-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lf0YK2FtzALdZop/mvOzz3ySbUtds6Ww8Iao+e9hcHtRH+Y/WUbbesCaH305crXj zDUfKtikEdziRF29Tfh5Tw== 0000950134-03-010480.txt : 20030724 0000950134-03-010480.hdr.sgml : 20030724 20030724150813 ACCESSION NUMBER: 0000950134-03-010480 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030722 ITEM INFORMATION: Financial statements and exhibits ITEM INFORMATION: Regulation FD Disclosure FILED AS OF DATE: 20030724 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSTEAD MORTGAGE CORP CENTRAL INDEX KEY: 0000766701 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752027937 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08896 FILM NUMBER: 03800855 BUSINESS ADDRESS: STREET 1: 8401 NORTH CENTRAL EXPRESSWAY STREET 2: STE 800 CITY: DALLAS STATE: TX ZIP: 75225 BUSINESS PHONE: 2148742323 MAIL ADDRESS: STREET 1: 8401 NORTH CENTRAL EXPRESSWAY STREET 2: STE 800 CITY: DALLAS STATE: TX ZIP: 75225 FORMER COMPANY: FORMER CONFORMED NAME: LOMAS MORTGAGE CORP DATE OF NAME CHANGE: 19891105 8-K 1 d07682e8vk.txt FORM 8-K 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: JULY 22, 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 7. FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits. 99.1 Press releases issued by Capstead Mortgage Corporation dated July 22, 2003 ITEM 9. REGULATION FD DISCLOSURE This information, furnished under this "Item 9. Regulation FD Disclosure," is intended to be furnished under "Item 12. Disclosure of Results of Operations and Financial Condition" in accordance with SEC Release No. 33-8216. Additionally, as provided in SEC Release No. 33-8216, the Company deems this information to be "filed" for the purposes of Section 18 of the Securities Exchange Act of 1934. On July 22, 2003, Capstead Mortgage Corporation and Fortress Investment Group LLC issued a joint press release announcing management changes at Capstead. On July 22, 2003, Capstead Mortgage Corporation issued a press release announcing second quarter 2003 earnings results. Copies of the press releases are attached as Exhibit 99.1. 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 July 24, 2003 By: /s/ Phillip A. Reinsch -------------------------------------------- Phillip A. Reinsch, Senior Vice President EX-99.1 3 d07682exv99w1.txt PRESS RELEASES EXHIBIT 99.1 CAPSTEAD MORTGAGE CORPORATION AND FORTRESS INVESTMENT GROUP LLC ANNOUNCE MANAGEMENT CHANGES AT CAPSTEAD DALLAS - July 22, 2003 - Capstead Mortgage Corporation (NYSE: CMO) and Fortress Investment Group LLC ("Fortress") today announced that Wesley R. Edens has tendered his resignation as Chairman, Chief Executive Officer, President and director of Capstead. Robert I. Kauffman, a partner of Mr. Edens at Fortress and a director of Capstead since December 1999, has also resigned. Paul M. Low, one of Capstead's founders and a long-time member of the Board of Directors, has succeeded Mr. Edens as Chairman. Andrew F. Jacobs, formerly Executive Vice President and Chief Financial Officer, has been promoted to Chief Executive Officer and President and has been elected to serve on the Board of Directors. Phillip A. Reinsch, Senior Vice President - Control, has been promoted to Chief Financial Officer. Mr. Edens, who heads up Fortress's $2.1 billion private equity investment business, led an investment in Capstead on behalf of Fortress Investment Fund LLC and assumed management of the Company in April 2000. At its peak, Fortress owned approximately 34% of the Company and was Capstead's largest stockholder. Commenting on his departure, Mr. Edens said, "My experience working with Capstead's Board and management has been tremendous from both a business and a personal perspective. The phenomenal results we have achieved for stockholders over the past three-plus years are especially satisfying in contrast to the turbulence experienced within the broader equity markets. In recent months, Fortress has sold most of its investment in the Company, and so I believe it is an appropriate time for me to step down as Chairman and CEO. I leave Capstead in the capable hands of existing management and the Board of Directors." Mr. Jacobs, Capstead's Chief Executive Officer and President, stated, "It has been a pleasure working with Wes Edens and his organization. We would like to acknowledge and thank Wes for his contributions to the Company over the past three years." Capstead Mortgage Corporation is a real estate investment trust which earns income from investing in real estate-related assets and other investment strategies. Fortress Investment Group LLC is a $3.8 billion global alternative investment and management firm specializing in asset-based investing. CAPSTEAD MORTGAGE CORPORATION ANNOUNCES SECOND QUARTER NET INCOME DALLAS - July 22, 2003 - Capstead Mortgage Corporation (NYSE: CMO) today reported net income of $15,241,000, or $0.65 per diluted common share, for the quarter ended June 30, 2003, compared to $24,586,000, or $1.24 per diluted common share, for the second quarter of 2002. Operating income, calculated after excluding depreciation on real estate, gain on asset sales and CMO redemptions, and the dilutive effects of the Series B preferred shares, was $0.68 per common share for the second quarter of 2003, compared to $0.82 for the first quarter of 2003 and $1.43 for the second quarter of 2002. In a separate press release today the Company announced that Wesley R. Edens tendered his resignation as Chairman, Chief Executive Officer, President and director of Capstead. Robert I. Kauffman, an associate of Mr. Edens and a director since December 1999, also resigned. Paul M. Low, one of Capstead's founders and a long-time member of the Board of Directors, succeeded Mr. Edens as Chairman. Andrew F. Jacobs, formerly Executive Vice President and Chief Financial Officer, was promoted to President and Chief Executive Officer and was elected to serve on the Board of Directors. Phillip A. Reinsch, Senior Vice President - Control, was promoted to Chief Financial Officer. SECOND QUARTER RESULTS AND RELATED DISCUSSION As anticipated, Capstead's second quarter operating income continues to be impacted by declines in the size of the Company's portfolio of mortgage securities and similar investments. The portfolio, which consists largely of adjustable-rate mortgage ("ARM") Fannie Mae, Freddie Mac and Ginnie Mae securities, declined by $202 million during the second quarter primarily as a result of runoff caused by mortgage prepayments. This follows a decline of $184 million during the first quarter of 2003. Financing spreads (the difference between the yields earned on these investments and the rates charged on related borrowings) declined 25 basis points during the second quarter to 2.76% primarily due to declines in portfolio yields. The overall yield earned on the portfolio averaged 4.06% during the second quarter of 2003, a decline of 29 basis points from an average yield of 4.35% 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 current rates, the average yield on the portfolio could decline approximately 64 basis points by the second quarter of 2004. 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 1.30% during the second quarter of 2003, a decline of four basis points from the first quarter. The June 25, 2003 action taken by the Federal Reserve to reduce the Federal Funds Rate by 25 basis points is expected to lead to a 14 basis point decline in the Company's average borrowing rates during the third quarter. Further declines in borrowing rates, if any, are 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. Commenting on Capstead's operations, Mr. Jacobs, President and Chief Executive Officer, said, "With continuing declines in both the size of Capstead's portfolio of adjustable-rate securities and in average yields, the recent trend of smaller contributions to operating income from this portfolio is expected to continue in the coming quarters absent significant levels of new investments. The second quarter common dividend included the distribution of gains of $0.10 per share from the redemption of remaining CMO bonds on several securitizations previously issued by the Company. Although additional gains from CMO redemptions could occur in the coming quarters, the amount and timing of any such gains is dependent upon future market conditions. In addition, the Board of Directors may elect to retain the capital represented by these gains." Commenting on the Company's investment strategy, Mr. Jacobs added, "We will be reevaluating our investment strategy in the coming months. While we fully expect to continue our current strategy of investing in assets that can provide attractive risk-adjusted returns over the long term with less sensitivity to changes in interest rates, we will also examine other real estate-related opportunities to invest available capital." In conclusion, Mr. Jacobs cautioned, "While we expect Capstead's earnings will continue to benefit from strong financing spreads for the immediate future, opportunities to reinvest capital made available by maturing investments over the near term will likely not be of the size or have the return profile capable of generating sufficient returns to offset declining earnings from our existing portfolios. As a result, we anticipate that quarterly operating income and common dividends will continue trending lower from these current elevated levels." BOOK VALUE PER COMMON SHARE As of June 30, 2003, the Company's book value per common share was $7.83, a decline of $0.40 from December 31, 2002. Book value declined primarily because of dividend payments in excess of quarterly net income (approximately $0.10 per share) 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. * * * * * 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. CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, 2003 DECEMBER 31, 2002 ------------- ----------------- (UNAUDITED) ASSETS Mortgage securities and similar investments ($1.9 billion pledged under repurchase arrangements) $ 2,045,272 $ 2,431,519 CMO collateral and investments 541,346 1,083,421 ----------- ----------- 2,586,618 3,514,940 Real estate held for lease, net of accumulated depreciation 135,268 137,122 Receivables and other assets 68,358 55,863 Cash and cash equivalents 60,221 59,003 ----------- ----------- $ 2,850,465 $ 3,766,928 =========== =========== LIABILITIES Repurchase arrangements and similar borrowings $ 1,881,631 $ 2,145,656 Collateralized mortgage obligations ("CMOs") 539,005 1,074,779 Borrowings secured by real estate 120,299 120,400 Incentive fee payable to management and affiliate 1,493 5,986 Common dividend payable 10,931 116,585 Accounts payable and accrued expenses 3,879 4,944 ----------- ----------- 2,557,238 3,468,350 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock - $0.10 par value; 100,000 shares authorized: $1.60 Cumulative Preferred Stock, Series A, 214 and 219 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively ($3,504 aggregate liquidation preference) 2,987 3,058 $1.26 Cumulative Convertible Preferred Stock, Series B, 15,819 and 15,820 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively ($180,025 aggregate liquidation preference) 176,707 176,708 Common stock - $0.01 par value; 100,000 shares authorized; 14,014 and 13,962 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively 140 140 Paid-in capital 457,715 458,919 Accumulated deficit (387,718) (387,718) Accumulated other comprehensive income 43,396 47,471 ----------- ----------- 293,227 298,578 ----------- ----------- $ 2,850,465 $ 3,766,928 =========== =========== BOOK VALUE PER COMMON SHARE $ 7.83 $ 8.23
CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------------------- --------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- INTEREST INCOME: Mortgage securities and similar investments $ 21,648 $ 40,067 $ 46,785 $ 85,835 CMO collateral and investments 10,122 30,696 25,090 68,130 --------- --------- --------- --------- Total interest income 31,770 70,763 71,875 153,965 --------- --------- --------- --------- INTEREST AND RELATED EXPENSE: Repurchase arrangements and similar borrowings 6,454 12,965 13,673 27,011 CMO borrowings 10,010 30,979 25,349 68,965 Mortgage insurance and other 99 155 208 324 --------- --------- --------- --------- Total interest and related expense 16,563 44,099 39,230 96,300 --------- --------- --------- --------- Net margin on financial assets 15,207 26,664 32,645 57,665 --------- --------- --------- --------- REAL ESTATE LEASE INCOME 2,575 2,187 5,096 2,187 --------- --------- --------- --------- REAL ESTATE-RELATED EXPENSE: Interest 1,133 1,296 2,225 1,296 Depreciation 927 642 1,854 642 --------- --------- --------- --------- Total real estate-related expense 2,060 1,938 4,079 1,938 --------- --------- --------- --------- Net margin on real estate held for lease 515 249 1,017 249 --------- --------- --------- --------- OTHER REVENUE (EXPENSE): Gain on asset sales and CMO redemptions 1,392 -- 3,140 -- CMO administration and other 181 753 401 1,200 Management and affiliate incentive fee (587) (1,630) (1,493) (3,224) Other operating expense (1,467) (1,450) (2,926) (2,929) --------- --------- --------- --------- Total other revenue (expense) (481) (2,327) (878) (4,953) --------- --------- --------- --------- NET INCOME $ 15,241 $ 24,586 $ 32,784 $ 52,961 ========= ========= ========= ========= Net income $ 15,241 $ 24,586 $ 32,784 $ 52,961 Less cash dividends paid on preferred stock (5,068) (5,099) (10,138) (10,199) --------- --------- --------- --------- Net income available to common stockholders $ 10,173 $ 19,487 $ 22,646 $ 42,762 ========= ========= ========= ========= NET INCOME PER COMMON SHARE: Basic $ 0.73 $ 1.41 $ 1.62 $ 3.09 Diluted 0.65 1.24 1.41 2.67 CASH DIVIDENDS DECLARED PER SHARE: Common $ 0.780 $ 1.430 $ 1.720 $ 3.080 Series A Preferred 0.400 0.400 0.800 0.800 Series B Preferred 0.315 0.315 0.630 0.630
CAPSTEAD MORTGAGE CORPORATION MARKET VALUE ANALYSIS (IN THOUSANDS) (UNAUDITED)
JUNE 30, 2003 DECEMBER 31, 2002 ----------------------------------------------------------------------- ----------------- UNREALIZED UNREALIZED PRINCIPAL PREMIUM MARKET GAINS GAINS BALANCE (DISCOUNT) BASIS VALUE (LOSSES) (LOSSES) ----------- ----------- ----------- ----------- ----------- ----------------- DEBT SECURITIES HELD AVAILABLE- FOR-SALE: (a) Agency securities: Fannie Mae/Freddie Mac: Fixed-rate $ 1,125 $ 6 $ 1,131 $ 1,236 $ 105 $ 139 ARMs: LIBOR/CMT 960,496 13,603 974,099 996,558 22,459 25,679 COFI 108,969 (3,153) 105,816 111,000 5,184 5,774 Ginnie Mae ARMs 692,385 7,743 700,128 713,617 13,489 12,792 ----------- ----------- ----------- ----------- ----------- ----------- 1,762,975 18,199 1,781,174 1,822,411 41,237 44,384 Non-agency Securities (b) 69,839 644 70,483 71,629 1,146 1,504 CMBS (b) 72,716 (28) 72,688 72,700 12 82 CMO collateral and investments 18,897 542 19,439 20,116 677 871 ----------- ----------- ----------- ----------- ----------- ----------- $ 1,924,427 $ 19,357 $ 1,943,784 $ 1,986,856 $ 43,072 $ 46,841 =========== =========== =========== =========== =========== =========== DEBT SECURITIES HELD-TO-MATURITY: (c) Released CMO collateral: Agency securities $ 1,564 $ 10 $ 1,574 $ 1,717 $ 143 $ 192 Non-agency securities 39,811 1,362 41,173 40,842 (331) 52 CMO collateral 515,020 6,210 521,230 520,458 (772) (3,844) ----------- ----------- ----------- ----------- ----------- ----------- $ 556,395 $ 7,582 $ 563,977 $ 563,017 $ (960) $ (3,600) =========== =========== =========== =========== =========== ===========
(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. 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. CAPSTEAD MORTGAGE CORPORATION MORTGAGE SECURITIES AND SIMILAR INVESTMENTS YIELD/COST ANALYSIS (DOLLARS IN THOUSANDS) (UNAUDITED)
2ND QUARTER AVERAGE (a) AS OF JUNE 30, 2003 ---------------------------------- ------------------------- PROJECTED LIFETIME ACTUAL ACTUAL PREMIUMS 3RD QUARTER PREPAYMENT BASIS YIELD/COST RUNOFF (DISCOUNTS) BASIS (a) YIELD/COST (b) ASSUMPTIONS ----------- ---------- ------ ----------- ---------- -------------- ----------- Agency securities: Fannie Mae/Freddie Mac: Fixed-rate $ 2,865 9.35% 43% $ 16 $ 2,705 9.69% 30% ARMs: LIBOR/CMT 1,019,003 3.67 27 13,603 974,099 3.40 25 COFI 111,468 4.86 28 (3,153) 105,816 4.70 25 Ginnie Mae ARMs 751,343 4.33 39 7,743 700,128 3.93 26 ----------- --------- ---------- 1,884,679 4.01 32 18,209 1,782,748 3.69 25 Non-agency securities 131,379 3.81 35 2,006 111,656 4.51 40 CMBS and other commercial loans 109,937 5.12 32 (2) 108,473 4.35 -- ----------- --------- ---------- 2,125,995 4.06 34 $ 20,213 2,002,877 3.80 25 ========= Borrowings 1,963,485 1.30 1,881,631 1.16 ----------- ---------- $ 121,246 2.64 ========== Capital employed/ financing spread $ 162,510 2.76 =========== Return on assets (c) 2.85
(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 annualized yields reflect ARM coupon resets and lifetime prepayment assumptions as adjusted for expected prepayments over the next three 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 generally 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. CAPSTEAD MORTGAGE CORPORATION COMPARISON OF OPERATING INCOME * AND DILUTED INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
QUARTER ENDED --------------------------------------------------------------------------------- JUNE 30, 2003 MARCH 31, 2003 JUNE 30, 2002 ----------------------- ----------------------- ----------------------- OPERATING DILUTED OPERATING DILUTED OPERATING DILUTED --------- -------- --------- -------- --------- -------- Net income $ 15,241 $ 15,241 $ 17,543 $ 17,543 $ 24,586 $ 24,586 Adjustments for: Depreciation on real estate 927 -- 927 -- 642 -- Gain on asset sales and CMO redemptions (1,393) -- (1,748) -- -- -- Series B preferred dividends (4,982) -- (4,983) -- (4,990) -- -------- -------- -------- -------- -------- -------- $ 9,793 $ 15,241 $ 11,739 $ 17,543 $ 20,238 $ 24,586 ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding 13,978 13,978 13,935 13,935 13,856 13,856 Net effect of dilutive securities: Preferred B shares -- 8,943 -- 8,910 -- 5,638 Stock options and other preferred shares 349 349 407 407 319 319 -------- -------- -------- -------- -------- -------- 14,327 23,270 14,342 23,252 14,175 19,813 ======== ======== ======== ======== ======== ======== $ 0.68 $ 0.65 $ 0.82 $ 0.75 $ 1.43 $ 1.24 ======== ======== ======== ======== ======== ========
* Capstead reports operating income per share calculated after excluding depreciation on real estate, gain on asset sales and CMO redemptions, 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 the amount and timing of any such gains are dependent upon future market conditions. 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. The Series B preferred shares are considered dilutive, for diluted net income per share purposes only, whenever annualized basic net income per share exceeds $2.22 ($1.26 Series B annualized dividend divided by the current conversion rate of 0.5681). -----END PRIVACY-ENHANCED MESSAGE-----