EXHIBIT 10.10

CAPSTEAD MORTGAGE CORPORATION

25,000 Capital Securities

Fixed/Floating Rate Capital Securities

(Liquidation Amount $1,000.00 per Capital Security)

PLACEMENT AGREEMENT

 

 

September 8, 2006

FTN Financial Capital Markets

845 Crossover Lane, Suite 150

Memphis, Tennessee 38117

Keefe, Bruyette & Woods, Inc.

787 7th Avenue

4th Floor

New York, New York 10019

Ladies and Gentlemen:

Capstead Mortgage Corporation, a Maryland corporation (the “Company”), and its
financing subsidiary, Capstead Mortgage Trust III, a Delaware statutory trust
(the “Trust,” and hereinafter together with the Company, the “Offerors”), hereby
confirm their agreement (this “Agreement”) with you as placement agents (the
“Placement Agents”), as follows:

 

 

Section

1. Issuance and Sale of Securities.

 

 

1.1.

Introduction.

The Offerors propose to issue and sell at the Closing (as defined in
Section 2.3.1 hereof) 25,000 of the Trust’s Fixed/Floating Rate Capital
Securities, with a liquidation amount of $1,000.00 per capital security (the
“Capital Securities”), to First Tennessee Bank National Association, a national
banking association organized under the laws of the United States of America
(the “Purchaser”) pursuant to the terms of a Subscription Agreement entered
into, or to be entered into on or prior to the Closing Date (as defined in
Section 2.3.1 hereof), between the Offerors and the Purchaser (the “Subscription
Agreement”), the form of which is attached hereto as Exhibit A and incorporated
herein by this reference.

 

 

1.2.

Operative Agreements.

The entire proceeds from the sale by the Trust to the holders of the Capital
Securities shall be combined with the entire proceeds from the sale by the Trust
to the Company of its common securities (the “Common Securities”), and shall be
used by the Trust to purchase $25,774,000.00 in principal amount of the
Fixed/Floating Rate Junior Subordinated Debentures (the “Debentures”) of the
Company. The Capital Securities and the Common Securities for the Trust shall be
issued pursuant to an Amended and Restated Declaration of Trust among WTC, as
Delaware trustee (the “Delaware Trustee”), WTC, as

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institutional trustee (the “Institutional Trustee”), the Administrators named
therein, and the Company, to be dated as of the Closing Date and in
substantially the form heretofore delivered to the Placement Agents (the “Trust
Agreement”). The Debentures shall be issued pursuant to an Indenture (the
“Indenture”), to be dated as of the Closing Date, between the Company and WTC,
as indenture trustee (the “Indenture Trustee”). The documents identified in this
Section 1.2 and in Section 1.1 are referred to herein as the “Operative
Documents.”

 

 

1.3.

Rights of Purchaser.

The Capital Securities shall be offered and sold by the Trust directly to the
Purchaser without registration of any of the Capital Securities, the Debentures
under the Securities Act of 1933, as amended (the “Securities Act”), or any
other applicable securities laws in reliance upon exemptions from the
registration requirements of the Securities Act and other applicable securities
laws. The Offerors agree that this Agreement shall be incorporated by reference
into the Subscription Agreement and the Purchaser shall be entitled to each of
the benefits of the Placement Agents and the Purchaser under this Agreement and
shall be entitled to enforce obligations of the Offerors under this Agreement as
fully as if the Purchaser were a party to this Agreement. The Offerors and the
Placement Agents have entered into this Agreement to set forth their
understanding as to their relationship and their respective rights, duties and
obligations.

 

 

1.4.

Legends.

Upon original issuance thereof, and until such time as the same is no longer
required under the applicable requirements of the Securities Act, the Capital
Securities and Debentures certificates shall each contain a legend as required
pursuant to any of the Operative Documents.

 

 

Section

2. Purchase of Capital Securities.

 

 

2.1.

Exclusive Rights; Purchase Price.

From the date hereof until the Closing Date (which date may be extended by
mutual agreement of the Offerors and the Placement Agents), the Offerors hereby
grant to the Placement Agents the exclusive right to arrange for the sale of the
Capital Securities to the Purchaser at a purchase price of $1,000.00 per Capital
Security.

 

 

2.2.

Subscription Agreement.

The Offerors hereby agree to evidence their acceptance of the subscription by
countersigning a copy of the Subscription Agreement and returning the same to
the Placement Agents.

 

 

2.3.

Closing and Delivery of Payment.

 

 

2.3.1.

Closing; Closing Date.

The sale and purchase of the Capital Securities by the Offerors to the Purchaser
shall take place at a closing (the “Closing”) at the offices of Lewis, Rice &
Fingersh, L.C., at 10:00 a.m. (St. Louis time) on September 11, 2006, or such
other business day as may be agreed upon by the Offerors and the Placement
Agents (the “Closing Date”); provided, however, that in no event shall the
Closing Date occur later than September 29, 2006 unless consented to by the
Purchaser. Payment by the Purchaser shall be payable in the manner set forth in
the Subscription Agreement and shall be made prior to or on the Closing Date.

 

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2.3.2.

Delivery.

The certificates for the Capital Securities shall be in definitive form,
registered in the name of the Purchaser, or the Purchaser’s designee, and in the
aggregate amount of the Capital Securities purchased by the Purchaser.

 

 

2.3.3.

Transfer Agent.

The Offerors shall deposit the certificates representing the Capital Securities
with the Institutional Trustee or other appropriate party prior to the Closing
Date.

2.4. Placement Agents’ Fees and Expenses.

 

 

2.4.1.

Placement Agents’ Compensation.

Because the proceeds from the sale of the Capital Securities shall be used to
purchase the Debentures from the Company, the Company shall pay an aggregate of
$27.50 for each $1,000.00 of principal amount of Debentures sold to the Trust
(excluding the Debentures related to the Common Securities purchased by the
Company). Of this amount, $13.75 for each $1,000.00 of principal amount of
Debentures shall be payable to FTN Financial Capital Markets and $13.75 for each
$1,000.00 of principal amount of Debentures shall be payable to Keefe,
Bruyette & Woods, Inc. Such amount shall be delivered to WTC or such other
person designated by the Placement Agents on the Closing Date and shall be
allocated between and paid to the respective Placement Agents as directed by the
Placement Agents.

 

 

2.4.2.

Costs and Expenses.

Whether or not this Agreement is terminated or the sale of the Capital
Securities is consummated, the Company hereby covenants and agrees that it shall
pay or cause to be paid (directly or by reimbursement) all reasonable costs and
expenses incident to the performance of the obligations of the Offerors under
this Agreement, including all fees, expenses and disbursements of counsel and
accountants for the Offerors; all reasonable expenses incurred by the Offerors
incident to the preparation, execution and delivery of the Trust Agreement and
the Indenture; and all other reasonable costs and expenses incurred by the
Offerors incident to the performance of the obligations of the Company hereunder
and under the Trust Agreement. The Placement Agents shall pay or cause to be
paid all costs and expenses incident to the performance of its obligations under
this Agreement, including all fees, expenses and disbursements of its counsel
and all other costs and expenses incurred by the Placement Agents incident to
the performance of its obligations hereunder.

 

 

2.5.

Failure to Close.

If any of the conditions to the Closing specified in this Agreement shall not
have been fulfilled to the satisfaction of the Placement Agents or if the
Closing shall not have occurred on or before 10:00 a.m. (St. Louis time) on
September 29, 2006, then each party hereto, notwithstanding anything to the
contrary in this Agreement, shall be relieved of all further obligations under
this Agreement without thereby waiving any rights it may have by reason of such
nonfulfillment or failure; provided, however, that the obligations of the
parties under Sections 2.4.2, 7.5 and 9 shall not be so relieved and shall
continue in full force and effect.

 

 

Section

3. Closing Conditions.

The obligations of the Purchaser and the Placement Agents on the Closing Date
shall be subject to the accuracy, at and as of the Closing Date, of the
representations and warranties of the Offerors contained in this Agreement, to
the accuracy, at and as of the Closing Date, of the statements of the Offerors
made in any certificates pursuant to this Agreement, to the performance by the
Offerors of their respective obligations under this Agreement, to compliance, at
and as of the Closing Date, by the Offerors with their respective agreements
herein contained, and to the following further conditions:

 

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3.1.

Opinions of Counsel.

On the Closing Date, the Placement Agents shall have received the following
favorable opinions, each dated as of the Closing Date: (a) from Andrews
Kurth LLP, counsel for the Company and addressed to the Purchaser, the Placement
Agents, the Offerors and WTC in substantially the form set forth on Exhibit B-1
attached hereto and incorporated herein by this reference, (b) from Hogan &
Hartson L.L.P., Maryland counsel for the Company and addressed to the Purchaser,
the Placement Agents, the Offerors and WTC in substantially the form set forth
on Exhibit B-2 attached hereto and incorporated herein by this reference,
(c) from Richards, Layton & Finger, P.A., special Delaware counsel to the Trust
and addressed to the Purchaser, the Placement Agents and the Offerors, in
substantially the form set forth on Exhibit B-3 attached hereto and incorporated
herein by this reference and (d) from Lewis, Rice & Fingersh, L.C., special tax
counsel to the Offerors, and addressed to the Placement Agents and the Offerors,
addressing the items set forth on Exhibit B-4 attached hereto and incorporated
herein by this reference, subject to the receipt by Lewis, Rice & Fingersh, L.C.
of a representation letter from the Company in the form set forth in Exhibit B-4
completed in a manner reasonably satisfactory to Lewis, Rice & Fingersh, L.C.
(collectively, the “Offerors’ Counsel Opinions”). In rendering the Offerors’
Counsel Opinions, counsel to the Offerors may rely as to factual matters upon
certificates or other documents furnished by officers, directors and trustees of
the Offerors (copies of which shall be delivered to the Placement Agents and the
Purchaser) and by government officials, and upon such other documents as counsel
to the Offerors may, in their reasonable opinion, deem appropriate as a basis
for the Offerors’ Counsel Opinions. Counsel to the Offerors may specify the
jurisdictions in which they are admitted to practice and that they are not
admitted to practice in any other jurisdiction and are not experts in the law of
any other jurisdiction. If the Offerors’ counsel is not admitted to practice in
the State of New York, the opinion of Offerors’ counsel may assume, for purposes
of the opinion, that the laws of the State of New York are substantively
identical, in all respects material to the opinion, to the internal laws of the
state in which such counsel is admitted to practice. Such Offerors’ Counsel
Opinions shall not state that they are to be governed or qualified by, or that
they are otherwise subject to, any treatise, written policy or other document
relating to legal opinions, including, without limitation, the Legal Opinion
Accord of the ABA Section of Business Law (1991).

 

 

3.2.

Officer’s Certificate.

At the Closing Date, the Purchaser and the Placement Agents shall have received
certificates from an authorized officer of the Company, dated as of the Closing
Date, stating that (i) the representations and warranties of the Offerors set
forth in Section 5 hereof are true and correct as of the Closing Date and that
the Offerors have complied with all agreements and satisfied all conditions on
their part to be performed or satisfied at or prior to the Closing Date,
(ii) since the date of this Agreement the Offerors have not incurred any
liability or obligation, direct or contingent, or entered into any material
transactions, other than in the ordinary course of business, which is material
to the Offerors, and (iii) covering such other matters as the Placement Agents
may reasonably request.

 

 

3.3.

Administrator’s Certificate.

At the Closing Date, the Purchaser and the Placement Agents shall have received
a certificate of one or more Administrators of the Trust, dated as of the
Closing Date, stating that the representations and warranties of the Trust set
forth in Section 5 are true and correct as of the Closing Date and that the
Trust has complied with all agreements and satisfied all conditions on its part
to be performed or satisfied at or prior to the Closing Date.

 

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3.4.

Purchase Permitted by Applicable Laws; Legal Investment.

The purchase of and payment for the Capital Securities as described in this
Agreement and pursuant to the Subscription Agreement shall (a) not be prohibited
by any applicable law or governmental regulation, (b) not subject the Purchaser
or the Placement Agents to any penalty or, in the reasonable judgment of the
Purchaser and the Placement Agents, other onerous conditions under or pursuant
to any applicable law or governmental regulation, and (c) be permitted by the
laws and regulations of the jurisdictions to which the Purchaser and the
Placement Agents are subject.

 

 

3.5.

Consents and Permits.

The Company and the Trust shall have received all consents, permits and other
authorizations, and made all such filings and declarations, as may be required
from any person or entity pursuant to any law, statute, regulation or rule
(federal, state, local and foreign), or pursuant to any agreement, order or
decree to which the Company or the Trust is a party or to which either is
subject, in connection with the transactions contemplated by this Agreement.

 

 

3.6.

Information.

Prior to or on the Closing Date, the Offerors shall have furnished to the
Placement Agents such further information, certificates, opinions and documents
addressed to the Purchaser and the Placement Agents, which the Placement Agents
may reasonably request, including, without limitation, a complete set of the
Operative Documents or any other documents or certificates required by this
Section 3; and all proceedings taken by the Offerors in connection with the
issuance, offer and sale of the Capital Securities as herein contemplated shall
be reasonably satisfactory in form and substance to the Placement Agents.

If any condition specified in this Section 3 shall not have been fulfilled when
and as required in this Agreement, or if any of the opinions or certificates
mentioned above or elsewhere in this Agreement shall not be reasonably
satisfactory in form and substance to the Placement Agents, this Agreement may
be terminated by the Placement Agents by notice to the Offerors at any time at
or prior to the Closing Date. Notice of such termination shall be given to the
Offerors in writing or by telephone or facsimile confirmed in writing.

 

 

Section

4. Conditions to the Offerors’ Obligations.

The obligations of the Offerors to sell the Capital Securities to the Purchaser
and consummate the transactions contemplated by this Agreement shall be subject
to the accuracy, at and as of the Closing Date, of the representations and
warranties of the Placement Agents contained in this Agreement and to the
following further conditions:

 

 

4.1.

Executed Agreement.

The Offerors shall have received from the Placement Agents an executed copy of
this Agreement.

 

 

4.2.

Fulfillment of Other Obligations.

The Placement Agents shall have fulfilled all of their other obligations and
duties required to be fulfilled under this Agreement prior to or at the Closing.

 

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Section

5. Representations and Warranties of the Offerors.

Except as set forth on the Disclosure Schedule (as defined in Section 11.1)
attached hereto, if any, the Offerors jointly and severally represent and
warrant to the Placement Agents and the Purchaser as of the date hereof and as
of the Closing Date as follows:

 

 

5.1.

Securities Law Matters.

(a) Neither the Company nor the Trust, nor any of their “Affiliates” (as defined
in Rule 501(b) of Regulation D under the Securities Act (“Regulation D”)), nor
any person acting on any of their behalf has, directly or indirectly, made
offers or sales of any security, or solicited offers to buy any security, under
circumstances that would require the registration under the Securities Act of
any of the Capital Securities or the Debentures (collectively, the
“Securities”).

(b) Neither the Company nor the Trust, nor any of their Affiliates, nor any
person acting on its or their behalf has (i) other than the Placement Agents,
offered for sale or solicited offers to purchase the Securities or (ii) engaged
in any form of offering, general solicitation or general advertising (within the
meaning of Regulation D) in connection with any offer or sale of any of the
Securities.

(c) The Securities satisfy the eligibility requirements of Rule 144A(d)(3) under
the Securities Act.

(d) Neither the Company nor the Trust is or, after giving effect to the offering
and sale of the Capital Securities and the consummation of the transactions
described in this Agreement, will be an “investment company” or an entity
“controlled” by an “investment company,” in each case within the meaning of
Section 3(a) of the Investment Company Act of 1940, as amended (the “Investment
Company Act”).

(e) Neither the Company nor the Trust has paid or agreed to pay to any person or
entity (other than the Placement Agents) any compensation for soliciting another
to purchase any of the Securities.

(f) The Company is a “qualified purchaser” within the meaning of
section 2(a)(51) of the Investment Company Act and will purchase the Common
Securities for its own account.

 

 

5.2.

Organization, Standing and Qualification of the Trust.

The Trust has been duly created and is validly existing in good standing as a
statutory trust under the Delaware Statutory Trust Act (the “Statutory Trust
Act”) with the power and authority to own property and to conduct the business
it transacts and proposes to transact and to enter into and perform its
obligations under the Operative Documents. The Trust is duly qualified to
transact business as a foreign entity and is in good standing in each
jurisdiction in which such qualification is necessary, except where the failure
to so qualify or be in good standing would not have a material adverse effect on
the Trust. The Trust is not a party to or otherwise bound by any agreement other
than the Operative Documents. The Trust is and will, under current law, be
classified for federal income tax purposes as a grantor trust and not as an
association taxable as a corporation.

 

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5.3.

Trust Agreement.

The Trust Agreement has been duly authorized by the Company and, on the Closing
Date, will have been duly executed and delivered by the Company and the
Administrators of the Trust, and, assuming due authorization, execution and
delivery by the Delaware Trustee and the Institutional Trustee, will be a valid
and binding obligation of the Company and such Administrators, enforceable
against them in accordance with its terms, subject to (a) applicable bankruptcy,
insolvency, moratorium, receivership, reorganization, liquidation and other laws
relating to or affecting creditors’ rights generally, and (b) general principles
of equity (regardless of whether considered and applied in a proceeding in
equity or at law) (“Bankruptcy and Equity”). Each of the Administrators of the
Trust is an employee or a director of the Company and has been duly authorized
by the Company to execute and deliver the Trust Agreement.

 

 

5.4.

Indenture.

The Indenture has been duly authorized by the Company and, on the Closing Date,
will have been duly executed and delivered by the Company, and, assuming due
authorization, execution and delivery by the Indenture Trustee, will be a valid
and binding obligation of the Company enforceable against it in accordance with
its terms, subject to Bankruptcy and Equity.

 

 

5.5.

Capital Securities and Common Securities.

The Capital Securities and the Common Securities have been duly authorized by
the Trust Agreement and, when issued and delivered against payment therefor on
the Closing Date to the Purchaser, in the case of the Capital Securities, and to
the Company, in the case of the Common Securities, will be validly issued and
represent undivided beneficial interests in the assets of the Trust. None of the
Capital Securities or the Common Securities is subject to preemptive or other
similar rights. On the Closing Date, all of the issued and outstanding Common
Securities will be directly owned by the Company free and clear of any pledge,
security interest, claim, lien or other encumbrance.

 

 

5.6.

Debentures.

The Debentures have been duly authorized by the Company and, at the Closing
Date, will have been duly executed and delivered to the Indenture Trustee for
authentication in accordance with the Indenture, and, when authenticated in the
manner provided for in the Indenture and delivered against payment therefor by
the Trust, will constitute valid and binding obligations of the Company entitled
to the benefits of the Indenture enforceable against the Company in accordance
with their terms, subject to Bankruptcy and Equity.

 

 

5.7.

Power and Authority.

This Agreement has been duly authorized, executed and delivered by the Company
and the Trust and constitutes the valid and binding obligation of the Company
and the Trust, enforceable against the Company and the Trust in accordance with
its terms, subject to Bankruptcy and Equity.

 

 

5.8.

No Defaults.

The Trust is not in violation of the Trust Agreement or, to the knowledge of the
Administrators, any provision of the Statutory Trust Act. The execution,
delivery and performance by the Company or the Trust of this Agreement or the
Operative Documents to which it is a party, and the consummation of the
transactions contemplated herein or therein and the use of the proceeds
therefrom, will not conflict with or constitute a breach of, or a default under,
or result in the creation or imposition of any lien, charge

 

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or other encumbrance upon any property or assets of the Trust, the Company or
any of the Company’s Subsidiaries (as defined in Section 5.11 hereof) pursuant
to any contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Trust, the Company or any of its Subsidiaries is a party
or by which it or any of them may be bound, or to which any of the property or
assets of any of them is subject, except for a conflict, breach, default, lien,
charge or encumbrance which could not, singly or in the aggregate, reasonably be
expected to have a Material Adverse Effect nor will such action result in any
violation of the Trust Agreement or the Statutory Trust Act or require the
consent, approval, authorization or order of any court or governmental agency or
body. As used herein, the term “Material Adverse Effect” means any one or more
effects that individually or in the aggregate (i) are material and adverse to
the Offerors’ ability to consummate the transactions contemplated herein or in
the Operative Documents, (ii) could cause the Company to fail to be organized or
operated in conformity with the requirements for qualification and taxation as a
real estate investment trust (“REIT”) under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the “Code”), or (iii) are material
and adverse to the financial condition, earnings, business, liabilities and
assets of the Company and its Subsidiaries taken as whole, whether or not
arising from transactions occurring in the ordinary course of business.

 

 

5.9.

Organization, Standing and Qualification of the Company.

The Company has been duly incorporated and is validly existing as a corporation
in good standing under the laws of Maryland, with all requisite corporate power
and authority to own its properties and conduct the business it transacts and
proposes to transact, and is duly qualified to transact business and is in good
standing as a foreign corporation in each jurisdiction where the nature of its
activities requires such qualification, except where the failure of the Company
to be so qualified would not, singly or in the aggregate, have a Material
Adverse Effect.

 

 

5.10.

Capital Stock of the Company.

All of the issued and outstanding shares of capital stock of the Company are
validly issued, fully paid and non-assessable; and none of the issued and
outstanding capital stock of the Company was issued in violation of any
preemptive or similar rights arising by operation of law, under the charter or
by-laws of such entity or under any agreement to which the Company is a party.

 

 

5.11.

Subsidiaries of the Company.

The Company has no “significant subsidiaries” (as defined in Section 1-02(w) of
Regulation S-X to the Securities Act.

 

 

5.12.

Permits.

The Company and each of its subsidiaries (as defined in Section 1-02(x) of
Regulation S-X to the Securities Act) (the “Subsidiaries”) have all requisite
power and authority, and all necessary authorizations, approvals, orders,
licenses, certificates and permits of and from regulatory or governmental
officials, bodies and tribunals, to own or lease their respective properties and
to conduct their respective businesses as now being conducted, except such
authorizations, approvals, orders, licenses, certificates and permits which, if
not obtained and maintained, would not, singly or in the aggregate, have a
Material Adverse Effect, and neither the Company nor any of its Subsidiaries has
received any notice of proceedings relating to the revocation or modification of
any such authorizations, approvals, orders, licenses, certificates or permits
which, singly or in the aggregate, if the failure to be so licensed or approved
is the subject of an unfavorable decision, ruling or finding, would, singly or
in the aggregate, have a Material Adverse Effect; and the Company and its
Subsidiaries are in compliance with all applicable laws, rules, regulations and
orders and consents, the violation of which would, singly or in the aggregate,
have a Material Adverse Effect.

 

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5.13.

Conflicts, Authorizations and Approvals.

Neither the Company nor any of its Subsidiaries is in violation of its
respective articles or certificate of incorporation, charter or by-laws or
similar organizational documents or in default in the performance or observance
of any obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument to which either the Company or any of its Subsidiaries is a party, or
by which it or any of them may be bound or to which any of the property or
assets of the Company or any of its Subsidiaries is subject, the effect of which
violation or default in performance or observance would have, singly or in the
aggregate, a Material Adverse Effect.

 

 

5.14.

Financial Statements.

(a) The consolidated balance sheets of the Company and all of its Subsidiaries
as of December 31, 2005 and December 31, 2004 and related consolidated income
statements and statements of changes in shareholders’ equity for the three years
ended December 31, 2005 together with the notes thereto, and the consolidated
balance sheets of the Company and all of its Subsidiaries as of June 30, 2006
and the related consolidated income statements and statements of changes in
shareholders’ equity for the six months then ended, copies of each of which have
been provided to the Placement Agents (together, the “Financial Statements”),
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (“GAAP”) (except as may be disclosed therein) and
fairly present in all material respects the financial position and the results
of operations and changes in shareholders’ equity of the Company and all of its
Subsidiaries as of the dates and for the periods indicated (subject, in the case
of interim financial statements, to normal recurring year-end adjustments, none
of which shall be material).

(b) Since the respective dates of the Financial Statements, there has been
(i) no material adverse change or development with respect to the financial
condition or earnings of the Company and all of its Subsidiaries, taken as a
whole, or (ii) any dividend or distribution of any kind declared, paid or made
by the Company on any class of its capital stock other than regular quarterly
dividends on the Company’s common stock, regular quarterly dividends on the
Company’s Series A preferred stock and regular monthly dividends on the
Company’s Series B preferred stock.

(c) The accountants of the Company who certified the Financial Statements are
independent public accountants of the Company and its Subsidiaries within the
meaning of the Securities Act and the rules and regulations thereunder.

(d) The books, records and accounts of the Company accurately and fairly
reflect, in reasonable detail, the transactions in, and dispositions of, the
assets of, and the results of operations of, the Company. The Company maintains
a system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management’s
general or

 

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specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and to maintain
asset accountability, (iii) access to assets is permitted only in accordance
with management’s general or specific authorization, and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.

 

 

5.15.

Exchange Act Reporting.

The reports filed with the Securities and Exchange Commission (the “Commission”)
by the Company under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) and the regulations thereunder at the time they were filed with
the Commission complied as to form in all material respects with the
requirements of the Exchange Act and such reports did not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading. Other than such
instruments, agreements, contracts and other documents as are filed as exhibits
to the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q or
Current Reports on Form 8-K, there are no instruments, agreements, contracts or
documents of a character described in Item 601 of Regulation S-K promulgated by
the Commission to which the Company is a party, other than the Operative
Documents.

 

 

5.16.

Governmental Matters.

Neither the Company nor any of its Subsidiaries is subject or is party to, or
has received any notice or advice that any of them may become subject or party
to, any investigation with respect to, any cease-and-desist order, agreement,
consent agreement, memorandum of understanding or other regulatory enforcement
action, proceeding or order with or by, or is a party to any commitment letter
or similar undertaking to, has adopted any board resolutions at the request of,
any government, governmental authority, agency or instrumentality or court,
domestic or foreign, having jurisdiction over the Company or its Subsidiaries or
their respective property or assets (collectively, the “Governmental Entities”)
that currently restricts in any material respect the conduct of their business
or that in any material manner relates to their capital adequacy, their ability
or authority to pay dividends or make distributions to their shareholders or
make payments of principal or interest on their debt obligations, their
management or their business. No filing with, or authorization, approval,
consent, license, order, registration, qualification or decree of, any
Governmental Entity, other than those that have been made or obtained, is
necessary or required for the performance by the Trust or the Company of their
respective obligations under the Operative Documents, as applicable, or the
consummation by the Trust and the Company of the transactions contemplated by
the Operative Documents. Neither the Company nor any of the Subsidiaries is
currently unable to pay dividends or make distributions to its shareholders with
respect to any class of its equity securities, or prohibited from paying
principal or interest on its debt obligations, due to a restriction or
limitation, whether by statute, contract or otherwise, and, in the reasonable
judgment of the Company’s management, neither the Company nor any of the
Subsidiaries will be unable in the foreseeable future to pay dividends or make
distributions with respect to any class of equity securities, or be prohibited
from paying principal or interest on its debt obligations, due to a restriction
or limitation, whether by statute, contract or otherwise.

 

 

5.17.

No Undisclosed Liabilities.

Neither the Company nor any of its Subsidiaries has any material liability,
whether known or unknown, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due, including any liability for taxes (and there
is no past or present fact, situation, circumstance, condition or other basis
for any present or future action, suit, proceeding, hearing, charge, complaint,
claim or demand against the Company or its

 

10

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Subsidiaries giving rise to any such liability) that, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect,
except (i) for liabilities set forth in the Financial Statements and (ii) normal
fluctuation in the amount of the liabilities referred to in clause (i) above
occurring in the ordinary course of business of the Company and all of its
Subsidiaries since the date of the most recent balance sheet included in the
Financial Statements.

 

 

5.18.

Litigation.

No charge, investigation, action, suit or proceeding is pending or, to the
knowledge of the Offerors, threatened, against or affecting the Company or its
Subsidiaries or any of their respective properties before or by any courts or
any regulatory, administrative or governmental official, commission, board,
agency or other authority or body, or any arbitrator, wherein an unfavorable
decision, ruling or finding could have, singly or in the aggregate, a Material
Adverse Effect.

 

 

5.19.

Labor Matters.

No labor dispute with the employees of the Trust or the Company exists or, to
the knowledge of the executive officers of the Trust or the Company, is
imminent, except those which would not, singly or in the aggregate, have a
Material Adverse Effect.

 

 

5.20.

Property.

Except as disclosed in the Company’s Exchange Act reports and for liens for
(i) taxes and other governmental charges and assessments which are not yet
delinquent or the amount of which is being contested in good faith by
appropriate proceedings; (ii) encumbrances in the nature of zoning restrictions,
easements, rights or restrictions of record on the use of real property;
(iii) statutory or common law liens to secure landlords, lessors or renters
under leases or rental agreements confined to the premises rented; (iv) liens
created under or in connection with asset securitizations, repurchase
agreements, warehouse credit facilities or other loan facilities; and (v) other
liens incurred in the ordinary course of business not material in amount, the
Company and each Subsidiary has good and marketable title to all of its
respective real and personal properties, in each case free and clear of all
liens and defects, except for those that would not, singly or in the aggregate,
have a Material Adverse Effect; and all of the leases and subleases under which
the Trust or any Subsidiary holds properties are in full force and effect,
except where the failure of such leases and subleases to be in full force and
effect would not, singly or in the aggregate, have a Material Adverse Effect;
and neither the Company nor any Subsidiary has any notice of any claim of any
sort that has been asserted by anyone adverse to the rights of a Subsidiary or
the Company under any such leases or subleases, or affecting or questioning the
rights of such entity to the continued possession of the leased or subleased
premises under any such lease or sublease, except for such claims that would
not, singly or in the aggregate, have a Material Adverse Effect.

 

 

5.21.

Tax Matters.

(a) Commencing with its taxable year ended December 31, 1985 the Company has
been, and upon the completion of the transactions contemplated hereby, the
Company will continue to be, organized and operated in conformity with the
requirements for qualification and taxation as a REIT under Sections 856 through
860 of the Code, and the Company’s proposed method of operation will enable it
to continue to meet the requirements for qualification and taxation as a REIT
under the Code, and no actions have been taken (or not taken which are required
to be taken) which would reasonably be expected to cause such qualification to
be lost. The Company expects to continue to be organized and to operate in a
manner so as to qualify as a REIT in the taxable year ending December 31, 2006
and succeeding taxable years.

 

11

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(b) The Company and each Subsidiary has timely and duly filed all Tax Returns
(as defined below) required to be filed by them, and all such Tax Returns are
true, correct and complete, except for such failures to timely file or
inaccuracies that would not, singly or in the aggregate, have a Material Adverse
Effect. The Company and each Subsidiary has timely and duly paid in full all
material Taxes (as defined below) required to be paid by them (whether or not
such amounts are shown as due on any Tax Return) and has timely and duly paid
all required estimated Tax payments in accordance with applicable law. There are
no federal, state, or other Tax audits or deficiency assessments proposed or
pending with respect to the Company or any Subsidiary, and, to the knowledge of
the Offerors, no such audits or assessments are threatened. As used herein, the
terms “Tax” or “Taxes” mean (i) all federal, state, local, and foreign taxes,
and other assessments of a similar nature (whether imposed directly or through
withholding), including any interest, additions to tax, or penalties applicable
thereto, imposed by any Governmental Entity, and (ii) all liabilities in respect
of such amounts arising as a result of being a member of any affiliated,
consolidated, combined, unitary or similar group, as a successor to another
person or by contract. As used herein, the term “Tax Returns” means all federal,
state, local, and foreign Tax returns, declarations, statements, reports,
schedules, forms, and information returns and any amendments thereto filed or
required to be filed with any Governmental Entity.

(c) To the knowledge of the Offerors, there are no rulemaking or similar
proceedings before the United States Internal Revenue Service or comparable
federal, state, local or foreign government bodies which involve or affect the
Company or any Subsidiary, which, if the subject of an action unfavorable to the
Company or any Subsidiary, could result in a Material Adverse Effect.

 

 

5.22.

Insurance.

The Company and each Subsidiary and their respective assets and businesses are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts in all material respects as are customary in the
businesses in which they are engaged or propose to engage after giving effect to
the transactions contemplated hereby. All policies of insurance and fidelity or
surety bonds insuring the Company and each Subsidiary or their respective
business, assets, employees, officers and directors are in full force and
effect. The Company and each Subsidiary are in compliance with the terms of such
policies and instruments in all material respects. The Company does not have
reason to believe that it or any Subsidiary will not be able to renew such
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue their
respective business at a cost that would not have a Material Adverse Effect.
Within the past twelve months, neither the Company nor any Subsidiary has been
denied any insurance coverage which it has sought or for which it has applied.

 

 

5.23.

Corporate Funds.

The Company or, to the knowledge of the Offerors, any person acting on behalf of
the Company, including, without limitation, any director, officer, agent or
employee of the Company, has not, directly or indirectly, while acting on behalf
of the Company (i) used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity;
(ii) made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds; (iii) violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended; or (iv) made any other unlawful payment.

 

12

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5.24.

Environmental Compliance.

(a) Except as would not, individually or in the aggregate, have a Material
Adverse Effect, (i) the Company and each Subsidiary have been and are in
compliance with applicable Environmental Laws (as defined below), (ii) neither
the Company nor any Subsidiary nor, to the knowledge of the Offerors, any other
owners of any of the real properties currently or previously owned, leased or
operated by the Company or any Subsidiary (the “Properties”) at any time or any
other party, has at any time released (as such term is defined in CERCLA (as
defined below)) or otherwise disposed of Hazardous Materials (as defined below)
on, to, in, under or from the Properties, (iii) neither the Company nor any
Subsidiary intends to use or will use the Properties or any subsequently
acquired properties, other than in compliance with applicable Environmental
Laws, (iv) neither the Company nor any Subsidiary has received any notice of, or
has any knowledge of any occurrence or circumstance which, with notice or
passage of time or both, would give rise to a claim under or pursuant to any
Environmental Law with respect to the Properties, or their respective assets or
arising out of the conduct of the Company or any Subsidiary, (v) none of the
Properties are included or, to the knowledge of the Offerors, proposed for
inclusion, on the National Priorities List issued pursuant to CERCLA by the
United States Environmental Protection Agency or, to the knowledge of the
Offerors, proposed for inclusion on any similar list or inventory issued
pursuant to any other Environmental Law or issued by any other Governmental
Entity, (vi) none of the Company, any Subsidiary, any of their respective agents
or, to the knowledge of the Offerors, any other person or entity for whose
conduct any of them is or may be held responsible, has generated, manufactured,
refined, transported, treated, stored, handled, disposed, transferred, produced
or processed any Hazardous Material at any of the Properties, except in
compliance with all applicable Environmental Laws, and has not transported or
arranged for the transport of any Hazardous Material from the Properties to
another property, except in compliance with all applicable Environmental Laws,
(vii) no lien has been imposed on the Properties by any Governmental Entity in
connection with the presence on or off such Property of any Hazardous Material,
and (vii) neither the Company nor any Subsidiary nor, to the knowledge of the
Offerors, any other person or entity for whose conduct the Company or any
Subsidiary is or may be held responsible, has entered into or been subject to
any consent decree, compliance order, or administrative order with respect to
the Properties or any facilities or improvements or any operations or activities
thereon.

(b) As used herein, “Hazardous Materials” shall include, without limitation, any
flammable materials, explosives, radioactive materials, hazardous materials,
hazardous substances, hazardous wastes, toxic substances or related materials,
asbestos, petroleum, petroleum products and any hazardous material as defined by
any federal, state or local environmental law, statute, ordinance, rule or
regulation, including, without limitation, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C.
§§9601-9675 (“CERCLA”), the Hazardous Materials Transportation Act, as amended,
49 U.S.C. §§5101-5127, the Resource Conservation and Recovery Act, as amended,
42 U.S.C. §§6901-6992k, the Emergency Planning and Community Right-to-Know Act
of 1986, 42 U.S.C. §§11001-11050, the Toxic Substances Control Act, 15 U.S.C.
§§2602-2692, the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.
§§136-136y, the Clean Air Act, 42 U.S.C. §§7401-7642, the Clean Water Act
(Federal Water Pollution Control Act), 33 U.S.C. §§1251-1387, the Safe Drinking
Water Act, 42 U.S.C. §§300f-300j-26, and the Occupational Safety and Health Act,
29 U.S.C. §§651-678, and any analogous state laws, as any of the above may be
amended from time to time and in the regulations promulgated pursuant to each of
the foregoing (including environmental statutes and laws not specifically
defined herein) (individually, an “Environmental Law” and collective, the
“Environmental Laws”) or by any Governmental Entity.

 

13

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(c) In the ordinary course of their respective businesses, the Company and each
Subsidiary periodically review the effect of Environmental Laws on their
respective businesses, operations and properties, and periodically identify and
evaluate associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of properties
or compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities to
third parties). On the basis of such reviews and the amount of their respective
established reserves, the Company has reasonably concluded that such associated
costs and liabilities would not, individually or in the aggregate, have a
Material Adverse Effect.

 

 

5.25.

OSHA Compliance.

Neither the Company nor any of its Subsidiaries is in violation of any federal
or state law or regulation relating to occupational safety and health, and the
Company and its Subsidiaries have received all permits, licenses or other
approvals required of them under applicable federal and state occupational
safety and health and environmental laws and regulations to conduct their
respective businesses, and the Company and each of its Subsidiaries are in
compliance with all terms and conditions of any such permit, license or
approval, except any such violation of law or regulation, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals which would not,
singly or in the aggregate, result in a Material Adverse Effect.

 

 

Section

6. Representations and Warranties of the Placement Agents.

Each Placement Agent represents and warrants to the Offerors as to itself (but
not as to the other Placement Agent) as follows:

 

 

6.1.

Organization, Standing and Qualification.

(a) FTN Financial Capital Markets is a division of First Tennessee Bank National
Association, a national banking association duly organized, validly existing and
in good standing under the laws of the United States, with full power and
authority to own, lease and operate its properties and conduct its business as
currently being conducted. FTN Financial Capital Markets is duly qualified to
transact business as a foreign corporation and is in good standing in each other
jurisdiction in which it owns or leases property or conducts its business so as
to require such qualification and in which the failure to so qualify would,
individually or in the aggregate, have a material adverse effect on the
condition (financial or otherwise), earnings, business, prospects or results of
operations of FTN Financial Capital Markets.

(b) Keefe, Bruyette & Woods, Inc. is a corporation duly organized, validly
existing and in good standing under the laws of the State of New York, with full
power and authority to own, lease and operate its properties and conduct its
business as currently being conducted. Keefe, Bruyette & Woods, Inc. is duly
qualified to transact business as a foreign corporation and is in good standing
in each other jurisdiction in which it owns or leases property or conducts its
business so as to require such qualification and in which the failure to so
qualify would, individually or in the aggregate, have a material adverse effect
on the condition (financial or otherwise), earnings, business, prospects or
results of operations of Keefe, Bruyette & Woods, Inc.

 

14

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6.2.

Power and Authority.

The Placement Agent has all requisite power and authority to enter into this
Agreement, and this Agreement has been duly and validly authorized, executed and
delivered by the Placement Agent and constitutes the legal, valid and binding
agreement of the Placement Agent, enforceable against the Placement Agent in
accordance with its terms, subject to Bankruptcy and Equity and except as any
indemnification or contribution provisions thereof may be limited under
applicable securities laws. No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any Governmental
Entity, other than those that have been made or obtained, is necessary or
required for the performance by the Placement Agent of its obligations under
this Agreement or the consummation by the Placement Agent of the transactions
contemplated by this Agreement.

 

 

6.3.

General Solicitation.

In the case of the offer and sale of the Capital Securities, no form of general
solicitation or general advertising was used by the Placement Agent or its
representatives including, but not limited to, advertisements, articles, notices
or other communications published in any newspaper, magazine or similar medium
or broadcast over television or radio or any seminar or meeting whose attendees
have been invited by any general solicitation or general advertising. Neither
the Placement Agent nor its representatives have engaged or will engage in any
“directed selling efforts” within the meaning of Regulation S with respect to
the Capital Securities.

 

 

6.4.

Purchaser.

The Placement Agent has made such reasonable inquiry as is necessary to
determine that the Purchaser is acquiring the Capital Securities for its own
account, except as contemplated in Section 7.8 hereto, that the Purchaser does
not intend to distribute the Capital Securities in contravention of the
Securities Act or any other applicable securities laws.

 

 

6.5.

Qualified Purchasers.

The Placement Agent has not offered or sold and will not arrange for the offer
or sale of the Capital Securities except (a) to those the Placement Agent
reasonably believes are “qualified purchasers” within the meaning of
Section 2(a)(51) of the Investment Company Act and (b)(i) to those the Placement
Agent reasonably believes are institutional “accredited investors” (as defined
in Rule 501(a)(1), (2), (3) or (7) of Regulation D) and (ii) in any other manner
that does not require registration of the Capital Securities under the
Securities Act. In connection with each such sale, the Placement Agent has taken
or will take reasonable steps to ensure that the respective purchaser is aware
that (y) such sale is being made in reliance on an exemption under the
Securities Act and (z) future transfers of the Capital Securities will not be
made except in compliance with applicable securities laws.

 

 

6.6.

Offering Circulars.

Neither the Placement Agent nor its representatives will include any non-public
information about the Company, the Trust or any of their Affiliates in any
registration statement, prospectus, offering circular or private placement
memorandum used in connection with any purchase of Capital Securities without
the prior written consent of the Trust and the Company.

 

 

Section

7. Covenants of the Offerors.

The Offerors covenant and agree with the Placement Agents and the Purchaser as
follows:

 

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7.1.

Compliance with Representations and Warranties.

During the period from the date of this Agreement to the Closing Date, the
Offerors shall use their best efforts and take all action necessary or
appropriate to cause their representations and warranties contained in Section 5
hereof to be true as of the Closing Date, after giving effect to the
transactions contemplated by this Agreement, as if made on and as of the Closing
Date.

 

 

7.2.

Sale and Registration of Securities.

The Offerors and their Affiliates shall not nor shall any of them permit any
person acting on their behalf (other than the Placement Agents), to directly or
indirectly (i) sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in the Securities Act) that
would or could be integrated with the sale of the Capital Securities in a manner
that would require the registration under the Securities Act of the Securities
or (ii) make offers or sales of any such Security, or solicit offers to buy any
such Security, under circumstances that would require the registration of any of
such Securities under the Securities Act.

 

 

7.3.

Use of Proceeds.

The Trust shall use the proceeds from the sale of the Capital Securities and the
Common Securities to purchase the Debentures from the Company.

 

 

7.4.

Investment Company.

The Offerors shall not engage, or permit any Subsidiary to engage, in any
activity which would cause it or any Subsidiary to be an “investment company”
under the provisions of the Investment Company Act.

 

 

7.5.

Reimbursement of Expenses.

If the sale of the Capital Securities provided for herein is not consummated
(i) because any condition set forth in Section 3 hereof is not satisfied, or
(ii) because of any refusal, inability or failure on the part of the Company or
the Trust to perform any agreement herein or comply with any provision hereof
other than by reason of a breach by the Placement Agents, the Company shall
reimburse the Placement Agents upon demand for all of their pro rata share of
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
in an amount not to exceed $50,000.00 that shall have been incurred by them in
connection with the proposed purchase and sale of the Capital Securities.
Notwithstanding the foregoing, the Company shall have no obligation to reimburse
the Placement Agents for their out-of-pocket expenses if the sale of the Capital
Securities fails to occur because the Placement Agents fail to fulfill a
condition set forth in Section 4.

 

 

7.6.

Solicitation and Advertising.

In connection with any offer or sale of any of the Securities, the Offerors
shall not, nor shall either of them permit any of their Affiliates or any person
acting on their behalf, other than the Placement Agents, to engage in any form
of general solicitation or general advertising (as defined in Regulation D).

 

 

7.7.

Compliance with Rule 144A(d)(4) under the Securities Act.

So long as any of the Securities are outstanding and are “restricted securities”
within the meaning of Rule 144(a)(3) under the Securities Act, the Offerors
will, during any period in which they are not subject to and in compliance with
Section 13 or 15(d) of the Securities Exchange Act of 1934, as

 

16

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amended (the “Exchange Act”), or the Offerors are not exempt from such reporting
requirements pursuant to and in compliance with Rule 12g3-2(b) under the
Exchange Act, provide to each holder of such restricted securities and to each
prospective purchaser (as designated by such holder) of such restricted
securities, upon the request of such holder or prospective purchaser in
connection with any proposed transfer, any information required to be provided
by Rule 144A(d)(4) under the Securities Act, if applicable. This covenant is
intended to be for the benefit of the holders, and the prospective purchasers
designated by such holders, from time to time of such restricted securities. The
information provided by the Offerors pursuant to this Section 7.7 will not, at
the date thereof, contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.

 

 

7.8.

Transfer Notice.

The Offerors acknowledge that the Purchaser may transfer the Capital Securities,
in whole or in part, at any time and from time to time following the Closing
Date by delivering the notice (the “Transfer Notice”) attached as Exhibit B to
the Master Custodian Agreement, dated May 27, 2004, as amended, and attached as
Exhibit A to the Subscription Agreement. In order to facilitate such transfer,
the Company shall execute in blank five additional Capital Securities
certificates, to be delivered at Closing, such certificates to be completed with
the name of the transferee(s) to which the Capital Securities, in whole or in
part, will be transferred upon the receipt of a Transfer Notice and
authenticated by the Institutional Trustee at the time of each such transfer.

 

 

7.9.

Quarterly Reports.

Within 50 days of the end of each calendar quarter and within 100 days of the
end of each calendar year during which the Debentures are issued and
outstanding, the Offerors shall submit to The Bank of New York a completed
quarterly report in the form attached hereto as Exhibit C, with a copy provided
to the Purchaser during the period when it holds any of the Capital Securities;
provided, that the financial statements of the Company required to be delivered
pursuant to such quarterly report shall be deemed to have been furnished in
compliance with such quarterly report if such financial statements have been
duly filed with the Commission as part of the Company’s Annual Report on Form
10-K, Quarterly Reports on Form 10-Q or Current Reports on Form 8-K, as
applicable. If the Purchaser transfers the Capital Securities as contemplated by
Section 7.8, in addition to the reporting obligations of the Offerors to The
Bank of New York and the Purchaser provided for in this Section 7.9, the
Offerors shall submit to the trustee designated in the Transfer Notice such
periodic reports as may be required by such trustee in the form and at such
times as such trustee may require. The Offerors acknowledge and agree that The
Bank of New York and such designated trustee and its successors and assigns are
third party beneficiaries of this Section 7.9.

 

 

7.10.

Continued REIT Status.

Unless and until the Company’s Board of Directors determines that it is not in
the best interests of the Company’s stockholders, the Company will use its
commercially reasonable efforts to meet the requirements to qualify as a REIT
under Sections 856 through 860 of the Code for the taxable year ending
December 31, 2006 and succeeding taxable years.

 

 

Section

8. Covenants of the Placement Agents.

The Placement Agents covenant and agree with the Offerors that, during the
period from the date of this Agreement to the Closing Date, the Placement Agents
shall use their best efforts and take all action necessary or appropriate to
cause their representations and warranties contained in Section 6 to be true as
of the Closing Date, after giving effect to the transactions contemplated by
this Agreement, as if made on

 

17

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and as of the Closing Date. The Placement Agents further covenant and agree not
to engage in hedging transactions with respect to the Capital Securities unless
such transactions are conducted in compliance with the Securities Act.

Section 9. Indemnification.

9.1. Indemnification Obligation.

The Offerors shall jointly and severally indemnify and hold harmless the
Placement Agents and the Purchaser and each of their respective agents,
employees, officers and directors and each person that controls either of the
Placement Agents or the Purchaser within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, and agents, employees,
officers and directors or any such controlling person of either of the Placement
Agents or the Purchaser (each such person or entity, an “Indemnified Party”)
from and against any and all losses, claims, damages, judgments, liabilities or
expenses, joint or several, to which such Indemnified Party may become subject
under the Securities Act, the Exchange Act or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Offerors, but excluding any such losses, claims, damages, judgments, liabilities
or expenses that are caused by the gross negligence or willful misconduct of the
Indemnified Party), insofar as such losses, claims, damages, judgments,
liabilities or expenses (or actions in respect thereof) arise out of, or are
based upon, or relate to, in whole or in part, (a) any untrue statement or
alleged untrue statement of a material fact contained in any information
(whether written or oral) or documents executed in favor of, furnished or made
available to the Placement Agents or the Purchaser by the Offerors, or (b) any
omission or alleged omission to state in any information (whether written or
oral) or documents executed in favor of, furnished or made available to the
Placement Agents or the Purchaser by the Offerors a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
shall reimburse each Indemnified Party for any legal and other expenses as such
expenses are reasonably incurred by such Indemnified Party in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, judgments, liability, expense or action described in this Section 9.1.
In addition to their other obligations under this Section 9, the Offerors hereby
agree that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of, or based upon, or
related to the matters described above in this Section 9.1, they shall reimburse
each Indemnified Party on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, each Indemnified Party
shall promptly return such amounts to the Offerors together with interest,
determined on the basis of the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to time by First
Tennessee Bank National Association (the “Prime Rate”). Any such interim
reimbursement payments which are not made to an Indemnified Party within 30 days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.

9.2. Conduct of Indemnification Proceedings.

Promptly after receipt by an Indemnified Party under this Section 9 of notice of
the commencement of any action, such Indemnified Party shall, if a claim in
respect thereof is to be made against the Offerors under this Section 9, notify
the Offerors in writing of the commencement thereof; but, subject to
Section 9.4, the omission to so notify the Offerors shall not relieve them from
any liability pursuant to Section 9.1 which the Offerors may have to any
Indemnified Party unless and to the extent

 

18

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that the Offerors did not otherwise learn of such action and such failure by the
Indemnified Party results in the forfeiture by the Offerors of substantial
rights and defenses. In case any such action is brought against any Indemnified
Party and such Indemnified Party seeks or intends to seek indemnity from the
Offerors, the Offerors shall be entitled to participate in, and, to the extent
that they may wish, to assume the defense thereof with counsel reasonably
satisfactory to such Indemnified Party; provided, however, if the defendants in
any such action include both the Indemnified Party and the Offerors and the
Indemnified Party shall have reasonably concluded that there may be a conflict
between the positions of the Offerors and the Indemnified Party in conducting
the defense of any such action or that there may be legal defenses available to
it and/or other Indemnified Parties which are different from or additional to
those available to the Offerors, the Indemnified Party shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such Indemnified Party.
Upon receipt of notice from the Offerors to such Indemnified Party of their
election to so assume the defense of such action and approval by the Indemnified
Party of counsel, the Offerors shall not be liable to such Indemnified Party
under this Section 9 for any legal or other expenses subsequently incurred by
such Indemnified Party in connection with the defense thereof unless (i) the
Indemnified Party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso in the preceding
sentence (it being understood, however, that the Offerors shall not be liable
for the expenses of more than one separate counsel representing the Indemnified
Parties who are parties to such action), or (ii) the Offerors shall not have
employed counsel reasonably satisfactory to the Indemnified Party to represent
the Indemnified Party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel of such
Indemnified Party shall be at the expense of the Offerors.

9.3. Contribution.

If the indemnification provided for in this Section 9 is required by its terms,
but is for any reason held to be unavailable to or otherwise insufficient to
hold harmless an Indemnified Party under Section 9.1 in respect of any losses,
claims, damages, liabilities or expenses referred to herein or therein, then the
Offerors shall contribute to the amount paid or payable by such Indemnified
Party as a result of any losses, claims, damages, judgments, liabilities or
expenses referred to herein (i) in such proportion as is appropriate to reflect
the relative benefits received by the Offerors, on the one hand, and the
Indemnified Party, on the other hand, from the offering of such Capital
Securities, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Offerors, on the one hand, and the Placement Agents, on the other
hand, in connection with the statements or omissions or inaccuracies in the
representations and warranties herein or other breaches which resulted in such
losses, claims, damages, judgments, liabilities or expenses, as well as any
other relevant equitable considerations. The respective relative benefits
received by the Offerors, on the one hand, and the Placement Agents, on the
other hand, shall be deemed to be in the same proportion, in the case of the
Offerors, as the total price paid to the Offerors for the Capital Securities
sold by the Offerors to the Purchaser (net of the compensation paid to the
Placement Agents hereunder, but before deducting expenses), and in the case of
the Placement Agents, as the compensation received by them, bears to the total
of such amounts paid to the Offerors and received by the Placement Agents as
compensation. The relative fault of the Offerors and the Placement Agents shall
be determined by reference to, among other things, whether the untrue statement
or alleged untrue statement of a material fact or the omission or alleged
omission of a material fact or the inaccurate or the alleged inaccurate
representation and/or warranty relates to information supplied by the Offerors
or the Placement Agents and the parties’ relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The provisions set forth in Section 9.2 with respect to notice of commencement
of any action shall apply if a claim for contribution is made under this
Section 9.3; provided, however, that no additional notice shall be required with
respect to any action for which notice has been given under

 

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Section 9.2 for purposes of indemnification. The Offerors and the Placement
Agents agree that it would not be just and equitable if contribution pursuant to
this Section 9.3 were determined by pro rata allocation or by any other method
of allocation that does not take account of the equitable considerations
referred to in this Section 9.3. The amount paid or payable by an Indemnified
Party as a result of the losses, claims, damages, judgments, liabilities or
expenses referred to in this Section 9.3 shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably incurred
by such Indemnified Party in connection with investigating or defending any such
action or claim. In no event shall the liability of the Placement Agents
hereunder be greater in amount than the dollar amount of the compensation (net
of payment of all expenses) received by the Placement Agents upon the sale of
the Capital Securities giving rise to such obligation. No person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
found guilty of such fraudulent misrepresentation.

9.4. Additional Remedies.

The indemnity and contribution agreements contained in this Section 9 are in
addition to any liability that the Offerors may otherwise have to any
Indemnified Party.

9.5. Additional Indemnification.

The Company shall indemnify and hold harmless the Trust against all loss,
liability, claim, damage and expense whatsoever, as due from the Trust under
Sections 9.1 through 9.4 hereof.

Section 10. Rights and Responsibilities of Placement Agents.

10.1. Reliance.

In performing their duties under this Agreement, the Placement Agents shall be
entitled to rely upon any notice, signature or writing which they shall in good
faith believe to be genuine and to be signed or presented by a proper party or
parties. The Placement Agents may rely upon any opinions or certificates or
other documents delivered by the Offerors or their counsel or designees to
either the Placement Agents or the Purchaser.

10.2. Rights of Placement Agents.

In connection with the performance of their duties under this Agreement, the
Placement Agents shall not be liable for any error of judgment or any action
taken or omitted to be taken unless the Placement Agents were grossly negligent
or engaged in willful misconduct in connection with such performance or
non-performance. No provision of this Agreement shall require the Placement
Agents to expend or risk their own funds or otherwise incur any financial
liability on behalf of the Purchaser in connection with the performance of any
of their duties hereunder. The Placement Agents shall be under no obligation to
exercise any of the rights or powers vested in them by this Agreement.

Section 11. Miscellaneous.

11.1. Disclosure Schedule.

The term “Disclosure Schedule,” as used herein, means the schedule, if any,
attached to this Agreement that sets forth items the disclosure of which is
necessary or appropriate as an exception to one or more representations or
warranties contained in Section 5 hereof; provided, that any item set forth in
the Disclosure Schedule as an exception to a representation or warranty shall be
deemed an admission by the Offerors that such item represents an exception,
fact, event or circumstance that is reasonably likely to

 

20

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result in a Material Adverse Effect. The Disclosure Schedule shall be arranged
in paragraphs corresponding to the section numbers contained in Section 5.
Nothing in the Disclosure Schedule shall be deemed adequate to disclose an
exception to a representation or warranty made herein unless the Disclosure
Schedule identifies the exception with reasonable particularity and describes
the relevant facts in reasonable detail. Without limiting the generality of the
immediately preceding sentence, the mere listing (or inclusion of a copy) of a
document or other item in the Disclosure Schedule shall not be deemed adequate
to disclose an exception to a representation or warranty made herein unless the
representation or warranty has to do with the existence of the document or other
item itself. Information provided by the Company in response to any due
diligence questionnaire shall not be deemed part of the Disclosure Schedule and
shall not be deemed to be an exception to one or more representations or
warranties contained in Section 5 hereof unless such information is specifically
included on the Disclosure Schedule in accordance with the provisions of this
Section 11.1.

11.2. Legal Expenses.

At Closing, the Placement Agents shall provide a credit for the Offerors’
transaction-related legal expenses in the amount of $10,000.00.

11.3. Non-Disclosure.

Except as required by applicable law, including without limitation securities
laws and regulations promulgated thereunder, the Offerors shall not, and will
cause their advisors and representatives not to, issue any press release or
other public statement regarding the transactions contemplated by this Agreement
or the Operative Documents prior to or on the Closing Date. Notwithstanding
anything to the contrary, the Offerors may (1) consult any tax advisor regarding
U.S. federal income tax treatment or tax structure of the transaction
contemplated under this Agreement and the Operative Documents and (2) disclose
to any and all persons, without limitation of any kind, the U.S. Federal income
tax structure (in each case, within the meaning of Treasury Regulation §
1.6011-4) of the transaction contemplated under this Agreement and the Operative
Documents and all materials of any kind (including opinions or other tax
analyses) that are provided to you relating to such tax treatment and tax
structure. For this purpose, “tax structure” is limited to any facts relevant to
the U.S. federal income tax treatment of the transaction and does not include
information relating to identity of the parties.

11.4. Notices.

Prior to the Closing, and thereafter with respect to matters pertaining to this
Agreement only, all notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, first-class mail, telex,
telecopier or overnight air courier guaranteeing next day delivery:

if to the Placement Agents, to:

FTN Financial Capital Markets

845 Crossover Lane, Suite 150

Memphis, Tennessee 38117

Telecopier: 901-435-4706

Telephone: 800-456-5460

Attention: James D. Wingett

 

21

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and

Keefe, Bruyette & Woods, Inc.

787 7th Avenue

4th Floor

New York, New York 10019

Telecopier: 212-403-2000

Telephone: 212-403-1004

Attention: Mitchell Kleinman, General Counsel

with a copy to:

Lewis, Rice & Fingersh, L.C.

500 North Broadway, Suite 2000

St. Louis, Missouri 63102

Telecopier: 314-241-6056

Telephone: 314-444-7600

Attention: Thomas C. Erb, Esq.

and

Sidley Austin LLP

787 7th Avenue

New York, New York 10019

Telecopier: 212-839-5599

Telephone: 212-839-5300

Attention: Renwick Martin, Esq.

if to the Offerors, to:

Capstead Mortgage Corporation

8401 North Central Expressway, Suite 800

Dallas, Texas 75225-4410

Telecopier: 214-874-2398

Telephone: 214-874-2350

Attention: Andrew F. Jacobs

with a copy to:

Andrews Kurth LLP

1717 Main Street, Suite 3700

Dallas, Texas 75201

Telecopier: 214-659-4401

Telephone: 214-659-4400

Attention: David A. Barbour, Esq.

All such notices and communications shall be deemed to have been duly given
(i) at the time delivered by hand, if personally delivered, (ii) five business
days after being deposited in the mail, postage prepaid, if mailed, (iii) when
answered back, if telexed, (iv) the next business day after being telecopied, or
(v) the next business day after timely delivery to a courier, if sent by
overnight air courier guaranteeing next day delivery. From and after the Closing
Date, the foregoing notice provisions shall be superseded by any notice
provisions of the Operative Documents under which notice is given. The Placement
Agents, the Offerors, and their respective counsel, may change their respective
notice addresses from time to time by written notice to all of the foregoing
persons.

 

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11.5. Parties in Interest, Successors and Assigns.

Except as expressly set forth herein, this Agreement is made solely for the
benefit of the Placement Agents, the Purchaser and the Offerors and any person
controlling the Placement Agents, the Purchaser or the Offerors and their
respective successors and assigns; and no other person shall acquire or have any
right under or by virtue of this Agreement. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties.

11.6. Counterparts.

This Agreement may be executed by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.

11.7. Headings.

The headings in this Agreement are for convenience of reference only and shall
not limit or otherwise affect the meaning hereof.

11.8. Governing Law.

THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS (AND NOT THE LAWS PERTAINING TO CONFLICTS OF LAWS) OF THE STATE OF
NEW YORK.

11.9. Entire Agreement.

This Agreement, together with the Operative Documents and the other documents
delivered in connection with the transactions contemplated by this Agreement, is
intended by the parties as a final expression of their agreement and intended to
be a complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and therein.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein. This Agreement, together with
the Operative Documents and the other documents delivered in connection with the
transaction contemplated by this Agreement, supersedes all prior agreements and
understandings between the parties with respect to such subject matter.

11.10. Severability.

In the event that any one or more of the provisions contained herein, or the
application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired or affected, it being
intended that all of the Placement Agents’ and the Purchaser’s rights and
privileges shall be enforceable to the fullest extent permitted by law.

11.11. Survival.

The Placement Agents and the Offerors, respectively, agree that the
representations, warranties and agreements made by each of them in this
Agreement and in any certificate or other instrument delivered pursuant hereto
shall remain in full force and effect and shall survive the delivery of, and
payment for, the Capital Securities.

Signatures appear on the following page

 

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If this Agreement is satisfactory to you, please so indicate by signing the
acceptance of this Agreement and deliver such counterpart to the Offerors
whereupon this Agreement will become binding between us in accordance with its
terms.

 

Very truly yours,

 

CAPSTEAD MORTGAGE CORPORATION

By:

 

/s/ PHILLIP A. REINSCH

Name: Phillip A. Reinsch

Title: Executive Vice President & CFO

 

CAPSTEAD MORTGAGE TRUST III

By:

 

/s/ PHILLIP A. REINSCH

Name: Phillip A. Reinsch

Title: Administrator

 

CONFIRMED AND ACCEPTED,

as of the date first set forth above

FTN FINANCIAL CAPITAL MARKETS,

a division of First Tennessee Bank National Association,

as a Placement Agent

By:

 

/s/ JAMES D. WINGETT

Name: James D. Wingett

Title: Senior Vice President

 

KEEFE, BRUYETTE & WOODS, INC.,

a New York corporation, as a Placement Agent

By:

 

/s/ PETER J. WIRTH

Name: Peter J. Wirth

Title: Managing Director

 

24

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EXHIBIT A

FORM OF SUBSCRIPTION AGREEMENT

CAPSTEAD MORTGAGE TRUST III

CAPSTEAD MORTGAGE CORPORATION

SUBSCRIPTION AGREEMENT

September 11, 2006

THIS SUBSCRIPTION AGREEMENT (this “Agreement”) made among Capstead Mortgage
Trust III (the “Trust”), a statutory trust created under the Delaware Statutory
Trust Act (Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. §§ 3801, et
seq.), Capstead Mortgage Corporation, a Maryland corporation, with its principal
offices located at 8401 North Central Expressway, Suite 800, Dallas, Texas
75225-4410 (the “Company” and, collectively with the Trust, the “Offerors”), and
First Tennessee Bank National Association (the “Purchaser”).

RECITALS:

A. The Trust desires to issue 25,000 of its Fixed/Floating Rate Capital
Securities (the “Capital Securities”), liquidation amount $1,000.00 per Capital
Security, representing an undivided beneficial interest in the assets of the
Trust (the “Offering”), to be issued pursuant to an Amended and Restated
Declaration of Trust (the “Declaration”) by and among the Company, Wilmington
Trust Company (“WTC”), the administrators named therein, and the holders (as
defined therein); and

B. The proceeds from the sale of the Capital Securities will be combined with
the proceeds from the sale by the Trust to the Company of its common securities,
and will be used by the Trust to purchase an equivalent amount of Fixed/Floating
Rate Junior Subordinated Debentures of the Company (the “Debentures”) to be
issued by the Company pursuant to an indenture to be executed by the Company and
WTC, as trustee (the “Indenture”); and

C. In consideration of the premises and the mutual representations and covenants
hereinafter set forth, the parties hereto agree as follows:

ARTICLE I

PURCHASE AND SALE OF CAPITAL SECURITIES

1.1. Upon the execution of this Agreement, the Purchaser hereby agrees to
purchase from the Trust 25,000 Capital Securities at a price equal to $1,000.00
per Capital Security (the “Purchase Price”) and the Trust agrees to sell such
Capital Securities to the Purchaser for said Purchase Price. The rights and
preferences of the Capital Securities are set forth in the Declaration. The
Purchase Price is payable in immediately available funds on September 11, 2006,
or such other business day as may be designated by the Purchaser, but in no
event later than September 29, 2006 (the “Closing Date”). The Offerors shall
provide the Purchaser wire transfer instructions no later than 3 days prior to
the Closing Date.

1.2. As a condition to its purchase of the Capital Securities, Purchaser shall
enter into the Joinder Agreement to the Master Custodian Agreement, the form of
which is attached hereto as Exhibit A (the “Custodian Agreement”) and, in
accordance therewith, the certificate for the Capital Securities shall be
delivered by the Trust on the Closing Date to the custodian in accordance with
the Custodian Agreement. Purchaser shall not transfer the Capital Securities to
any person or entity except in accordance with the terms of the Custodian
Agreement.

 

A-1

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1.3. The Placement Agreement, dated September 8, 2006 (the “Placement
Agreement”), among the Offerors and the placement agents identified therein (the
“Placement Agents”) includes certain representations and warranties, covenants
and conditions to closing and certain other matters governing the Offering. The
Placement Agreement is hereby incorporated by reference into this Agreement and
the Purchaser shall be entitled to each of the benefits of the Placement Agents
and the Purchaser under the Placement Agreement and shall be entitled to enforce
the obligations of the Offerors under such Placement Agreement as fully as if
the Purchaser were a party to such Placement Agreement.

1.4. Anything herein or in the Placement Agreement notwithstanding, the Offerors
acknowledge and agree that, so long as Purchaser holds some or all of the
Capital Securities, the Purchaser may in its discretion from time to time
transfer or sell, or sell or grant participation interests in, some or all of
such Capital Securities to one or more parties, provided that any such
transaction complies, as applicable, with the registration requirements of the
Securities Act of 1933, as amended (the “Securities Act”) and any other
applicable securities laws, is pursuant to an exemption therefrom, or is
otherwise not subject thereto.

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF PURCHASER

2.1. The Purchaser understands and acknowledges that neither the Capital
Securities nor the Debentures have been registered under the Securities Act or
any other applicable securities law, are being offered for sale by the Trust in
transactions not requiring registration under the Securities Act, and may not be
offered, sold, pledged or otherwise transferred by the Purchaser except in
compliance with the registration requirements of the Securities Act or any other
applicable securities laws, pursuant to an exemption therefrom or in a
transaction not subject thereto.

2.2. The Purchaser represents and warrants that, except as contemplated under
Section 1.4 hereof, it is purchasing the Capital Securities for its own account,
for investment, and not with a view to, or for offer or sale in connection with,
any distribution thereof in violation of the Securities Act or other applicable
securities laws, subject to any requirement of law that the disposition of its
property be at all times within its control and subject to its ability to resell
such Capital Securities pursuant to an effective registration statement under
the Securities Act or under Rule 144A or any other exemption from registration
available under the Securities Act or any other applicable securities law.

2.3. The Purchaser represents and warrants that neither the Offerors nor the
Placement Agents are acting as a fiduciary or financial or investment adviser
for the Purchaser.

2.4. The Purchaser represents and warrants that it is not relying (for purposes
of making any investment decision or otherwise) upon any advice, counsel or
representations (whether written or oral) of the Offerors or of the Placement
Agents.

2.5. The Purchaser represents and warrants that (a) it has consulted with its
own legal, regulatory, tax, business, investment, financial and accounting
advisers in connection herewith to the extent it has deemed necessary, (b) it
has had a reasonable opportunity to ask questions of and receive answers from
officers and representatives of the Offerors concerning their respective
financial condition and results of operations and the purchase of the Capital
Securities, and any such questions have been answered to its satisfaction,
(c) it has had the opportunity to review all publicly available records and
filings concerning the Offerors and it has carefully reviewed such records and
filings that it considers

 

A-2

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relevant to making an investment decision, and (d) it has made its own
investment decisions based upon its own judgment, due diligence and advice from
such advisers as it has deemed necessary and not upon any view expressed by the
Offerors or the Placement Agents.

2.6. The Purchaser represents and warrants that it is a “qualified institutional
buyer” as defined under Rule 144A under the Securities Act. If the Purchaser is
a dealer of the type described in paragraph (a)(1)(ii) of Rule 144A under the
Securities Act, it owns and invests on a discretionary basis not less than U.S.
$25,000,000.00 in securities of issuers that are not affiliated with it. The
Purchaser is not a participant-directed employee plan, such as a 401(k) plan, or
any other type of plan referred to in paragraph (a)(1)(i)(D) or (a)(1)(i)(E) of
Rule 144A, or a trust fund referred to in paragraph (a)(1)(i)(F) of Rule 144A
that holds the assets of such a plan, unless investment decisions with respect
to the plan are made solely by the fiduciary, trustee or sponsor of such plan.

2.7. The Purchaser represents and warrants that on each day from the date on
which it acquires the Capital Securities through and including the date on which
it disposes of its interests in the Capital Securities, either (i) it is not
(a) an “employee benefit plan” (as defined in Section 3(3) of the United States
Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) which is
subject to the provisions of Part 4 of Subtitle B of Title I of ERISA, or any
entity whose underlying assets include the assets of any such plan (an “ERISA
Plan”), (b) any other “plan” (as defined in Section 4975(e)(1) of the United
States Internal Revenue Code of 1986, as amended (the “Code”)) which is subject
to the provisions of Section 4975 of the Code or any entity whose underlying
assets include the assets of any such plan (a “Plan”), (c) an entity whose
underlying assets include the assets of any such ERISA Plan or other Plan by
reason of Department of Labor regulation section 2510.3-101 or otherwise, or
(d) a governmental or church plan that is subject to any federal, state or local
law which is substantially similar to the provisions of Section 406 of ERISA or
Section 4975 of the Code (a “Similar Law”); or (ii) the purchase, holding and
disposition of the Capital Securities by it will satisfy the requirements for
exemptive relief under Prohibited Transaction Class Exemption (“PTCE”) 84-14,
PTCE 90-1, PTCE 91-38, PTCE 95-60, PTCE 96-23 or a similar exemption, or, in the
case of a plan subject to a Similar Law, will not result in a non-exempt
violation of such Similar Law.

2.8. The Purchaser represents and warrants that it is acquiring the Capital
Securities as principal for its own account for investment and, except as
contemplated under Section 1.4 hereof, not for sale in connection with any
distribution thereof. It was not formed solely for the purpose of investing in
the Capital Securities, and additional capital or similar contributions were not
specifically solicited from any person owning a beneficial interest in it for
the purpose of enabling it to purchase any Capital Securities. The Purchaser is
not a (i) partnership, (ii) common trust fund or (iii) special trust, pension,
profit sharing or other retirement trust fund or plan in which the partners,
beneficiaries or participants, as applicable, may designate the particular
investments to be made or the allocation of any investment among such partners,
beneficiaries or participants, and except as contemplated under Section 1.4
hereof, it agrees that it shall not hold the Capital Securities for the benefit
of any other person and shall be the sole beneficial owner thereof for all
purposes and that it shall not sell participation interests in the Capital
Securities or enter into any other arrangement pursuant to which any other
person shall be entitled to a beneficial interest in the distribution on the
Capital Securities. The Capital Securities purchased directly or indirectly by
the Purchaser constitute an investment of no more than 40% of its assets. The
Purchaser understands and agrees that any purported transfer of the Capital
Securities to a purchaser which would cause the representations and warranties
of Section 2.6 and this Section 2.8 to be inaccurate shall be null and void ab
initio and the Offerors retain the right to resell any Capital Securities sold
to non-permitted transferees.

2.9. The Purchaser represents and warrants that it has full power and authority
to execute and deliver this Agreement, to make the representations and
warranties specified herein, and to consummate the transactions contemplated
herein and it has full right and power to subscribe for Capital Securities and
perform its obligations pursuant to this Agreement.

 

A-3

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2.10. The Purchaser represents and warrants that no filing with, or
authorization, approval, consent, license, order, registration, qualification or
decree of, any governmental body, agency or court having jurisdiction over the
Purchaser, other than those that have been made or obtained, is necessary or
required for the performance by the Purchaser of its obligations under this
Agreement or to consummate the transactions contemplated herein.

2.11. The Purchaser represents and warrants that this Agreement has been duly
authorized, executed and delivered by the Purchaser.

2.12. The Purchaser understands and acknowledges that the Company will rely upon
the truth and accuracy of the foregoing acknowledgments, representations,
warranties and agreements and agrees that, if any of the acknowledgments,
representations, warranties or agreements deemed to have been made by it by its
purchase of the Capital Securities are no longer accurate, it shall promptly
notify the Company.

2.13. The Purchaser understands that no public market exists for any of the
Capital Securities, and that it is unlikely that a public market will ever exist
for the Capital Securities.

2.14. The Purchaser is an “accredited investor” pursuant to Regulation D
promulgated under the Securities Act.

2.15. The Purchaser is a “qualified purchaser” within the meaning of
Section 2(a)(51) of the Investment Company Act.

ARTICLE III

MISCELLANEOUS

3.1. Any notice or other communication given hereunder shall be deemed
sufficient if in writing and sent by registered or certified mail, return
receipt requested, international courier or delivered by hand against written
receipt therefor, or by facsimile transmission and confirmed by telephone, to
the following addresses, or such other address as may be furnished to the other
parties as herein provided:

        To the Offerors:          Capstead Mortgage Corporation

8401 North Central Expressway, Suite 800

Dallas, Texas 75225-4410

Attention: Andrew F. Jacobs

Fax: 214-874-2398

        To the Purchaser:        First Tennessee Bank National Association

845 Crossover Lane, Suite 150

Memphis, Tennessee 38117

Attention: David Work

Fax: 901-435-7983

Unless otherwise expressly provided herein, notices shall be deemed to have been
given on the date of mailing, except notice of change of address, which shall be
deemed to have been given when received.

 

A-4

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3.2. This Agreement shall not be changed, modified or amended except by a
writing signed by the parties to be charged, and this Agreement may not be
discharged except by performance in accordance with its terms or by a writing
signed by the party to be charged.

3.3. Upon the execution and delivery of this Agreement by the Purchaser, this
Agreement shall become a binding obligation of the Purchaser with respect to the
purchase of Capital Securities as herein provided.

3.4. NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY ANY OF
THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS AND
PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS
OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

3.5. The parties agree to execute and deliver all such further documents,
agreements and instruments and take such other and further action as may be
necessary or appropriate to carry out the purposes and intent of this Agreement.

3.6. This Agreement may be executed in one or more counterparts each of which
shall be deemed an original, but all of which shall together constitute one and
the same instrument.

3.7. In the event that any one or more of the provisions contained herein, or
the application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired or affected, it being
intended that all of the Offerors’ and the Purchaser’s rights and privileges
shall be enforceable to the fullest extent permitted by law.

Signatures appear on the following page

 

A-5

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IN WITNESS WHEREOF, this Agreement is agreed to and accepted as of the day and
year first written above.

 

FIRST TENNESSEE BANK NATIONAL ASSOCIATION

By:

   

Print Name:

   

Title:

   

 

CAPSTEAD MORTGAGE CORPORATION

By:

   

Name:

   

Title:

   

 

CAPSTEAD MORTGAGE TRUST III

By:

   

Name:

   

Title:

 

Administrator

 

A-6

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EXHIBIT A TO SUBSCRIPTION AGREEMENT

MASTER CUSTODIAN AGREEMENT

This Master Custodian Agreement (this “Agreement”) is made and entered into as
of May 27, 2004 by and among each purchaser (each a “Purchaser” and collectively
the “Purchasers”) that enters into a Joinder Agreement attached hereto as
Exhibit A (the “Joinder Agreement”), Wilmington Trust Company, a Delaware
banking corporation (the “Custodian”) and each financial institution (each an
“Issuer” and collectively the “Issuers”) that enters into a Joinder Agreement.
The Purchasers and the Issuers are sometimes referred to herein as the
“Interested Parties”.

RECITALS

A. The Purchasers intend to purchase from the Issuers or their respective
statutory business trust subsidiaries Securities issued by such Issuers (the
“Securities”).

B. In order to facilitate any future transfer of all or any portion of the
Securities by the Purchasers, the Interested Parties intend to provide for the
custody of the Securities and certain other securities on the terms set forth
herein.

C. The Custodian is willing to hold and administer such securities and to
distribute the securities held by it in accordance with the agreement of the
Interested Parties and/or arbitral or judicial orders and decrees as set forth
in this Agreement.

NOW, THEREFORE, in consideration of the foregoing, the mutual covenants herein
contained and other good and valuable consideration (the receipt, adequacy and
sufficiency of which are hereby acknowledged by the parties by their execution
hereof), the parties agree as follows:

1. Joinder Agreement. On or before the delivery to the Custodian of any
Securities issued by an Issuer, such Issuer and the applicable Purchaser or
Purchasers shall enter into a Joinder Agreement substantially in the form of
Exhibit A attached hereto, with such additional provisions as the Interested
Parties may wish to add from time to time. An executed copy of each such Joinder
Agreement shall be delivered to the Custodian on or before the date on which
such Issuer’s Securities are issued. This Agreement and each Joinder Agreement
constitute the entire agreement among the Purchasers, Issuers and the Custodian
pertaining to the subject matter hereof.

2. Delivery of Securities. On or before each date on which an Issuer enters into
a Joinder Agreement:

(a) The applicable Issuer shall deliver to the Custodian a signed, authenticated
certificate representing a beneficial interest in such Issuer’s Securities, with
the Purchaser designated as owner thereof (the “Original Securities”). The
Custodian shall have no responsibility for the genuineness, validity, market
value, title or sufficiency for any intended purpose of the Original Securities.

(b) The applicable Issuer shall deliver to the Custodian five signed,
unauthenticated and undated certificates with no holder designated, each of
which when completed representing a beneficial interest in such Issuer’s
Securities (the “Replacement Securities”). The Custodian shall have no
responsibility for the genuineness, validity, market value, title or sufficiency
for any intended purpose of the Replacement Securities.

 

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3. Timing of Release from Custody. Upon receipt of a signed transfer notice in
the form of Exhibit B to be delivered in connection with the Purchaser’s
transfer of all or any portion of an Issuer’s Securities, on the effective date
set forth in such transfer notice, the Custodian shall:

(a) Deliver the Original Securities certificate corresponding to the Issuer
identified in the transfer notice to Wilmington Trust Company, as Institutional
Trustee under the Amended and Restated Declaration of Trust, dated as of the
date of the applicable Joinder Agreement, among the Institutional Trustee, the
Company and the administrators named therein (the “Declaration”) or as Trustee
under the Indenture, dated as of the date of the applicable Joinder Agreement,
between the Company and the Trustee (the “Indenture”), as applicable, for the
purpose of canceling the applicable Original Securities certificate in
accordance with the terms of the Issuer’s Amended and Restated Declaration of
Trust or Indenture, as applicable; and

(b) Deliver the Replacement Securities certificate(s) corresponding to the
Issuer identified in the transfer notice in the amount designated in and in
accordance with the transfer notice for the purpose of completing and
authenticating the applicable Replacement Securities certificate(s) in
accordance with the terms of the Issuer’s Declaration or Indenture, as
applicable.

The initial term of this Agreement shall be one year (the “Initial Term”).
Unless FTN Financial Capital Markets or Keefe, Bruyette & Woods, Inc. shall
otherwise notify the Custodian in writing, upon expiration of the Initial Term,
this Agreement shall automatically renew for an additional one-year term and
shall continue to automatically renew for succeeding one-year terms until
terminated. Upon termination of this Agreement, the Custodian and the Interested
Parties shall be released from all obligations hereunder, except for the
indemnification obligations set forth in paragraphs 5(b) and 5(c) hereof.

4. Concerning the Custodian.

(a) Each Interested Party acknowledges and agrees that the Custodian (i) shall
not be responsible for any of the agreements referred to or described herein
(including without limitation any Issuer’s Declaration or Indenture relating to
such Issuer’s Securities), or for determining or compelling compliance
therewith, and shall not otherwise be bound thereby, (ii) shall be obligated
only for the performance of such duties as are expressly and specifically set
forth in this Agreement on its part to be performed, each of which are
ministerial (and shall not be construed to be fiduciary) in nature, and no
implied duties or obligations of any kind shall be read into this Agreement
against or on the part of the Custodian, (iii) shall not be obligated to take
any legal or other action hereunder which might in its judgment involve or cause
it to incur any expense or liability unless it shall have been furnished with
acceptable indemnification, (iv) may rely on and shall be protected in acting or
refraining from acting upon any written notice, instruction, instrument,
statement, certificate, request or other document furnished to it hereunder and
believed by it to be genuine and to have been signed or presented by the proper
person, and shall have no responsibility for determining the accuracy thereof,
and (v) may consult counsel satisfactory to it, including in-house counsel, and
the opinion or advice of such counsel in any instance shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in accordance with the opinion or advice of
such counsel.

(b) The Custodian shall not be liable to anyone for any action taken or omitted
to be taken by it hereunder except in the case of the Custodian’s negligence or
willful misconduct in breach of the terms of this Agreement. In no event shall
the Custodian be liable for indirect, punitive, special or consequential damage
or loss (including but not limited to lost profits) whatsoever, even if the
Custodian has been informed of the likelihood of such loss or damage and
regardless of the form of action.

 

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(c) The Custodian shall have no more or less responsibility or liability on
account of any action or omission of any book-entry depository, securities
intermediary or other subcustodian employed by the Custodian than any such
book-entry depository, securities intermediary or other subcustodian has to the
Custodian, except to the extent that such action or omission of any book-entry
depository, securities intermediary or other subcustodian was caused by the
Custodian’s own negligence, bad faith or willful misconduct in breach of this
Agreement.

(d) The recitals contained herein shall be taken as the statements of each of
the Issuers and the Purchaser, and the Custodian assumes no responsibility for
the correctness of the same. The Custodian makes no representations as to the
validity or sufficiency of this Agreement or the Securities. The Custodian shall
not be accountable for the use or application by any of the Issuers or the
Purchaser of any Securities or the proceeds of any Securities.

5. Compensation, Expense Reimbursement and Indemnification.

(a) The Custodian shall be compensated pursuant to a separate fee agreement.

(b) Each of the Interested Parties agrees, jointly and severally, to reimburse
the Custodian on demand for all costs and expenses incurred in connection with
the administration of this Agreement or the performance or observance of its
duties hereunder which are in excess of its customary compensation for normal
services hereunder, including without limitation, payment of any legal fees and
expenses incurred by the Custodian in connection with resolution of any claim by
any party hereunder.

(c) Each of the Interested Parties covenants and agrees, jointly and severally,
to indemnify the Custodian (and its directors, officers and employees) and hold
it (and such directors, officers and employees) harmless from and against any
loss, liability, damage, cost and expense of any nature incurred by the
Custodian arising out of or in connection with this Agreement or with the
administration of its duties hereunder, including but not limited to attorney’s
fees and other costs and expenses of defending or preparing to defend against
any claim of liability unless and except to the extent such loss, liability,
damage, cost and expense shall be caused by the Custodian’s negligence, bad
faith, or willful misconduct. The provisions in this paragraph 5 shall survive
the expiration of this Agreement and the resignation or removal of the
Custodian.

6. Voting Rights. The Custodian shall be under no obligation to preserve,
protect or exercise rights in the Original Securities, and shall be responsible
only for reasonable measures to maintain the physical safekeeping thereof, and
otherwise to perform and observe such duties on its part as are expressly set
forth in this Agreement. The Custodian shall not be responsible for forwarding
to any Interested Party, notifying any Interested Party with respect to, or
taking any action with respect to, any notice, solicitation or other document or
information, written or otherwise, received from an issuer or other person with
respect to the Original Securities, including but not limited to, proxy
material, tenders, options, the pendency of calls and maturities and expiration
of rights.

7. Resignation. The Custodian may at any time resign as Custodian hereunder by
giving thirty (30) days’ prior written notice of resignation to each of the
Interested Parties. Prior to the effective date of the resignation as specified
in such notice, the Interested Parties will issue to the Custodian a written
instruction authorizing redelivery of the Original Securities and the
Replacement Securities to a bank or trust company that they select as successor
to the Custodian hereunder. If, however, the Interested Parties shall fail to
name such a successor custodian within twenty days after the notice of
resignation from the

 

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Custodian, the Purchasers shall be entitled to name such successor custodian. If
no successor custodian is named by the Interested Parties or the Purchasers, the
Custodian may apply to a court of competent jurisdiction for appointment of a
successor custodian.

8. Dispute Resolution. It is understood and agreed that should any dispute arise
with respect to the delivery, ownership, right of possession, and/or disposition
of the Original Securities or the Replacement Securities, or should any claim be
made upon the Custodian, the Original Securities or the Replacement Securities
by a third party, the Custodian upon receipt of notice of such dispute or claim
is authorized and shall be entitled (at its sole option and election) to retain
in its possession without liability to anyone, all or any of said Original
Securities and Replacement Securities until such dispute shall have been settled
either by the mutual written agreement of the parties involved or by a final
order, decree or judgment of a court in the United States of America, the time
for perfection of an appeal of such order, decree or judgment having expired.
The Custodian may, but shall be under no duty whatsoever to, institute or defend
any legal proceedings which relate to the Original Securities and Replacement
Securities.

9. Consent to Jurisdiction and Service. Each of the Interested Parties hereby
absolutely and irrevocably consents and submits to the jurisdiction of the
courts in the State of Delaware and of any Federal court located in said State
in connection with any actions or proceedings brought against any of the
Interested Parties (or each of them) by the Custodian arising out of or relating
to this Agreement. In any such action or proceeding, the Interested Parties each
hereby absolutely and irrevocably (i) waives any objection to jurisdiction or
venue, (ii) waives personal service of any summons, complaint, declaration or
other process, and (iii) agrees that the service thereof may be made by
certified or registered first-class mail directed to such party, as the case may
be, at their respective addresses in accordance with paragraph 10 hereof.

10. Force Majeure. The Custodian shall not be responsible for delays or failures
in performance resulting from acts beyond its control. Such acts shall include
but not be limited to acts of God, strikes, lockouts, riots, acts of war,
epidemics, governmental regulations superimposed after the fact, fire,
communication line failures, computer viruses, power failures, earthquakes or
other disasters.

11. Notices.

(a) Any notice permitted or required hereunder shall be in writing, and shall be
sent by personal delivery, overnight delivery by a recognized courier or
delivery service, mailed by registered or certified mail, return receipt
requested, postage prepaid, or by confirmed facsimile accompanied by mailing of
the original on the same day by first class mail, postage prepaid, in each case
the parties at their address set forth below (or to such other address as any
such party may hereafter designate by written notice to the other parties).

If to an Issuer, to the address appearing on such Issuer’s Joinder Agreement

If to the Purchaser, to the address appearing on such Purchaser’s Joinder
Agreement

If to the Custodian:

Wilmington Trust Company

Rodney Square North

1100 North Market Street

Wilmington, Delaware 19890-1600

Attention: Chris Slaybaugh—Corporate Trust Administration

Fax: 302-636-4140

 

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12. Miscellaneous.

(a) Binding Effect. This Agreement shall be binding upon the respective parties
hereto and their heirs, executors, successors and assigns.

(b) Modifications. This Agreement may not be altered or modified without the
express written consent of the parties hereto. No course of conduct shall
constitute a waiver of any of the terms and conditions of this Agreement, unless
such waiver is specified in writing, and then only to the extent so specified. A
waiver of any of the terms and conditions of this Agreement on one occasion
shall not constitute a waiver of the other terms of this Agreement, or of such
terms and conditions on any other occasion.

(c) Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware.

(d) Reproduction of Documents. This Agreement and all documents relating
thereto, including, without limitation, (a) consents, waivers and modifications
which may hereafter be executed, and (b) certificates and other information
previously or hereafter furnished, may be reproduced by any photographic,
photostatic, microfilm, optical disk, micro-card, miniature photographic or
other similar process. The parties agree that any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding, whether or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and that any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.

(e) Counterparts. This Agreement may be executed in several counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

signatures appear on the following page

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day first
above written.

 

WILMINGTON TRUST COMPANY

By:

 

/s/ Christopher J. Slaybaugh         

Print

 

Name: Christopher J. Slaybaugh

Title:

 

Financial Services Officer

 

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EXHIBIT A TO MASTER CUSTODIAN AGREEMENT

FORM OF JOINDER AGREEMENT

September 11, 2006

This Joinder Agreement (this “Agreement”) is entered into as of September 11,
2006 by First Tennessee Bank National Association (the “Purchaser”) and Capstead
Mortgage Corporation (the “Issuer”).

RECITALS

A. Wilmington Trust Company (the “Custodian”) is party to that certain Master
Custodian Agreement dated as of May 27, 2004, as amended (the “Custodian
Agreement”).

B. The Custodian Agreement provides that certain financial institutions that
have issued securities (or whose statutory trust subsidiaries have issued
securities) and the Purchaser of such securities will join into the Custodian
Agreement pursuant to the terms of a joinder agreement.

C. On the date hereof, Issuer is issuing securities to the Purchaser and the
Issuer and the Purchaser desire to enter into this Agreement to facilitate the
subsequent transfer of the Issuer’s securities by the Custodian.

NOW, THEREFORE, in consideration of the foregoing, the mutual covenants herein
contained and other good and valuable consideration (the receipt, adequacy and
sufficiency of which are hereby acknowledged by the Issuer by its execution
hereof), the Issuer agrees as follows:

1. Joinder. The Issuer and Purchaser hereby join in the Custodian Agreement and
agree to be subject to, and bound by, the terms and provisions of the Custodian
Agreement that are ascribed to “Issuers” and “Purchasers” respectively therein
to the same extent as if the Issuer and Purchaser had signed the Custodian
Agreement as an original party thereto; provided, however, that the Issuer does
not join in the Custodian Agreement with respect to compensation, cost and
expense reimbursement and indemnification of the Custodian by the Interested
Parties pursuant to Section 5 of the Custodian Agreement, it being understood
that the Issuer shall have no obligations whatsoever under Section 5 of the
Custodian Agreement.

2. Notice. Any notice permitted or required to be sent to an Issuer under the
Custodian Agreement shall be sent to the following address:

Capstead Mortgage Corporation

8401 North Central Expressway, Suite 800

Dallas, Texas 75225-4410

Attention: Andrew F. Jacobs

Any notice permitted or required to be sent to a Purchaser under the Custodian
Agreement shall be sent to the following address:

First Tennessee Bank National Association

845 Crossover Lane, Suite 150

Memphis, Tennessee 38117

Attention: David Work

 

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3. Termination. This Agreement and the Purchaser’s and Issuer’s respective
rights and obligations under the Custodian Agreement shall terminate upon the
transfer of all of Issuer’s securities pursuant to the Custodian Agreement.

4. Entire Agreement. This Agreement and the Custodian Agreement constitute the
entire agreement among the Purchaser, Issuer and the Custodian pertaining to the
subject matter hereof.

IN WITNESS WHEREOF, the Issuer and Purchaser have executed this Agreement as of
the day first above written.

 

CAPSTEAD MORTGAGE CORPORATION

By:

   

Name:

   

Title:

   

 

FIRST TENNESSEE BANK NATIONAL

ASSOCIATION

By:

   

Name:

   

Title:

   

 

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EXHIBIT B TO MASTER CUSTODIAN AGREEMENT

FORM OF TRANSFER NOTICE

[DATE]

Wilmington Trust Company

Rodney Square North

1100 North Market Street

Wilmington, Delaware 19890-1600

Attention: Corporate Trust Administration

Dear Sir or Madam:

The undersigned hereby notifies you of the transfer of [            ] of the
Capital Securities of Capstead Mortgage Trust III, such transfer to be effective
on [DATE OF TRANSFER]. In accordance with Section 7.9 of the Placement Agreement
dated September 8, 2006 between the Offerors and the placement agents named
therein (the “Placement Agreement”), periodic reports shall be delivered to
[                    ] in accordance with such Section 7.9 during the term of
the Capital Securities, in the form attached thereto. Capitalized terms used in
this notice and not otherwise defined shall have the meanings ascribed to such
terms in the Placement Agreement.

The undersigned hereby instructs you as Custodian to deliver the Original
Securities certificate to Wilmington Trust Company, as Institutional Trustee
(the “Trustee”) under the Amended and Restated Trust Agreement dated
September 11, 2006 among the Trustee, Capstead Mortgage Corporation and the
administrative trustees named therein (the “Trust Agreement”) for cancellation
in accordance with the terms of the Trust Agreement and to deliver the
Replacement Securities certificate to the Trustee for authentication in
accordance with the terms of the Trust Agreement.

By copy of this notice, the Institutional Trustee is hereby instructed to make
the Replacement Securities certificate registered to [NAME, ADDRESS AND IDENTITY
OF TRANSFEREE] in the liquidation amount of [                ] and bearing the
identification number “CUSIP NO. [                    ]” and to authenticate and
deliver the Replacement Securities certificate to [                    ].

 

FIRST TENNESSEE BANK NATIONAL ASSOCIATION

By:

   

Name:

   

Title:

   

 

 

cc:

Capstead Mortgage Corporation

 

    

Wilmington Trust Company, as Trustee

 

A-A-B-1

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EXHIBIT B-1

FORM OF COMPANY COUNSEL OPINION

September 11, 2006

 

First Tennessee Bank National Association

845 Crossover Lane, Suite 150

Memphis, Tennessee 38117

  

FTN Financial Capital Markets

845 Crossover Lane, Suite 150

Memphis, Tennessee 38117

  

Capstead Mortgage Corporation

8401 North Central Expressway, Suite 800

Dallas, Texas 75225

  

Keefe, Bruyette & Woods, Inc.

787 7th Avenue, 4th Floor

New York, New York 10019

     

Wilmington Trust Company

Rodney Square North

1100 North Market Street

Wilmington, Delaware 19890-1600

  

Ladies and Gentlemen:

We have acted as special counsel to Capstead Mortgage Corporation, a Maryland
corporation (the “Company”) and Capstead Mortgage Trust III, a Delaware
statutory trust (the “Trust”), in connection with the negotiation and execution
of the Placement Agreement dated as of September 8, 2006 (the “Placement
Agreement”) among the Company, the Trust, FTN Financial Capital Markets and
Keefe, Bruyette & Woods, Inc. (collectively, the “Placement Agents”). We are
delivering this opinion to you pursuant to Section 3.1 of the Placement
Agreement. Capitalized terms used and not otherwise defined herein have the
meanings given them in the Placement Agreement.

In our examination we have assumed the genuineness of all signatures, the legal
capacity of natural persons, the authenticity, completeness and accuracy of all
documents submitted to us as originals, and the conformity to authentic original
documents of all documents submitted to us as facsimile, certified or
photostatic copies. In making our examination of documents executed by parties
other than the Company or the Trust, we have assumed that such parties had the
power to enter into and perform all obligations thereunder and have also assumed
the due authorization by all requisite action, and due execution and delivery by
such parties of such documents and the validity and binding effect thereof. As
to any facts material to this opinion that we did not independently establish or
verify, we have relied, to the extent we deemed appropriate, upon (i) written
representations of (or made on behalf of) (a) the Company and the officers and
other representatives of the Company and representations made in the Placement
Agreement and (b) the Trust and the officers and other representatives of the
Trust, and (ii) statements and certifications of public officials.

In rendering the opinions set forth herein, we have examined and relied on
originals or copies, certified or otherwise identified to our satisfaction, of
the following:

 

 

1.

The Placement Agreement;

 

 

2.

The Indenture, dated as of the date hereof (the “Indenture”), between the
Company and Wilmington Trust Company, as Trustee (in such capacity, the
“Trustee”), pursuant to which the Company will issue fixed/floating rate junior
subordinated debentures (the “Debentures”) to evidence loans made to the Company
of the proceeds from the issuance by the Trust of the Capital Securities and the
Common Securities;

 

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3.

The Amended and Restated Declaration of Trust, dated as of the date hereof (the
“Trust Agreement”) by and among Wilmington Trust Company, as Delaware Trustee,
Wilmington Trust Company, as Institutional Trustee, the Company, as Sponsor, and
Andrew F. Jacobs and Phillip A. Reinsch, as Administrators (Messrs. Jacobs and
Reinsch collectively, the “Administrators”);

 

 

4.

The Certificate of Trust filed with the Secretary of State of the State of
Delaware on September 5, 2006 with respect to the formation of the Trust;

 

 

5.

Form of Common Securities;

 

 

6.

Form of Capital Securities;

 

 

7.

The agreements and other documents set forth in Schedule I hereto;

 

 

8.

A certificate dated the date hereof (the “Company’s Opinion Support
Certificate”), executed by the Chief Financial Officer of the Company, a copy of
which is attached hereto as Exhibit A;

 

 

9.

A certificate dated the date hereof (the “Trust’s Opinion Support Certificate”),
executed by an Administrator of the Trust, a copy of which is attached hereto as
Exhibit B; and

 

 

10.

Such other documents as we have deemed necessary or appropriate as a basis for
the opinions set forth below.

The Placement Agreement, the Indenture, the Trust Agreement, the Capital
Securities and the Common Securities are collectively referred to herein as the
“Operative Documents.”

We express no opinion in paragraphs (1) through (8) below as to the laws of any
jurisdiction other than (i) the Applicable Laws of the State of Texas, (ii) the
Applicable Laws of the State of New York, (iii) the Applicable Laws of the
United States of America, and (iv) certain specified laws of the United States
of America to the extent referred to specifically herein.

As used herein, the following terms have the respective meanings set forth
below:

“Applicable Laws” means those laws, rules and regulations that, in our
experience, are normally applicable to transactions of the type contemplated by
the Placement Agreement, without our having made any special investigation as to
the applicability of any specific law, rule or regulation, and which are not the
subject of a specific opinion herein referring expressly to a particular law or
laws; provided that the term “Applicable Laws” does not include:

 

 

1.

any municipal or other local law, rule or regulation, and any other law, rule or
regulation relating to (i) pollution or protection of the environment,
(ii) zoning, land use, building or construction codes or guidelines,
(iii) labor, employee rights and benefits, or occupational safety and health, or
(iv) utility regulation;

 

 

2.

antitrust laws and other laws regulating competition;

 

 

3.

tax laws, rules or regulations;

 

 

4.

antifraud laws;

 

 

5.

state securities or blue sky laws, rules or regulations;

 

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6.

the rules and regulations of the National Association of Securities Dealers,
Inc.; or

 

 

7.

any law, rule or regulation that may have become applicable because of any facts
specifically pertaining to the Purchaser or the Placement Agents or relating to
the legal or regulatory status of the Purchaser or the Placement Agents.

Based upon the foregoing and subject to the limitations, qualifications,
exceptions and assumptions set forth herein, and with due regard to such legal
considerations as we deem relevant, we are of the opinion that:

1. Neither the issuance and sale of the Common Securities or the Capital
Securities nor the purchase by the Trust of the Debentures, nor the execution
and delivery of and compliance with the Operative Documents by the Trust nor the
consummation of the transactions contemplated thereby will constitute a breach
or violation of the Trust Agreement or the Certificate of Trust.

2. Assuming the Indenture has been duly authorized, executed and delivered by
the Indenture Trustee and the Company and is a legal and enforceable agreement
against the Indenture Trustee, the Indenture constitutes a legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms under the law of the State of New York, except as limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors’ rights generally (including, without limitation,
fraudulent conveyance laws) and by the application of general principles of
equity (regardless of whether enforcement is considered in a proceeding at law
or in equity) including, without limitation (A) the possible unavailability of
specific performance, injunctive relief or any other equitable remedy,
(B) concepts of materiality, reasonableness, good faith and fair dealing, and
(C) the unenforceability under certain circumstances of provisions providing for
indemnification or contribution for liabilities where such indemnification or
contribution is against public policy.

3. When the Debentures have been duly authorized, executed and delivered by the
Company, authenticated by the Trustee in accordance with the provisions of the
Indenture and delivered to the Trust against payment therefore, the Debentures
will constitute legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms under the law of the State of
New York, except as limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors’ rights generally
(including, without limitation, fraudulent conveyance laws) and by the
application of general principles of equity (regardless of whether enforcement
is considered in a proceeding at law or in equity) including, without limitation
(A) the possible unavailability of specific performance, injunctive relief or
any other equitable remedy, (B) concepts of materiality, reasonableness, good
faith and fair dealing, and (C) the unenforceability under certain circumstances
of provisions providing for indemnification or contribution for liabilities
where such indemnification or contribution is against public policy.

4. Neither the Trust nor the Company is and, following the issuance and sale of
the Capital Securities and the consummation of the transactions contemplated by
the Operative Documents and the application of the net proceeds therefrom,
neither the Trust nor the Company will be an “investment company” within the
meaning of Section 3(a) of the Investment Company Act of 1940, as amended.

5. Assuming (a) the truth and accuracy of the representations and warranties of
the Company, the Trust and the Placement Agents in the Placement Agreement,
(b) compliance by the Purchaser with the transfer restrictions applicable to the
Capital Securities, (c) compliance by the Company with the transfer restrictions
applicable to the Common Securities and (d) compliance by the Trust with the
transfer restriction applicable to the Debentures, it is not necessary in
connection with the offer, sale and delivery of the Common Securities, the
Capital Securities and the Debentures register the same under the Securities Act
of 1933, as amended, as contemplated in the Placement Agreement and the Trust
Agreement, or to require qualification of the Indenture under the Trust
Indenture Act of 1939, as amended.

 

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6. The execution, delivery and performance of the Placement Agreement, the
Indenture and the Trust Agreement by the Company and the consummation of the
transactions contemplated by such documents do not and will not (A) result in
the creation or imposition of any material lien, claim, charge encumbrance or
restriction upon any property or assets of the Company pursuant to, or (B) to
the best of our knowledge, constitute a material breach or violation of, or
constitute a material default under, with or without notice or lapse of time or
both, any of the terms, provisions or conditions of (x) any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease, franchise,
license or any other agreement or instrument listed on Schedule I hereto or
(y) any order, decree, judgment, franchise, license, permit, rule or regulation
of any court, arbitrator, government, or governmental agency or instrumentality,
domestic or foreign, known to us having jurisdiction over the Company or its
properties which, in the case of each of (A) or (B) above, is material to the
Company.

7. To our knowledge, (A) no action, suit or proceeding at law or in equity is
pending or threatened to which the Company or the Trust is or may be a party,
and (B) no action, suit or proceeding is pending or threatened against or
affecting the Company or the Trust or any of their properties, before or by any
court or governmental official, commission, board or other administrative
agency, authority or body, or any arbitrator, wherein an unfavorable decision,
ruling or finding could reasonably be expected to have a material adverse effect
on the consummation of the transactions contemplated by the Operative Documents
or the issuance and sale of the Common Securities or the Capital Securities as
contemplated therein or the condition (financial or otherwise), earnings,
affairs, business, or results of operations of the Company and the Trust on a
consolidated basis.

8. Except for filings, registrations or qualifications that may be required by
applicable securities laws, no authorization, approval, consent or order of, or
filing, registration or qualification with, any person (including, without
limitation, any court, governmental body or authority) is required under the
laws of the State of New York in connection with the transactions contemplated
by the Operative Documents in connection with the offer and sale of the Capital
Securities or the Common Securities as contemplated by the Operative Documents.

* * * * *

Our opinions are subject to the following assumptions and qualifications:

A. The opinion expressed in paragraph 4 above is given in reliance upon facts
set forth in the Trust’s Opinion Support Certificate.

B. We express no opinion as to the effect on the opinions expressed herein of
the compliance or non-compliance of the Placement Agents, the Purchaser or any
other party (other than the Company) with any state, federal or other laws or
regulations applicable to it.

C. We express no opinion as to the last paragraph of Section 6.12 of the
Indenture.

D. We express no opinion as to any provision (i) relating to severability or
separability; (ii) purporting to require the disregard of mandatory choice of
law rules; (iii) purporting to convey jurisdiction on any Federal court located
in the State of New York to the extent said court does not have such
jurisdiction; or (iv) providing that the assertion or employment of any right or
remedy shall not prevent the concurrent assertion or employment of any other
right or remedy, or that each and every remedy shall be cumulative and in
addition to every other remedy or that any delay or omission to exercise any
right or remedy shall not impair any other right or remedy or constitute a
waiver thereof.

This opinion is being furnished only to you in connection with the sale of the
Capital Securities under the Placement Agreement occurring today and is solely
for your benefit and is not to be used, circulated, quoted or otherwise referred
to for any other purpose or relied upon by any other person or entity,

 

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including any purchaser of any Capital Securities from you and any subsequent
purchaser of any Capital Securities, without our express written permission. The
opinions expressed herein are as of the date hereof only and are based on laws,
orders, contract terms and provisions, and facts as of such date, and we
disclaim any obligation to update this opinion letter after such date or to
advise you of changes of facts stated or assumed herein or any subsequent
changes in applicable law.

 

Very truly yours,

 

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EXHIBIT B-2

FORM OF COMPANY COUNSEL OPINION

September 11, 2006

 

First Tennessee Bank National Association

845 Crossover Lane, Suite 150

Memphis, Tennessee 38117

  

FTN Financial Capital Markets

845 Crossover Lane, Suite 150

Memphis, Tennessee 38117

  

Capstead Mortgage Corporation

8401 North Central Expressway, Suite 800

Dallas, Texas 75225

  

Keefe, Bruyette & Woods, Inc.

787 7th Avenue, 4th Floor

New York, New York 10019

     

Wilmington Trust Company

Rodney Square North

1100 North Market Street

Wilmington, Delaware 19890-1600

  

Ladies and Gentlemen:

This firm has acted as special Maryland counsel to Capstead Mortgage
Corporation, a Maryland corporation (the “Company”), in connection with the
authorization, execution and delivery by the Company of a Placement Agreement
among the Company, Capstead Mortgage Trust III, FTN Financial Capital Markets
and Keefe, Bruyette & Woods, Inc. dated as of September 8, 2006 (the “Placement
Agreement”). This opinion letter is furnished to you pursuant to the
requirements set forth in Section 3.1(b) of the Placement Agreement in
connection with the closing thereunder on the date hereof. Capitalized terms not
otherwise defined herein have the meanings specified in Schedule 1 attached
hereto.

For purposes of this opinion letter, we have examined copies of the documents
listed on Schedule 1 attached hereto (the “Documents”).

In our examination of the Placement Agreement and other Documents, we have
assumed the genuineness of all signatures, the legal capacity of all natural
persons, the accuracy and completeness of all of the Documents, the authenticity
of all originals of the Documents and the conformity to the authentic originals
of all of the Documents submitted to us as copies (including telecopies). As to
all matters of fact relevant to the opinions expressed and other statements made
herein, we have relied on the representations and statements of fact made in the
Documents, we have not independently established the facts so relied on and we
have not made any investigation or inquiry other than our examination of the
Documents. We have also assumed the validity and constitutionality of each
relevant statute, rule, regulation and agency action covered by this opinion
letter. This opinion letter is given, and all statements herein are made, in the
context of the foregoing.

This opinion letter is based as to matters of law solely on applicable
provisions of the General Corporation Law of the State of Maryland, as amended,
as currently in effect (the “MGCL”).

Based upon, subject to and limited by the foregoing, we are of the opinion that:

 

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(a) The Company is validly existing as a corporation and in good standing as of
the date of the certificate specified in paragraph 3 of Schedule 1 attached
hereto under the laws of the State of Maryland.

(b) The Company has the corporate power to own and lease its properties and to
conduct its business as described under “Business” and “Properties” in its
Annual Report on Form 10-K for the year ended December 31, 2005 referred to in
paragraph 5 of Schedule 1 attached hereto.

(c) The Company has the corporate power to execute and deliver the Operative
Documents and the Subscription Agreements and to perform its obligations under
the Operative Documents.

(d) The execution and delivery of the Operative Documents and the Subscription
Agreements and the performance on the date hereof by the Company of the
Operative Documents do not violate the Charter or By-Laws of the Company.

(e) The Operative Documents and the Subscription Agreements have each been duly
authorized, executed and delivered on behalf of the Company.

(f) No authorization, approval, consent or order of, or filing, registration or
qualification is required to be obtained or made by the Company with, any
Maryland governmental authority under the MGCL in connection with the execution
and delivery of the Operative Documents and the Subscription Agreements and the
performance on the date hereof by the Company of its obligations under the
Operative Documents.

We express no opinion herein as to any other laws and regulations not
specifically identified above (and in particular, we express no opinion as to
any effect that such other laws and regulations may have on the opinions
expressed herein). We express no opinion herein as to federal or state
securities, antitrust, unfair competition, banking, or tax laws or regulations
or laws or regulations of any political subdivision below the state level.

We assume no obligation to advise you of any changes in the foregoing subsequent
to the delivery of this opinion letter. This opinion letter has been prepared
solely for your use in connection with the closing under the Placement Agreement
on the date hereof, and should not be quoted in whole or in part or otherwise be
referred to, and should not be filed with or furnished to any governmental
agency or other person or entity, without the prior written consent of this
firm.

Very truly yours,

HOGAN & HARTSON L.L.P.

 

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Schedule 1

 

 

1.

The charter of the Company, as certified by the Maryland State Department of
Assessments and Taxation on December 13, 2005, and as certified by the Secretary
of the Company on the date hereof as being complete, accurate and in effect on
the date hereof (the “Charter”).

 

 

2.

The by-laws of the Company, as certified by the Secretary of the Company on the
date hereof as being complete, accurate and in effect on the date hereof (the
“By-laws”).

 

 

3.

A certificate of good standing of the Company issued by the Maryland State
Department of Assessments and Taxation dated September 8, 2006.

 

 

4.

Certain resolutions of the Board of Directors of the Company adopted July 20,
2006 and a written consent of the Executive Committee of the Board of Directors
of the Company adopted on August 16, 2006, each as certified by the Secretary of
the Company on the date hereof as being complete, accurate and in effect,
relating to, among other things, the authorization of the Placement Agreement
and the performance of the transactions contemplated thereby.

 

 

5.

The Company’s Annual Report on Form 10-K for the year ended December 31, 2005 as
filed with the Securities and Exchange Commission on March 13, 2006 via the
EDGAR database of the Securities and Exchange Commission.

 

 

6.

An executed copy of the Placement Agreement.

 

 

7.

An executed copy of the Subscription Agreement dated as of September 11, 2006,
made among the Company, Capstead Mortgage Trust III and First Tennessee Bank
National Association (the “First Tennessee Subscription Agreement”).

 

 

8.

An executed copy of the Amended and Restated Trust Agreement establishing
Capstead Mortgage Trust III dated as of September 11, 2006 among the Company,
Wilmington Trust Company, and the Administrators named therein (the “Trust
Agreement”).

 

 

9.

An executed copy of the Indenture, dated as of September 11, 2006, between the
Company, as issuer, and Wilmington Trust Company, as trustee (the “Indenture”).

 

 

10.

An executed copy of the Fixed/Floating Rate Capital Securities dated as of
September 11, 2006 issued by the Company to the Trust (the “Debenture,” and
together with the Placement Agreement, the Trust Agreement and the Indenture,
the “Operative Documents”).

 

 

11.

Certificates of certain officers of the Company, dated the date hereof, as to
certain facts relating to the Company and as to the incumbency and signature of
certain officers of the Company.

 

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EXHIBIT B-3

FORM OF DELAWARE COUNSEL OPINION

To Each of the Persons

Listed on Schedule A Hereto

Re: Capstead Mortgage Trust III

Ladies and Gentlemen:

We have acted as special Delaware counsel for Capstead Mortgage Trust III, a
Delaware statutory trust (the “Trust”), in connection with the matters set forth
herein. At your request, this opinion is being furnished to you.

For purposes of giving the opinions hereinafter set forth, our examination of
documents has been limited to the examination of originals or copies of the
following:

(a) The Certificate of Trust of the Trust (the “Certificate of Trust”), as filed
in the office of the Secretary of State of the State of Delaware (the “Secretary
of State”) on September 5, 2006;

(b) The Declaration of Trust, dated as of September 5, 2006, among Capstead
Mortgage Corporation, a Maryland corporation (the “Company”), Wilmington Trust
Company, a Delaware banking corporation (“WTC”), as trustee and the
administrators named therein (the “Administrators”);

(c) The Amended and Restated Declaration of Trust of the Trust, dated as of
September 11, 2006 (including the form of Capital Securities Certificate
attached thereto as Exhibits A-1 and A-2 and the terms of the Capital Securities
attached as Annex I) (the “Declaration of Trust”), among the Company, as
sponsor, WTC, as Delaware trustee (the “Delaware Trustee”) and institutional
trustee (the “Institutional Trustee”), the Administrators and the holders, from
time to time, of undivided beneficial interests in the assets of the Trust;

(d) The Placement Agreement, dated September 8, 2006 (the “Placement
Agreement”), among the Company, the Trust, and FTN Financial Capital Markets and
Keefe, Bruyette & Woods, Inc., as placement agents;

(e) The Subscription Agreement, dated September 11, 2006 (the “Subscription
Agreement”), among the Trust, the Company and First Tennessee Bank National
Association (the documents identified in items (c) through (e) being
collectively referred to as the “Operative Documents”);

(f) The Capital Securities being issued on the date hereof (the “Capital
Securities”);

(g) The Common Securities being issued on the date hereof (the “Common
Securities”) (the documents identified in items (f) and (g) being collectively
referred to as the “Trust Securities”); and

(h) A Certificate of Good Standing for the Trust, dated September 8, 2006,
obtained from the Secretary of State.

 

B-3-1

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Capitalized terms used herein and not otherwise defined are used as defined in
the Declaration of Trust, except that reference herein to any document shall
mean such document as in effect on the date hereof. This opinion is being
delivered pursuant to Section 3.1 of the Placement Agreement.

For purposes of this opinion, we have not reviewed any documents other than the
documents listed in paragraphs (a) through (h) above. In particular, we have not
reviewed any document (other than the documents listed in paragraphs (a) through
(h) above) that is referred to in or incorporated by reference into the
documents reviewed by us. We have assumed that there exists no provision in any
document that we have not reviewed that is inconsistent with the opinions stated
herein. We have conducted no independent factual investigation of our own but
rather have relied solely upon the foregoing documents, the statements and
information set forth therein and the additional matters recited or assumed
herein, all of which we have assumed to be true, complete and accurate in all
material respects.

With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.

For purposes of this opinion, we have assumed (i) that the Declaration of Trust
constitutes the entire agreement among the parties thereto with respect to the
subject matter thereof, including with respect to the creation, operation, and
termination of the Trust, and that the Declaration of Trust and the Certificate
of Trust are in full force and effect and have not been amended further,
(ii) that there are no proceedings pending or contemplated, for the merger,
consolidation, liquidation, dissolution or termination of the Trust,
(iii) except to the extent provided in paragraph 1 below, the due creation, due
formation or due organization, as the case may be, and valid existence in good
standing of each party to the documents examined by us under the laws of the
jurisdiction governing its creation, formation or organization, (iv) that each
party to the documents examined by us is qualified to do business in each
jurisdiction where such qualification is required generally or necessary in
order for such party to enforce its rights under the documents examined by us,
(v) the legal capacity of each natural person who is a party to the documents
examined by us, (vi) except to the extent set forth in paragraph 2 below, that
each of the parties to the documents examined by us has the power and authority
to execute and deliver, and to perform its obligations under, such documents,
(vii) except to the extent provided in paragraph 3 below, that each of the
parties to the documents examined by us has duly authorized, executed and
delivered such documents, (viii) the receipt by each Person to whom a Capital
Security is to be issued by the Trust (the “Capital Security Holders”) of a
Capital Security Certificate for the Capital Security and the payment for the
Capital Securities acquired by it, in accordance with the Declaration of Trust
and the Subscription Agreement, (ix) that the Capital Securities are issued and
sold to the Holders of the Capital Securities in accordance with the Declaration
of Trust and the Subscription Agreement, (x) the receipt by the Person (the
“Common Securityholder”) to whom the common securities of the Trust representing
common undivided beneficial interests in the assets of the Trust (the “Common
Securities” and, together with the Capital Securities, the “Trust Securities”)
are to be issued by the Trust of a Common Security Certificate for the Common
Securities and the payment for the Common Securities acquired by it, in
accordance with the Declaration of Trust, (xi) that the Common Securities are
issued and sold to the Common Securityholder in accordance with the Declaration
of Trust, (xii) that each of the parties to the documents reviewed by us has
agreed to and received the stated consideration for the incurrence of its
obligations under such documents, (xiii) that each of the documents reviewed by
us (other than the Declaration of Trust) is a legal, valid, binding and
enforceable obligation of the parties thereto in accordance with the terms
thereof and (xiv) that the Trust derives no income from or connected with
sources within the State of Delaware and has no assets, activities (other than
having a trustee and the filing of documents with the Secretary of State) or
employees in the State of Delaware. We have not participated in the preparation
of any offering materials with respect to the Trust Securities and assume no
responsibility for its contents.

 

B-3-2

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This opinion is limited to the laws of the State of Delaware (excluding the
securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder that are
currently in effect.

We express no opinion as to (i) the effect of suretyship defenses, or defenses
in the nature thereof, with respect to the obligations of any applicable
guarantor, joint obligor, surety, accommodation party, or other secondary
obligor or any provisions of the Declaration of Trust with respect to
indemnification or contribution and (ii) the accuracy or completeness of any
exhibits or schedules to the Operative Documents. No opinion is given herein as
to the choice of law or internal substantive rules of law that any court or
other tribunal may apply to the transactions contemplated by the Operative
Documents.

We express no opinion as to the enforceability of any particular provision of
the Declaration of Trust or the other Operative Documents relating to remedies
after default.

We express no opinion as to the enforceability of any particular provision of
any of the Operative Documents relating to (i) waivers of rights to object to
jurisdiction or venue, or consents to jurisdiction or venue, (ii) waivers of
rights to (or methods of) service of process, or rights to trial by jury, or
other rights or benefits bestowed by operation of law, (iii) waivers of any
applicable defenses, setoffs, recoupments, or counterclaims, (iv) waivers or
variations of provisions which are not capable of waiver or variation under the
Uniform Commercial Code (“UCC”) of the State, (v) the grant of powers of
attorney to any person or entity, or (vi) exculpation or exoneration clauses,
indemnity clauses, and clauses relating to releases or waivers of unmatured
claims or rights.

We have made no examination of, and no opinion is given herein as to the
Trustee’s or the Trust’s title to or other ownership rights in, or the existence
of any liens, charges or encumbrances on, or adverse claims against, any asset
or property held by the Institutional Trustee or the Trust. We express no
opinion as to the creation, validity, attachment, perfection or priority of any
mortgage, security interest or lien in any asset or property held by the
Institutional Trustee or the Trust.

We express no opinion as to the effect of events occurring, circumstances
arising, or changes of law becoming effective or occurring, after the date
hereof on the matters addressed in this opinion letter, and we assume no
responsibility to inform you of additional or changed facts, or changes in law,
of which we may become aware.

We express no opinion as to any requirement that any party to the Operative
Documents (or any other persons or entities purportedly entitled to the benefits
thereof) qualify or register to do business in any jurisdiction in order to be
able to enforce its rights thereunder or obtain the benefits thereof.

Based upon the foregoing, and upon our examination of such questions of law and
statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:

1. The Trust has been duly created and is validly existing in good standing as a
statutory trust under the Delaware Statutory Trust Act (12 Del. C. § 3801, et
seq.) (the “Act”). All filings required under the laws of the State of Delaware
with respect to the creation and valid existence of the Trust as a statutory
trust have been made.

 

B-3-3

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2. Under the Declaration of Trust and the Act, the Trust has the trust power and
authority to (A) execute and deliver the Operative Documents, (B) perform its
obligations under such Operative Documents and (C) issue the Trust Securities.

3. The execution and delivery by the Trust of the Operative Documents, and the
performance by the Trust of its obligations thereunder, have been duly
authorized by all necessary trust action on the part of the Trust.

4. The Declaration of Trust constitutes a legal, valid and binding obligation of
the Company, the Trustees and the Administrators, and is enforceable against the
Company, the Trustees and the Administrators, in accordance with its terms.

5. Each of the Operative Documents constitutes a legal, valid and binding
obligation of the Trust, enforceable against the Trust, in accordance with its
terms.

6. The Capital Securities have been duly authorized for issuance by the
Declaration of Trust, and, when duly executed and delivered to and paid for by
the purchasers thereof in accordance with the Declaration of Trust, the
Subscription Agreement and the Placement Agreement, the Capital Securities will
be validly issued, fully paid and, subject to the qualifications set forth in
paragraph 8 below, nonassessable undivided beneficial interests in the assets of
the Trust and will entitle the Capital Securities Holders to the benefits of the
Declaration of Trust. The issuance of the Capital Securities is not subject to
preemptive or other similar rights under the Act or the Declaration of Trust.

7. The Common Securities have been duly authorized for issuance by the
Declaration of Trust and, when duly executed and delivered to the Company as
Common Security Holder in accordance with the Declaration of Trust, will be
validly issued, fully paid and, subject to paragraph 8 below and Section 9.1(b)
of the Declaration of Trust (which provides that the Holder of the Common
Securities are liable for debts and obligations of Trust), nonassessable
undivided beneficial interests in the assets of the Trust and will entitle the
Common Security Holder to the benefits of the Declaration of Trust. The issuance
of the Common Securities is not subject to preemptive or other similar rights
under the Act or the Declaration of Trust.

8. Under the Declaration of Trust and the Act, the Holders of the Capital
Securities, as beneficial owners of the Trust, will be entitled to the same
limitation of personal liability extended to stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware. We note that the Holders of the Capital Securities and the Holder
of the Common Securities may be obligated, pursuant to the Declaration of Trust,
(A) to provide indemnity and/or security in connection with and pay taxes or
governmental charges arising from transfers or exchanges of Capital Security
Certificates and the issuance of replacement Capital Security Certificates, and
(B) to provide security or indemnity in connection with requests of or
directions to the Institutional Trustee to exercise its rights and powers under
the Declaration of Trust.

9. Neither the execution, delivery and performance by the Trust of the Operative
Documents, nor the consummation by the Trust of any of the transactions
contemplated thereby, requires the consent or approval of, the authorization of,
the withholding of objection on the part of, the giving of notice to, the
filing, registration or qualification with, or the taking of any other action in
respect of, any governmental authority or agency of the State of Delaware, other
than the filing of the Certificate of Trust with the Secretary of State (which
Certificate of Trust has been duly filed).

10. Neither the execution, delivery and performance by the Trust of the Trust
Documents, nor the consummation by the Trust of the transactions contemplated
thereby, (i) is in

 

B-3-4

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violation of the Declaration of Trust or of any law, rule or regulation of the
State of Delaware applicable to the Trust or (ii) to the best of our knowledge,
without independent investigation, violates, contravenes or constitutes a
default under, or results in a breach of or in the creation of any lien (other
than as permitted by the Operative Documents) upon any property of the Trust
under any indenture, mortgage, chattel mortgage, deed of trust, conditional
sales contract, bank loan or credit agreement, license or other agreement or
instrument to which the Trust is a party or by which it is bound.

11. Assuming that the Trust will not be taxable as a corporation for federal
income tax purposes, but rather will be classified for such purposes as a
grantor trust under Subpart E, Part I of Subchapter J of the Internal Revenue
Code of 1986, as amended, the Trust will not be subject to any tax, fee or
governmental charge under the laws of the State of Delaware.

The opinions expressed in paragraph 4, 5, 6, 7 and 8 above are subject, as to
enforcement, to the effect upon the Declaration of Trust of (i) bankruptcy,
insolvency, moratorium, receivership, reorganization, liquidation, fraudulent
conveyance and transfer, and other similar laws relating to or affecting the
rights and remedies of creditors generally, (ii) principles of equity, including
applicable law relating to fiduciary duties (regardless of whether considered
and applied in a proceeding in equity or at law), and (iii) the effect of
applicable public policy on the enforceability of provisions relating to
indemnification or contribution.

Circular 230 Notice. Any advice contained in this communication with respect to
any federal tax matter was not intended or written to be used, and it cannot be
used by any taxpayer, for the purpose of avoiding penalties that the Internal
Revenue Service may impose on the taxpayer. If any such advice is made to any
person other than to our client for whom the advice was prepared, the advice
expressed above is being delivered to support the promotion or marketing (by a
person other than Richards, Layton & Finger) of the transaction or matter
discussed or referenced, and such taxpayer should seek advice based on the
taxpayer’s particular circumstances from an independent tax advisor.

In basing the opinions set forth herein on “our knowledge,” the words “our
knowledge” signify that no information has come to the attention of the
attorneys in the firm who are directly involved in the representation of the
Trust in this transaction that would give us actual knowledge that any such
opinions are not accurate. Except as otherwise stated herein, we have undertaken
no independent investigation or verification of such matters.

We consent to your relying as to matters of Delaware law upon this opinion in
connection with the Placement Agreement. We also consent to Lewis, Rice &
Fingersh, L.C.’s and Andrews Kurth LLP’s relying as to matters of Delaware law
upon this opinion in connection with opinions to be rendered by them on the date
hereof pursuant to the Placement Agreement. Except as stated above, without our
prior written consent, this opinion may not be furnished or quoted to, or relied
upon by, any other Person for any purpose.

 

Very truly yours,

 

B-3-5

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SCHEDULE A

Wilmington Trust Company

FTN Financial Capital Markets

Keefe, Bruyette & Woods, Inc.

First Tennessee Bank National Association

Capstead Mortgage Corporation

Capstead Mortgage Trust III

 

B-3-6

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EXHIBIT B-4

TAX COUNSEL OPINION ITEMS

 

1.

The Debentures will be classified as indebtedness of the Company for U.S.
federal income tax purposes.

 

2.

The Trust will be characterized as a grantor trust and not as an association
taxable as a corporation for U.S. federal income tax purposes.

 

B-4-1

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Lewis, Rice & Fingersh, L.C.

500 N. Broadway, Suite 2000

St. Louis, Missouri 63102

 

 

Re:

Representations Concerning the Issuance of Junior Subordinated Debentures (the
“Debentures”) to Capstead Mortgage Trust III (the “Trust”) and Sale of Trust
Securities (the “Trust Securities”) of the Trust

Ladies and Gentlemen:

In accordance with your request, Capstead Mortgage Corporation (the “Company”)
hereby makes the following representations in connection with the preparation of
your opinion letter as to the United States federal income tax consequences of
the issuance by the Company of the Debentures to the Trust and the sale of the
Trust Securities.

Company hereby represents that:

1. The sole assets of the Trust will be the Debentures, any interest paid on the
Debentures to the extent not distributed, proceeds of the Debentures, or any of
the foregoing.

2. The Company intends to use the net proceeds from the sale of the Debentures
for general corporate purposes.

3. The Trust was not formed to conduct any trade or business and is not
authorized to conduct any trade or business. The Trust exists for the exclusive
purposes of (i) issuing and selling the Trust Securities, (ii) using the
proceeds from the sale of Trust Securities to acquire the Debentures, and
(iii) engaging only in activities necessary or incidental thereto.

4. The Company has not entered into an agency agreement with the Trust or
authorized the trustee to act as its agent in dealing with third parties. To the
Company’s knowledge, after due inquiry, the Trust has not acted as the agent of
the Company or of anyone else in dealing with third parties.

5. The Trust was formed to facilitate direct investment in the assets of the
Trust, and the existence of multiple classes of ownership is incidental to that
purpose. There is no intent to provide holders of such interests in the Trust
with diverse interests in the assets of the Trust.

6. The Company intends to create a debtor-creditor relationship between the
Company, as debtor, and the Trust, as a creditor, upon the issuance and sale of
the Debentures to the Trust by the Company. The Company will (i) record and at
all times continue to reflect the Debentures as indebtedness on its separate
books and records for financial accounting purposes, and (ii) treat the
Debentures as indebtedness for all United States tax purposes.

7. During each year, the Trust’s income will consist solely of payments made by
the Company with respect to the Debentures. Such payments will not be derived
from the active conduct of a financial business by the Trust. Both the Company’s
obligation to make such payments and the measurement of the amounts payable by
the Company are defined by the terms of the Debentures. Neither the Company’s
obligation to make such payments nor the measurement of the amounts payable by
the Company is dependent on income or profits of the Company or any affiliate of
the Company.

 

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8. The Company expects that it will be able to make, and will make, timely
payment of amounts identified by the Debentures as principal and interest in
accordance with the terms of the Debentures with available capital or
accumulated earnings.

9. Immediately after the issuance of the Debentures, the debt-to-equity ratio of
the Company (as determined on a consolidated basis for financial accounting
purposes) will be within industry norms of debt-to-equity ratios of publicly
traded real estate investment trusts whose principal holdings are
mortgage-backed securities and, in any event, will be no higher than fifteen to
one (15 : 1).

10. The Company believes that, were it not issuing the Debentures, the Company
would be able to borrow Twenty-Five Million Dollars from financial institutions
or other lenders not related to the Company through stock ownership, on terms
and conditions closely comparable to the terms and conditions set forth in the
Debentures. The Company has not received advice from any financial institution
or any investment banker with which it works that is inconsistent with this
belief.

11. To the best of our knowledge, the Company is currently in compliance with
all federal, state, and local capital requirements, except to the extent that
failure to comply with any such requirements would not have a material adverse
effect on the Company and its affiliates.

12. The Company will not issue any class of common stock or preferred stock
senior to the Debentures during their term.

13. The Internal Revenue Service has not challenged the interest deduction on
any class of the Company’s debt in the last ten (10) years on the basis that
such debt constitutes equity for federal income tax purposes.

The above representations are accurate as of the date below and will continue to
be accurate through the issuance of the Trust Securities, unless you are
otherwise notified by us in writing. The undersigned understands that you will
rely on the foregoing in connection with rendering certain legal opinions, and
possesses the authority to make the representations set forth in this letter on
behalf of the Company.

 

   

Very truly yours,

   

CAPSTEAD MORTGAGE CORPORATION

Date: September 8, 2006

   

By:

       

Title:

   

 

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EXHIBIT C

FORM OF QUARTERLY REPORT

The Bank of New York

Collateralized Debt Obligation Group

101 Barclay Street, 8E

New York, New York 10286

Attention: Franco B. Talavera

CDO Relationship Manager

The undersigned, the [Chairman/Vice Chairman/Chief Executive
Officer/President/Vice President/Chief Financial Officer/Treasurer/Assistant
Treasurer], hereby certifies, pursuant to Section 7.9 of the Placement
Agreement, dated as of September 8, 2006, among Capstead Mortgage Corporation.
(the “Company”), Capstead Mortgage Trust III (the “Trust”), on the one hand, and
FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc., on the other
hand, that, as of [date], [20__], the Company, if applicable, and its
subsidiaries, if applicable, had the following ratios and balances:

As of [Quarterly/Annual Financial Date], 20__

 

Senior secured indebtedness for borrowed money (“Debt”)

     $________   

Senior unsecured Debt

     $________   

Subordinated Debt

     $________   

Total Debt

     $________   

Preferred Stock

     $________   

Total Shareholders’ Equity

     $________   

Ratio of senior secured and unsecured Debt to total Debt

     ______%   

Ratio of total Debt to total Capital

     ______%   

Net Interest Margin

     ______%   

Interest coverage ratio (EBITDA/Interest expense)

     ______%   

Fixed charge coverage ratio (EBITDA/Interest expense + preferred dividends +
amortization of amortized debt)

     ______%   

Net Income

     $________   

Most recently declared common stock dividend per share (amount per share and
date of declaration)

     $________         __/__/____   

 

C-1

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[FOR FISCAL YEAR END: Attached hereto are the audited consolidated financial
statements (including the balance sheet, income statement and statement of cash
flows, and notes thereto, together with the report of the independent
accountants thereon) of the Company and its consolidated subsidiaries for the
three years ended [date], 20            and all financial statements required to
be filed with any Governmental Entity (as defined in the Placement Agreement)
other than the Securities and Exchange Commission for the year ended [date],
20__]

[FOR FISCAL QUARTER END: Attached hereto are the unaudited consolidated and
consolidating financial statements (including the balance sheet and income
statement) of the Company and its consolidated subsidiaries and all financial
statements required to be filed with any Governmental Entity (as defined in the
Placement Agreement) other than the Securities and Exchange Commission for the
fiscal quarter ended [date], 20__.]

The financial statements fairly present in all material respects, in accordance
with U S generally accepted accounting principles (“GAAP”), the financial
position of the Company and its consolidated subsidiaries, and the results of
operations and changes in financial condition as of the date, and for the
[            quarter interim] [annual] period ended [date], 20__, and such
financial statements have been prepared in accordance with GAAP consistently
applied throughout the period involved (except as otherwise noted therein).

IN WITNESS WHEREOF, the undersigned has executed this Officer’s Financial
Certificate as of this             day of                     , 20__.

 

CAPSTEAD MORTGAGE CORPORATION

By:

   

Name:

   

8401 North Central Expressway, Suite 800

Dallas, Texas 75225-4410

214-874-2350

 

C-2