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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1994
OR
_______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ______________
COMMISSION FILE NUMBER: 1-8896
CAPSTEAD MORTGAGE CORPORATION
(Exact name of Registrant as specified in its Charter)
MARYLAND 75-2027937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 NORTH HASKELL, DALLAS, TEXAS 75204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 874-2323
2001 BRYAN TOWER, DALLAS, TEXAS 75201
(Former name, former address and formal fiscal year, if changed from last
report)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
Common Stock ($0.01 par value) New York Stock Exchange
$1.60 Cumulative Preferred Stock,
Series A ($0.10 par value) New York Stock Exchange
$1.26 Cumulative Convertible Preferred
Stock, Series B ($0.10 par value) New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X__ NO ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /
AT FEBRUARY 10, 1995 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES WAS $307,611,000.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 10, 1995: 15,303,923
DOCUMENTS INCORPORATED BY REFERENCE:
(1) PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 1994 ARE INCORPORATED BY REFERENCE INTO PARTS II AND IV.
(2) PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED MARCH 15,
1995, ISSUED IN CONNECTION WITH THE ANNUAL MEETING OF STOCKHOLDERS OF THE
REGISTRANT, ARE INCORPORATED BY REFERENCE INTO PART III.
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
1994 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS........................................... 1
ITEM 2. PROPERTIES......................................... 7
ITEM 3. LEGAL PROCEEDINGS.................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................... 8
ITEM 6. SELECTED FINANCIAL DATA........................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............... 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............... 8
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 8
ITEM 11. EXECUTIVE COMPENSATION............................. 8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.............................. 9
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 9
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K................................... 10
PART I
ITEM 1. BUSINESS.
ORGANIZATION
Capstead Mortgage Corporation ("CMC" or the "Company") was incorporated on April
15, 1985 in the state of Maryland and commenced operations in September 1985.
The Company operates as a mortgage conduit which purchases and securitizes
various types of single-family residential mortgage loans. In addition, the
Company has a mortgage servicing unit that functions as the primary mortgage
servicer for mortgage loans and mortgage servicing rights acquired by the
Company.
CMC, and its qualified real estate investment trust ("REIT") subsidiaries, have
elected to be taxed as a REIT and intend to continue to do so. As a result of
this election, CMC is not taxed at the corporate level on taxable income
distributed to stockholders, provided that certain REIT qualification tests are
met. All taxable income of certain other subsidiaries, including the mortgage
servicing unit, are subject to federal and state income taxes, where applicable.
CONDUIT OPERATIONS
The Company purchases many different types of mortgage loan products that it
classifies as fixed-rate, medium-term or adjustable-rate mortgage investments.
Fixed-rate mortgage investments (i) have fixed rates of interest for their
entire terms or (ii) have an initial fixed-rate period of ten years after
origination and then adjust annually based on a specified margin over 1-year
United States Treasury Securities ("1-year Treasuries"). Medium-term mortgage
investments (i) have an initial fixed-rate period of three or five years after
origination and then adjust annually based on a specified margin over 1-year
Treasuries or (ii) have initial interest rates that adjust one time,
approximately five years following origination of the mortgage loan, based on a
specified margin over the Federal National Mortgage Association ("FNMA") yields
for 30-year, fixed-rate commitments at the time of adjustment. Adjustable-rate
mortgage investments either (i) adjust semi-annually based on a specified margin
over the 6-month London Interbank Offered Rate ("LIBOR") or (ii) adjust annually
based on a specified margin over 1-year Treasuries.
The Company purchases mortgage loans from mortgage banking companies, savings
banks, commercial banks, credit unions, mortgage brokers and other financial
intermediaries ("Correspondents") throughout the United States. Correspondents
must meet certain financial and performance requirements before they are
approved to participate in the Company's Correspondent Program. A purchase and
sale agreement is executed with each Correspondent that provides for recourse
against the Correspondent in the event of fraud or misrepresentation in the
process by which a mortgage loan is originated.
The Company maintains purchase guidelines for the acquisition of mortgage loans
based on the anticipated requirements of its mortgage pool insurers, mortgage
investors and management's assessment of the criteria used by nationally
recognized statistical rating organizations ("Rating Agencies") to analyze the
quality of the collateral pledged to mortgage-backed securities issued by the
Company. The Company does not itself underwrite mortgage loans, but instead
relies on the credit review and analysis of its mortgage pool insurers
(primarily General Electric Mortgage Insurance Company), other Company-approved
underwriters or originators of mortgage loans where the Company has specifically
delegated underwriting responsibilities.
-1-
The principal amount of mortgage loans acquired by the Company at the time of
origination generally range from $203,150 to $650,000 per loan. Substantially
all of the mortgage loans acquired by the Company comply with the underwriting
criteria of the mortgage securities programs sponsored by the Federal Home Loan
Mortgage Corporation ("FHLMC") and FNMA, except that original outstanding
principal amounts generally exceed the maximum permissible amount ($203,150,
effective January 1, 1993) for such programs ("Nonconforming Mortgage Loans").
The average loan purchased in 1994 had an original principal balance of
approximately $282,000.
Commitments are issued that obligate the Company to purchase mortgage loans from
the Correspondent for a specific period of time (typically 10 to 90 days), in a
specific aggregate principal amount and bearing a specified mortgage interest
rate and price. The Company issues three types of commitments: mandatory,
optional and best efforts. The Company receives a fee on optional and best
effort commitments, but not on mandatory commitments. However, if a
Correspondent fails to deliver a loan subject to a mandatory commitment, the
Correspondent is obligated to pay the Company the difference between the yield
the Company would have obtained on the mortgage loan and the yield available on
similar mortgage loans subject to mandatory commitments issued at the time of
such failure to deliver, plus a penalty.
MORTGAGE LOAN PORTFOLIO
The Company purchases mortgage loans from Correspondents on a daily basis. The
loans purchased by the Company in the past have been warehoused in the mortgage
loan portfolio until a long term investment strategy was implemented.
Periodically, mortgage loans would be pledged to secure collateralized mortgage
obligations ("CMOs"), publicly-offered, multi-class mortgage pass-through
certificates ("MPCs"), or AAA-rated private mortgage pass-through securities
("Mortgage Pass-Throughs") issued by the Company's special-purpose finance
subsidiaries.
The Company utilizes repurchase agreements to finance the warehousing of
mortgage loans. A repurchase agreement is a form of short term financing
pursuant to which mortgage loans are pledged as collateral for funds borrowed at
short term interest rates, typically 30 to 60 days. Generally, mortgage
interest income earned exceeds related borrowing costs resulting in a positive
interest spread.
In response to low purchase volumes as experienced in 1994 and expected for
1995, the Company does not plan to continue assuming market risk associated with
aggregating and securitizing mortgage loans. To eliminate this risk and create
more competitive prices, mortgage loans will be held in warehouse for a very
brief period, usually about a week. Then, instead of the usual practice of
accumulating $100 million or more of loans for a securitization, mortgage loans
will be sold outright to private investors in amounts of up to $10 million.
This strategy may reduce the long term profit potential somewhat, but
substantially reduces market risk.
The Company also plans to offer a "B paper" loan program to Correspondents in
1995. B paper loans are mortgage loans to potential homeowners whose poor
credit history will not allow them to obtain traditional mortgage financing.
Interest rates on B paper are higher than traditional mortgage loans and the
resulting spreads are wider, thus creating the opportunity to generate
additional profits through the Correspondent network. The Company will not
retain any risk in this program as all loans will be purchased to specific
investor commitments.
-2-
The Company has a commitment by a mortgage pool insurer to issue mortgage pool
insurance on most of its mortgage loan acquisitions. A mortgage pool insurance
policy will cover losses due to mortgagor default in amounts generally ranging
from 7 to 15 percent of the aggregate principal amount of the insured pool of
mortgage loans. Mortgage pool insurance policies are generally not in force
during warehousing of mortgage loans, but instead may be activated at the time
mortgage loans are pledged as collateral for a CMO, MPC or Mortgage Pass-Through
unless an investor in the former securitizations is willing to assume the credit
risk for the entire issuance (a "senior/subordinate" structure).
Senior/subordinate structures were used extensively in 1994. During the
warehousing period the Company retains the full risk that mortgage loans may
default. The Company has exposure to certain other risks during the warehousing
period. These include bankruptcy and special hazards which are not covered by
standard hazard insurance policies (e.g., earthquakes), as well as fraud or
misrepresentation in the origination of the mortgage loan. Defaults on mortgage
loans during the warehousing period, if linked to fraud or misrepresentation,
may be mitigated by the Correspondent's obligation to repurchase such mortgage
loan. However, to the extent the Correspondent does not perform on its
repurchase obligation, the Company may incur a loss.
MORTGAGE PASS-THROUGH PORTFOLIO
The Company's long term investment strategy includes the securitization of
adjustable-rate and medium-term mortgage loans into Mortgage Pass-Throughs.
This investment strategy primarily features adjustable-rate mortgage loans
which, because of their adjustable interest rates, are more likely to retain
value.
At the time mortgage loans are pledged as collateral for Mortgage Pass-Throughs,
the mortgage pool insurance policy is activated. The level of coverage under
any such mortgage pool insurance policy is determined by one or more of the
Rating Agencies, and is at a level necessary to allow the insured pool of
mortgage loans, or the securities such pools are pledged to secure, to be AAA-
rated. At such time, the Company also insures or reserves against bankruptcy
and special hazard risks.
The Company utilizes repurchase agreements to finance the Mortgage Pass-Through
portfolio. The formation of Mortgage Pass-Throughs enhances the marketability
of the underlying mortgage loans, thus enabling the Company to reduce its
borrowing costs below the level paid on non-rated loans.
AGENCY SECURITIES PORTFOLIO
The Company also invests in fixed-rate and adjustable-rate agency securities
that consist primarily of mortgage-backed securities guaranteed by government
sponsored entities such as FNMA, Government National Mortgage Association or
FHLMC. Because agency securities are the most widely traded mortgage-backed
securities, unique financing opportunities exist in the marketplace that enable
the Company to achieve attractive interest rate spreads on the financing of such
assets. The agency securities portfolio also includes investments in callable
agency notes. Callable agency notes currently held by the Company are
unsecured, 3-year fixed-rate notes issued by FHLMC, FNMA, or the Federal Home
Loan Bank Board ("FHLBB") and mature in 1997, unless redeemed earlier by FHLMC,
FNMA or FHLBB.
-3-
CMO INVESTMENT PORTFOLIO AND RELATED SECURITIZATION ACTIVITY
The Company's long term investment strategy has included the securitization of
fixed-rate and medium-term mortgage loans, whereby such loans have been pledged
as collateral for the issuance of CMOs or MPCs. Most of the Company's CMOs are
structured as financings in which the Company recognizes economic gains or
losses over the term of the collateral. MPCs and some CMOs are structured as
sales. Such sales preserve capital because the investment retained in the
securitization is limited; however, income can be more volatile because of the
recognition of transactional gains or losses.
Each series of CMOs consist of multiple classes of bonds, each having its own
maturity. MPCs are structured in a similar fashion with the exception that
investors do not purchase bonds subject to an indenture; rather, they purchase
certificates evidencing undivided interests in a trust that owns the underlying
mortgage loans. The segmentation of CMOs into classes of bonds with varying
maturities along with mortgage pool insurance or other credit enhancements
provided to make all or most of the CMO bonds AAA-rated enables the Company to
issue CMO classes with shorter scheduled maturities and lower interest rates
than the underlying mortgage loans. Each of these factors contributes to a
positive difference between the payments received on the mortgage loans pledged
to secure such CMOs and the payments made on the CMOs issued (the "Excess Cash
Flow"). Because the shorter-term classes of CMO bonds typically bear lower
rates of interest than longer-term classes, the Excess Cash Flow on a CMO is
typically greatest in the early years of the CMO. As the mortgage loans are
repaid and the shorter-term classes of CMO bonds are retired, the average
interest cost of the CMOs outstanding increases. Thus, the Excess Cash Flow
will decline over time.
The right to receive the Excess Cash Flow, along with the noncash amortization
of collateral and bond premiums and discounts is referred to as the "CMO
Residual". CMO structures have evolved in recent years such that the Excess
Cash Flow portion of a CMO Residual has been virtually eliminated by the
formation of additional CMO securities including various forms of interest-only
and/or principal-only securities. Interest-only securities represent ownership
in an undivided interest in interest payments on the underlying collateral.
Principal-only securities represent ownership in an undivided interest in
principal payments on the underlying collateral. Since the fall of 1992 the
Company typically has sold much of the noncash portion of its CMO Residuals and
retained for its CMO investment portfolio certain of the interest-only and/or
principal-only securities formed in connection with CMO and MPC issuances.
Investments in interest-only and principal-only securities held in the CMO
investment portfolio are sensitive to changes in interest rates. In a falling
interest rate environment, prepayments on the underlying mortgage collateral
generally will be high and the Company could incur losses on investments in
interest-only securities. Conversely, in periods of rising interest rates,
interest-only securities will tend to perform favorably because the underlying
mortgage collateral will generally prepay at slower rates. Principal-only
securities react differently to changes in interest rates. Lower interest rates
result in the recovery of this investment more rapidly thus increasing yields.
During periods of rising rates, it takes longer for the Company to recover its
principal-only investments thus lowering yields. Principal-only securities
retained by the Company generally represent a much smaller investment than
interest-only investments.
At the time the loans are pledged for issuance of a CMO or MPC, the mortgage
pool insurance policy can be activated. At such time, the Company also can
-4-
insure or reserve against bankruptcy and special hazard risks, and reduce its
exposure to losses from fraud or misrepresentation in the origination of the
mortgage loan. In late 1993 the Company began issuing CMOs in a
senior/subordinate structure (in lieu of purchasing mortgage pool insurance and
special hazard insurance) where the investor is the subordinate classes assumes
credit and special hazard risks. The Company has retained an aggregate of
approximately $2.2 million of credit and special hazard risk on certain of these
issuances. Actual losses to the Company due to this risk are dependent upon the
timing and magnitude of related collateral defaults. The Company does not
currently anticipate a need to increase its provision for possible losses for
this risk.
The issuance of CMOs typically eliminates the Company's short term financing
risk associated with mortgage loans that are pledged as collateral for such CMOs
as well as the risk that the market value of such mortgage loans will decline.
This is because each series of CMOs is structured to be fully repaid out of the
principal and interest payments on the underlying mortgage loans, including
reinvestment proceeds, regardless of fluctuations in the market value of such
mortgage loans.
For 1995 the Company expects to sell rather than securitize much of its current
production. As a result, further CMO issuances by the Company and, therefore,
additions to its CMO investment portfolio are expected to be limited. However,
the Company may from time to time invest in other issuers' CMO bonds.
SERVICING OPERATIONS
The Company formed its mortgage servicing unit early in 1993, and as of December
31, 1993, serviced a portfolio of 8,000 mortgage loans with an aggregate
principal balance of $2.4 billion. Mortgage servicing includes collecting and
accounting for payments of principal and interest from borrowers, remitting such
payments to investors, holding escrow funds for payment of mortgage-related
expenses such as taxes and insurance, making advances to cover delinquent
payments, inspecting the mortgage premises as required, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults, and generally administering the loans. The Company
receives fees for servicing residential mortgage loans ranging generally from
0.25 to 0.38 percent per annum on the declining principal balances of the loans.
Servicing fees are collected by the Company out of monthly mortgage payments.
Growth during 1993 was accomplished primarily by retaining mortgage servicing
rights on mortgage loans purchased through the Company's conduit operations.
Beginning in late 1993 the Company began committing to bulk acquisitions of
mortgage servicing rights for both conforming and non-conforming mortgage loan
portfolios. During 1994 another 110,000 mortgage loans with an aggregate
principal balance of $12.5 billion were added to the portfolio. At year-end the
mortgage servicing portfolio totaled 116,000 loans with a balance of $14.4
billion, had a weighted average interest rate of 7.16 percent, and delinquencies
of 30 days and over of only 1.1 percent. The prepayment rate on mortgage loans
held in the mortgage servicing portfolio was a low 7.2 percent during 1994.
Late in 1994 the Company purchased the mortgage servicing rights for an
additional 53,000 mortgage loans with an aggregate principal balance of $5.1
billion that the Company will begin servicing by the end of the first quarter of
1995. This will bring the total mortgage servicing portfolio to
-5-
more than $19 billion. The Company expects the mortgage servicing portfolio to
reach $25 billion before the end of 1995.
EFFECTS OF INTEREST RATE CHANGES
For a discussion of effects of interest rate changes on the Company's mortgage
investment portfolios, CMO investment portfolio and mortgage servicing
portfolio, see the Registrant's Annual Report to Stockholders for the year ended
December 31, 1994 on pages 50 and 51 under the caption "Management's Discussion
and Analysis - Effects of Interest Rate Changes."
OTHER INVESTMENT STRATEGIES
The Company may enter into other short or long term investment strategies as the
opportunities arise.
COMPETITION
In purchasing and pooling mortgage loans and in purchasing other mortgage-
related assets, the Company competes with savings banks, commercial banks,
mortgage and investment bankers, conduits, insurance companies, other lenders,
FNMA and FHLMC, many of whom may have greater financial resources than the
Company. The competition for the acquisition of mortgage servicing rights is
equally diverse. Mortgage banking companies, savings banks and commercial banks
all engage in servicing mortgage loans, some for others and some for their own
portfolio. Additionally, in issuing CMOs or other mortgage-backed securities,
the Company will face competition from other issuers of these securities and the
securities themselves will compete with other investment opportunities available
to prospective purchasers. An increase in the purchasing of long term mortgage
loans by others may reduce the Company's ability to compete in the purchase of
such loans and may reduce the yields available to the Company. In addition, if
FHLMC and FNMA were to increase the dollar amount limitation on loans they are
permitted to purchase (currently $203,150), they would be able to purchase a
greater percentage of mortgage loans in the secondary market than they currently
are permitted to acquire, and the Company's ability to maintain or increase its
current acquisition levels could be adversely affected.
REGULATION AND RELATED MATTERS
The Company's mortgage servicing unit is subject to the rules and regulations of
FNMA and FHLMC with respect to securitizing and servicing mortgage loans. In
addition, there are other Federal and state statutes and regulations affecting
such activities. Moreover, the Company is required annually to submit audited
financial statements to FNMA and FHLMC and each regulatory entity has its own
financial requirements. The Company's affairs are also subject to examination
by FNMA and FHLMC at all times to assure compliance with applicable regulations,
policies and procedures. Many of the aforementioned regulatory requirements are
designed to protect the interests of consumers, while others protect the owners
or insurers of mortgage loans. Failure to comply with these requirements can
lead to loss of approved status, termination of servicing contracts without
compensation to the servicer, demands for indemnification or loan repurchases,
class action lawsuits and administrative enforcement actions.
EMPLOYEES
As of December 31, 1994, the Company had 183 full-time employees. Until
becoming fully self-administered on October 1, 1993, the Company was managed
-6-
by Capstead Advisers, Inc., a wholly-owned subsidiary of Lomas Mortgage USA,
Inc., who provided executive and administrative personnel required by the
Company under the terms of a management agreement.
TAX STATUS
As used herein, "Capstead REIT" refers to CMC and the entities that are
consolidated with CMC for federal income tax purposes. Capstead REIT has
elected to be taxed as a REIT for federal income tax purposes and intends to
continue to do so. As a result of this election, Capstead REIT will not be
taxed at the corporate level on taxable income distributed to stockholders,
provided that certain requirements concerning the nature and composition of its
income and assets are met and that at least 95 percent of its REIT taxable
income is distributed.
If Capstead REIT fails to qualify as a REIT in any taxable year, it would be
subject to federal income tax at regular corporate rates and would not receive a
deduction for dividends paid to stockholders. If this were the case, the amount
of after-tax earnings available for distribution to stockholders would decrease
substantially.
So long as Capstead REIT qualifies as a REIT, it will generally be taxable only
on its undistributed taxable income. Distributions out of current or
accumulated earnings and profits will be taxed to stockholders as ordinary
income or capital gain, as the case may be. Distributions in excess of the
Company's accumulated and current earnings and profits will constitute a non-
taxable return of capital to the stockholders (except insofar as such
distributions exceed the cost basis of the shares of stock) resulting in a
corresponding reduction in the cost basis of the shares of stock. The Company
notifies its stockholders of the proportion of distributions made during the
taxable year that constitutes ordinary income, capital gain or a return of
capital. During 1993, 20 percent of distributions made were characterized as
long term capital gains. Other distributions during the last three years were
characterized as ordinary income. Distributions by the Company will not
normally be eligible for the dividends received deduction for corporations.
Should the Company incur losses, stockholders will not be entitled to include
such losses in their individual income tax returns.
All taxable income of certain other subsidiaries, including Capstead Inc., which
conduct mortgage servicing and certain securitization operations, are subject to
federal and state income taxes, where applicable. Capstead REIT's taxable
income will include earnings of these subsidiaries only upon payment to Capstead
REIT by dividend of such earnings.
The foregoing is general in character. Reference should be made to pertinent
Internal Revenue Code sections and the Regulations issued thereunder for a
comprehensive statement of applicable federal income tax consequences.
ITEM 2. PROPERTIES.
The Company's operations are conducted primarily in Dallas, Texas on properties
leased by the Company.
ITEM 3. LEGAL PROCEEDINGS.
At December 31, 1994 there were no material pending legal proceedings, outside
the normal course of business, to which the Company or its subsidiaries were a
party or of which any of their property was the subject.
-7-
ITEM 4. RESULTS OF SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1994 on page 42 under the
caption "Note R - Market and Dividend Information," and is incorporated herein
by reference, pursuant to General Instruction G(2).
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1994 on page 43 under the
caption "Selected Financial Data," and is incorporated herein by reference,
pursuant to General Instruction G(2).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1994 on pages 44 through
51 under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and is incorporated herein by reference,
pursuant to General Instruction G(2).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1994 on pages 23 through
42, and is incorporated herein by reference, pursuant to General Instruction
G(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included in the Registrant's definitive
Proxy Statement dated March 15, 1995 on pages 3 through 6 under the captions
"Election of Directors," "Board of Directors" and "Executive Officers," which is
incorporated herein by reference pursuant to General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Registrant's definitive
Proxy Statement dated March 15, 1995 on pages 7 through 14 under the captions
"Executive Compensation," "Compensation Committee Report on
-8-
Executive Compensation," and "Performance Graph," which is incorporated herein
by reference pursuant to General Instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS.
The information required by this item is included in the Registrant's definitive
Proxy Statement dated March 15, 1995 on pages 15 and 16 under the caption
"Security Ownership of Management and Certain Beneficial Owners," which is
incorporated herein by reference pursuant to General Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1994 on page 40 under the
caption "Notes to Consolidated Financial Statements - Note N - Management and
Non-Competition Agreements", which is incorporated herein by reference pursuant
to General Instruction G(2).
-9-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. The following financial statements of the Company, included in the
1994 Annual Report to Stockholders, are incorporated herein by
reference:
PAGE
----
Consolidated Statement of Income - Years
Ended December 31, 1994, 1993 and 1992 *
Consolidated Balance Sheet -
December 31, 1994 and 1993 *
Consolidated Statement of Stockholders' Equity -
Three Years Ended December 31, 1994 *
Consolidated Statement of Cash Flows - Years
Ended December 31, 1994, 1993 and 1992 *
Notes to Consolidated Financial Statements -
December 31, 1994 *
2. Financial statement schedules:
Schedule VIII-Valuation and Qualifying Accounts 14
Schedule XII-Mortgage Loans on Real Estate 15
NOTE: All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
- ----------------
* Incorporated herein by reference from the Company's Annual Report to
Stockholders for the year ended December 31, 1994.
3. Exhibits:
Exhibit
Number
3.1(a) Charter of the Company, which includes Articles of
Incorporation, Articles Supplementary for each outstanding
Series of Preferred Stock and all other amendments to such
Articles of Incorporation(5)
3.1(b) Articles Supplementary ($1.26 Cumulative Convertible
Preferred Stock, Series B)(4)
3.2 Bylaws of the Company, as amended(5)
10.17 Amendment to Management Agreement dated March 31, 1993,
between the Registrant and Capstead Advisers, Inc.(5)
10.18 Second Amendment to Management Agreement dated September 3,
1993, between the Registrant and Capstead Advisers, Inc.(6)
10.19 Stock Option Agreement, dated June 16, 1992, between the
Company and Lomas Financial Corporation(5)
10.20 Form of Loan Sale Agreement(3)
10.21 1990 Employee Stock Option Plan(1)
10.22 1990 Directors' Stock Option Plan(2)
10.23 Employment Agreement dated August 1, 1992 between Capstead
Mortgage Corporation and Ronn K. Lytle(4)
-10-
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
PART IV
ITEM 14. - CONTINUED
10.24 Restricted Stock Grant Agreement dated August 1, 1992 between
Capstead Mortgage Corporation and Ronn K. Lytle(4)
10.25 1994 Flexible Long Term Incentive Plan*
10.26 1994 Capstead Inc. Restricted Stock Plan*
10.27 Capstead Mortgage Corporation Deferred Compensation Plan*
10.28 Summary of Employment Agreement dated December 9, 1993
between Capstead Mortgage Corporation and Christopher T.
Gilson*
11 Computation of per share earnings*
12 Computation of ratio of earnings to combined fixed charges
and preferred stock dividends*
13 Portions of the Annual Report to Stockholders of the Company
for the year ended December 31, 1994*
21 List of subsidiaries of the Company*
23 Consent of Ernst & Young LLP, Independent Auditors*
27 Financial Data Schedule (electronic filing only)*
----------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 33-40016) dated April 29, 1991
(2) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 33-40017) dated April 29, 1991
(3) Incorporated by reference to Amendment No. 1 on Form 8 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1991
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992
(5) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-62212) dated May 6, 1993
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993
* Filed herewith.
(b) Reports on Form 8-K: None.
(c) Exhibits - The response to this section of ITEM 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - The response to this section of ITEM 14
is submitted as a separate section of this report.
-11-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CAPSTEAD MORTGAGE CORPORATION
REGISTRANT
Date: March 23, 1995 By: /s/ ANDREW F. JACOBS
------------------------------
Andrew F. Jacobs
Senior Vice President-Control,
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated below and on the dates indicated.
/s/ RONN K. LYTLE
- ------------------------------- Chairman, Chief March 23, 1995
(Ronn K. Lytle) Executive Officer
and Director
/s/ ANDREW F. JACOBS
- ------------------------------- Senior Vice President- March 23, 1995
(Andrew F. Jacobs) Control, Treasurer
and Secretary
/s/ BEVIS LONGSTRETH
- ------------------------------- Director March 15, 1995
(Bevis Longstreth)
/s/ PAUL M. LOW
- ------------------------------- Director March 20, 1995
(Paul M. Low)
/s/ HARRIET E. MIERS
- ------------------------------- Director March 23, 1995
(Harriet E. Miers)
/s/ WILLIAM R. SMITH
- ------------------------------ Director March 16, 1995
(William R. Smith)
/s/ JOHN C. TOLLESON
- ------------------------------ Director March 20, 1995
(John C. Tolleson)
-12-
PORTIONS OF THE
ANNUAL REPORT ON FORM 10-K
ITEMS 14(A)(1), (2) AND (3)
FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
YEAR ENDED DECEMBER 31, 1994
CAPSTEAD MORTGAGE CORPORATION
DALLAS, TEXAS
-13-
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------- ---------- ---------------------- ----------- --------------
ADDITIONS
----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS ACCOUNTS- DEDUCTIONS- BALANCE AT END
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE * OF PERIOD
- ---------------------------------- ---------- ------------ --------- ----------- --------------
Reserves and Allowances Deducted
From Mortgage Investments:
Year ended December 31, 1994
Allowance for losses........... $6,927,000 $3,500,000 - $3,073,000 $7,354,000
Year ended December 31, 1993
Allowance for losses........... $8,228,000 $2,800,000 - $4,101,000 $6,927,000
Year ended December 31, 1992
Allowance for losses........... $3,505,000 $7,750,000 - $3,027,000 $8,228,000
* Loss on sale of foreclosed properties and charge-offs of other mortgage
securities.
-14-
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1994
PART 1 - MORTGAGE LOANS ON REAL ESTATE AT CLOSE OF PERIOD PART 2 INTEREST
- ------------------------------------------------------------------------------------------------------ ------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F AND COLUMN G(4)
- --------------------------- -------- ------------------ -------------------------------- ------------ ------------------------
AMOUNT OF PRINCIPAL UNPAID AT
CLOSE OF PERIOD
------------------------------ AMOUNT
SUBJECT TO MORTGAGE
PRIOR CARRYING AMOUNT DELINQUENT BEING WEIGHTED AVERAGE
DESCRIPTION LIENS OF MORTGAGES(2) TOTAL INTEREST(3) FORECLOSED(3) INTEREST RATE
- --------------------------- ----- ------------------ --------------- ----------- --------------- -------------------
$ -0- - $ 49,999( None $ 321,000 $ 321,000 $ 105,000 $ - 7.16%
51)......................
$ 50,000 - $ 99,999( None 5,615,000 4,670,000 154,000 - 6.28%
65)......................
$100,000 - $ 149,999( None 26,287,000 24,097,000 665,000 - 6.08%
203).....................
$150,000 - $ 199,999( None 58,931,000 55,915,000 389,000 - 5.90%
336).....................
$200,000 - $ None 406,506,000 398,019,000 10,889,000 4,109,000 6.32%
249,999(1,797)...........
$250,000 - $ None 296,521,000 318,147,000 6,594,000 3,324,000 6.27%
299,999(1,082)...........
$300,000 - $ 349,999( None 198,972,000 194,115,000 5,774,000 2,227,000 6.21%
615).....................
$350,000 - $ 399,999( None 133,135,000 133,135,000 5,571,000 3,363,000 6.11%
356).....................
$400,000 - $ 449,999( None 79,529,000 78,698,000 3,002,000 2,154,000 6.35%
187).....................
$450,000 - $ 499,999( None 61,106,000 61,106,000 4,348,000 2,423,000 6.14%
128).....................
$500,000 - $1,500,000( None 189,930,000 188,630,000 7,667,000 2,499,000 6.07%
316)..................... --------------- --------------- ----------- -----------
1,456,853,000 $1,456,853,000 $45,158,000 $20,099,000
============== =========== ===========
Plus premium
Less unrealized loss on mortgage 2,233,000
loans included in debt securities (33,673,000)
--------------
$1,425,413,000
==============
See accompanying notes to Schedule XII.
-15-
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO SCHEDULE XII
(1) Mortgage loans at December 31, 1994 consisted of single-family,
conventional, first mortgage loans. The Company classifies its mortgage
loans by term and interest rate characteristics. Fixed-rate mortgage loans
(i) have fixed rates of interest for their entire terms or (ii) have an
initial fixed-rate period of ten years after origination and then adjust
annually based on a specified margin over 1-year United States Treasury
Securities ("1-year Treasuries"). Medium-term mortgage loans (i) have an
initial fixed-rate period of three or five years after origination and then
adjust annually based on a specified margin over 1-year Treasuries or (ii)
have initial interest rates then adjust one time, approximately five years
following origination of the mortgage loan, based on a specified margin over
the Federal National Mortgage Association ("FNMA") yields for 30-year,
fixed-rate commitments at the time of adjustment. Adjustable-rate mortgage
loans either (i) adjust semi-annually based on a specified margin over the
6-month London Interbank Offered Rate ("LIBOR") or (ii) adjust annually
based on a specified margin over 1-year Treasuries. Principal amount of
mortgage loans in the portfolio totaling $55,464,000, or 3.9 percent, were
fixed-rate loans; $481,634,000, or 33.8 percent, were medium-term loans; and
$888,315,000, or 62.3 percent, were adjustable-rate loans.
(2) Reconciliation of mortgage loans:
Balance at December 31, 1993.......... $2,439,370,000
Additions:
Purchases of mortgage loans........ 1,935,136,000
Amortization of discount........... 58,000 1,935,194,000
------------- --------------
4,374,564,000
Deductions:
Principal collections.............. 227,117,000
Unrealized loss on mortgage loans
included in debt securities....... 33,673,000
Mortgage loans transferred to
mortgage securities collateral.... 2,688,361,000 2,949,151,000
------------- --------------
Balance at December 31, 1994.......... $1,425,413,000
==============
(3) Consists of all mortgage loans delinquent 90 days or more. Note that of the
amount of principal unpaid at the close of the period that is subject to
delinquent principal, $41.1 million is covered by mortgage pool insurance
that effectively limits the Company's loss. Similarly, $19.2 million of the
amount of mortgages being foreclosed is covered by pool insurance. For a
discussion of the Company's exposure to possible loan losses, see the
Registrant's Annual Report to Stockholders for the year ended December 31,
1994 on page 36 under the caption "Note I - Allowance for Possible Losses".
(4) Interest due and accrued at the end of the period and interest income earned
applicable to the period for each of the categories presented above is not
available without unreasonable effort or expense and therefore has been
omitted in accordance with Rule 12-23 of Regulation S-X. Total accrued
interest for the above listed mortgage loans totaled $7,911,000 at December
31, 1994.
-16-
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO SCHEDULE XII - CONTINUED
(5) The geographic distribution of the Company's portfolio at December 31, 1994
was as follows:
NUMBER PRINCIPAL
STATE OF LOANS AMOUNT
- ------------------------------------------- ------------ --------------
Alabama................................. 16 $ 4,713,000
Arizona................................. 55 13,077,000
Arkansas................................ 2 548,000
California.............................. 3,430 974,241,000
Colorado................................ 91 24,549,000
Connecticut............................. 25 7,795,000
Delaware................................ 7 1,959,000
District of Columbia.................... 31 9,269,000
Florida................................. 181 54,955,000
Georgia................................. 182 50,011,000
Hawaii.................................. 8 3,035,000
Idaho................................... 2 212,000
Illinois................................ 43 11,001,000
Indiana................................. 4 438,000
Kansas.................................. 4 1,444,000
Kentucky................................ 2 358,000
Louisiana............................... 22 6,508,000
Maryland................................ 132 39,291,000
Massachusetts........................... 24 6,387,000
Michigan................................ 69 21,107,000
Minnesota............................... 3 492,000
Mississippi............................. 1 103,000
Missouri................................ 9 3,651,000
Nebraska................................ 5 1,636,000
Nevada.................................. 20 3,952,000
New Hampshire........................... 1 230,000
New Jersey.............................. 100 27,949,000
New Mexico.............................. 47 14,291,000
New York................................ 43 13,297,000
North Carolina.......................... 9 2,499,000
Ohio.................................... 11 3,070,000
Oklahoma................................ 19 5,105,000
Oregon.................................. 5 642,000
Pennsylvania............................ 49 14,609,000
South Carolina.......................... 5 1,533,000
Tennessee............................... 3 513,000
Texas................................... 216 57,937,000
Utah.................................... 19 4,561,000
Vermont................................. 4 1,333,000
Virginia................................ 176 53,208,000
Washington.............................. 56 14,462,000
West Virginia........................... 1 104,000
Wisconsin............................... 4 778,000
----------- --------------
1,456,853,000
Plus premium............................ 2,233,000
Less unrealized loss on mortgage loans
included in debt securities............ (33,673,000)
--------------
Total.......................... 5,136 $1,425,413,000
=========== ==============
-17-
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ------- ------------
3.1 (a) Charter of the Company, which includes Articles of Incorporation,
Articles Supplementary for each outstanding Series of Preferred Stock and
all other amendments to such Articles of Incorporation(5)
3.1 (b) Articles Supplementary ($1.26 Cumulative Convertible Preferred Stock,
Series B)(4)
3.2 Bylaws of the Company, as amended(5)
10.17 Amendment to Management Agreement dated March 31, 1993, between the
Registrant and Capstead Advisers, Inc.(5)
10.18 Second Amendment to Management Agreement dated September 3, 1993, between
the Registrant and Capstead Advisers, Inc.(6)
10.19 Stock Option Agreement, dated June 16, 1992, between the Company and
Lomas Financial Corporation(5)
10.20 Form of Loan Sale Agreement(3)
10.21 1990 Employee Stock Option Plan(1)
10.22 1990 Directors' Stock Option Plan(2)
10.23 Employment Agreement dated August 1, 1992 between Capstead Mortgage
Corporation and Ronn K. Lytle(4)
10.24 Restricted Stock Grant Agreement dated August 1, 1992 between Capstead
Mortgage Corporation and Ronn K. Lytle(4)
10.25 1994 Flexible Long Term Incentive Plan*
10.26 1994 Capstead Inc. Restricted Stock Plan*
10.27 Capstead Mortgage Corporation Deferred Compensation Plan*
10.28 Summary of Employment Agreement dated December 9, 1993 between Capstead
Mortgage Corporation and Christopher T. Gilson*
11 Computation of per share earnings*
12 Computation of ratio of earnings to combined fixed charges and preferred
stock dividends*
13 Portions of the Annual Report to Stockholders of the Company for the year
ended December 31, 1994*
21 List of subsidiaries of the Company*
23 Consent of Ernst & Young LLP, Independent Auditors*
27 Financial Data Schedule (electronic filing only)*
- ------------------
(1) Incorporated by reference to the Company's Registration Statement on Form S-
8 (No. 33-40016) dated April 29, 1991.
(2) Incorporated by reference to the Company's Registration Statement on Form S-
8 (No. 33-40017) dated April 29, 1991.
(3) Incorporated by reference to Amendment No. 1 on Form 8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(5) Incorporated by reference to the Company's Registration Statement on Form S-
3 (No. 33-62212) dated May 6, 1993.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993.
* Filed herewith.
-18-