Filed Pursuant to Rule 424(b)(5)
Registration No. 333-63358
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 26, 2001)
(CAPSTEAD LOGO)
CAPSTEAD MORTGAGE CORPORATION
COMMON STOCK
You should carefully consider the risk factors beginning on page 5 of the
accompanying prospectus.
This prospectus supplement relates to the offering and sale of 73,900 shares of
our common stock held by the selling stockholder, Fortress CAP LLC.
Our common stock is listed on the New York Stock Exchange under the symbol
"CMO." On March 5, 2003, the last reported sale price of the common stock on the
New York Stock Exchange was $12.55 per share.
This prospectus supplement may not be used to consummate any sales of
our common stock without an accompanying prospectus.
References in this prospectus supplement to "we," "us," "our" and "the
company" are to Capstead Mortgage Corporation. References in this prospectus
supplement to "Fortress" are to Fortress CAP LLC and its affiliates.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
On March 4, 2003, the selling stockholder sold 65,000 shares of our
common stock to an unaffiliated third party in a privately-negotiated
transaction at a price of $12.5015 per share, resulting in $812,597.50 in
proceeds to the selling stockholder. In addition, on March 5, 2003, the selling
stockholder sold 8,900 shares of our common stock to an unaffiliated third party
in a privately-negotiated transaction at a price of $12.5118 per share,
resulting in $111,355.02 in proceeds to the selling stockholder.
Prospectus Supplement dated March 5, 2003.
THE SELLING STOCKHOLDER
This prospectus relates to the offering and sale for the account of the
selling stockholder of 73,900 shares of our common stock.
In December 1999, we issued $51.2 million of our Series C and D voting
preferred shares to an affiliate of the selling stockholder, which then assigned
its interest to the selling stockholder. The Series C and D voting preferred
shares were convertible into shares of our common stock at any time at
Fortress's option. During the fourth quarter of 2000 and the second quarter of
2001, Fortress converted all of its Series C and D voting preferred shares into
an aggregate of 2,689,000 shares of our common stock. In addition, during the
year 2000, Fortress also acquired 1,960,359 shares of our common stock though
open market purchases and a public tender offer for shares of our common stock.
Fortress sold 1,000,000 of these shares in 2001 and has sold an additional
300,000 of these shares in the current year through March 3, 2003. As of March
3, 2003, Fortress beneficially owned 3,349,359 shares of our common stock, or
approximately 24% of our voting shares. Wesley Edens, our chairman and chief
executive officer, is also chairman and chief executive officer of the manager
of Fortress Investment Fund LLC, which indirectly wholly owns Fortress CAP LLC.
The following table sets forth the number of shares of our common stock
owned by Fortress prior to the offering pursuant to this prospectus supplement
and the number of shares offered hereby. All of the shares of our common stock
beneficially owned by Fortress have been registered to permit public secondary
trading of the shares.
SHARES BENEFICIALLY OWNED SHARES BEING SHARES BENEFICIALLY OWNED
PRIOR TO THIS OFFERING SOLD AFTER THIS OFFERING
----------------------------- ------------ -----------------------------
NAME AND ADDRESS OF SELLING
STOCKHOLDER NUMBER PERCENT NUMBER PERCENT
------------ ------------ ------------ ------------
Fortress CAP LLC 3,349,359 23.98% 73,900 3,275,459 23.45%
1251 Avenue of the Americas
New York, New York 10020
USE OF PROCEEDS
We will not receive any proceeds from the sale by Fortress of any
shares of our common stock.
-2-
PLAN OF DISTRIBUTION
We have been advised that the offering and sale by the selling
stockholder of the common stock pursuant to this prospectus supplement was made
in privately-negotiated transactions between the selling stockholder and the
purchaser and was not subject to any underwriting agreement.
-3-
PROSPECTUS
(CAPSTEAD LOGO)
CAPSTEAD MORTGAGE CORPORATION
COMMON STOCK
Through this prospectus, Fortress Investment Group, LLC and its
affiliates may offer and sell from time to time up to 4,649,359 shares of our
common stock, which is listed on the New York Stock Exchange under the symbol
"CMO." Fortress may sell the shares from time to time at market prices at the
time of sale or at negotiated prices.
---------
You should carefully consider the risk factors beginning on page 5 of
the accompanying prospectus.
---------
Fortress may sell all or a portion of the common stock through agents,
to or through underwriters or dealers, or directly to other purchasers. See
"Plan of Distribution." The related prospectus supplement for each offering of
securities will set forth the name of any agents, underwriters or dealers
involved in the sale of those securities and any applicable fee, commission,
discount or indemnification arrangement with any such party. We will not receive
any of the proceeds from the sale of any common stock by Fortress. See "Use of
Proceeds."
This prospectus may not be used to consummate sales of common stock
without an accompanying prospectus supplement.
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 or Fortress have referred you to.
Neither we nor Fortress has 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. References in this prospectus to
"Fortress" are to Fortress Investment Group, LLC and its affiliates.
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 NOVEMBER 26, 2001.
TABLE OF CONTENTS
WHERE YOU CAN FIND MORE INFORMATION .................................... 3
INCORPORATION OF INFORMATION WE FILE ................................... 3
RISK FACTORS ........................................................... 5
THE COMPANY ............................................................ 9
THE SELLING STOCKHOLDER ................................................ 10
USE OF PROCEEDS ........................................................ 11
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND ........................ 11
DESCRIPTION OF SECURITIES .............................................. 11
PLAN OF DISTRIBUTION ................................................... 14
TAXATION ............................................................... 16
2
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,
2000.
2. Our definitive Proxy Statement dated March 9, 2001, issued in
connection with our annual stockholders' meeting.
3. Our Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2001.
4. Our definitive Proxy Statement dated May 17, 2001, issued in connection
with a proposed one-for-two reverse split of our common stock.
5. Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2001.
6. Our Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2001.
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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.
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RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
OUR COMMON STOCK.
CHANGES IN INTEREST RATES
MAY ADVERSELY AND MARKET
LIQUIDITY AFFECT OUR
EARNINGS ........................... Our earnings currently depend, in part, 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
London Interbank Offered Rates. The resulting spread may be
reduced or even turn negative in a rising short-term interest
rate environment. Because a substantial portion of our
mortgage investments are adjustable-rate mortgage securities,
the risk of rising short-term interest rates is generally
offset to some extent by increases in the rates of interest
earned on the underlying adjustable-rate mortgage loans, which
reset periodically based on underlying indices (generally
1-year Constant Maturity U.S. Treasury Note Rates). Since
adjustable-rate mortgage loans 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. At other times, as seen in 1998
and now in 2001, 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. We
may invest in derivative financial instruments from time to
time with the goal of achieving more stable financial spreads
on a portion of our mortgage investment portfolio. We did not
own any derivative financial instruments for this purpose as
of the date of this prospectus supplement.
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. As seen in 1998, and to
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some extent 2001, 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. Further, to the
extent we do not reinvest or cannot reinvest the proceeds of
prepayments on our mortgage investments at a rate of interest
at least equal to the rate previously earned on those
investments, our earnings may be adversely affected. There can
be no assurance that suitable investments at attractive
pricing will be available in a timely fashion to replace
runoff as it occurs or that the current composition of
investments (consisting primarily of adjustable-rate mortgage
securities issued by the government-sponsored entities, Fannie
Mae, Freddie Mac or Ginnie Mae) will be maintained.
A change in interest rates also impacts the results we
recognize in our earnings from our CMO investments, which
currently consist primarily of fixed-rate CMO residuals. As
seen in 1998, if mortgage interest rates fall, prepayments on
the underlying mortgage loans generally will be higher,
accelerating the amortization of collateral premiums and bond
discounts. Conversely, if mortgage interest rates rise
significantly above interest rates on the collateral,
principal prepayments will typically diminish, improving the
overall return on an investment in a fixed-rate CMO residual
because of an increase in time over which we receive positive
net cash flows and can amortize remaining collateral premiums
and bond discounts.
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 as the
value of our mortgage assets fluctuates with changes in
interest rates. At other times, such as in the second quarter
of 2000, we may shift our investment focus, resulting in asset
sales. Because we currently have significant capital loss
carryforwards for tax purposes, gains on the sale of mortgage
assets may not be distributed to stockholders as dividends.
During periods of rising interest rates or falling market
liquidity, mortgage asset values can decline leading to
increased margin calls, reducing our liquidity. A margin call
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means that a lender requires a borrower to pledge additional
collateral to re-establish the agreed-upon ratio of the value
of the collateral to the amount of the borrowing. If we are
unable or unwilling to pledge additional collateral, lenders
can liquidate the collateral under adverse market conditions,
likely resulting in losses.
SOME OF OUR MORTGAGE INVESTMENTS
ARE MORE CREDIT SENSITIVE THAN OUR
OTHER INVESTMENTS....................... In addition to its residential mortgage investments, the
company invests from time to time in commercial mortgage
assets including commercial mortgage-backed securities.
Commercial mortgage assets are generally viewed as exposing an
investor to greater risk of loss than residential
mortgage-backed securities because such assets are typically
secured by larger loans to fewer obligors than residential
mortgage-backed securities. 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 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
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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 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
somewhat lower credit ratings 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 lower credit ratings 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
8
mortgage assets that are not financed to maturity at
acquisition may be diminished during periods of mortgage
finance market illiquidity, such as was experienced in 1998.
Additionally, if market conditions deteriorate resulting in
substantial declines in value of these assets, sufficient
capital may not be available to support the continued ownership
of these assets, requiring them to be sold at a loss.
IF OUR EARNINGS OR THE VALUE OF OUR MORTGAGE ASSETS ARE
ADVERSELY AFFECTED BY A CHANGE IN INTEREST RATES, MARKET
LIQUIDITY OR CHANGE IN THE CREDIT QUALITY OF THE INVESTMENT
PORTFOLIO, THE BOOK VALUE OF OUR COMMON STOCK AND THE
DIVIDENDS ON OUR COMMON STOCK MAY DECLINE.
WE ARE CURRENTLY INVOLVED IN
STOCKHOLDER LITIGATION.................. During 1998 twenty-four purported class action lawsuits were
filed against us and certain of our officers alleging, among
other things, that we violated federal securities laws by
publicly issuing false and misleading statements and omitting
disclosure of material adverse information regarding our
business. The complaints seek monetary damages in an
undetermined amount. In March 1999 these actions were
consolidated and in July 2000 a lead plaintiff group was
appointed by the court. An amended complaint was filed October
20, 2000. The amended complaint claims that as a result of
alleged improper actions, the market prices of our equity
securities were artificially inflated during that period
between April 17, 1997 and June 26, 1998. The amended
complaint seeks monetary damages in an undetermined amount. We
responded to this amended complaint on February 20, 2001 with
a motion to dismiss all allegations against us and our
officers. On April 20, 2001, the plaintiffs responded to our
motion to dismiss. We filed our reply to the plaintiff's
response on May 21, 2001. We believe that we have meritorious
defenses to the claims and we intend to vigorously defend
against the actions. Based on available information, we
believe the resolution of these suits will not have a material
adverse effect on our financial position.
THE COMPANY
We were incorporated on April 15, 1985 in Maryland and commenced
operations in September 1985. We operate as a real estate investment trust
("REIT") earning income from
9
investing in real estate-related assets on a leveraged basis and from other
investment strategies. These investments currently include, but are not limited
to, adjustable-rate single-family residential mortgage-backed securities issued
by government-sponsored entities, either Fannie Mae, Freddie Mac or Ginnie Mae
("Agency Securities"). We are also evaluating other suitable investments, which
may include credit-sensitive commercial and residential real estate-related
assets.
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 the company
for financial reporting purposes, are not consolidated for federal income tax
purposes because such entities were not established as REITs or qualified REIT
subsidiaries. All taxable income of these affiliated entities are subject to
federal and state income taxes, where applicable.
THE SELLING STOCKHOLDER
Fortress is a real estate investment firm with experience in investing
in a variety of asset types across the credit spectrum.
In December 1999, we issued $51.2 million of our Series C and D voting
preferred shares to Fortress. The Series C and D voting preferred shares were
convertible into shares of our common stock at any time at Fortress's option.
During the fourth quarter of 2000 and the second quarter of 2001, Fortress
converted all of its Series C and D voting preferred shares into an aggregate of
5,378,000 shares of our common stock. In addition, during the year 2000,
Fortress also acquired 3,920,717 shares of our common stock though open market
purchases and a public tender offer for shares of our common stock. On June 29,
2001, we effected a 1-for-2 reverse stock split of our common stock. After
giving effect to the 1-for-2 reverse stock split of our common stock, Fortress
beneficially owned 4,649,358 shares of our common stock (the "Fortress Shares")
or approximately 34% of our voting shares, as of November 23, 2001.
Through this prospectus, Fortress may sell all of the Fortress Shares
from time to time at market prices at the time of sale or at negotiated prices.
Fortress and/or the purchasers of its shares may pay broker-dealers compensation
in the form of discounts, concessions or commissions. Fortress and any agents or
broker-dealers that participate with Fortress in the distribution of these
shares may be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"). Any commissions received by them
and any profit on the resale of these shares may be deemed to be underwriting
commissions or discounts under the Securities Act.
Since Fortress may sell all, some or none of the Fortress Shares, no
estimate can be made of the actual aggregate number of shares that will be sold
pursuant to this prospectus. See "Plan of Distribution" for more information
concerning sales of the Fortress Shares. If all of the Fortress Shares offered
hereby are sold, Fortress would no longer own any of our outstanding
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common stock, assuming Fortress does not purchase or acquire any additional
shares of our common stock after the date of this prospectus.
Any prospectus supplement relating to the offering of any Fortress
Shares under this prospectus will set forth the number of Fortress Shares being
offered for the account of Fortress, as well as the number of Fortress Shares
owned by Fortress upon completion of such offering.
In the event that any offering by Fortress is underwritten, we will
have the right to select the managing underwriter or underwriters. Additionally,
if Fortress makes an offering of Fortress Shares in conjunction with an offering
by us of our securities, Fortress must sell its Fortress Shares to the
underwriter selected by us on the same terms and conditions as apply to us.
Fortress may also elect to sell all or a portion of the Fortress Shares pursuant
to an exemption from registration, provided that we have determined to our
satisfaction that registration of the Fortress Shares is not required as a
result of the availability of such an exemption from registration under the
Securities Act.
USE OF PROCEEDS
We will not receive any proceeds from the sale by Fortress of any
Fortress Shares.
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:
YEAR ENDED DECEMBER 31,
QUARTER ENDED --------------------------------------------------
SEPTEMBER 30, 2001 2000 1999 1998 1997 1996
------------------ ------ ------ ------ ------ ------
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends(a) 1.20:1 0.87:1 1.07:1 0.63:1 1.20:1 1.14:1
(a) Includes fixed charges relating to CMO's issued by the company's finance
subsidiaries. Excluding interest expense on CMO debt, the ratio of earnings to
combined fixed charges and preferred stock dividends would have been 1.39:1,
0.77:1, 1.14:1, 0.28:1, 1.36:1, and 1.28:1, respectively, for the periods
indicated.
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 November 23, 2001, there were 13,853,787
shares of our common stock, 282,105 shares of our $1.60 Cumulative Preferred
Stock designated as "Series A Preferred Stock" and 15,842,279 shares of our
$1.26 Cumulative Convertible Preferred Stock designated as "Series B
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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.
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.
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Our board of directors has elected to exclude purchases of our common
stock by Fortress from the operation of the charter provisions described above.
SPECIAL STATUTORY REQUIREMENTS FOR CERTAIN TRANSACTIONS
The following summary of certain provisions of the Maryland General
Corporations Law (the "MGCL") and of the company's charter and the bylaws does
not purport to be complete and is subject to and qualified in its entirety by
reference to Maryland law and to the company's charter and the bylaws, copies of
which are filed with the Commission.
Business Combination Statute. Under the MGCL, 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 beneficially owns
10% or more of the voting power of the corporation's shares or an affiliate 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 MGCL) 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.
Pursuant to the statute, our board of directors has elected to exclude
purchases of our common stock by Fortress from the operation of the statute.
Consequently, the five-year prohibition and the super-majority vote requirements
of the statute will not in any event apply to business combinations between
Fortress and us. As a result, Fortress may be able to enter into business
combinations with us without compliance by Fortress with the super-majority vote
requirements and the other provisions of the statute.
Control Share Acquisition Statute. The MGCL 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, by officers 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),
13
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (1) one-fifth or more but less than
one-third, (2) one-third or more but less than a majority, 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. 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 (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 or (b) to acquisitions approved or exempted by the
charter or bylaws of the corporation and adopted at any time before the
acquisition of shares.
Our bylaws have been amended to include a provision exempting from the
control share acquisition statute any and all acquisitions by Fortress and its
affiliates of up to 40% of the voting power of our common stock. This provision
is irrevocable and may only be amended to increase the aggregate percentage of
our common stock that Fortress may acquire.
Possible Anti-takeover Effect of Certain Provisions of Maryland Law and
of the Company's Charter and Bylaws. The business combination provisions and, if
the applicable provision in the company's bylaws is rescinded, the control share
acquisition provisions of the MGCL, the provisions of the company's charter on
ownership and transfer of stock could delay, defer or prevent a transaction or a
change in control of the company or other transaction that might involve a
premium price for holders of common stock or otherwise be in their best
interest.
PLAN OF DISTRIBUTION
We are registering shares of common stock for Fortress, who may sell or
distribute these shares from time to time after the registration statement
relating to this prospectus becomes effective. These shares may also be sold by
third parties to whom Fortress transfers its stock, or
14
by its successors in interest. Fortress may sell stock to one or more purchasers
or through brokers, dealers or underwriters acting as agents or acquiring the
stock as principals. Fortress may sell the stock at prices prevailing at the
time of sale, at prices related to prevailing market prices, at negotiated
prices, or at fixed prices, which may be changed. Fortress may sell its stock in
one or more of the following methods, which may include block transactions:
o ordinary brokers' transactions;
o purchases by brokers, dealers or underwriters as principal and
resale by such purchasers for their own accounts pursuant to
this prospectus;
o "at the market" to or through market makers or into an
existing market for the common stock;
o in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales
effected through agents;
o through transactions in options, swaps or other derivatives
(whether exchange-listed or otherwise);
o in privately negotiated transactions;
o to cover short sales; or
o any combination of the foregoing.
From time to time, Fortress may pledge, hypothecate or grant a security
interest in some or all of the shares it owns. If Fortress does so, and if there
is a foreclosure or default on those obligations the pledgees, secured parties
or persons to whom Fortress hypothecated its shares will be considered the
relevant selling shareholders under this prospectus.
The number of shares Fortress beneficially owns will decrease if it
transfers, pledges, donates or assigns its shares. The plan of distribution
under this prospectus will otherwise remain unchanged, except that the
transferees, pledgees, donees or other successors will be considered additional
selling shareholders. Also, Fortress may sell short its common stock from time
to time. Fortress may deliver this prospectus in connection with short sales,
and it may use shares it sells under this prospectus to cover those short sales.
Fortress may enter into hedging transactions with broker- dealers, and
the broker-dealers may engage in short sales of the common stock in the course
of hedging the positions they assume with Fortress. This may involve
distributions of the common stock by those broker-dealers. Fortress may also
enter into option or other transactions with broker-dealers that involve the
delivery of shares to the broker-dealers, who may then resell them or otherwise
transfer them. Fortress may also pledge its shares to a broker-dealer to secure
a loan or other agreement, and the
15
broker-dealer may sell them or otherwise transfer them if Fortress defaults on
the underlying loan or agreement.
Brokers, dealers, underwriters or agents participating in the
distribution of shares as agents may receive compensation in the form of
commissions, discounts or concessions from Fortress and/or purchasers of common
stock for whom such broker-dealers may act as agent, or to whom they may sell as
principal, or both. This compensation as to a particular broker-dealer may be
less than or in excess of customary commissions. Regulators may deem selling
shareholders and any broker-dealers who act in connection with the sale of
shares under this prospectus "underwriters" within the meaning of the Securities
Act. Also, any commission they receive and proceeds of any sale of shares may be
deemed to be underwriting discounts and commissions under the Securities Act. We
cannot presently estimate the amount of such compensation. In addition, we do
not know of existing arrangements between Fortress and any other shareholder,
broker, dealer, underwriter or agent relating to the sale or distribution of
shares included in this prospectus.
We will pay all of the expenses required to be paid by us under the
terms of our registration rights agreement with Fortress in connection with the
registration, offering and sale of shares included in this prospectus, other
than commissions or discounts of underwriters, broker-dealers or agents.
We advised Fortress that while it seeks to sell shares under this
prospectus it is required to comply with Regulation M under the Securities
Exchange Act. With certain exceptions, Regulation M precludes it or any
affiliated purchasers, and any broker-dealer or other person who participates in
a distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the shares sold under this prospectus.
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. 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 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
16
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.
FEDERAL INCOME TAXATION OF CAPSTEAD MORTGAGE CORPORATION
As used herein, "Capstead REIT" refers to Capstead Mortgage Corporation
and the entities that are effectively consolidated with Capstead Mortgage
Corporation for federal income tax purposes. Certain of the our subsidiaries
(the "Non-REIT subsidiaries") are consolidated with Capstead Mortgage Company
for financial reporting purposes but are not consolidated for federal income tax
purposes. All of the Non-REIT subsidiaries' taxable income is subject to federal
and state income taxes. We may form additional Non-REIT subsidiaries.
So long as a corporation such as Capstead REIT qualifies as a REIT and
distributes at least 90% of its REIT taxable income to stockholders, it will not
be subject to federal corporate income taxes on such income distributed to
stockholders, 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 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 L.L.P., tax counsel to Capstead REIT,
for all of its taxable years beginning September 5, 1985 and ending December 31,
2000, 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, 2001, 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 L.L.P. is not
aware of any facts or circumstances that are inconsistent with these assumptions
and representations. Moreover, such qualification and
17
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 L.L.P. 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. First, Capstead REIT will be taxed at regular corporate
rates on any undistributed REIT taxable income, including undistributed net
capital gains. Second, under certain circumstances, Capstead REIT may be subject
to the "alternative minimum tax" on items of tax preference, if any. Third, 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 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. Fourth, 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. Fifth, 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 90%
gross income test. Sixth, if Capstead REIT should fail to distribute during each
calendar year at least the sum of:
- 85% of its REIT ordinary income for such year,
- 95% of its REIT capital gain net income for such year and
- 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. Seventh, Capstead REIT may be
subject to a 100% excise tax with respect to certain
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"redetermined rents," "redetermined deductions," and "excess interest" to ensure
arm's length (1) pricing for certain services provided by taxable REIT
subsidiaries of Capstead REIT to Capstead REIT's tenants, if any, and (2)
allocation of shared expenses between Capstead REIT and its taxable REIT
subsidiaries. Finally, 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,
provided an election is made by Capstead REIT to defer this gain for the 10-year
period under the principles of Section 1374 of the Code.
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;
(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.
19
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, 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.
20
Capstead REIT does not presently earn substantial amounts of rental
income. However, if Capstead REIT were to acquire rental real estate, the rent
received by Capstead REIT from its tenants would qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, 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. Second, 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. Third, 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." Finally, 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 90% gross income tests.
21
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 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 with respect to each taxable year dividends, other
than capital gain dividends, to its stockholders in an aggregate amount at least
equal to (1) the sum of (A) 90% of its "REIT taxable income," computed without
regard to the dividends paid deduction and its net capital gain, and (B) 90% of
the net after tax income, if any, from foreclosure property, minus (2) the sum
of certain items of non-cash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable 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," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gains corporate tax rates.
22
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.
If Capstead REIT should fail to distribute during each calendar year at least
the sum of:
- 85% of its REIT ordinary income for such year,
- 95% of its REIT capital gain income for such year and
- 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
23
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. 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,
(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 (B) one or more
United States persons have the authority to control all substantial decisions of
the trust.
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. 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
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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.
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.
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 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. The backup withholding tax rate is 30.5% and will be reduced to 30% for
amounts paid in 2002 with further reductions
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through 2005 and with a rate of 28% after December 31, 2005. 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.
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.
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.
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LEGAL MATTERS
Certain legal matters with respect to the securities offered hereby
will be passed on for the company and Fortress by Andrews & Kurth L.L.P.,
Dallas, Texas, and for the underwriters or agents by counsel to be identified in
the related prospectus supplement. Andrews & Kurth L.L.P. 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 and schedules included in our Annual Report on Form 10-K
for the year ended December 31, 2000, as set forth in their report, which is
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our financial statements and schedules are incorporated by reference
in reliance on Ernst & Young's report, given on their authority as experts in
accounting and auditing.
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