AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 2003
REGISTRATION NO. 333-68424
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------
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, TEXAS 75225-4410
(214) 874-2323
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
----------------------
PHILLIP A. REINSCH
8401 NORTH CENTRAL EXPRESSWAY
SUITE 800
DALLAS, TEXAS 75225-4410
(214) 874-2323
(Name, address, including zip code, and telephone number
including area code, of agent for service)
----------------------
The Commission is requested to send copies of all communication to:
DAVID BARBOUR
ANDREWS KURTH LLP
1717 MAIN STREET
SUITE 3700
DALLAS, TEXAS 75201
(214) 659-4400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or reinvestment plans, please check the following box [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
======================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(2)
----------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value 875,000 shares $25.26 $22,102,500.00 $5,525.63
----------------------------------------------------------------------------------------------------------------------
$1.26 Cumulative Convertible
Preferred Stock, Series B, $0.10
par value 1,000,000 shares $12.29 $12,290,000.00 $3,072.50
======================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based upon the average of the high and low
sales prices of the Common Stock on August 24, 2001 as reported on the
New York Stock Exchange.
(2) Previously paid on August 27, 2001.
[CAPSTEAD LOGO]
CAPSTEAD MORTGAGE CORPORATION
COMMON STOCK
$1.26 CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B
You should carefully consider the risk factors beginning on page 5 of this
prospectus
Through this prospectus, Capstead Mortgage
Corporation may offer and sell from time to time up
to 875,000 shares of our common stock, and up to
1,000,000 shares of our $1.26 Cumulative Convertible
Preferred Stock, Series B which are listed on the New
York Stock Exchange under the symbols "CMO" and
"CMOPB", respectively.
We may sell all or a portion of the shares of stock offered pursuant to
this prospectus through agents, to or through underwriters or dealers. We are a
party to a sales agreement with Brinson Patrick Securities Corporation as sales
manager, relating to the sale of shares offered pursuant to this prospectus. The
sales manager is not required to sell any specific number or dollar amount of
shares, but will use its best efforts to sell the shares offered by this
prospectus. Such sales will be at market prices prevailing at the time of the
sale. On December 16, 2003, the last reported sales price on the New York Stock
Exchange of our common stock was $16.26 per share, and the last reported sales
price of our preferred stock, Series B, was $12.77 per share. The compensation
to the sales manager for sales of common and preferred stock will be at
commission rates ranging from 3.0% to 2.0% of the gross sales price per share,
depending upon the aggregate sales proceeds raised by the sales manager in each
year under the sales agreement. The sales manager will be deemed to be an
underwriter, within the meaning of the Securities Act, in connection with any
sales of common or preferred shares on our behalf. See "Description of Sales
Agreement" and "Plan of Distribution".
You should rely only on the information contained or incorporated by
reference in this prospectus and in any prospectus supplement accompanying this
prospectus and that we have referred you to. We have not authorized anyone to
provide you with information that is different. You should not assume that the
information in this prospectus or in any prospectus supplement is accurate as of
any date other than the date on the front of those documents. References in this
prospectus to "we," "us," "our" and "the company" are to Capstead Mortgage
Corporation.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS DECEMBER 17, 2003.
-1-
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
at the SEC's web site at http://www.sec.gov and at the public reference rooms of
the New York Stock Exchange, 20 Broad Street, New York, New York and the Pacific
Stock Exchange, 115 Sansome Street, San Francisco, California.
We have filed a registration statement with the SEC on Form S-3
relating to the securities offered by this prospectus. This prospectus does not
contain all of the information included in the registration statement. You may
refer to the registration statement and the related exhibits for more
information about the securities offered by this prospectus. The statements we
make in this prospectus regarding the content of any documents filed as exhibits
to the registration statement are not necessarily complete, and you should refer
to the filed copy for additional information. All our statements about these
documents are qualified in their entirety by the exhibits to the registration
statement.
INCORPORATION OF INFORMATION WE FILE
WITH THE SEC BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information that we file
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until all the securities offered under this prospectus are
sold. This prospectus is part of the registration statement we filed with the
SEC.
1. Our Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.
2. Our definitive Proxy Statement dated March 10, 2003, issued in
connection with our annual stockholders' meeting.
3. Our Current Report on Form 8-K dated March 31, 2003.
4. Our Current Report on Form 8-K dated April 24, 2003.
5. Our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2003.
6. Our Current Report on Form 8-K dated May 14, 2003.
7. Our Current Report on Form 8-K dated July 22, 2003.
-2-
8. Our Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2003.
9. Our Current Report on Form 8-K dated October 22, 2003.
10. Our Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2003.
You may view and obtain copies of these filings in the Investor
Relations section of our website at www.capstead.com. You may also request a
copy of these filings, at no cost, by writing or telephoning us at Capstead
Mortgage Corporation, 8401 N. Central Expressway, Suite 800, Dallas, Texas
75225, telephone (214) 874-2323, Attention: Investor Relations.
FORWARD-LOOKING INFORMATION
This prospectus contains "forward-looking statements" (within the
meaning of the Private Securities Litigation Reform Act of 1995) that inherently
involve risks and uncertainties. Our actual results and liquidity can differ
materially from those anticipated in these forward-looking statements because of
changes in the level and composition of our investments and unforeseen factors.
Relative to our investments in financial assets, 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. Relative to direct investments in
real estate, these factors may include, but are not limited to, lessee
performance under lease agreements, changes in general as well as local economic
conditions and real estate markets, increases in competition and inflationary
pressures, changes in the tax and regulatory environment including zoning and
environmental laws, uninsured losses or losses in excess of insurance limits and
the availability of adequate insurance coverage at reasonable costs. For a
discussion of the risks and uncertainties which could cause actual results to
differ from those contained in the forward-looking statements, see "Risk
Factors" beginning on page 4 of this prospectus. We do not undertake, and
specifically disclaim any obligation, to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
ABOUT CAPSTEAD MORTGAGE CORPORATION
We were incorporated on April 15, 1985 in Maryland and commenced
operations in September 1985. We are a mortgage investment firm operating as a
real estate investment trust ("REIT") that earns 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. In
addition, we have made
-3-
limited investments in credit sensitive commercial real estate-related assets,
including the direct ownership of real estate.
We and our qualified REIT subsidiaries have elected to be taxed as a
REIT under the Internal Revenue Code of 1986, as amended (the "Code"), and
intend to continue to do so. As a result of this election, we and our qualified
REIT subsidiaries are not taxed at the corporate level on taxable income
distributed to stockholders, provided that certain REIT qualification tests are
met. Certain other affiliated entities, which are consolidated with us for
financial reporting purposes, are not consolidated for federal income tax
purposes because such entities have elected taxable REIT subsidiary tax-status.
All taxable income of taxable REIT subsidiaries is subject to federal and state
income taxes, where applicable.
-4-
RISK FACTORS
The following information, which you should carefully consider,
identifies certain significant sources of risk associated with an investment in
our common stock and our Series B Preferred Stock.
Changes in interest rates may
adversely affect our earnings Our earnings currently depend primarily on
the difference or "spread" between the
interest we receive on our mortgage
securities and other investments, and the
interest we pay on our related borrowings,
which are generally based on 30-day LIBOR,
an index that reflects prevailing short-term
interest rates. The resulting spread may be
reduced or even be negative in a rising
short-term interest rate environment.
Because a substantial portion of our
mortgage investments currently consist of
adjustable-rate mortgage 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
adjustable-rate mortgage loans, a portion of
which reset each month based on underlying
indices (generally 1-year Constant Maturity
U.S. Treasury Note Rates).
Since only a portion of the adjustable-rate
mortgage loans underlying our securities
reset each month, and the terms of an
adjustable rate mortgage loan generally
limit the amount of these 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.
Declines in these indices during periods of
falling short-term interest rates will
negatively affect yields on adjustable-rate
mortgage securities as the underlying
adjustable-rate loans reset at lower
interest rates. If declines in these indices
exceed declines in our borrowing rates, our
earnings may be adversely affected.
-5-
An increase in prepayments may
adversely affect our earnings Another effect of changes in interest rates
is that, as long-term interest rates
decrease, the rate of principal prepayments
on mortgage loans underlying our mortgage
investments generally increases. Prolonged
periods of high prepayments can
significantly reduce the expected life of
our mortgage investments; therefore, the
actual yields realized can be lower due to
faster amortization of premiums.
The availability of suitable
investments at attractive
pricing may adversely affect
our earnings To the extent proceeds of prepayments on our
mortgage investments are not reinvested or
cannot be reinvested at a rate of interest
at least equal to the rate previously earned
on those investments, our earnings may be
adversely affected. We cannot assure you
that we will be able to acquire suitable
investments at attractive pricing and in a
timely manner to replace portfolio runoff as
it occurs or that we will maintain the
current composition of our investments,
consisting primarily of adjustable-rate
mortgage securities.
The value of our mortgage assets
fluctuates with changes in
interest rates and market
liquidity which could result
in losses We periodically sell mortgage assets, which
may increase our income volatility because
of the recognition of transactional gains or
losses. These sales may become attractive or
prudent as the value of our mortgage assets
fluctuates with changes in interest rates
and market liquidity. At other times, we may
shift our investment focus, resulting in
asset sales.
During periods of rising interest rates or
falling market liquidity, the value of our
mortgage assets can decline, leading to
increased margin calls and reducing our
liquidity. In the event of a margin call,
our lenders may require us to pledge
additional collateral to re-establish the
ratio of the value of our collateral to the
amount of our borrowing. If we are
-6-
unable or unwilling to pledge additional
collateral, our lenders can liquidate our
collateral under adverse market conditions.
Any such liquidation would likely result in
a loss to us.
We may invest in derivatives to
mitigate our interest rate
and prepayment risks on our
mortgage investments. We may invest in derivative financial
instruments from time to time with the goal
of achieving more stable financing spreads
on a portion of our mortgage investment
portfolio. As of the date of this filing, we
did not own any derivative financial
instruments for this purpose.
Some of our current or future
investments may be more
credit sensitive than our
other investments We continue to evaluate suitable real
estate-related investments, which may
include credit sensitive assets that
generally earn higher yields due largely to
a higher risk of default and reduced
liquidity. We believe that such investments,
when combined with the prudent use of
leverage, can provide attractive returns
over the long term. Suitable investments may
include credit sensitive commercial and
residential mortgage assets.
Commercial mortgage assets are generally
viewed as exposing an investor to greater
risk of loss than residential mortgage
assets because commercial mortgage assets
are typically secured by larger loans to
fewer obligors than residential mortgage
assets. Commercial property values and net
operating income are subject to volatility,
and net operating income may be sufficient
or insufficient to cover debt service on the
related mortgage loan at any given time. The
repayment of loans secured by
income-producing properties is typically
dependent upon the successful operation of
the related real estate project and the
ability of the applicable property to
produce net operating income rather than
upon the liquidation value of the underlying
real estate. Even when the current net
operating income
-7-
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
readily be convertible to alternative uses
if such properties were to become
unprofitable due to competition, age of
improvements, decreased demand, regulatory
changes or other factors. The conversion of
commercial properties to alternate uses
generally requires substantial capital
expenditures, which may or may not be
available.
The availability of credit for commercial
mortgage loans is significantly dependent
upon economic conditions in the markets
where such properties are located, as well
as the willingness and ability of lenders to
make such loans. The availability of funds
in the credit markets fluctuates and there
can be no assurance that the availability of
such funds will increase above, or will not
contract below current levels. In addition,
the availability of similar commercial
properties, and the competition for
available credit, may affect the ability of
potential purchasers to obtain financing for
the acquisition of properties. This could
effect the repayment of commercial
mortgages.
Credit sensitive residential mortgages
differ from commercial mortgages in several
important ways, yet can still carry
substantial credit risk. Residential
mortgage-backed securities typically are
secured by smaller loans to more obligors
than commercial mortgage-backed securities,
thus spreading the risk of mortgagor
default. However, most of the mortgages
supporting credit sensitive residential
mortgage-backed 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 we may incur losses
if proceeds from sales of the underlying
collateral are less than the unpaid
principal balances of the mortgage loans and
related foreclosure costs. However, with
-8-
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 that are not financed to
maturity at acquisition may be diminished
during periods of mortgage finance market
illiquidity. 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 these assets, requiring them to be sold
at a loss.
If the value of our investments
is adversely affected by changes
in interest rates, market
liquidity or the credit quality
of our investment portfolio, the
book value of our common stock
may decline Most of our mortgage investments are debt
securities which we carry at fair value on
our balance sheet. Changes in the fair value
of these investments are reflected in our
stockholders' equity. The fair value of
these investments fluctuates with changes in
-9-
interest rates and market liquidity, and
such changes will generally be reflected in
the book value of our common stock.
Similarly, changes in credit quality can
affect the fair value of our investments.
The book value of our common stock will also
be affected by other factors, including the
level of dividend distributions and
depreciation charges on net-leased real
estate; however, temporary changes in the
fair value of investments other than debt
securities will generally not affect the
book value of our common stock.
Our real estate investments may
subject us to risks of ownership The direct ownership of commercial real
estate involves a number of risks. With our
first acquisition of real estate in 2002, we
have attempted to mitigate these risks by
entering into a long-term "net-lease"
arrangement whereby the lessee is
responsible for the ongoing operation and
management of the properties and for paying
all expenses associated with the operation
of the properties. Although reduced by this
net-lease arrangement, risks of ownership
remain, including:
- The risk that changes in economic
conditions or real estate markets
may adversely affect the value of
our properties.
- The risk that, during inflationary
periods, which are generally
accompanied by rising interest
rates, increases in operating costs
and borrowing rates may be greater
than increases in lessee revenues
from operating properties. Over an
extended period of time, this could
result in lessee defaults.
- The risk that a deterioration of
local conditions could adversely
affect the ability of a lessee to
profitably operate a property. For
instance, an oversupply of senior
living properties could hamper the
leasing of senior living units at
favorable rates. This could
ultimately affect the value of our
properties.
- The risk that changes in tax,
zoning or other
-10-
laws could make our properties less
attractive or less profitable.
- The risk that our lessees will not
elect to renew their leases when
the terms expire. If a lessee does
not renew its lease or otherwise
defaults on its lease obligations,
there is no assurance that we will
be able to obtain a substitute
lessee on acceptable terms. If we
cannot obtain another qualified
operator to lease a property, we
may be required to modify the
property for a different use, which
may involve significant capital
expenditures and delays in
re-leasing the property.
- The risk that lessees will not
perform under their leases,
reducing our income from the leases
or requiring us to assume costs
(such as real estate taxes,
insurance, utilities and
maintenance) that are the lessees'
responsibility under net-leases. In
the case of special-purpose real
estate such as senior living
facilities, compliance with
licensing requirements could
complicate or delay the transfer of
operational control of such
properties. This could lead to a
significant cash flow burden for us
to service the debt and otherwise
maintain the properties.
- The risk that lessees will not be
able to obtain insurance at a
commercially reasonable cost.
Net-leases generally require the
lessee to carry comprehensive
liability, casualty, workers'
compensation and rental loss
insurance. The required coverage is
typical of the type, and amount,
customarily obtained by an owner of
similar properties. However, there
are some types of losses, such as
catastrophic acts of nature, for
which insurance cannot be obtained
at a commercially reasonable cost.
If there is an uninsured loss or a
loss in excess of insurance limits,
we could lose both the revenues
generated by the affected property
and the capital invested in the
property. We would, however, remain
obligated to repay
-11-
any mortgage indebtedness or other
obligations related to the
property.
- The risk of a failure to comply
with applicable regulatory
requirements. Our real estate
investments are subject to various
federal, state and local regulatory
requirements, including without
limitation, the Americans with
Disabilities Act (the "ADA"). The
ADA requires that public
accommodations reasonably
accommodate individuals with
disabilities and that new
construction or alterations be made
to commercial facilities to conform
to accessibility guidelines.
Failure to comply with the ADA can
result in injunctions, fines, and
damage awards to private parties
and additional capital expenditures
to remedy noncompliance. Existing
requirements may change and
compliance with future requirements
may involve significant
unanticipated expenditures.
Although typically these
expenditures would be the
responsibility of the lessee under
the terms of net-leases, if the
lessees fail to perform these
obligations, we may be required to
do so.
- Under federal, state and local
environmental laws, we may be
required to investigate and clean
up any release of hazardous or
toxic substances or petroleum
products at our properties,
regardless of our knowledge or
actual responsibility, simply
because of current or past
ownership of the real estate. If
unidentified environmental problems
arise, we may have to make
substantial payments, which could
adversely affect our cash flow and
our ability to make distributions
to stockholders. This is so
because:
1. We may have to pay for property
damage and for investigation
and clean-up costs incurred in
connection with the
contamination.
2. The law may impose clean-up
-12-
responsibility and liability on
us regardless of whether we
knew of or caused the
contamination. Even if more
than one person is responsible
for the contamination, each
person who shares legal
liability under environmental
laws may be held responsible
for all of the clean-up costs.
3. Governmental entities and third
parties may sue us for damages
and costs associated with a
contaminated site.
- The risks associated with the sale
of real property. We may desire to
sell a property in the future
because of changes in market
conditions or poor lessee
performance or to avail ourselves
of other opportunities. We may also
be required to sell a property in
the future to meet our debt
obligations or to avoid a default.
Unlike investments in mortgage
securities, real estate cannot
always be sold quickly, and there
can be no assurance that we can
sell any of our properties at a
favorable price or that a
prospective buyer will view our
existing lease or operating
arrangements favorably. In
addition, a property may require
restoration or modification before
we are able to sell it.
We have not established a
minimum dividend payment level We intend to pay quarterly dividends and to
make distributions to our stockholders in
amounts such that most, if not all, of our
REIT taxable income in each year (subject to
certain adjustments) is distributed. This
will enable us to meet certain REIT
distribution requirements, which are part of
the requirements that must be met to qualify
for the tax benefits accorded to a REIT
under the Code. We have not established a
minimum dividend payment level and our
ability to pay dividends may be adversely
affected due to the risk factors described
in this prospectus. All distributions will
be made at
-13-
the discretion of our board of directors and
will depend on our earnings, our financial
condition, maintenance of our REIT status
and such other factors as our board of
directors may deem relevant from time to
time.
Our failure to qualify as a REIT
would have adverse tax
consequences Many REIT-related tax requirements are
highly technical and complex. The
determination of whether we and our
qualified REIT subsidiaries are taxable as a
REIT requires an analysis of various factual
matters and circumstances that may not be
totally within our control. Even a technical
or inadvertent mistake could jeopardize our
REIT status. Furthermore, Congress and the
IRS might make changes to the tax laws and
regulations, and the courts might issue new
rulings that make it more difficult or
impossible for us to remain qualified as a
REIT. If we fail to qualify as a REIT, we
would be subject to federal income tax at
regular corporate rates. Also, unless the
IRS granted us relief under certain
statutory provisions, we would remain
disqualified as a REIT for four years
following the year we first fail to qualify.
If we fail to qualify as a REIT, we would
have to pay significant income taxes and
would therefore have less money available
for investments or for distributions to our
stockholders. This would likely have a
significant adverse effect on the value of
our securities. In addition, the tax law
would no longer require us to make
distributions to our stockholders.
We have certain distribution
requirements As a REIT, we are generally required to
distribute at least 90% of our annual REIT
taxable income, excluding any net capital
gains. This distribution requirement limits
the amount we may have available for other
business purposes, including amounts to fund
our growth.
-14-
Failure to maintain an exemption
from the Investment Company Act
would harm our results of
operations The Investment Company Act of 1940, as
amended (the "Investment Company Act"),
exempts entities that are primarily engaged
in the business of purchasing or otherwise
acquiring mortgages and other liens on and
interests in real estate. We intend to
conduct our business so as not to become
regulated as an investment company under the
Investment Company Act. If we fail to
qualify for this exemption, our ability to
use leverage would be substantially reduced
and we would be unable to conduct our
business as described in this prospectus.
Under the current interpretation of the SEC
staff, in order to qualify for this
exemption we must maintain at least 55% of
our assets directly in these qualifying real
estate interests. Mortgage-backed securities
that do not represent all of the
certificates issued with respect to an
underlying pool of mortgages may be treated
as separate from the underlying mortgage
loans and, thus, may not qualify for
purposes of the 55% requirement. Therefore,
our ownership of these mortgage backed
securities is limited by the provisions of
the Investment Company Act.
In satisfying the 55% requirement under the
Investment Company Act, we treat as
qualifying interests mortgage-backed
securities issued with respect to an
underlying pool as to which we hold all
issued certificates. If the SEC or its staff
adopts a contrary interpretation of such
treatment, we could be required to sell a
substantial amount of our mortgage-backed
securities under potentially adverse market
conditions. Further, in our attempts to
ensure that we continue to qualify for the
exemption under the Investment Company Act,
we might be precluded from acquiring
mortgage-backed securities if their yield is
higher than the yield on mortgage-backed
securities that could be purchased in a
manner consistent with the exemption. These
factors may lower or eliminate our net
income.
-15-
Issuances of large amounts of our
stock could cause our price
to decline As of December 16, 2003, there were
14,014,910 shares of our common stock and
15,819,432 shares of our Series B Preferred
Stock outstanding. This prospectus may be
used for the issuance of additional shares
of our common stock or Series B Preferred
Stock. The continuing availability of new
shares in the market may decrease or limit
increases in the market prices of these
securities.
We may change our policies
without stockholder approval Our board of directors and management
determine all of our policies, including our
investment, financing and distribution
policies and may amend or revise these
policies at any time without a vote of our
stockholders. Policy changes could adversely
affect our financial condition, results of
operations, the market price of our common
stock and/or Series B Preferred Stock or our
ability to pay dividends or distributions.
USE OF PROCEEDS
Unless otherwise specified in the applicable prospectus supplement for
any offering of the shares of stock offered pursuant to this prospectus, the net
proceeds from the stock offered by us will be available for general corporate
purposes. These general corporate purposes may include, without limitation,
repayment of maturing obligations, redemption of outstanding indebtedness,
financing future acquisitions (including acquisitions of real estate-related
companies or real estate-related assets), capital expenditures and working
capital. Pending any such uses, we may invest the net proceeds from the sale of
any stock offered pursuant to this prospectus or related prospectus supplement
in short-term investments, or may use them to reduce short-term indebtedness.
-16-
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
The following table sets forth the historical ratios of earnings to
combined fixed charges and our preferred stock dividends for the periods
indicated:
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED ----------------------------------------------
SEPTEMBER 30, 2003 2002 2001 2000 1999 1998
------------------ ---- ---- ---- ---- ----
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends(a) 1.47:1 1.40:1 1.22:1 0.87:1 1.07:1 0.63:1
(a) Includes fixed charges relating to CMO's issued by our finance subsidiaries.
Excluding interest expense on CMO debt, the ratio of earnings to combined fixed
charges and preferred stock dividends would have been 1.86:1, 2.03:1, 1.46:1,
0.77:1, 1.14:1, and 0.28:1, respectively, for the periods indicated.
DESCRIPTION OF SALES AGREEMENT
We may sell our common stock and our $1.26 cumulative convertible
Preferred Stock designated as "Series B Preferred Stock" from time to time (1)
through arrangements with underwriters or dealers, (2) directly to one or more
purchasers, or (3) through agents. We have entered into a sales agreement with
Brinson Patrick Securities Corporation ("Brinson Patrick") with respect to sales
of common stock and Series B Preferred Stock, and may enter into other sales
agreements with other sales agents or underwriters in the future. Under the
terms of the Brinson Patrick sales agreement, we may issue and sell up to
875,000 shares of our common stock and up to 1,000,000 shares of our Series B
Preferred Stock from time to time through Brinson Patrick, as our sales agent.
We have agreed to provide indemnification and contribution to Brinson Patrick
against certain liabilities, including liabilities under the Securities Act.
CERTAIN TERMS OF THE SALES AGENCY AGREEMENT
Sales pursuant to the Brinson Patrick sales agreement may be effected
on a daily basis. The compensation to Brinson Patrick for sales of common stock
and Series B Preferred Stock under the Brinson Patrick sales agreement shall be
at the following commission rates:
- 3.0% of the gross sales price per shares ("sales proceeds")
for the first $8 million of aggregate sales proceeds raised under this sales
agreement in each year;
- 2.5% of sales proceeds for the next $4 million of aggregate
sales proceeds raised in such year; and
- 2.0% of sales proceeds for any additional aggregate sales
proceeds raised in such year.
-17-
For purposes of determining the appropriate commission rates, each year shall
begin on January 1 and end on the following December 31. The remaining proceeds,
after further deduction for any transaction fees imposed by any governmental or
self-regulatory organization in respect to such sale shall constitute the net
proceeds to us for such shares of stock.
The offering of common stock and Series B Preferred Stock pursuant to
the Brinson Patrick sales agreement will terminate upon the earlier of (i) the
sale of all shares of common stock and Series B Preferred Stock subject thereto
or (ii) termination of the Brinson Patrick sales agreement. The Brinson Patrick
sales agreement may be terminated by us or by Brinson Patrick upon written
notice and in certain other circumstances specified therein.
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock currently consists of 100,000,000 shares
of common stock, par value $0.01 per share, and 100,000,000 shares of preferred
stock, par value $0.10 per share. As of December 16, 2003, there were 14,014,910
shares of our common stock, 211,446 shares of our $1.60 Cumulative Preferred
Stock designated as "Series A Preferred Stock" and 15,819,432 shares of our
Series B Preferred Stock issued and outstanding. The common stock, Series A
Preferred Stock and Series B Preferred Stock are listed on the New York Stock
Exchange.
COMMON STOCK
Each share of common stock is entitled to one vote. The outstanding
shares of common stock are fully paid and non-assessable. Holders of shares of
common stock do not have cumulative voting rights or preference, conversion,
exchange, subscription or preemptive rights. Subject to our obligations to pay
dividends on all shares of our outstanding preferred stock, each share of common
stock is entitled to participate equally in dividends on the common stock when
and as declared by our board of directors and in the distribution of our assets
upon liquidation after payment of our liabilities and liquidation preferences
with regard to our preferred stock. The foregoing summary does not purport to be
a complete description of our common stock and is subject to, and qualified in
its entirety by reference to, our charter and bylaws, in each case as amended
and supplemented to date and filed as exhibits to the registration statement.
SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK
General. In November, 1989, a wholly-owned subsidiary of ours was
merged with and into Strategic Mortgage Investments, Inc., a Maryland
corporation ("Strategic"), and each outstanding share of Strategic common stock
was converted into one share of our Series A Preferred Stock. In December, 1992,
Tyler Cabot Mortgage Securities Fund, Inc., a Maryland corporation ("Tyler
Cabot"), was merged with and into us, and each outstanding share of Tyler Cabot
common stock was converted into one share of our Series B Preferred Stock. The
Series A Preferred Stock and Series B Preferred Stock are fully paid and
non-assessable and neither has preemptive rights. The Series A Preferred Stock
ranks on a parity with the Series B Preferred
-18-
Stock, and each rank on a parity with any other series of our preferred stock
which is not by its terms made junior or senior to the Series A Preferred Stock
or Series B Preferred Stock with respect to the payment of dividends and
distribution of assets in liquidation.
Dividends. Holders of the Series B Preferred Stock are entitled to
receive, when, as and if declared by our board of directors out of funds legally
available therefor, cumulative preferential cash dividends at the annual rate of
$1.26 per share, and no more, payable in equal monthly installments on each
monthly dividend payment date. Holders of the Series A Preferred Stock are
entitled to receive, when, as and if declared by our board of directors out of
funds legally available therefor, cumulative preferential cash dividends at the
rate of $1.60 per annum per share, and no more, payable in equal quarterly
installments on each March 31, June 30, September 30 and December 31. Whenever
dividends are in arrears and until all accrued and unpaid dividends on shares of
Series A Preferred Stock and Series B Preferred Stock outstanding have been paid
in full and the then current dividend on each such series shall have been paid
or declared and sufficient funds set aside for payment thereof, we may not
declare or pay dividends on the common stock or any other class or series of
capital stock ranking junior to the Series A Preferred Stock and the Series B
Preferred Stock in respect of dividends or redeem, purchase or otherwise acquire
for consideration any shares of common stock or stock ranking junior to the
Series A Preferred Stock or Series B Preferred Stock.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of our company, whether voluntary or involuntary, the holders of the
Series A Preferred Stock and the Series B Preferred Stock will be entitled to
receive out of our assets available for distribution to stockholders, whether
from capital, surplus or earnings, before any distribution is made to holders of
shares of common stock or junior stock:
- in the case of the Series A Preferred Stock, an amount equal
to $16.40 per share of Series A Preferred Stock; and
- in the case of Series B Preferred Stock, an amount per share
of Series B Preferred Stock equal to $11.38 per share of Series B Preferred
Stock,
plus, in each case, dividends accumulated and unpaid to the date of final
distribution. If we consolidate or merge with or into any other corporation or
transfer of all or any part of our assets for cash, property or securities, it
will not be considered a liquidation, dissolution or winding-up of our company.
Voting Rights. Except as indicated below, as otherwise provided in our
charter or as required under the Maryland General Corporation Law, the holders
of shares of our Series A Preferred Stock and Series B Preferred Stock will not
have voting rights. If at any time all or any portion of the dividends on the
Series A Preferred Stock or Series B Preferred Stock shall be in arrears and
unpaid for any two or more dividend periods (whether or not consecutive), then
the number of directors constituting our board of directors shall be increased
by two in case of such arrearages on one of the Series A Preferred Stock or
Series B Preferred Stock and four in the case of arrearages on both. The holders
of Series A Preferred Stock and Series B Preferred Stock, voting separately as a
class, will each be entitled to elect two directors to fill such newly created
-19-
directorships. At such time as all dividends in default have been paid in full
and dividends for the current quarterly period have been paid or declared and a
sufficient sum for payment has been set aside, the term of any director then in
office solely as a result of the voting rights described in this paragraph will
terminate.
The affirmative vote of at least two-thirds of the outstanding shares
of Series A Preferred Stock and Series B Preferred Stock, in each case voting
separately as a class, will be required to:
- create or increase the number of authorized shares of any
class of our stock ranking prior to the Series A Preferred Stock or Series B
Preferred Stock as to dividends or distributions upon liquidation;
- authorize any reclassification of Series A Preferred Stock or
Series B Preferred Stock; or
- amend, alter or repeal any provisions of our charter which
would adversely affect the rights, powers or preferences of the Series A
Preferred Stock or Series B Preferred Stock.
So long as 20% or more of the aggregate number of shares of Series B
Preferred Stock issued in connection with the Tyler Cabot merger remain
outstanding, the affirmative vote of at least a majority of the outstanding
shares of such Series B Preferred Stock will be required for the sale, lease or
conveyance by us of all or substantially all of our property or business, or our
consolidation or merger with any other corporation unless the corporation
resulting from such consolidation or merger will have after such consolidation
or merger no class of shares either authorized or outstanding ranking prior to
or on a parity with the Series B Preferred Stock except the same number of
shares ranking prior to or on a parity with the Series B Preferred Stock and
having the same rights and preferences as our authorized and outstanding shares
immediately preceding such consolidation or merger, and each holder of Series B
Preferred Stock immediately preceding such consolidation or merger shall receive
the same number of shares, with the same rights and preferences, of the
resulting corporation.
Except as described herein or otherwise required by law, no consent of
the holders of Series B Preferred Stock will be required for:
- our creation of any indebtedness of any kind;
- the creation, or increase or decrease in the amount, of any
class or series of our stock ranking on a parity with, or not ranking prior to,
the Series B Preferred Stock as to dividends or as to amounts distributable upon
liquidation; or
- any increase or decrease in the amount of our authorized
common stock or any increase, decrease or change in the par value thereof.
Redemption. Neither the Series A Preferred Stock nor the Series B
Preferred Stock is subject to mandatory redemption and neither is entitled to
the benefit of a sinking fund. We may, at our option, redeem the Series A
Preferred Stock, in whole or in part, for cash in an amount per
-20-
share equal to $16.40 plus accumulated and unpaid dividends to the date of
redemption, whether or not earned or declared. In addition, we may, at our
option, redeem the Series B Preferred Stock, in whole or in part, for cash in an
amount per share equal to $12.50 plus accumulated and unpaid dividends to the
date of redemption, whether or not earned or declared.
Conversion Rights. Holders of the Series A Preferred Stock may, at
their option, convert shares of Series A Preferred Stock into shares of our
common stock at the rate of 1.4818 shares of our common stock for each share of
Series A Preferred Stock converted. Holders of Series B Preferred Stock may, at
their option, convert shares of Series B Preferred Stock into shares of the our
common stock at the rate of 0.5708 shares of our common stock for each share of
Series B Preferred Stock converted. The conversion rates of the Series A
Preferred Stock and the Series B Preferred Stock are subject to adjustment in
certain circumstances.
REDEMPTION OR REPURCHASE OF CAPITAL STOCK TO MAINTAIN OUR STATUS AS A REIT
Our charter provides that if our board of directors determines in good
faith that the direct or indirect ownership of our stock has or may become
concentrated to an extent which would cause us to fail to qualify or be
qualified as a REIT under Sections 856(a)(5) or (6) of the Code, or similar
provisions of successor statutes, we may redeem or repurchase any number of
shares of common stock and/or preferred stock sufficient to maintain or bring
such ownership into conformity with the Code and may refuse to transfer or issue
shares of common stock and/or preferred stock to any person whose acquisition
would result in our being unable to conform with the requirements of the Code.
In general, Code Sections 856(a)(5) and (6) provide that, as a REIT, we must
have at least 100 beneficial owners for 335 days of each taxable year and that
we cannot qualify as a REIT if, at any time during the last half of our taxable
year, more than 50% in value of our outstanding stock is owned, directly or
indirectly, by or for not more than five individuals. In addition, our charter
provides that we may redeem or refuse to transfer any shares of our capital
stock to the extent necessary to prevent the imposition of a penalty tax as a
result of ownership of those shares by certain disqualified organizations,
including governmental bodies and tax-exempt entities that are not subject to
tax on unrelated business taxable income. The redemption or purchase price for
those shares shall be equal to the fair market value of those shares as
reflected in the closing sales price for those shares if then listed on a
national securities exchange, or the average of the closing sales prices for
those shares if then listed on more than one national securities exchange, or if
those shares are not then listed on a national securities exchange, the latest
bid quotation for the shares if then traded over-the-counter on the last
business day for which closing prices are available immediately preceding the
day on which notices of such acquisitions are sent or, if no such closing sales
prices or quotations are available, then the net asset value of those shares as
determined by our board of directors in accordance with the provisions of
applicable law.
SPECIAL STATUTORY REQUIREMENTS FOR CERTAIN TRANSACTIONS
The following summary of certain provisions of the Maryland General
Corporations Law and of our charter and the bylaws does not purport to be
complete and is subject to and qualified
-21-
in its entirety by reference to Maryland law and to our charter and the bylaws,
copies of which are filed with the SEC.
Business Combination Statute. Under the Maryland General Corporations
Law, certain "business combinations" (including a merger, consolidation, share
exchange or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland corporation and any
person who directly or indirectly beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate or associate of the
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate of such an Interested Stockholder are prohibited for five years
after the most recent date on which the Interested Stockholder becomes an
Interested Stockholder. Thereafter, any such business combination must be
recommended by the board of directors of such corporation and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of outstanding shares of voting stock of the corporation and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the Maryland General Corporations Law) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Stockholder for its shares. These provisions of Maryland law do not
apply, however, to business combinations that are approved or exempted by the
board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder.
Control Share Acquisition Statute. The Maryland General Corporations
Law provides that "control shares" of a Maryland corporation acquired in a
"control share acquisition" have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror, and by officers of the
corporation or by directors who are employees of the corporation. "Control
shares" are voting shares of stock which, if aggregated with all other such
shares of stock previously acquired by the acquiror or in respect of which the
acquiror is able to exercise or direct the exercise of voting power except
solely by virtue of a revocable proxy, would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power: (1) one-tenth or more but less than one-third of all voting power, (2)
one-third or more but less than a majority of all voting power, or (3) a
majority or more of all voting power. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval within any level of voting power set forth above.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions. A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including an undertaking
to pay expenses), may compel the board of directors of the corporation to call a
special meeting of stockholders to be held within 50 days of demand to consider
the voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders meeting. If
voting rights are not approved at the meeting or if the acquiring person does
not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares
-22-
(except those for which voting rights have previously been approved) for fair
value determined, without regard to the absence of voting rights for the control
shares, as of the date of the last control share acquisition by the acquiror or
of any meeting of stockholders at which the voting rights of such shares are
considered and not approved.
If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The fair
value of the shares as determined for purposes of such appraisal rights may not
be less than the highest price per share paid by the acquiror in the control
share acquisition. The control share acquisition statute does not apply (a) to
shares acquired in a merger, consolidation or share exchange if the corporation
is a party to the transaction, (b) to acquisitions approved or exempted by the
charter or bylaws of the corporation and adopted at any time before the
acquisition of shares, or (c) to the acquisition of shares within one-tenth or
more but less than one-fifth of all voting power of outstanding shares of stock
of the corporation before June 1, 2000.
Possible Anti-takeover Effect of Certain Provisions of Maryland Law and
of our Charter and Bylaws. The business combination provisions, if the
applicable provision in our bylaws is rescinded, the control share acquisition
provisions of the Maryland General Corporations Law, and the provisions of our
charter on ownership and transfer of stock could delay, defer or prevent a
change in control or other transaction that might involve a premium price for
holders of our common stock or otherwise be in their best interest.
PLAN OF DISTRIBUTION
We may sell common stock and Series B Preferred Stock through
arrangements with broker dealers, directly to one or more purchasers, or through
agents such as Brinson Patrick.
In connection with the sale of the common stock and the Series B
Preferred Stock on our behalf under the Brinson Patrick sales agreement, Brinson
Patrick will be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), and the compensation
payable to Brinson Patrick under the Brinson Patrick sales agreement will be
deemed to be an underwriting commission or discount. We have separately agreed
to provide indemnification and contribution to Brinson Patrick against certain
civil liabilities, including liabilities under the Securities Act. Brinson
Patrick may engage in transactions with, or perform services for, us in the
ordinary course of business.
We will open and maintain a trading account at the clearing agent
designated by Brinson Patrick to facilitate the transactions contemplated by the
Brinson Patrick sales agreement. The net proceeds from the sale of the common
stock and Series B Preferred Stock under the Brinson Patrick sales agreement
shall be available in the trading account on the third business day (or such
other day as is industry practice for regular-way trading) following each sale
of the common stock and Series B Preferred Stock (each, a "Settlement Date"). We
will effect the delivery of the applicable number of shares of common stock
and/or Series B Preferred Stock (as the case may be) to an account designated by
Brinson Patrick at The Depository Trust Company on or
-23-
before the settlement date of each sale hereunder. Brinson Patrick's
compensation shall be withheld from the sales proceeds on each settlement date
and shall be paid to Brinson Patrick.
The offering of common stock and Series B Preferred Stock pursuant to
the Brinson Patrick sales agreement will terminate upon the earlier of (i) the
sale of all shares of common stock and Series B Preferred Stock subject thereto
or (ii) termination of the Brinson Patrick sales agreement. The Brinson Patrick
sales agreement may be terminated by us or by Brinson Patrick upon written
notice and in certain other circumstances specified therein.
COMMISSIONS
The following table shows the public offering price, underwriting
commissions and proceeds, before expenses, to us, assuming all 875,000 shares of
common stock are sold at $16.26 per share, the last reported sales price of our
common stock on the New York Stock Exchange on December 16, 2003.
Per Share* Total*
--------- -----
Public offering price $ 16.26 $ 14,227,500.00
Underwriting commissions (3.0%) $ 0.49 $ 428,750.00
Proceeds, before expenses, to us $ 15.77 $ 13,798,750.00
The following table shows the public offering price, underwriting
commissions and proceeds, before expenses, to us, assuming all 1,000,000 shares
of preferred stock, Series B, are sold at $12.77 per share, the last reported
sales price of our preferred stock, Series B, on the New York Stock Exchange on
December 16, 2003.
Per Share* Total*
---------- ------
Public offering price $ 12.77 $12,770,000.00
Underwriting commissions (3.0%) $ 0.38 $ 380,000.00
Proceeds, before expenses, to us $ 12.39 $12,390,000.00
*This is an offering that will be made, if at all, from time to time at
the then-prevailing market prices. Therefore, there can be no assurances that
the public offering price, underwriting commissions, and proceeds, before
expenses, will be as set forth above. The commissions are computed based upon
the highest applicable rate under the sales agreement.
The expenses of the offering, not including underwriting commissions,
are estimated at $83,598 and are payable by us.
-24-
TAXATION
The applicable provisions of the Code are highly technical and complex.
This summary is not intended as a detailed discussion of all applicable
provisions of the Code, the rules and regulations promulgated thereunder, or the
administrative and judicial interpretations thereof. For the particular
provisions that govern the federal income tax treatment of the company and its
stockholders, reference is made generally to Sections 856 and 860 of the Code
and the Treasury Regulations promulgated thereunder. We have not obtained
rulings from the Internal Revenue Service with respect to any tax considerations
relevant to our organization or operations or to an investment in our common
stock or Series B Preferred Stock. This summary is not intended to substitute
for prudent tax planning and stockholders are urged to consult their own tax
advisors with respect to these and other federal, state and local tax
consequences of the ownership and disposition of any of our common stock or
Series B Preferred Stock and any potential changes in applicable law.
Nonresident aliens, non-U.S. persons and entities, tax-exempt organizations,
life insurance companies, cooperatives and certain other categories of investors
may be subject to special tax rules that are not discussed below and that could
affect an investment in our common stock or Series B Preferred Stock.
FEDERAL INCOME TAXATION OF CAPSTEAD MORTGAGE CORPORATION
As used herein, "Capstead REIT" refers to Capstead Mortgage Corporation
and its "qualified REIT subsidiaries" which are entities that are effectively
consolidated with Capstead Mortgage Corporation for federal income tax purposes.
Certain of our subsidiaries that are consolidated with Capstead Mortgage
Corporation for financial reporting purposes may elect taxable REIT subsidiary
tax status for federal income tax purposes. All taxable income of taxable REIT
subsidiaries is subject to federal and state income taxes. We may form
additional taxable REIT subsidiaries.
So long as Capstead REIT qualifies as a REIT, and distributes to
stockholders the sum of at least 90% of its REIT taxable income (excluding net
capital gain) plus at least 90% of its net after tax income, if any, from
foreclosure property, minus the excess of the sum of specified items of non-cash
income, if any, over 5% of REIT taxable income, then such income distributed to
stockholders will not be subject to federal corporate income taxes, with limited
exceptions discussed below. Under certain circumstances, a REIT may be subject
to the corporate minimum tax or certain other special taxes. However, Capstead
REIT does not anticipate generating material items of income or deductions that
would cause it to be subject to the minimum tax or any such special tax.
QUALIFICATION AND TAXATION OF CAPSTEAD REIT AS A REIT
Capstead REIT has made an election to be taxed as a REIT under Sections
856 through 860 of the Code effective for its taxable years ending on and after
December 31, 1985. Capstead REIT's qualification and taxation as a REIT depends
upon Capstead REIT's ability to meet on a continuing basis, through actual
annual operating results, distribution levels and diversity of
-25-
stock ownership, the various qualification tests and organizational requirements
imposed under the Code, as discussed below. Capstead REIT believes that it is
organized and has operated in such a manner as to qualify under the Code for
taxation as a REIT commencing with its 1985 taxable year, and Capstead REIT
intends to continue to operate in such a manner. No assurance, however, can be
given that Capstead REIT will operate in a manner so as to qualify or remain
qualified as a REIT. See "Failure to Qualify" below.
In the opinion of Andrews Kurth LLP, tax counsel to Capstead REIT, for
all of its taxable years beginning September 5, 1985 and ending December 31,
2002, Capstead REIT has met the requirements for qualification as a REIT under
the Code and will be able to qualify as a REIT for taxable years beginning on
and after January 1, 2003, provided that Capstead REIT continues to be organized
and operated after the date of this prospectus so as to satisfy the applicable
REIT requirements under the Code. This opinion is based on various assumptions
relating to the organization and operation of Capstead REIT, and is conditioned
upon the accuracy of certain representations made by Capstead REIT as to certain
relevant factual matters relating to the organization and expected manner of
operation of Capstead REIT and its subsidiaries. Andrews Kurth LLP is not aware
of any facts or circumstances that are inconsistent with these assumptions and
representations. Moreover, such qualification and taxation as a REIT will depend
upon Capstead REIT's ability to meet on a continuing basis, through actual
annual operating results, distribution levels and diversity of stock ownership,
the various qualification tests imposed under the Code discussed below. Andrews
Kurth LLP will not review compliance with these tests on a continuing basis. No
assurance can be given that Capstead REIT will satisfy such tests on a
continuing basis. See "Failure to Qualify" below.
The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth
certain material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder and administrative and judicial interpretations thereof, all of which
are subject to change prospectively or retroactively.
So long as Capstead REIT continues to qualify for taxation as a REIT,
it generally will not be subject to federal corporate income tax on its net
income that is distributed currently to its stockholders. That treatment
substantially eliminates the "double taxation" (i.e., taxation at both the
corporate and stockholder levels) that generally results from investment in a
corporation. However, Capstead REIT will be subject to federal income tax in the
following circumstances:
(1) Capstead REIT will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains;
(2) Under certain circumstances, Capstead REIT may be subject to the
"alternative minimum tax" on items of tax preference, if any;
(3) If Capstead REIT has (1) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property
acquired by foreclosure or
-26-
otherwise on default of a loan or lease secured by the property) that
is held primarily for sale to customers in the ordinary course of
business or (2) other nonqualifying income from foreclosure property,
it will be subject to tax at the highest corporate rate on such income;
(4) If Capstead REIT has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property, other
than foreclosure property, held primarily for sale to customers in the
ordinary course of business), such income will be subject to a 100%
tax;
(5) If Capstead REIT should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), and nonetheless has
maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net
income attributable to the greater of the amounts by which it fails the
75% or 95% gross income test;
(6) If Capstead REIT should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year and
(iii) any undistributed taxable income from prior periods, it would be
subject to a 4% excise tax on the excess of such required distribution
over the sum of the amounts actually distributed and amounts retained
for which federal income tax was paid;
(7) Capstead REIT may be subject to a 100% excise tax with respect to
certain "redetermined rents," "redetermined deductions," and "excess
interest" to ensure arm's length (i) pricing for certain services
provided by taxable REIT subsidiaries of Capstead REIT to Capstead
REIT's tenants, if any, and (ii) allocation of shared expenses between
Capstead REIT and its taxable REIT subsidiaries; and
(8) If Capstead REIT acquires any asset from a C corporation (i.e., a
corporation generally subject to full corporate-level tax) in a
transaction in which the basis of the asset in Capstead REIT's hands is
determined by reference to the basis of the asset or any other property
in the hands of the corporation, and Capstead REIT recognizes gain on
the disposition of such asset during the ten-year period beginning on
the date on which such asset was acquired by Capstead REIT, then, to
the extent of such property's "built-in" gain (the excess of the fair
market value of such property at the time of acquisition by Capstead
REIT over the adjusted basis of such property at such time), that gain
will be subject to the highest corporate rate applicable.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
-27-
(2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation, but for the REIT
provisions of the Code;
(4) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) not more than 50% in value of the outstanding shares of which is
owned, directly or indirectly, by five or fewer individuals, as defined
in the Code to include certain entities (the "5/50 Rule");
(7) that makes an election to be a REIT, or has made such election for
a previous taxable year which has not been revoked or terminated, and
satisfies all relevant filing and other administrative requirements
established by the IRS that must be met in order to elect and maintain
REIT status;
(8) that uses a calendar year for federal income tax purposes; and
(9) that meets certain other tests, described below, regarding the
nature of its income and assets.
The Code provides that conditions (1) to (4), inclusive, must be met
during the entire taxable year, that condition (5) must be met during at least
335 days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months, and that condition (6) must be met during
the last half of the taxable year. For purposes of determining stock ownership
under the 5/50 Rule, a supplemental unemployment compensation benefits plan, a
private foundation or a portion of a trust permanently set aside or used
exclusively for charitable purposes generally is considered an individual. A
qualified employee benefit trust, however, generally is not considered an
individual, and beneficiaries of such trust are treated as holding shares of a
REIT in proportion to their actuarial interests in such trust. Finally, Capstead
REIT will be treated as having met condition (6) above if it has complied with
certain Treasury Regulations for ascertaining the ownership of its stock for
such year and if it did not know, or after the exercise of reasonable diligence
would not have known, that its stock was sufficiently closely held during such
year to cause it to fail condition (6).
A corporation that is a qualified REIT subsidiary is not treated as a
separate corporation for federal income tax purposes, and all assets,
liabilities and items of income, deduction and credit of a qualified REIT
subsidiary are treated as assets, liabilities and items of income, deduction and
credit of the REIT. A qualified REIT subsidiary is a corporation, all of the
capital stock of which is owned directly by the REIT. Certain subsidiaries of
Capstead REIT constitute qualified REIT subsidiaries. Accordingly, in applying
the income and asset tests described below,
-28-
those subsidiaries will be ignored for federal income tax purposes, and all
assets, liabilities and items of income, deduction and credit of those
subsidiaries will be treated as assets, liabilities and items of income,
deduction, and credit of Capstead REIT. Those subsidiaries therefore will not be
subject to federal corporate income taxation, although they may be subject to
state and local taxation.
In the case of a REIT that is a partner in an entity that is classified
for federal income tax purposes as a partnership, Treasury Regulations provide
that the REIT will be deemed to own its proportionate share of the assets of the
partnership, based on the REIT's capital interest in the partnership, and will
be deemed to be entitled to the gross income of the partnership attributable to
such share. In addition, the assets and gross income of the partnership will
retain the same character in the hands of the REIT for purposes of the REIT
provisions of the Code, including satisfying the gross income and asset tests
described below.
INCOME TESTS. In order for Capstead REIT to maintain its qualification
as a REIT, two requirements relating to gross income must be satisfied annually.
First, at least 75% of its gross income, excluding gross income from prohibited
transactions, for each taxable year must consist of defined types of income
derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property" and, in certain
circumstances, interest) or temporary investment income. Second, at least 95% of
its gross income, excluding gross income from prohibited transactions, for each
taxable year must be derived from real property or temporary investments, and
from dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing.
Capstead REIT presently earns limited amounts of rental income. The
rent received by Capstead REIT from its tenants will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if the following conditions are met:
(1) The amount of rent must not be based, in whole or in part, on the
income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term rents from real property
solely by reason of being based on a fixed percentage or percentages of
receipts or sales;
(2) Rents received from a tenant of Capstead REIT will not qualify as
rents from real property in satisfying the gross income tests if
Capstead REIT, or a direct or indirect owner of 10% or more of Capstead
REIT, directly or constructively owns 10% or more of such tenant (a
"Related Party Tenant") unless such tenant is a taxable REIT subsidiary
of the REIT and certain other conditions are satisfied;
(3) If rent attributable to personal property that is leased in
connection with a lease of real property is greater than 15% of the
total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as rents from
real property; and
-29-
(4) For the rent to qualify as rents from real property, Capstead REIT
generally must not operate or manage its properties or furnish or
render services to the tenants of such properties, other than through
an independent contractor who is adequately compensated and from whom
Capstead REIT derives or receives no income. The "independent
contractor" requirement, however, does not apply to the extent the
services provided by Capstead REIT are usually or customarily rendered
in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant." In addition, the
"independent contractor" requirement will not apply to noncustomary
services provided by Capstead REIT, the annual value of which does not
exceed 1% of the gross income derived from the property with respect to
which the services are provided (the "1% de minimis exception"). For
this purpose, such services may not be valued at less than 150% of
Capstead REIT's direct cost of providing the services, and any gross
income deemed to have been derived by Capstead REIT from the
performance of noncustomary services pursuant to the 1% de minimis
exception will constitute nonqualifying gross income under the 75% and
95% gross income tests. In addition, a taxable REIT subsidiary of a
REIT may provide noncustomary services to the tenants of the REIT
without causing the rents paid by such tenants to be disqualified as
"rents from real property."
If Capstead REIT fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it nevertheless may qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
Those relief provisions generally will be available if the failure to meet such
tests is due to reasonable cause and not due to willful neglect, Capstead REIT
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances Capstead
REIT would be entitled to the benefit of those relief provisions. As discussed
above in "Qualification and Taxation of Capstead REIT as a REIT," even if those
relief provisions apply, a 100% tax would be imposed on the net income
attributable to the greater of the amount by which Capstead REIT fails the 75%
and 95% gross income tests.
ASSET TESTS. At the close of each quarter of its taxable year, Capstead
REIT also must satisfy several tests relating to the nature of its assets.
First, at least 75% of the value of Capstead REIT's total assets must be
represented by real estate assets, cash, cash items and government securities.
Second, of the investments not included in the 75% asset class, the value of any
one issuer's debt and equity securities owned by Capstead REIT may not exceed 5%
of the value of Capstead REIT's total assets. Third, Capstead REIT may not own
more than 10% of any one issuer's outstanding voting securities, nor, more than
10% of the total value of any one issuer's outstanding debt and equity
securities.
The 5% and 10% asset tests described above do not apply to the
securities of a taxable REIT subsidiary of Capstead REIT, although the value of
the debt and equity securities of all taxable REIT subsidiaries owned by
Capstead REIT cannot represent more than 20% of the value of the REIT's total
assets. Any corporation in which a REIT directly or indirectly owns stock (other
than another REIT, a corporation which directly or indirectly operates or
manages a
-30-
lodging facility or a health care facility, and, with certain exceptions, a
corporation which directly or indirectly provides to any other person (under a
franchise, license, or otherwise) rights to any brand name under which any
lodging facility or health care facility is operated) may be treated as a
taxable REIT subsidiary if the REIT and the corporation file a joint election
with the Internal Revenue Service for the corporation to be treated as a taxable
REIT subsidiary of the REIT.
A number of constraints are imposed on REITs and their taxable REIT
subsidiaries to ensure that REITs cannot, through taxable REIT subsidiaries,
engage in substantial non-real estate activities and also to ensure that taxable
REIT subsidiaries pay an appropriate corporate-level tax on their income. For
example, a taxable REIT subsidiary will be subject to the "earnings stripping"
rules of the Code with respect to interest paid to the REIT, which could
disallow a portion of the taxable REIT subsidiary's interest deductions under
certain circumstances. In addition, a 100% excise tax may be imposed on the REIT
with respect to certain "redetermined rents", "redetermined deductions", and
"excess interest" to ensure arm's length (1) pricing for services provided by
the taxable REIT subsidiary to REIT tenants and (2) allocation of shared
expenses between the REIT and the taxable REIT subsidiary.
DISTRIBUTION REQUIREMENTS. In order to qualify as a REIT, Capstead REIT
is required to distribute each year, dividends other than net capital gain
dividends, to its stockholders in an aggregate amount at least equal to the sum
of 90% of its REIT taxable income, computed without regard to the dividends paid
deduction and any net capital gain, and 90% of the net after tax income, if any,
from foreclosure property, minus the excess of the sum of specified items of
non-cash income, if any, over 5% of REIT taxable income. The specified items of
non-cash income include income attributable to certain accrued rents, certain
original issue discount income, income from like kind exchanges that are later
determined to be taxable, and income from cancellation of indebtedness. Such
distributions to stockholders must be paid in the taxable year to which they
relate, or in the following year if declared before Capstead REIT timely files
its federal income tax return for such year and if paid on or before the first
regular dividend payment date after such declaration. To the extent that
Capstead REIT does not distribute all of its net capital gain or distributes at
least 90%, but less than 100%, of its REIT taxable income and its net after tax
income from foreclosure property, as adjusted, it will be subject to tax thereon
at corporate ordinary tax rates or corporate capital gains tax rates, as
appropriate.
Capstead REIT has made and intends to continue to make timely
distributions sufficient to satisfy the minimum annual distribution
requirements. It is possible, however, that Capstead REIT, from time to time,
may not have sufficient cash or other liquid assets to meet the distribution
requirements due to timing differences between the actual receipt of income and
actual payment of deductible expenses and the inclusion of such income and
deduction of such expenses in arriving at Capstead REIT's taxable income, or if
the amount of nondeductible expenses (such as principal amortization or capital
expenses) exceeds the amount of noncash deductions. In the event that such
timing differences occur, in order to meet the distribution requirements,
Capstead REIT may arrange for borrowings to permit the payment of required
dividends.
-31-
If Capstead REIT should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain income for such year and (iii) any undistributed taxable
income from prior periods, it would be subject to a 4% nondeductible excise tax
on the excess of such required distribution over the sum of the amounts actually
distributed and amounts retained for which federal income tax was paid.
Under certain circumstances, Capstead REIT may be able to rectify a
failure to meet the distribution requirements for a year by paying deficiency
dividends to its stockholders in a later year, which may be included in its
deduction for dividends paid for the earlier year. Although Capstead REIT may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the IRS interest based upon the amount of any
deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS. Pursuant to applicable Treasury
Regulations, Capstead REIT must maintain certain records and request on an
annual basis certain information from its stockholders designed to disclose the
actual ownership of its outstanding shares. Capstead REIT intends to comply with
these requirements.
FAILURE TO QUALIFY
If Capstead REIT fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, it will be subject to tax,
including any applicable alternative minimum tax on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which
Capstead REIT fails to qualify will not be deductible nor will they be required
to be made. In such event, to the extent of current and accumulated earnings and
profits, all distributions to stockholders will be taxable as ordinary income
and, subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, Capstead REIT also will be disqualified from
taxation as a REIT for the four taxable years following the year during which it
ceased to qualify as a REIT. It is not possible to predict whether in all
circumstances Capstead REIT would be entitled to such statutory relief.
TAXATION OF STOCKHOLDERS
As long as Capstead REIT qualifies as a REIT, distributions made to
taxable U.S. Stockholders out of current or accumulated earnings and profits,
and not designated as capital gain dividends will be taken into account by such
U.S. Stockholders as ordinary income and will not be eligible for the dividends
received deduction generally available to corporations. Generally, ordinary
income dividends from Capstead REIT will not qualify for the dividend tax
reduction to 15% enacted as part of the Jobs and Growth Tax Relief Act of 2003.
The term "U.S. Stockholder" means a holder of Capstead REIT's shares that for
United States federal income tax purposes is:
(1) a citizen or resident of the United States,
-32-
(2) a corporation, partnership or other entity created or organized in
or under the laws of the United States, any State or the District of
Columbia,
(3) an estate the income of which is subject to United States federal
income taxation regardless of its source, or
(4) a trust if (A) a court within the United States is able to exercise
primary supervision over the administration of the trust, and one or
more United States persons have the authority to control all
substantial decisions of the trust, or (B) it has a valid election in
effect to be treated as a U.S. Stockholder.
If a partnership is a beneficial owner of Capstead REIT shares, the
treatment of a partner in the partnership will generally depend upon the status
of the partner and the activities of the partnership. A beneficial owner that is
a partnership and partners in such partnership should consult their tax advisors
about the U.S. federal income tax consequences of the acquisition, ownership and
disposition of Capstead REIT shares.
Distributions that are designated as capital gain dividends will be
taxed as gain from the sale or exchange of a capital asset held for more than
one year (to the extent they do not exceed Capstead REIT's actual net capital
gain for the taxable year) without regard to the period for which the U.S.
Stockholder has held his or her shares. We will generally designate our capital
gain dividends as either 15% or 25% rate distributions. However, corporate U.S.
Stockholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Distributions in excess of current and accumulated
earnings and profits will not be taxable to a U.S. Stockholder to the extent
that they do not exceed the adjusted basis of the U.S. Stockholder's shares, but
will reduce the adjusted basis of such shares. To the extent that such
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a U.S. Stockholder's shares, such distributions will be
included in income as capital gain, if such shares are capital assets in the
hands of the U.S. Stockholder. In addition, any distribution declared by
Capstead REIT in October, November or December of any year and payable to a U.S.
Stockholder of record on a specified date in any such month will be treated as
both paid by Capstead REIT and received by the U.S. Stockholder on December 31
of such year, provided that the distribution is actually paid by Capstead REIT
during January of the following calendar year.
Capstead REIT may make an election to treat all or part of its
undistributed net capital gain as if it had been distributed to its
stockholders. As described above, these undistributed amounts would be subject
to corporate level tax payable by Capstead REIT. If Capstead REIT should make
such an election, its stockholders would be required to include in their income
as long-term capital gain their proportionate share of Capstead REIT's
undistributed net capital gain as designated by Capstead REIT. Each such
stockholder would be deemed to have paid his proportionate share of the income
tax imposed on Capstead REIT with respect to such undistributed net capital
gain, and this amount would be credited or refunded to the stockholder. In
addition, the tax basis of the stockholder's stock would be increased by his
proportionate share of undistributed net capital gains included in his income
less his proportionate share of the income tax imposed on Capstead REIT with
respect to such gains.
-33-
U.S. Stockholders may not include in their individual income tax
returns any net operating losses or capital losses of Capstead REIT. Instead,
such losses would be carried over by Capstead REIT for potential offset against
its future income (subject to certain limitations). Taxable distributions from
Capstead REIT and gain from the disposition of its shares will not be treated as
passive activity income and, therefore, U.S. Stockholders generally will not be
able to apply any "passive activity losses" (such as losses from certain types
of limited partnerships in which a stockholder is a limited partner) against
such income. In addition, taxable distributions from Capstead REIT generally
will be treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Capstead REIT's shares (or
distributions treated as such), however, will be treated as investment income
only if the U.S. Stockholder so elects, in which case such capital gains will be
taxed at ordinary income rates. Capstead REIT will notify stockholders after the
close of Capstead REIT's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return of capital and
capital gain.
In general, any gain or loss realized upon a taxable disposition of
Capstead REIT's shares by a U.S. Stockholder who is not a dealer in securities
will be treated as a capital gain or loss. However, any loss upon a sale or
exchange by a U.S. Stockholder who has held such shares for six months or less,
after applying certain holding period rules, will be treated as a long-term
capital loss to the extent of distributions from Capstead REIT required to be
treated by such U.S. Stockholder as long- term capital gain. All or a portion of
any loss realized upon a taxable disposition of Capstead REIT's shares may be
disallowed if other Capstead REIT shares are purchased within 30 days before or
after the disposition.
Under the Code and related regulations, a change in the conversion
ratio for convertible preferred stock may be treated as a taxable distribution
of stock with respect to any shareholder whose proportionate interest in the
earnings and profits or assets of the corporation is increased by such change. A
change in a conversion ratio or conversion price of convertible preferred stock
pursuant to a bonafide, reasonable adjustment formula which has the effect of
preventing dilution of the interest of the holders of such stock will not be
considered to result in a deemed distribution of stock. However, generally an
adjustment in the conversion ratio to compensate for a taxable cash distribution
to other shareholders will not be considered as made pursuant to a bonafide
adjustment formula. For example, in the case of the Series B Preferred Stock,
the conversion rate may be adjusted if we distribute to holders of our common
stock cash or other assets (other than regular quarterly cash dividends payable
out of consolidated earnings or earned surplus or dividends payable in shares of
common stock). Under the above described federal income tax provisions, such an
adjustment may result in a taxable distribution to the Series B Preferred
Stockholders.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Capstead REIT will report to its U.S. Stockholders and to the IRS the
amount of distributions paid during each calendar year and the amount of tax
withheld, if any. Under the backup withholding rules, a U.S. Stockholder may be
subject to backup withholding at the rate of
-34-
28% with respect to distributions paid unless such holder (1) is a corporation
or comes within certain other exempt categories and, when required, demonstrates
this fact or (2) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding and otherwise complies with the
applicable requirements of the backup withholding rules. A U.S. Stockholder who
does not provide Capstead REIT with his correct taxpayer identification number
also may be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the U.S. Stockholder's income tax
liability. In addition, Capstead REIT may be required to withhold a portion of
capital gain distributions to any U.S. Stockholders who fail to certify their
non-U.S. Stockholder status to Capstead REIT.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). The IRS has ruled
that dividend distributions from a REIT to an exempt employee pension trust do
not constitute UBTI, provided that the shares of the REIT are not otherwise used
in an unrelated trade or business of the exempt employee pension trust. Social
clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts and qualified group legal service plans that are exempt from
taxation under paragraphs (7), (9), (17) and (20), respectively, of Code section
501(c) are subject to different UBTI rules, which generally will require them to
characterize distributions from Capstead REIT as UBTI. In addition, in certain
circumstances, a pension trust that owns more than 10% (by value) of the shares
of a REIT would be required to treat a percentage of the dividends on its shares
as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income, less
related direct expenses, derived by Capstead REIT from an unrelated trade or
business (determined as if Capstead REIT were a pension trust) divided by the
gross income, less related direct expenses, of Capstead REIT for the year in
which the dividends are paid. The UBTI rule applies to a pension trust holding
more than 10% of the common stock only if (1) the UBTI Percentage is at least
5%, (2) Capstead REIT qualifies as a REIT by reason of the modification of the
5/50 Rule that allows the beneficiaries of the pension trust to be treated as
holding shares of Capstead REIT, in proportion to their actuarial interests in
the pension trust and (3) either (A) one pension trust owns more than 25% of the
value of such shares or (B) a group of pension trusts individually holding more
than 10% of the value of shares collectively owns more than 50% of the value of
the shares.
NON-U.S. STOCKHOLDERS
Specific tax rules of a complex nature not summarized herein apply to
non-U.S. investors in REITs. Accordingly, non-U.S. Stockholders should consult
their own tax advisers concerning the federal income and withholding tax
consequences and the state, local and foreign tax consequences of an investment
in Capstead REIT.
-35-
STATE AND LOCAL TAXES
State or local income tax treatment of Capstead REIT or holders of any
of its securities may differ from the federal income tax treatment described
above. As a result, prospective stockholders should consult their own tax
advisers for an explanation of how state and local tax laws may affect their
investment in Capstead REIT.
LEGAL MATTERS
Certain legal matters with respect to the securities offered hereby
will be passed on for the company by Andrews Kurth LLP, Dallas, Texas, and for
the underwriters or agents by counsel to be identified in the related prospectus
supplement. Andrews Kurth LLP will rely as to all matters of Maryland law on
Hogan & Hartson L.L.P., Baltimore, Maryland.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2002, as set forth in their report, which is incorporated by
reference in this prospectus and elsewhere in the registration statement. Our
financial statements are incorporated by reference in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.
-36-
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee.............................................. $ 8,598
Legal Fees and Expenses........................................... 60,000
Accounting Fees and Expenses...................................... 7,500
Printing Expenses................................................. 5,000
Miscellaneous..................................................... 2,500
--------
Total.................................................. $ 83,598
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's charter provides for indemnification of directors to
the full extent permitted by Maryland law, indemnification of officers who are
also directors to the extent the Registrant shall indemnify its directors and
indemnification of officers who are not directors to such further extent as
shall be authorized by the Board of Directors and be consistent with law.
Section 2-418 of the Maryland General Corporation Law generally permits
a Maryland corporation to indemnify any director made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administration, or investigative, by reason of service in his capacity as a
director, unless it is established that (i) the act or omission of the director
was material to the matter giving rise to the proceeding and (a) was committed
in bad faith or (b) was the result of active and deliberate dishonesty; or, (ii)
the director actually received an improper personal benefit in money, property,
or services or, (iii) in the case of any criminal proceeding, the director had
reasonable cause to believe that the act or omission was unlawful.
Indemnification may be against judgments, penalties, fines, settlements, and
reasonable expenses actually incurred by the director in connection with the
proceeding. If the proceeding was one by or in the right of the corporation,
indemnification may not be made in respect of any proceeding in which the
director shall have been adjudged to be liable to the corporation. In addition,
a director may not be indemnified in respect of any proceeding charging improper
personal benefit to the director, whether or not involving action in the
director's official capacity, in which the director was adjudged to be liable on
the basis that personal benefit was improperly received. The termination of any
proceeding by conviction, or a plea of nolo contendere or its equivalent, or an
entry of an order of probation prior to judgment, creates a rebuttable
presumption that the director did not meet the requisite standard of conduct.
Section 2-418 also provides that a court of appropriate jurisdiction
may, upon application of a director and such notice as the court shall require,
order indemnification if it determines that a director is entitled to
reimbursement because the director has been successful on the merits or
otherwise, in any such proceeding, in which case the director shall be entitled
to recover the expenses of securing such reimbursement, or if the court
determines that the director is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances, whether or not the
director has met the applicable standards of conduct or has been adjudged liable
in the proceeding charging improper personal benefit to the director.
Indemnification with respect to any proceeding by or in the right of the
corporation or in which liability shall have been adjudged on the basis that
personal benefit was improperly received shall be limited to expenses. The
indemnification and advancement of expenses provided or authorized by Section
2-418 may not be deemed exclusive of any other rights, by indemnification or
otherwise, to which a director may be entitled under the charter, the bylaws, a
resolution of stockholders or directors, an agreement or otherwise,
II-1
both as to action in an official capacity and as to action in another capacity
while holding such office. A corporation may indemnify and advance expenses to
an officer, employee, or agent in the corporation to the same extent that it may
indemnify directors under Section 2-418 and, in addition, may indemnify and
advance expenses to an officer, employee, or agent who is not a director to such
further extent, consistent with law, as may be provided by its charter, bylaws,
general or specific action of its board of directors or contract. Section 2-418
also provides that a corporation may purchase and maintain insurance against
liabilities for which indemnification is not expressly provided by the statute.
Capstead Mortgage Corporation provides insurance from commercial
carriers against certain liabilities incurred by its directors and officers.
ITEM 16. EXHIBITS
1.1 --Form of Brinson Patrick Sales Agreement**
1.2 --Form of First Amendment to Brinson Patrick Sales
Agreement***
3.1 --Charter, including Articles of Incorporation,
Articles Supplementary for each outstanding Series of
Preferred Stock and all other amendments to such
Articles of Incorporation*
3.2 --Amended and Restated Bylaws*
4.1 --Specimen of Common Stock Certificate*
4.2 --Specimen of $1.26 Cumulative Convertible Preferred
Stock, Series B**
5.1 --Opinion of Andrews & Kurth L.L.P., as to the
legality of the Securities being offered**
5.2 --Opinion of Hogan & Hartson L.L.P., as to the
legality of the Securities being offered**
8.1 --Opinion of Andrews Kurth LLP, as to certain tax
matters***
23.1 --Consent of Ernst & Young LLP.***
23.2 --Consent of Andrews & Kurth L.L.P. (included in its
opinion filed as Exhibit 5.1 hereto)
23.3 --Consent of Hogan & Hartson L.L.P. (included in its
opinion filed as Exhibit 5.2 hereto)
23.4 --Consent of Andrews Kurth LLP (included in its
opinion filed as Exhibit 8.1 hereto)
24.1 --Power of Attorney**
------------------------
*Previously filed with the Commission on June 19, 2001 as an Exhibit to the
Registrant's Registration Statement on Form S-3 (No. 333-63358).
** Previously filed with the Commission on August 27, 2001 as an Exhibit to the
Registrant's Registration Statement on Form S-3 (No. 333-68424).
*** Filed herewith.
The Company will file as an Exhibit to a Current Report on Form 8-K any related
forms utilized in the future and not previously so filed by means of an
amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section
l0(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the change in volume and price
represent no more than a 20% change in the maximum aggregate
II-2
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) to include any material information with
respect to the plan of distribution not previously disclosed
in the Registration. Statement or any material change to such
information in the Registration Statement;
provided, however, that the undertakings set forth in paragraphs (a)( I )(i) and
(a)( I )(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to Section 13 or Section 15(d) of the 1934 Act
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability
under the 1933 Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit of proceeding) is asserted
against the Registrant by such director, officer or controlling person in
connection with the securities being registered hereby, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as a part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(l) or (4), or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment No. 1 to Registration
Statement No. 68424 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on the 17th day of
December, 2003.
CAPSTEAD MORTGAGE CORPORATION
By: /s/ Phillip A. Reinsch
----------------------------------
Phillip A. Reinsch
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to Registration Statement No. 68424 has been signed by
the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- -----
/s/ Andrew F. Jacobs Chief Executive Officer, President
---------------------- and Director (Principal Executive December 17, 2003
Andrew F. Jacobs Officer)
/s/ Phillip A. Reinsch
---------------------- Senior Vice President and December 17, 2003
Phillip A. Reinsch Chief Financial Officer (Principal
Financial and Accounting Officer)
*
---------------------- Chairman and Director December 17, 2003
Paul M. Low
*
---------------------- Director December 17, 2003
Michael G. O'Neil
----------------------
Howard Rubin Director December 17, 2003
*
---------------------- Director December 17, 2003
Mark S. Whiting
*By: /s/ Andrew F. Jacobs
----------------------------------
Andrew F. Jacobs
Attorney-in-Fact
II-4