SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: FEBRUARY 6, 2003
----------------
(Date of Earliest Event Reported)
CAPSTEAD MORTGAGE CORPORATION
-------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 1-8896 75-2027937
(State of Incorporation) (Commission File No.) I.R.S. Employer
Identification No.)
8401 NORTH CENTRAL EXPRESSWAY
SUITE 800
DALLAS, TEXAS 75225
----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (214) 874-2323
--------------
ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
CAPSTEAD MORTGAGE CORPORATION ANNOUNCES FOURTH QUARTER RESULTS,
SETS RECORD DATE FOR ANNUAL MEETING AND ESTABLISHES
ACCELERATED COMMON DIVIDEND SCHEDULE FOR 2003
DALLAS -- February 6, 2003 -- Capstead Mortgage Corporation (NYSE: CMO)
today reported net income of $20,411,000, or $1.03 per diluted common share for
the quarter ended December 31, 2002, compared to $28,782,000, or $1.45 per
diluted common share for the same quarter in 2001. Operating income, calculated
after excluding depreciation on real estate, gain on asset sales and the
dilutive effects of the Series B preferred shares, was $0.95 per common share
for the fourth quarter of 2002, compared to $1.19 and $1.43 per common share for
the third and second quarters of 2002, respectively.
The Company reported net income of $96,123,000, or $4.85 per diluted
common share, for the year ended December 31, 2002 compared to $106,276,000, or
$5.68 per diluted common share reported in 2001.
Commenting on the Company's operations and financial position, Wesley
R. Edens, Chairman of the Board and Chief Executive Officer, said, "Results for
2002, particularly early in the year, were excellent thanks largely to lower
borrowing costs with lower prevailing short-term interest rates. However, with
the steady decline in size of Capstead's portfolio of adjustable-rate mortgage
("ARM") Fannie Mae, Freddie Mac and Ginnie Mae securities as a result of
mortgage prepayments, along with a lack of suitable investment opportunities,
the Company's capital increasingly has not been optimally utilized. The decision
in December 2002 to return to our common stockholders approximately $100 million
of equity capital in the form of a $7.19 per common share special dividend
should serve to enhance future returns on remaining common equity, particularly
under current market conditions, while maintaining adequate liquidity to take
advantage of suitable investment opportunities as they arise.
"We continue to evaluate suitable real estate-related investments,
which may include credit-sensitive assets intended to produce attractive returns
due largely to a higher risk of default and reduced liquidity compared to
residential ARM securities. New investments such as these may help to provide
more stability to future operating income; however, they may not offset the
effects of declining earnings from our existing portfolio. Further, as seen this
past year, additional investment opportunities may not be available on a timely
basis. As a result, we anticipate that quarterly operating income and common
dividends will continue trending lower and this trend would likely be
accelerated by any increases in short-term interest rates."
ANNUAL MEETING RECORD DATE
The Company announced that the record date for determining stockholders
entitled to notice of and to vote at the annual meeting of the Company on April
24, 2003 will be the close of business on February 20, 2003. The Company proxy
statement and annual report will be mailed to stockholders on or about March 10,
2003.
-1-
FOURTH QUARTER RESULTS AND RELATED DISCUSSION
Fourth quarter operating income was impacted by declines both in the
size of the Company's portfolio of mortgage securities and similar investments
and in financing spreads (the difference between the yields earned on these
investments and the rates charged on related borrowings). The portfolio declined
by $239 million during the fourth quarter primarily as a result of runoff caused
by mortgage prepayments. Financing spreads declined as lower borrowing rates
only partially offset declines in portfolio yields.
The overall yield earned on the portfolio averaged 4.65% during the
fourth quarter of 2002, a decline of 39 basis points from an average yield of
5.04% earned during the previous quarter. Yields on ARM securities fluctuate as
coupon interest rates on the underlying mortgage loans reset to reflect current
interest rates and are expected to continue to decline in the coming quarters.
For example, if interest rates stabilize at rates in effect on February 6, 2003,
the average yield on the portfolio could decline approximately 91 basis points
by the fourth quarter of 2003. Actual yields will depend on portfolio
composition as well as fluctuations in, and market expectations for fluctuations
in, interest rates and levels of mortgage prepayments.
Average rates on related borrowings were 1.62% during the fourth
quarter of 2002. Having benefited from reductions in the Federal Funds Rate
totaling 475 basis points during 2001, short-term interest rates were relatively
stable during the first three quarters of 2002. With the action taken by the
Federal Reserve in November to reduce the Federal Funds Rate by an additional 50
basis points, the Company's average borrowing rates declined by 22 basis points
during the fourth quarter and are expected to decline an additional 24 basis
points during the first quarter of 2003. This decline is not expected to fully
offset the effects on earnings of declining portfolio yields and balances. The
Company's borrowing rates depend on actions by the Federal Reserve to change
short-term interest rates, market expectations of future changes in short-term
interest rates and the extent of changes in financial market liquidity.
BOOK VALUE PER COMMON SHARE
As of December 31, 2002, the Company's book value per common share was
$8.23, a decline of $7.64 from the prior year. Book value declined primarily
because of the $7.19 special dividend (included as part of the $8.35 fourth
quarter dividend), dividend payments in excess of quarterly net income and a
reduction in the aggregate unrealized gain on the Company's investments (most of
which are debt securities carried at fair value with changes in fair value
reflected in stockholders' equity) as a result of runoff caused by mortgage
prepayments. This unrealized gain can be expected to continue to decline with
runoff and to fluctuate with changes in interest rates and market liquidity, and
such changes will largely be reflected in book value per common share. Book
value 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 fair values of investments not held in the form of debt or
equity securities generally will not affect book value.
-2-
POTENTIAL 2003 COMMON SHARE DIVIDEND DATES
The Company has modified its regular common dividend schedule for 2003
to accelerate the announcement and payment of the first, second and third
quarter common dividends by one month, conforming to the timing of the fourth
quarter dividend. Accordingly, 2003 potential common share dividend dates are as
follows:
QUARTER DECLARATION DATE RECORD DATE PAYABLE DATE
------- ---------------- ----------- ------------
First March 13 March 31 April 21
Second June 12 June 30 July 21
Third September 11 September 30 October 21
Fourth December 11 December 31 January 21, 2004
TAX CONSIDERATIONS OF 2002 COMMON DIVIDENDS
Each common dividend distribution applicable to the 2002 tax year
consists of 41.25% ordinary taxable income and 58.75% return of capital. This
has been determined based on the ratio of Capstead's taxable income for the year
to total distributions made for the year, applied to each common dividend
distribution, including the $8.35 fourth quarter dividend paid January 21, 2003.
Stockholders receiving all $12.75 of common dividends for 2002 received taxable
income of $5.26 per share and return of capital distributions of $7.49 per
share. Stockholders should reduce the tax cost basis of their shares by the
amount of return of capital distributions received. Return of capital
distributions received in excess of tax cost basis should be reported as capital
gain. Due to the complex nature of the applicable tax rules, it is recommended
that stockholders consult their tax advisors to ensure proper tax treatment of
common dividends received.
* * * *
Capstead Mortgage Corporation, a real estate investment trust, earns
income from investing in real estate-related assets and other investment
strategies.
This document contains "forward-looking statements" (within the meaning
of the Private Securities Litigation Reform Act of 1995) that inherently involve
risks and uncertainties. The Company's actual results and liquidity can differ
materially from those anticipated in these forward-looking statements because of
changes in the level and composition of the Company's investments and unforeseen
factors. As discussed in the Company's filings with the Securities and Exchange
Commission, 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.
-3-
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
(UNAUDITED)
ASSETS
Mortgage securities and similar investments
($2.1 billion pledged under repurchase arrangements) $2,431,519 $3,455,219
CMO collateral and investments 1,083,421 2,262,305
---------- ----------
3,514,940 5,717,524
Real estate held for lease, net of accumulated depreciation 137,122 -
Receivables and other assets 55,863 60,261
Cash and cash equivalents 59,003 117,640
---------- ----------
$3,766,928 $5,895,425
========== ==========
LIABILITIES
Repurchase arrangements and similar borrowings $2,145,656 $3,207,068
Collateralized mortgage obligations ("CMOs") 1,074,779 2,245,015
Borrowings secured by real estate 120,400 -
Incentive fee payable to management and affiliate 5,986 9,422
Common dividend payable 116,585 20,794
Accounts payable and accrued expenses 4,944 8,398
---------- ----------
3,468,350 5,490,697
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - $0.10 par value; 100,000 authorized:
$1.60 Cumulative Preferred Stock, Series A,
219 and 273 shares issued and outstanding at
December 31, 2002 and 2001, respectively
($3,587 aggregate liquidation preference) 3,058 3,821
$1.26 Cumulative Convertible Preferred Stock, Series B,
15,820 and 15,842 shares issued and outstanding at
December 31, 2002 and 2001, respectively
($180,026 aggregate liquidation preference) 176,708 176,961
Common stock - $0.01 par value; 100,000 shares authorized;
13,962 and 13,862 shares issued and outstanding at
December 31, 2001 and 2000, respectively 140 139
Paid-in capital 458,919 559,571
Accumulated deficit (387,718) (387,718)
Accumulated other comprehensive income 47,471 51,954
---------- ----------
298,578 404,728
---------- ----------
$3,766,928 $5,895,425
========== ==========
BOOK VALUE PER COMMON SHARE $8.23 $15.87
-4-
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Mortgage securities and similar investments $ 29,601 $ 51,850 $ 150,302 $ 274,480
CMO collateral and investments 19,907 42,861 114,353 198,216
--------- --------- --------- ---------
Total interest income 49,508 94,711 264,655 472,696
--------- --------- --------- ---------
INTEREST AND RELATED EXPENSE:
Repurchase arrangements and similar borrowings 9,432 19,590 48,329 164,422
CMO borrowings 20,510 42,723 116,069 197,905
Mortgage insurance and other 128 198 596 990
--------- --------- --------- ---------
Total interest and related expense 30,070 62,511 164,994 363,317
--------- --------- --------- ---------
Net margin on financial assets 19,438 32,200 99,661 109,379
--------- --------- --------- ---------
REAL ESTATE LEASE INCOME (affiliated) 2,764 -- 8,170 --
--------- --------- --------- ---------
REAL ESTATE-RELATED EXPENSE:
Interest 1,536 -- 4,750 --
Depreciation 939 -- 2,543 --
--------- --------- --------- ---------
Total real estate-related expense 2,475 -- 7,293 --
--------- --------- --------- ---------
Net margin on real estate held for lease 289 -- 877 --
--------- --------- --------- ---------
OTHER REVENUE (EXPENSE):
Gain on asset sales 2,824 815 4,725 7,956
CMO administration and other revenue 315 691 2,429 3,705
Management and affiliate incentive fee (1,139) (3,647) (5,986) (9,422)
Other operating expense (1,316) (1,277) (5,583) (5,342)
--------- --------- --------- ---------
Total other revenue (expense) 684 (3,418) (4,415) (3,103)
--------- --------- --------- ---------
NET INCOME $ 20,411 $ 28,782 $ 96,123 $ 106,276
========= ========= ========= =========
Net income $ 20,411 $ 28,782 $ 96,123 $ 106,276
Less cash dividends on preferred stock (5,068) (5,098) (20,362) (20,446)
--------- --------- --------- ---------
Net income available to common stockholders $ 15,343 $ 23,684 $ 75,761 $ 85,830
========= ========= ========= =========
NET INCOME PER COMMON SHARE:
Basic $ 1.11 $ 1.71 $ 5.47 $ 6.43
Diluted 1.03 1.45 4.85 5.68
CASH DIVIDENDS DECLARED PER SHARE:
Common - regular quarterly $ 1.160 $ 1.500 $ 5.560 $ 5.540
Common - special 7.190 -- 7.190 14.600
Series A Preferred 0.400 0.400 1.600 1.600
Series B Preferred 0.315 0.315 1.260 1.260
NOTE: All references to common shares and per common share amounts have been
adjusted to reflect a 1-for-2 reverse common stock split which went
into effect the close of business on June 29, 2001.
-5-
CAPSTEAD MORTGAGE CORPORATION
MARKET VALUE ANALYSIS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, 2002 DECEMBER 31, 2001
--------------------------------------------------------------------- -----------------
UNREALIZED UNREALIZED
PRINCIPAL PREMIUM MARKET GAINS GAINS
MORTGAGE INVESTMENTS BALANCE (DISCOUNT) BASIS VALUE (LOSSES) (LOSSES)
------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------------
DEBT SECURITIES HELD AVAILABLE-
FOR-SALE: (a)
Agency securities:
Fannie Mae/Freddie Mac:
Fixed-rate $ 1,498 $ 7 $ 1,505 $ 1,644 $ 139 $ 241
Medium-term -- -- -- -- -- 1,134
ARMs:
LIBOR/CMT 1,120,142 16,376 1,136,518 1,162,197 25,679 23,962
COFI 126,356 (3,655) 122,701 128,475 5,774 6,615
Ginnie Mae ARMs 881,911 9,767 891,678 904,470 12,792 15,897
----------- ----------- ----------- ----------- ----------- -----------
2,129,907 22,495 2,152,402 2,196,786 44,384 47,849
Non-agency securities (b) 82,545 717 83,262 84,766 1,504 1,426
CMBS (b) 107,989 (309) 107,680 107,762 82 285
CMO collateral and investments 26,793 150 26,943 27,814 871 1,453
----------- ----------- ----------- ----------- ----------- -----------
$ 2,347,234 $ 23,053 $ 2,370,287 $ 2,417,128 $ 46,841 $ 51,013
=========== =========== =========== =========== =========== ===========
DEBT SECURITIES HELD-TO-MATURITY: (c)
Released CMO collateral:
Agency securities $ 2,130 $ 14 $ 2,144 $ 2,336 $ 192 $ 285
Non-agency securities 528 (4) 524 576 52 88
CMO collateral 1,041,318 14,289 1,055,607 1,051,763 (3,844) (8,629)
----------- ----------- ----------- ----------- ----------- -----------
$ 1,043,976 $ 14,299 $ 1,058,275 $ 1,054,675 $ (3,600) $ (8,256)
=========== =========== =========== =========== =========== ===========
(a) Unrealized gains and losses on investments in debt and equity securities
classified as available-for-sale are recorded in stockholders' equity as a
component of "Accumulated other comprehensive income." Gains or losses are
recognized in operating results only if sold. Recent investments in a
commercial loan syndication and real estate held for lease are not
classified as debt securities. Consequently, these assets are not subject
to mark-to-market accounting and therefore have been excluded from this
analysis.
(b) As of the indicated dates, these portfolios consisted of adjustable-rate
investments.
(c) Investments in debt and equity securities classified as held-to-maturity
are carried on the balance sheet at amortized cost.
-6-
CAPSTEAD MORTGAGE CORPORATION
PORTFOLIO YIELD/COST ANALYSIS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
4TH QUARTER AVERAGE AS OF DECEMBER 31, 2002
-------------------------------------- ------------------------- PROJECTED LIFETIME
ACTUAL ACTUAL PREMIUMS 1ST QUARTER PREPAYMENT
BASIS YIELD/COST RUNOFF (DISCOUNTS) BASIS YIELD/COST ASSUMPTIONS
-------------- ---------- --------- ----------- ------------ ----------- ------------
(a) (a) (b) (b)
Agency securities:
Fannie Mae/Freddie Mac:
Fixed-rate $ 3,848 9.55% 34% $ 21 $ 3,649 9.41% 25%
Medium-term 10,463 6.41 39 -- -- -- --
ARMs:
LIBOR/CMT 1,178,045 4.39 27 16,376 1,136,518 4.02 40
COFI 127,328 5.03 22 (3,655) 122,701 4.87 20
Ginnie Mae ARMs 945,263 4.74 35 9,767 891,678 4.57 26
------------ --------- ------------
2,264,947 4.59 30 22,509 2,154,546 4.30 33
Non-agency securities 102,490 5.40 25 713 83,786 4.67 35
CMBS and other
commercial loans 171,966 4.86 63 (277) 147,217 4.75 --
------------ --------- ------------
2,539,403 4.65 35 $ 22,945 2,385,549 4.34 31
=========
Borrowings 2,283,494 1.62 2,145,656 1.38
----------- ------------
Capital employed/
financing spread $ 255,909 3.03 $ 239,893 2.96
=========== ============
Return on assets (c) 3.16 3.08
(a) Basis represents the Company's investment before unrealized gains and
losses. Actual asset yields, runoff rates, borrowing rates and resulting
financing spread are presented on an annualized basis.
(b) Projected yields reflect ARM coupon resets and lifetime prepayment
assumptions as adjusted for expected prepayments over the next 3 months, as
of the date of this press release. Actual yields realized in future periods
will largely depend upon (i) changes in portfolio composition, (ii) ARM
coupon resets, (iii) actual prepayments and (iv) any changes in lifetime
prepayment assumptions.
(c) The Company uses its liquidity to pay down borrowings. Return on assets is
calculated on an annualized basis assuming the use of this liquidity to
reduce borrowing costs.
-7-
CAPSTEAD MORTGAGE CORPORATION
COMPARISON OF OPERATING INCOME *
AND DILUTED INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
QUARTER ENDED
---------------------------------------------------------------------------
DECEMBER 31, 2002 SEPTEMBER 30, 2002 JUNE 30, 2002
---------------------- ----------------------- --------------------
OPERATING DILUTED OPERATING DILUTED OPERATING DILUTED
--------- ------- --------- ------- --------- -------
Net income $20,411 $20,411 $22,751 $22,751 $24,586 $24,586
Adjustments for:
Depreciation on real estate 939 -- 962 -- 642 --
Gain on asset sales (2,824) -- (1,901) -- -- --
Series B preferred dividends (4,983) -- (4,990) -- (4,990) --
------- ------- ------- ------- ------- -------
$13,543 $20,411 $16,822 $22,751 $20,238 $24,586
======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding 13,880 13,880 13,871 13,871 13,856 13,856
Net effect of dilutive securities:
Preferred B shares -- 5,689 -- 5,638 -- 5,638
Stock options and other preferred
shares 303 303 310 310 319 319
------- ------- ------- ------- ------- -------
14,183 19,872 14,181 19,819 14,175 19,813
======= ======= ======= ======= ======= =======
$0.95 $1.03 $1.19 $1.15 $1.43 $1.24
===== ===== ===== ===== ===== =====
* Capstead reports operating income per share calculated after excluding
depreciation on real estate, gain on asset sales, and the dilutive effects
of the Series B preferred shares. As such, operating income represents a
measure of the amount of funds generated by operations, which may, at the
discretion of Capstead's Board of Directors, be used for reinvestment or
distributed to common stockholders as dividends. Depreciation on real
estate, although an expense deductible for federal income tax purposes and
therefore an item that reduces Capstead's REIT distribution requirements,
is added back to arrive at operating income because it is a noncash
expense. Gains are excluded because they are considered non-operating in
nature and because the Company has substantial capital loss carryforwards
that are expected to eliminate REIT distribution requirements resulting
from any gains realized through the year 2005. Operating income per share
excludes the dilutive effects of the Series B preferred shares because at
the current market prices of both the common shares and Series B preferred
shares, it is not economically advantageous to convert the shares.
Consequently, few, if any, actual Series B conversions are expected.
Effective December 31, 2002, the Series B preferred shares are considered
dilutive, for diluted net income per share purposes only, whenever
annualized basic net income per share exceeds $2.24 ($1.26 Series B
annualized dividend divided by the current conversion rate of 0.5632).
-8-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
CAPSTEAD MORTGAGE CORPORATION
February 11, 2003 By: /s/ Phillip A. Reinsch
------------------------------------------
Phillip A. Reinsch, Senior Vice President
-9-