life of mortgage investments; therefore, the actual yields realized can be lower due to faster amortization of premiums. Further, to the extent the proceeds of prepayments on mortgage investments are not reinvested or
be adversely affected. The Company may invest in Derivatives from time to time as a hedge against rising interest rates on a portion of its short-term borrowings. At December 31, 2001 the Company did not own any Derivatives as a hedge against rising short-term interest rates. Another effect of changes in interest rates is that as long-term interest rates decrease, the rate of principal prepayments on mortgage loans underlying mortgage investments generally increases. As seen in 2001, and to some extent is expected in 2002, prolonged periods of high prepayments can significantly reduce the expected life of mortgage investments; therefore, the actual yields realized can be lower due to faster amortization of premiums. Further, to the extent the proceeds of prepayments on mortgage investments are not reinvested or cannot be reinvested at a rate of interest at least equal to the rate previously earned on that capital, earnings may be adversely affected. There can be no assurance that suitable investments at attractive pricing will be available on a timely basis to replace runoff as it occurs or that the current composition of investments (consisting primarily of ARM Agency Securities) will be maintained. A change in interest rates also impacts earnings recognized from CMO collateral and investments, which currently consist primarily of fixed-rate CMO residuals (see "Financial Condition"). As seen in 2001, and to some extent is expected in 2002, during periods of relatively low mortgage interest rates, prepayments on the underlying mortgage loans generally will be higher, accelerating the amortization of collateral premiums and bond discounts. Conversely, if mortgage interest rates rise significantly above interest rates on the collateral, principal prepayments will typically diminish, improving the overall return on an investment in a fixed-rate CMO residual because of an increase in time over which the Company receives positive net cash flows and can amortize remaining collateral premiums and bond discounts. Capstead periodically sells mortgage assets, which may increase income volatility because of the recognition of transactional gains or losses. Such sales may become attractive as values of mortgage assets fluctuate with changes in interest rates. At other times, such as in 2000, asset sales may become prudent to shift the Company's investment focus. During periods of rising interest rates or contracting market liquidity, mortgage asset values can decline leading to increased margin calls, reducing the Company's liquidity. A margin call means that a lender requires a borrower to pledge additional collateral to re-establish the agreed-upon ratio of the value of the collateral to the amount of the borrowing. If the Company is unable or unwilling to pledge additional collateral, lenders can liquidate the collateral under adverse market conditions, likely resulting in losses. RISKS ASSOCIATED WITH CREDIT-SENSITIVE INVESTMENTS Commercial mortgage assets may be viewed as exposing an investor to greater risk of loss than residential mortgage assets since such assets are typically secured by larger loans to fewer obligors than residential mortgage assets. Commercial property values and related net operating income are often subject to volatility, and net operating income may be sufficient or insufficient to cover debt service on the related mortgage loan at any given time. The repayment of loans secured by income-producing properties is typically dependent upon the successful operation of the related real estate project and the ability of the applicable
property to produce net operating income rather than upon the liquidation value of the underlying real estate. Even when the current net operating income is sufficient to cover debt service, there can be no assurance that this will continue to be the case in the future. Additionally, commercial properties may not be readily 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 often requires substantial capital expenditures, which may or may not be available. The availability of credit for commercial mortgage loans may be dependent upon economic conditions in the markets where such properties are located, as well as the willingness and ability of lenders to make such loans. The availability of funds in the credit markets fluctuates and there can be no assurance that the availability of such funds will increase above, or will not contract below current levels. In addition, the availability of similar commercial properties, and the competition for available credit, may affect the ability of potential purchasers to obtain financing for the acquisition of properties. This could effect the repayment of commercial mortgages.
property to produce net operating income rather than upon the liquidation value of the underlying real estate. Even when the current net operating income is sufficient to cover debt service, there can be no assurance that this will continue to be the case in the future. Additionally, commercial properties may not be readily 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 often requires substantial capital expenditures, which may or may not be available. The availability of credit for commercial mortgage loans may be dependent upon economic conditions in the markets where such properties are located, as well as the willingness and ability of lenders to make such loans. The availability of funds in the credit markets fluctuates and there can be no assurance that the availability of such funds will increase above, or will not contract below current levels. In addition, the availability of similar commercial properties, and the competition for available credit, may affect the ability of potential purchasers to obtain financing for the acquisition of properties. This could effect the repayment of commercial mortgages. Credit-sensitive residential mortgage assets differ from commercial mortgage assets 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 residential 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 commercial mortgages, in instances of default the Company may incur losses if proceeds from sales of the underlying residential collateral are less than the unpaid principal balances of the residential mortgage loans and related foreclosure costs. However, with residential mortgages this risk may be mitigated by various forms of credit enhancements including, but not limited to, primary mortgage insurance. Through the process of securitizing both commercial and residential mortgages, credit risk can be heightened or minimized. Senior classes in multi-class securitizations generally have first priority over cash flows from a pool of mortgages and, as a result, carry the least risk, highest investment ratings and the lowest yields. Typically, a securitization will also have mezzanine classes and subordinated classes. Mezzanine classes will generally have lower credit ratings, higher yields 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 even lower credit ratings and higher yields 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 commercial and residential mortgage assets 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 assets, sufficient capital may not be available to support the continued ownership of such investments, requiring these assets to be sold at a loss.
OTHER FORWARD LOOKING STATEMENTS This document contains "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) that inherently involve risks and uncertainties. The Company's actual results and liquidity can differ materially from those anticipated in these forward-looking statements because of changes in the level and composition of the Company's investments and unforeseen factors. These factors may include, but are not limited to, changes in general economic conditions, the availability of suitable investments, fluctuations in, and market expectations for fluctuations in, interest rates and levels of mortgage prepayments, deterioration in credit quality and ratings, the effectiveness of risk management strategies, the impact of leverage, liquidity of secondary markets and credit markets, increases in costs and other general competitive factors.
OTHER FORWARD LOOKING STATEMENTS This document contains "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) that inherently involve risks and uncertainties. The Company's actual results and liquidity can differ materially from those anticipated in these forward-looking statements because of changes in the level and composition of the Company's investments and unforeseen factors. These factors may include, but are not limited to, changes in general economic conditions, the availability of suitable investments, fluctuations in, and market expectations for fluctuations in, interest rates and levels of mortgage prepayments, deterioration in credit quality and ratings, the effectiveness of risk management strategies, the impact of leverage, liquidity of secondary markets and credit markets, increases in costs and other general competitive factors.
EXHIBIT 21 LIST OF SUBSIDIARIES OF CAPSTEAD MORTGAGE CORPORATION At December 31, 2001 the subsidiaries of Capstead Mortgage Corporation were as follows:
STATE DOMIC ----PARENT COMPANY SUBSIDIARY Capstead Mortgage Corporation ("CMC")................................................... Capstead Capital Corporation......................................................... Capstead Securities Corporation IV................................................... CMC Securities Corporation I......................................................... CMC Securities Corporation III....................................................... CMC Securities Corporation IV........................................................ Capstead Holdings, Inc.(1)........................................................... Capstead Inc.(2)................................................................... CMC Securities Corporation II(2)................................................... Maryl Delaw Delaw Nevad Delaw Delaw Delaw Delaw Delaw
(1) CMC owns all of the issued and outstanding preferred stock. (2) Capstead Holdings, Inc. owns all the issued and outstanding common stock.
EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of Capstead Mortgage Corporation of our report dated January 25, 2002, included in the 2001 Annual Report to Stockholders of Capstead Mortgage Corporation. We also consent to the incorporation by reference in the following registration statements and the related prospectuses, of our report dated January 25, 2002, with respect to the consolidated financial statements of Capstead Mortgage Corporation incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 2001: o Form S-8 (No. 33-40017); o Form S-3 (No. 33-62212);
EXHIBIT 21 LIST OF SUBSIDIARIES OF CAPSTEAD MORTGAGE CORPORATION At December 31, 2001 the subsidiaries of Capstead Mortgage Corporation were as follows:
STATE DOMIC ----PARENT COMPANY SUBSIDIARY Capstead Mortgage Corporation ("CMC")................................................... Capstead Capital Corporation......................................................... Capstead Securities Corporation IV................................................... CMC Securities Corporation I......................................................... CMC Securities Corporation III....................................................... CMC Securities Corporation IV........................................................ Capstead Holdings, Inc.(1)........................................................... Capstead Inc.(2)................................................................... CMC Securities Corporation II(2)................................................... Maryl Delaw Delaw Nevad Delaw Delaw Delaw Delaw Delaw
(1) CMC owns all of the issued and outstanding preferred stock. (2) Capstead Holdings, Inc. owns all the issued and outstanding common stock.
EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of Capstead Mortgage Corporation of our report dated January 25, 2002, included in the 2001 Annual Report to Stockholders of Capstead Mortgage Corporation. We also consent to the incorporation by reference in the following registration statements and the related prospectuses, of our report dated January 25, 2002, with respect to the consolidated financial statements of Capstead Mortgage Corporation incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 2001: o Form S-8 (No. 33-40017); o Form S-3 (No. 33-62212); o Form S-8 (No. 33-53555); o Form S-3 (No. 333-03187); o Form S-8 (No. 333-12719); o Form S-3 (No. 333-26419); o Amendment No. 1 to Form S-3 (No. 333-26419); o Form S-8 (No. 333-27215); o Form S-3 (No. 333-43169); o Amendment No. 1 to Form S-3 (No. 333-43169);
EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of Capstead Mortgage Corporation of our report dated January 25, 2002, included in the 2001 Annual Report to Stockholders of Capstead Mortgage Corporation. We also consent to the incorporation by reference in the following registration statements and the related prospectuses, of our report dated January 25, 2002, with respect to the consolidated financial statements of Capstead Mortgage Corporation incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 2001: o Form S-8 (No. 33-40017); o Form S-3 (No. 33-62212); o Form S-8 (No. 33-53555); o Form S-3 (No. 333-03187); o Form S-8 (No. 333-12719); o Form S-3 (No. 333-26419); o Amendment No. 1 to Form S-3 (No. 333-26419); o Form S-8 (No. 333-27215); o Form S-3 (No. 333-43169); o Amendment No. 1 to Form S-3 (No. 333-43169); o Form S-3 (No. 333-63358); and o Form S-3 (No. 333-68424).
/s/ ERNST & YOUNG LLP
Dallas, Texas March 18, 2002