CAPSTEAD MORTGAGE CORP - 10-K Annual Report

Back to GetFilings.com

================================================================================

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, 2001

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.)

8401 NORTH CENTRAL EXPRESSWAY, SUITE 800, DALLAS, TX 75225
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (214) 874-2323

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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 MARCH 8, 2002 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES WAS $174,762,000.

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 8, 2002: 13,862,929

DOCUMENTS INCORPORATED BY REFERENCE:

(1) PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 2001 ARE INCORPORATED BY REFERENCE INTO PARTS II AND IV.

(2) PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT, ISSUED IN
CONNECTION WITH THE 2002 ANNUAL MEETING OF STOCKHOLDERS OF THE REGISTRANT,
ARE INCORPORATED BY REFERENCE INTO PART III.

================================================================================

CAPSTEAD MORTGAGE CORPORATION

2001 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I

PART I

ITEM 1. BUSINESS.

Capstead Mortgage Corporation ("Capstead," the "Company" or the "Registrant")
was incorporated on April 15, 1985 in Maryland and commenced operations in
September 1985. Capstead operates as a real estate investment trust ("REIT")
earning income from investing in real estate-related assets on a leveraged basis
and 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.

For further discussion of the Company's business and financial condition, see
the Registrant's Annual Report to Stockholders for the year ended December 31,
2001 on pages 27 through 32.

EFFECTS OF INTEREST RATE CHANGES AND INTEREST RATE SENSITIVITY

For discussion of effects of interest rate changes on the Company, see the
Registrant's Annual Report to Stockholders for the year ended December 31, 2001
on pages 36 through 38.

RISKS ASSOCIATED WITH CREDIT-SENSITIVE INVESTMENTS

For discussion of risks associated with credit-sensitive investments, see the
Registrant's Annual Report to Stockholders for the year ended December 31, 2001
on pages 38 and 39.

OTHER INVESTMENT STRATEGIES

The Company may enter into other short- or long-term investment strategies as
the opportunities arise.

COMPETITION

In purchasing real estate-related mortgage assets, the Company competes with
other REITs, savings banks, commercial banks, mortgage and investment bankers,
conduits, insurance companies, other lenders and mutual funds.

REGULATION AND RELATED MATTERS

Prior to its sale December 31, 1998, the Company's mortgage banking operations
were subject to the rules and regulations of Fannie Mae and Freddie Mac with
respect to servicing and originating mortgage loans. In addition, there are
other federal and state statutes and regulations affecting such activities. Many
of these regulatory requirements are designed to protect the interests of
consumers, while others

1

protect the owners or insurers of mortgage loans. Failure to have complied with
these requirements could lead to demands for indemnification or loan repurchases
from the buyers of the mortgage banking operations or Fannie Mae or Freddie Mac,
class action lawsuits and administrative enforcement actions.

EMPLOYEES

As of December 31, 2001, the Company had 16 full-time employees.

TAX STATUS

As used herein, "Capstead REIT" refers to Capstead and the entities that are
consolidated with Capstead for federal income tax purposes. Capstead REIT has
elected to be taxed as a REIT for federal income tax purposes and intends to
continue to do so. As a result of this election, Capstead REIT will not be taxed
at the corporate level on taxable income distributed to stockholders, provided
that certain requirements concerning the nature and composition of its income
and assets are met and that at least 90% of its REIT taxable income is
distributed.

If Capstead REIT fails to qualify as a REIT in any taxable year, it would be
subject to federal income tax at regular corporate rates and would not receive a
deduction for dividends paid to stockholders. If this were the case, the amount
of after-tax earnings available for distribution to stockholders would decrease
substantially.

As long as Capstead REIT qualifies as a REIT, it will generally be taxable only
on its undistributed taxable income. Distributions out of current or accumulated
earnings and profits will be taxed to stockholders as ordinary income or capital
gain, as the case may be. Distributions in excess of Capstead REIT's accumulated
and current earnings and profits will constitute a non-taxable return of capital
to the stockholders (except insofar as such distributions exceed the cost basis
of the shares of stock) resulting in a corresponding reduction in the cost basis
of the shares of stock.

Distributions by the Company will not be eligible for the dividends received
deduction for corporations. Should the Company incur losses, stockholders will
not be entitled to include such losses in their individual income tax returns.
The Company notifies its stockholders of the proportion of distributions made
during the taxable year that constitutes ordinary income, return of capital or
capital gains. For the last five years, 100% of the preferred stock
distributions were characterized as ordinary income. For information regarding
the characterization of common dividend distributions for the last five years,
see the Registrants' Annual Report to Stockholders for the year ended December
31, 2001 on Page 32.

Capstead REIT realized substantial capital losses on the sale of mortgage assets
in 1998 and 2000. The resulting unused capital loss carryforwards of $330
million as of December 31, 2001, will in all likelihood eliminate the potential
for capital gain distributions through the year 2005 when these carryforwards
expire.

All taxable income of Capstead Holdings, Inc., and its primary subsidiary
Capstead Inc. (which held the mortgage banking operations prior to their sale in
December 1998), is subject to federal and state income taxes, where applicable.
These non-REIT subsidiaries had net operating loss carryforwards of $6.6 million
as of December 31, 2001 and sufficient alternative minimum tax credit
carryforwards to offset the payment of federal income taxes on $5.0 million of
future taxable income, if any, earned by these subsidiaries. Capstead REIT's
taxable income will include earnings of these subsidiaries only upon payment to
Capstead REIT by distribution of such earnings, and only if these distributions
are made out of current earnings and profits.

2

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 in Dallas, Texas in an office leased by
the Company.

ITEM 3. LEGAL PROCEEDINGS.

During 1998, twenty-four purported class action lawsuits were filed against the
Company and certain of its officers alleging, among other things, that the
defendants violated federal securities laws by publicly issuing false and
misleading statements and omitting disclosure of material adverse information
regarding the Company's business. 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.

ITEM 4. 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 regarding the market price of, dividends
on, and number of holders of the Registrant's common shares is included in the
Registrant's Annual Report to Stockholders for the year ended December 31, 2001
on page 25 under the caption "Note 16 - 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 five years ended December 31, 2001 on page 26
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, 2001 on pages 27 through
40 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).

3

ITEM 7.a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS.

The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 2001 on pages 27 through
40 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, 2001 on pages 3 through
25, 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 2002
definitive Proxy Statement on pages 4 through 6 under the captions "Election of
Directors," on page 9 under the caption "Executive Officers," and on page 18
under the caption "Compliance with Section 16(a) of the Securities Exchange Act
of 1934," all of which are incorporated herein by reference pursuant to General
Instruction G(3).

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is included in the Registrant's 2002
definitive Proxy Statement on pages 10 and 11 under the caption "Executive
Compensation," 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 2002
definitive Proxy Statement on pages 17 and 18 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 2002
definitive Proxy Statement on page 19 under the caption "Certain Relationships
and Related Transactions," which is incorporated herein by reference pursuant to
General Instruction G(3).

4

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 consolidated financial statements of the Company,
included in the 2001 Annual Report to Stockholders, are
incorporated herein by reference:

2. Financial Statement Schedules -- All schedules for which
provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been
omitted.

* Incorporated herein by reference from the Company's Annual Report
to Stockholders for the year ended December 31, 2001, filed
herewith as Exhibit 13.

3. Exhibits:

EXHIBIT
NUMBER

1.1 Underwriting Agreement dated November 26, 2001 by and between
Fortress and Bear, Stearns & Co. Inc. to sell 1,000,000 shares
Capstead common stock held by Fortress(5)

1.2 Sales Agreement dated August 20, 2001 by and between Capstead and
RCG Equity Finance, a division of Ramius Securities, LLC, for the
issuance of up to 875,000 common shares and 1,000,000 Series B
preferred shares(7)

3.1 Charter, including Articles of Incorporation, Articles
Supplementary for each series of preferred stock and all other
amendments to such Articles of Incorporation(5)

3.2 Amended and Restated Bylaws(5)

10.01 1990 Directors' Stock Option Plan(1)

10.02 1994 Flexible Long-Term Incentive Plan, as amended*

10.03 1994 Capstead Inc. Restricted Stock Plan(2)

10.04 Deferred Compensation Plan(2)

10.05 1996 Incentive Bonus Plan, as amended(6)

5

PART IV
ITEM 14. -- CONTINUED

3. Exhibits (continued):

EXHIBIT
NUMBER

10.06 1997 Flexible Long Term Incentive Plan(3)

10.07 Registration Rights Agreement between Capstead and Fortress(4)

10.08 Management Contract between Capstead and Fortress, as amended*

12 Computation of ratio of earnings to combined fixed charges and
preferred stock dividends*

13 Portions of the Company's Annual Report to Stockholders for
the year ended December 31, 2001*

21 List of subsidiaries of the Company*

23 Consent of Ernst & Young LLP, Independent Auditors*

(1) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 33-40017) dated April 29, 1991

(2) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1994

(3) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1997

(4) Incorporated by reference to the Company's Current Report on Form
8-K dated December 15, 1999

(5) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 333-63358) dated June 19, 2001

(6) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2001

(7) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 333-68424) dated August 27, 2001

* Filed herewith

(b) Reports on Form 8-K:

Current report on Form 8-K dated November 28, 2001 to file the
Underwriting Agreement dated November 26, 2001 by and between Fortress
and Bear, Stearns & Co. Inc. to sell 1,000,000 shares of Capstead
common stock held by Fortress and to amend and restate a portion of the
related core prospectus entitled "Description of the Securities --
Special Statutory Requirements for Certain Transactions."

(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.

6

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 18, 2002 By: /s/ ANDREW F. JACOBS
----------------------------------
Andrew F. Jacobs
Executive Vice President -- Finance

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated below and on the dates indicated.

/s/ WESLEY R. EDENS Chairman, Chief Executive March 18, 2002
- --------------------------------- Officer and Director
(Wesley R. Edens)

/s/ ANDREW F. JACOBS Executive Vice President -- March 18, 2002
- --------------------------------- Finance
(Andrew F. Jacobs)

/s/ ROBERT I. KAUFFMAN Director March 18, 2002
- ---------------------------------
(Robert I. Kauffman)

/s/ PAUL M. LOW Director March 14, 2002
- ---------------------------------
(Paul M. Low)

/s/ RONN K. LYTLE Vice Chairman and Director March 15, 2002
- ---------------------------------
(Ronn K. Lytle)

/s/ MICHAEL G. O'NEIL Director March 15, 2002
- ---------------------------------
(Michael G. O'Neil)

/s/ HOWARD RUBIN Director March 14, 2002
- ---------------------------------
(Howard Rubin)

/s/ MARK S. WHITING Director March 15, 2002
- ---------------------------------
(Mark S. Whiting)

7

INDEX TO EXHIBITS

(1) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 33-40017) dated April 29, 1991

(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994

(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997

(4) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 15, 1999

(5) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 333-63358) dated June 19, 2001

(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2001

(7) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 333-68424) dated August 27, 2001

* Filed herewith