##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 (Mark One)þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the quarterly period ended June 30, 2005ORo
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the transition period from      to
 Commission File Number: 000-31828
 
 LUMINENT MORTGAGE CAPITAL, INC.
  Maryland
    
    06-1694835(State or other jurisdiction of incorporation or
    
    (I.R.S. Employerorganization)
    
    Identification No.)
 One Market, Spear Tower, 30thFloor, San Francisco, California
    
    94105(Address of principal executive offices)
    
    (Zip Code)
 (415) 978-3000
 Former Address: 909 Montgomery Street, Suite 500, San Francisco, California, 94133
Former Telephone Number: (415) 486-2110
 
 þ o
 þ o




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INDEX
 PAGEPART IITEM 1. FINANCIAL STATEMENTS
    
    
    2ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    23ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
    
    
    49ITEM 4. CONTROLS AND PROCEDURES
    
    
    53PART IIITEM 1. LEGAL PROCEEDINGS
    
    
    54ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    54ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    54ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    54ITEM 5. OTHER INFORMATION
    
    
    54ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    54SIGNATURES
    
    
    55EXHIBIT INDEX
    
    
    56EXHIBIT 10.3EXHIBIT 10.6EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  i




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
   
    
    interest rate mismatches between our mortgage loans and mortgage-backed securities and the borrowings we
use to fund our purchases of such loans and securities;
 
    
    changes in interest rates and mortgage prepayment rates;
 
    
    our ability to obtain or renew sufficient funding to maintain our leverage strategies;
 
    
    potential impacts of our leveraging policies on our net income and cash available for distribution;
 
    
    the ability of our board of directors to change our operating policies and strategies without stockholder
approval or notice to you;
 
    
    effects of interest rate caps on our adjustable-rate and hybrid adjustable-rate mortgage-backed securities;
 
    
    the degree to which our hedging strategies may or may not protect us from interest rate volatility;
 
    
    the fact that Seneca could be motivated to recommend riskier investments in an effort to maximize its
incentive compensation under its management agreement with us;
 
    
    potential conflicts of interest arising out of our relationship with Seneca, on the one hand, and Senecas
relationships with other third parties, on the other hand;
 
    
    our ability to invest up to 10% of our investment portfolio in residuals, leveraged mortgage derivative
securities, and shares of other REITs as well as other investments;
 
    
    your inability to review the assets that we will acquire with the net proceeds of any securities we offer
before you purchase our securities; and
 
    
    the other important factors described in this Quarterly Report on Form 10-Q, including those under the
captions Managements Discussion and Analysis of Financial Condition and Results of Operations, Risk
Factors and Quantitative and Qualitative Disclosures about Market Risk.
   ii




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INDEX TO FINANCIAL STATEMENTS
 Condensed Consolidated Financial Statements of Luminent Mortgage Capital, Inc.:
 Condensed Consolidated Balance Sheets (unaudited) at June 30, 2005 and December 31, 2004
    
    
    2Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended
June 30, 2005 and June 30, 2004
    
    
    3Condensed Consolidated Statement of Stockholders Equity (unaudited) for the six months ended
June 30, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended
June 30, 2005 and June 30, 2004
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6
 1




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30,
    
    December 31,(in thousands, except share and per share amounts)
    
    2005
    
    2004Assets:Cash and cash equivalents
    
    $
    23,732
    
    
    $
    10,581Mortgage-backed securities available-for-sale, at fair value
    
    
    694,971
    
    
    
    186,351Mortgage-backed securities available-for-sale, pledged as collateral, at fair value
    
    
    4,404,864
    
    
    
    4,641,604Interest receivable
    
    
    19,778
    
    
    
    18,861Principal receivable
    
    
    18,935
    
    
    
    13,426Derivatives, at fair value
    
    
    6,014
    
    
    
    7,900Other assets
    
    
    4,070
    
    
    
    1,105Total assets
    
    $
    5,172,364
    
    
    $
    4,879,828Liabilities:Repurchase agreements
    
    $
    4,191,025
    
    
    $
    4,436,456Unsettled securities purchases
    
    
    471,128
    
    
    
    Junior subordinated notes
    
    
    49,964
    
    
    
    Cash distributions payable
    
    
    10,841
    
    
    
    15,959Derivatives, at fair value
    
    
    
    
    
    
    1,073Accrued interest expense
    
    
    16,155
    
    
    
    17,333Management compensation payable, incentive compensation payable, and other related
party liabilities
    
    
    1,315
    
    
    
    2,952Accounts payable and accrued expenses
    
    
    682
    
    
    
    552Total liabilities
    
    
    4,741,110
    
    
    
    4,474,325Stockholders Equity:Preferred stock, par value $0.001:10,000,000 shares authorized; no shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.001:100,000,000 shares authorized; 40,151,117 and 37,113,011 shares issued and
outstanding at June 30, 2005 and December 31, 2004, respectively
    
    
    40
    
    
    
    37Additional paid-in capital
    
    
    510,720
    
    
    
    478,457Deferred compensation
    
    
    (3,243
    )
    
    
    (2,207
    )Accumulated other comprehensive loss
    
    
    (67,379
    )
    
    
    (61,368
    )Accumulated distributions in excess of accumulated earnings
    
    
    (8,884
    )
    
    
    (9,416
    )Total stockholders equity
    
    
    431,254
    
    
    
    405,503Total liabilities and stockholders equity
    
    $
    5,172,364
    
    
    $
    4,879,828
  2




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,(in thousands, except share and per share amounts)
    
    2005
    
    2004
    
    2005
    
    2004Revenues:Net interest income:Interest income
    
    $
    42,463
    
    
    $
    27,218
    
    
    $
    84,978
    
    
    $
    47,422Interest expense
    
    
    32,098
    
    
    
    9,190
    
    
    
    52,637
    
    
    
    16,017Net interest income
    
    
    10,365
    
    
    
    18,028
    
    
    
    32,341
    
    
    
    31,405Other income (losses):Other losses
    
    
    (899
    )
    
    
    
    
    
    
    (899
    )
    
    
    Expenses:Management compensation expense to related party
    
    
    1,082
    
    
    
    1,086
    
    
    
    2,180
    
    
    
    1,873Incentive compensation expense to related parties
    
    
    403
    
    
    
    1,250
    
    
    
    873
    
    
    
    2,096Salaries and benefits
    
    
    648
    
    
    
    110
    
    
    
    856
    
    
    
    206Professional services
    
    
    514
    
    
    
    228
    
    
    
    1,076
    
    
    
    645Board of directors expense
    
    
    116
    
    
    
    63
    
    
    
    235
    
    
    
    119Insurance expense
    
    
    137
    
    
    
    137
    
    
    
    275
    
    
    
    357Custody expense
    
    

    143
    
    
    
    94
    
    
    
    194
    
    
    
    161Other general and administrative expenses
    
    
    249
    
    
    
    106
    
    
    
    610
    
    
    
    194Total expenses
    
    
    3,292
    
    
    
    3,074
    
    
    
    6,299
    
    
    
    5,651Net income
    
    $
    6,174
    
    
    $
    14,954
    
    
    $
    25,143
    
    
    $
    25,754Net income
per share  basic
    
    $
    0.16
    
    
    $
    0.41
    
    
    $
    0.67
    
    
    $
    0.83Net income
per share  diluted
    
    $
    0.16
    
    
    $
    0.41
    
    
    $
    0.67
    
    
    $
    0.83Weighted-average number of shares outstanding  basic
    
    
    38,176,274
    
    
    
    36,814,000
    
    
    
    37,694,382
    
    
    
    30,945,868Weighted-average number of shares outstanding  diluted
    
    
    38,351,238
    
    
    
    36,843,531
    
    
    
    37,780,366
    
    
    
    30,979,363
  3




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 (Unaudited)
 AccumulatedDistributionsCommon Stock
    
    Additional
    
    
    
    
    
    Accumulated
    
    in Excess ofPar
    
    Paid-in
    
    Deferred
    
    Other
    
    Accumulated
    
    Comprehensive(in thousands)
    
    Shares
    
   Value
    
    Capital
    
    Compensation
    
    Comprehensive Loss
    
    Earnings
    
    Income/(Loss)
    
    TotalBalance, January 1, 2005
    
    
    37,113
    
    
    $
    37
    
    
    $
    478,457
    
    
    $
    (2,207
    )
    
    $
    (61,368
    )
    
    $
    (9,416
    )
    
    
    
    
    
    $
    405,503Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,143
    
    
    $
    25,143
    
    
    
    25,143Mortgage-backed securities
Available-for-sale, fair
value
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,236
    )
    
    
    
    
    
    
    (1,236
    )
    
    
    (1,236
    )Derivatives, fair value
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,566
    )
    
    
    
    
    
    
    (2,566
    )
    
    
    (2,566
    )Futures contracts, net realized
losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,209
    )
    
    
    
    
    
    
    (2,209
    )
    
    
    (2,209
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,132Distributions to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,611
    )
    
    
    
    
    
    
    (24,611
    )Issuance of common stock
    
    
    3,038
    
    
    
    3
    
    
    
    32,261
    
    
    
    (2,048
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,216Amortization of stock options
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Amortization of restricted
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,012Balance, June 30, 2005
    
    
    40,151
    
    
    $
    40
    
    
    $
    510,720
    
    
    $
    (3,243
    )
    
    $
    (67,379
    )
    
    $
    (8,884
    )
    
    
    
    
    
    $
    431,254
  4




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six Months Ended June 30,(in thousands)
    
    2005
    
    2004Cash flows from operating activities:Net income
    
    $
    25,143
    
    
    $
    25,754Adjustments to reconcile net income to net cash provided by operating activities:Amortization of premium/discount on mortgage-backed securities available-for-sale
    
    
    12,801
    
    
    
    14,715Amortization of stock options
    
    
    2
    
    
    
    3Ineffectiveness gains on cash flow hedges
    
    
    (777
    )
    
    
    (1,411
    )Losses on derivative contracts
    
    
    899
    
    
    
    Changes in operating assets and liabilities:Decrease/(increase) in interest receivable, net of purchased interest
    
    
    1,818
    
    
    
    (1,212
    )Increase in other assets
    
    
    (4,001
    )
    
    
    (1,749
    )Increase in accounts payable and accrued expenses
    
    
    185
    
    
    
    1,652(Decrease)/increase in accrued interest expense

    
    
    (1,178
    )
    
    
    3,809Increase in management compensation payable, incentive compensation payable and other related
party liabilities
    
    
    541
    
    
    
    3,057Net cash provided by operating activities
    
    
    35,433
    
    
    
    44,618Cash flows from investing activities:Purchases of mortgage-backed securities available-for-sale
    
    
    (551,394
    )
    
    
    (2,789,013
    )Principal payments of mortgage-backed securities
    
    
    728,361
    
    
    
    485,042Net cash provided by (used in) investing activities
    
    
    176,967
    
    
    
    (2,303,971
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    30,030
    
    
    
    157,508Borrowings under repurchase agreements
    
    
    8,333,222
    
    
    
    18,054,023Principal payments on repurchase agreements
    
    
    (8,578,653
    )
    
    
    (15,940,124
    )Distributions to stockholders
    
    
    (29,729
    )
    
    
    (15,700
    )Borrowing under junior subordinated notes, net of debt issuance costs
    
    
    49,964
    
    
    
    Borrowing under note payable, net
    
    
    
    
    
    
    202Amortization of net realized gains on Eurodollar futures contracts
    
    
    (2,194
    )
    
    
    Realized gains/(losses) on Eurodollar futures contracts
    
    
    (15
    )
    
    
    1,922Purchases of derivative contracts
    
    
    (1,874
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (199,249
    )
    
    
    2,257,831Net increase (decrease) in cash and cash equivalents
    
    
    13,151
    
    
    
    (1,522
    )Cash and cash equivalents, beginning of the period
    
    
    10,581
    
    
    
    7,219Cash and cash equivalents, end of the period
    
    $
    23,732
    
    
    $
    5,697Supplemental disclosure of cash flow information:Interest paid
    
    $
    59,986
    
    
    $
    13,255Non-cash investing and financing activities:Increase/(decrease) in unsettled security purchases
    
    $
    471,128
    
    
    $
    (156,127
    )(Increase)/decrease in principal receivable
    
    
    (5,509
    )
    
    
    (12,545
    )Incentive compensation payable settled through issuance of restricted common stock
    
    
    2,178
    
    
    
    1,066Accounts payable and accrued expenses settled through issuance of restricted common stock
    
    
    55
    
    
    
    Deferred compensation reclassified to stockholders equity upon issuance of restricted common stock
    
    
    (1,036
    )
    
    
    (725
    )
  5




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NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Investment in Subsidiary Trust and Junior Subordinated Notes
 Consolidation
of Variable Interest Entities
   Purchased Beneficial Interests
 Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets
 Share-based Compensation
 Share-Based Payment
 6




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Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging Activities
 NOTE 2MORTGAGE-BACKED SECURITIES
  TotalAdjustable-
    
    Hybrid
    
    Balloon
    
    
    
    
    
    Mortgage-Rate
    
    Adjustable-Rate
    
    Maturity
    
    Other
    
    BackedSecurities
    
    Securities
    
    Securities
    
    Securities
    
    Securities(in thousands)Amortized cost
    
    $
    103,359
    
    
    $
    4,931,667
    
    
    $
    54,902
    
    
    $
    80,441
    
    
    $
    5,170,369Unrealized gains
    
    
    15
    
    
    
    2,116
    
    
    
    
    
    
    
    601
    
    
    
    2,732Unrealized losses
    
    
    (1,283
    )
    
    
    (70,400
    )
    
    
    (1,269
    )
    
    
    (314
    )
    
    
    (73,266
    )Fair value
    
    $
    102,091
    
    
    $
    4,863,383
    
    
    $
    53,633
    
    
    $
    80,728
    
    
    $
    5,099,835% of total
    
    
    2.0
    %
    
    
    95.4
    %
    
    
    1.0
    %
    
    
    1.6
    %
    
    
    100.0
    %
  TotalAdjustable-
    
    Hybrid
    
    Balloon
    
    Mortgage-Rate
    
    Adjustable-Rate
    
    Maturity
    
    BackedSecurities
    
    Securities
    
    Securities
    
    Securities(in thousands)Amortized cost
    
    $
    127,360
    
    
    $
    4,714,759
    
    
    $
    55,134
    
    
    $
    4,897,253Unrealized gains
    
    
    33
    
    
    
    739
    
    
    
    
    
    
    
    772Unrealized losses
    
    
    (1,618
    )
    
    
    (67,340
    )
    
    
    (1,112
    )
    
    
    (70,070
    )Fair value
    
    $
    125,775
    
    
    $
    4,648,158
    
    
    $
    54,022
    
    
    $
    4,827,955% of total
    
    
    2.6
    %
    
    
    96.3
    %
    
    
    1.1
    %
    
    
    100.0
    %
 7




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##### Table of Contents



Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    Amortized Cost
    
    Coupon(in thousands)Less than one year
    
    $
    650,068
    
    
    $
    641,026
    
    
    
    3.73
    %Greater than one year and less than five years
    
    
    4,458,971
    
    
    
    4,397,598
    
    
    
    4.45Greater than five years
    
    
    61,330
    
    
    
    61,211
    
    
    
    5.18Total
    
    $
    5,170,369
    
    
    $
    5,099,835
    
    
    
    4.37
    %
  Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    Amortized Cost
    
    Coupon(in thousands)Less than one year
    
    $
    211,475
    
    
    $
    215,099
    
    
    
    3.76
    %Greater than one year and less than five years
    
    
    4,616,480
    
    
    
    4,682,154
    
    
    
    4.24Greater than five years
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,827,955
    
    
    $
    4,897,253
    
    
    
    4.22
    %
   8




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##### Table of Contents



Less than 12 Months
    
    12 Months or More
    
    TotalGross
    
    
    
    
    
    GrossFair
    
    Gross
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Unrealized Losses
    
    Value
    
    Losses
    
    Value
    
    Losses(in thousands)Agency-backed
mortgage-backed securities
    
    $
    1,235,304
    
    
    $
    (8,948
    )
    
    $
    1,814,598
    
    
    $
    (34,833
    )
    
    $
    3,049,902
    
    
    $
    (43,781
    )Non-agency-backed
mortgage-backed securities
    
    
    583,248
    
    
    
    (7,704
    )
    
    
    980,838
    
    
    
    (21,782
    )
    
    
    1,564,086
    
    
    
    (29,486
    )Total temporarily impaired
Securities
    
    $
    1,818,552
    
    
    $
    (16,652
    )
    
    $
    2,795,436
    
    
    $
    (56,615
    )
    
    $
    4,613,988
    
    
    $
    (73,267
    )
  Less than 12 Months
    
    12 Months or More
    
    TotalGross
    
    
    
    
    
    Gross
    
    
    
    
    
    GrossFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    Losses(in thousands)Agency-backed
mortgage-backed securities
    
    $
    2,473,670
    
    
    $
    (35,605
    )
    
    $
    379,814
    
    
    $
    (5,701
    )
    
    $
    2,853,484
    
    
    $
    (41,306
    )Non-agency-backed
mortgage-backed securities
    
    
    1,468,329
    
    
    
    (22,189
    )
    
    
    251,452
    
    
    
    (6,575
    )
    
    
    1,719,781
    
    
    
    (28,764
    )Total temporarily impaired
Securities
    
    $
    3,941,999
    
    
    $
    (57,794
    )
    
    $
    631,266
    
    
    $
    (12,276
    )
    
    $
    4,573,265
    
    
    $
    (70,070
    )
  9




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##### Table of Contents



NOTE 3REPURCHASE AGREEMENTS AND OTHER BORROWINGS
   Overnight
    
    Between
    
    Between
    
    Between(1 day or
    
    2 and 30
    
    31 and 90
    
    91 and 421less)
    
    days
    
    days
    
    days
    
    Total(in thousands)Agency-backed mortgage-backed securities:Amortized cost of securities sold,
including accrued interest
    
    $
    
    
    
    $
    299,887
    
    
    $
    2,224,390
    
    
    $
    453,108
    
    
    $
    2,977,385Fair market value of securities sold,
including accrued interest
    
    
    
    
    
    
    297,223
    
    
    
    2,193,735
    
    
    
    446,438
    
    
    
    2,937,396Repurchase agreement liabilities
associated with these securities
    
    
    
    
    
    
    283,680
    
    
    
    2,077,708
    
    
    
    424,032
    
    
    
    2,785,420Weighted-average interest rate of
repurchase agreement liabilities
    
    
    0.00
    %
    
    
    3.24
    %
    
    
    3.35
    %
    
    
    3.10
    %
    
    
    3.30
    %Non-agency-backed mortgage-backed
securities:Amortized cost of securities sold,
including accrued interest
    
    $
    
    
    
    $
    160,900
    
    
    $
    919,517
    
    
    $
    432,621
    
    
    $
    1,513,038Fair market value of securities sold,
including accrued interest
    
    
    
    
    
    
    157,918
    
    
    
    903,263
    
    
    
    423,721
    
    
    
    1,484,902Repurchase agreement liabilities
associated with these securities
    
    
    
    
    
    
    149,736
    
    
    
    852,530
    
    
    
    403,339
    
    
    
    1,405,605Weighted-average interest rate of
repurchase agreement liabilities
    
    
    0.00
    %
    
    
    3.25
    %
    
    
    3.36
    %
    
    
    3.34
    %
    
    
    3.34
    %Total:Amortized cost of securities sold,
including accrued interest
    
    $
    
    
    
    $
    460,787
    
    
    $
    3,143,907
    
    
    $
    885,729
    
    
    $
    4,490,423Fair market value of securities sold,
including accrued interest
    
    
    
    
    
    
    455,141
    
    
    
    3,096,998
    
    
    
    870,159
    
    
    
    4,422,298Repurchase agreement liabilities
associated with these securities
    
    
    
    
    
    
    433,416
    
    
    
    2,930,238
    
    
    
    827,371
    
    
    
    4,191,025Weighted-average interest rate of
repurchase agreement liabilities
    
    
    0.00
    %
    
    
    3.24
    %
    
    
    3.35
    %
    
    
    3.22
    %
    
    
    3.31
    %
 10




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##### Table of Contents



Overnight
    
    Between
    
    Between
    
    Between(1 day or
    
    2 and 30
    
    31 and 90
    
    91 and 602less)
    
    days
    
    days
    
    days
    
    Total(in thousands)Agency-backed mortgage-backed securities:Amortized cost of securities sold,
including accrued interest
    
    $
    20,203
    
    
    $
    153,656
    
    
    $
    1,017,753
    
    
    $
    1,702,727
    
    
    $
    2,894,339Fair market value of securities sold,
including accrued interest
    
    
    20,010
    
    
    
    152,100
    
    
    
    1,005,208
    
    
    
    1,677,425
    
    
    
    2,854,743Repurchase agreement liabilities
associated with these securities
    
    
    19,058
    
    
    
    144,512
    
    
    
    956,307
    
    
    
    1,596,914
    
    
    
    2,716,791Weighted-average interest rate of
repurchase agreement liabilities
    
    
    2.36
    %
    
    
    2.28
    %
    
    
    2.41
    %
    
    
    2.35
    %
    
    
    2.37
    %Non-agency-backed mortgage-backed
securities:Amortized cost of securities sold,
including accrued interest
    
    $
    17,795
    
    
    $
    53,278
    
    
    $
    998,982
    
    
    $
    763,429
    
    
    $
    1,833,484Fair market value of securities sold,
including accrued interest
    
    
    17,555
    
    
    
    52,706
    
    
    
    982,301
    
    
    
    752,376
    
    
    
    1,804,938Repurchase agreement liabilities
associated with these securities
    
    
    16,719
    
    
    
    50,132
    
    
    
    936,901
    
    
    
    715,913
    
    
    
    1,719,665Weighted-average interest rate of
repurchase agreement liabilities
    
    
    2.36
    %
    
    
    2.27
    %
    
    
    2.44
    %
    
    
    2.35
    %
    
    
    2.35
    %Total:Amortized cost of securities sold,
including accrued interest
    
    $
    37,998
    
    
    $
    206,934
    
    
    $
    2,016,735
    
    
    $
    2,466,156
    
    
    $
    4,727,823Fair market value of securities sold,
including accrued interest
    
    
    37,565
    
    
    
    204,806
    
    
    
    1,987,509
    
    
    
    2,429,801
    
    
    
    4,659,681Repurchase agreement liabilities
associated with these securities
    
    
    35,777
    
    
    
    194,644
    
    
    
    1,893,208
    
    
    
    2,312,827
    
    
    
    4,436,456Weighted-average interest rate of
repurchase agreement liabilities
    
    
    2.36
    %
    
    
    2.28
    %
    
    
    2.43
    %
    
    
    2.35
    %
    
    
    2.38
    %
 11




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##### Table of Contents



Weighted-AverageMaturity ofAmount at
    
    RepurchaseRepurchase Agreement Counterparties
    
    Risk(1)
    
    Agreements(in thousands)
    
    (in days)Banc of America Securities LLC
    
    $
    9,334
    
    
    
    337Bear Stearns & Co.
    
    
    67,820
    
    
    
    82Countrywide Securities Corporation
    
    
    9,078
    
    
    
    58Deutsche Bank Securities Inc.
    
    
    43,373
    
    
    
    107Goldman Sachs & Co.
    
    
    13,435
    
    
    
    60Greenwich Capital Markets
    
    
    6,652
    
    
    
    105Lehman Brothers Inc.
    
    
    3,574
    
    
    
    62Merrill Lynch Government Securities Inc./Merrill Lynch
Pierce, Fenner & Smith Inc.
    
    
    8,317
    
    
    
    70Morgan Stanley & Co. Inc.
    
    
    1,331
    
    
    
    68Nomura Securities International, Inc.
    
    
    9,487
    
    
    
    67Salomon Smith Barney
    
    
    9,427
    
    
    
    218UBS Securities LLC
    
    
    20,079
    
    
    
    240Wachovia Securities, LLC
    
    
    13,541
    
    
    
    68Total
    
    $
    215,448
    
    
    
    121
 
 (1)
    
    Equal to the sum of the fair value of the securities sold and accrued
interest income minus the sum of repurchase agreement liabilities and
accrued interest expense.  Weighted-AverageMaturity ofAmount at
    
    RepurchaseRepurchase Agreement Counterparties
    
    Risk(1)
    
    Agreements(in thousands)
    
    (in days)Banc of America Securities LLC
    
    $
    11,970
    
    
    
    61Bear Stearns & Co.
    
    
    60,106
    
    
    
    100Countrywide Securities Corporation
    
    
    4,534
    
    
    
    115Deutsche Bank Securities Inc.
    
    
    42,589
    
    
    
    142Goldman Sachs & Co.
    
    
    23,489
    
    
    
    51Lehman Brothers, Inc.
    
    
    4,244
    
    
    
    151Merrill Lynch Government Securities Inc./Merrill Lynch
Pierce, Fenner & Smith Inc.
    
    
    8,509
    
    
    
    125Morgan Stanley & Co. Inc.
    
    
    2,039
    
    
    
    124Nomura Securities International, Inc.
    
    
    9,355
    
    
    
    114Salomon Smith Barney
    
    
    12,151
    
    
    
    69UBS Securities LLC
    
    
    23,413
    
    
    
    314Wachovia Securities, LLC
    
    
    3,493
    
    
    
    154Total
    
    $
    205,892
    
    
    
    133
 
 (1)
    
    Equal to the sum of the fair value of the securities sold and accrued
interest income minus the sum of repurchase agreement liabilities and
accrued interest expense.  12




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NOTE 4CAPITAL STOCK AND NET INCOME PER SHARE
       13




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##### Table of Contents



For the Three Months
    
    For the Six MonthsEnded June 30, 2005
    
    Ended June 30, 2005Basic
    
    Diluted
    
    Basic
    
    DilutedNet income (in thousands)
    
    $
    6,174
    
    
    $
    6,174
    
    
    $
    25,143
    
    
    $
    25,143Weighted-average number
of common shares
outstanding
    
    
    38,176,274
    
    
    
    38,176,274
    
    
    
    37,694,382
    
    
    
    37,694,382Additional shares due to
assumed conversion of
dilutive instruments
    
    
    
    
    
    
    174,964
    
    
    
    
    
    
    
    85,894Adjusted
weighted-average number
of common shares
outstanding
    
    
    38,176,274
    
    
    
    38,351,238
    
    
    
    37,694,382
    
    
    
    37,780,366Net income per share
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.67
    
    
    $
    0.67
  For the Three Months
    
    For the Six MonthsEnded June 30, 2004
    
    Ended June 30, 2004Basic
    
    Diluted
    
    Basic
    
    DilutedNet income (in thousands)
    
    $
    14,954
    
    
    $
    14,954
    
    
    $
    25,754
    
    
    $
    25,754Weighted-average number
of common shares
outstanding
    
    
    36,814,000
    
    
    
    36,814,000
    
    
    
    30,945,868
    
    
    
    30,945,868Additional shares due to
assumed conversion of
dilutive instruments
    
    
    
    
    
    
    29,531
    
    
    
    
    
    
    
    33,495Adjusted
weighted-average number
of common shares
outstanding
    
    
    36,814,000
    
    
    
    36,843,531
    
    
    
    30,945,868
    
    
    
    30,979,363Net income per share
    
    $
    0.41
    
    
    $
    0.41
    
    
    $
    0.83
    
    
    $
    0.83
 NOTE 52003 STOCK INCENTIVE PLANS
  14




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2003 Outside2003 Stock
    
    Advisors StockIncentive Plan
    
    Incentive Plan
    
    TotalShares reserved for issuance
    
    
    1,850,000
    
    
    
    150,000
    

    
    
    2,000,000Granted
    
    
    216,666
    
    
    
    
    
    
    
    216,666Forfeited
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    Total available for grant
    
    
    1,633,334
    
    
    
    150,000
    
    
    
    1,783,334
  Weighted-Number of
    
    AverageOptions
    
    Exercise PriceOutstanding, beginning of period
    
    
    55,000
    
    
    $
    14.82Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding, end of period
    
    
    55,000
    
    
    $
    14.82
  Outstanding
    
    ExercisableWeighted-Average
    
    Weighted-
    
    
    
    
    
    Weighted-Number
    
    Remaining
    
    Average
    
    Number
    
    AverageRange of
    
    of
    
    Life (in
    
    Exercise
    
    of
    
    ExerciseExercise Prices
    
    Options
    
    years)
    
    Price
    
    Options
    
    Price$13.00-$14.00
    
    
    5,000
    
    
    
    8.3
    
    
    $
    13.00
    
    
    
    1,667
    
    
    $
    13.00$14.01-$15.00
    
    
    50,000
    
    
    
    8.1
    
    
    
    15.00
    
    
    
    16,667
    
    
    
    15.00$13.00-$15.00
    
    
    55,000
    
    
    
    
    
    
    $
    14.82
    
    
    
    18,334
    
    
    $
    14.82
  Weighted-AverageNumber of
    
    Grant-DateOptions
    
    Fair ValueNonvested, beginning of the period
    
    
    36,666
    
    
    $
    0.22Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested, end of the period
    
    
    36,666
    
    
    $
    0.22
  15




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##### Table of Contents



Weighted-Number of
    
    Average IssueCommon Shares
    
    PriceOutstanding, beginning of period
    
    
    25,122
    
    
    $
    12.06Issued
    
    
    131,707
    
    
    
    11.37Repurchased
    
    
    
    
    
    
    Outstanding, end of period
    
    
    156,829
    
    
    $
    11.48
  Weighted-AverageNumber of
    
    Grant-DateCommon Shares
    
    Fair ValueNonvested, beginning of the period
    
    
    25,122
    
    
    $
    12.06Granted
    
    
    131,707
    
    
    
    11.37Vested
    
    
    (1,566
    )
    
    
    12.67Repurchased
    
    
    
    
    
    
    Nonvested, end of the period
    
    
    155,263
    
    
    $
    11.47
  NOTE 6THE MANAGEMENT AGREEMENT
  
    
    base management compensation equal to a percentage of the Companys
applicable average net worth, as defined in the New Management
Agreement, paid quarterly in arrears, calculated at the following
rates per annum: (1) 0.90% of the first $750 million; plus (2) 0.70%
of the next $750 million; plus (3) 0.50% of the amount in excess of
$1.5 billion;
    
    incentive management compensation equal to a percentage of applicable
average net worth, as defined in the New Management Agreement, paid
annually, calculated at the following rates per annum: (1) 0.35% for
the first $750 million of applicable average net worth; (2)
0.20% for the next $750 million of applicable average net worth; and
(3) 0.15% for the applicable average net worth in excess of $1.5
billion) if the return on assets, as defined in the New Management
Agreement, for any such fiscal year exceeds the threshold return,
defined as the average of the weekly values for any period of the sum
of (i) the 10-year U.S. Treasury rate for such period and (ii) two
percent (2%); and
 16




---



##### Table of Contents




    
    out-of-pocket expenses and certain other costs incurred by the
Manager and related directly to the Company.
       
    
    a base management compensation equal to a percentage of the Companys
average net worth during each fiscal year, as defined in the Prior
Management Agreement (1% of the first $300 million plus 0.8% of the
amount in excess of $300 million);
    
    incentive compensation based on the excess of a tiered percentage
(as defined in the Prior Management Agreement as the weighted-average
of the following rates based upon the Companys average net invested
assets, as defined in the Prior Management Agreement: (1) 20% for the
first $400 million of average net invested assets; and (2) 10% for the
average net invested assets in excess of $400 million) of the
difference between the Companys net income (defined in the Prior
Management Agreement as taxable income before incentive compensation,
net operating losses from prior periods and items permitted by the
Internal Revenue Code when calculating taxable income for a REIT) and
the threshold return (the amount of net income for the period that
would produce an annualized return on equity, calculated by dividing
the net income, as defined in the Prior Management Agreement, by the
average net invested assets, as defined in
 17




---



##### Table of Contents



the Prior Management
Agreement, equal to the 10-year U.S. Treasury rate for the period plus
2.0%) for the fiscal period; and
    
    out-of-pocket expenses and certain other costs incurred by the Manager
and related directly to the Company.
       18




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NOTE 7RELATED PARTY TRANSACTIONS
   NOTE 8FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosure About Fair Value of Financial Instruments
 19




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NOTE 9ACCUMULATED OTHER COMPREHENSIVE LOSS
  June 30,
    
    December 31,2005
    
    2004(in thousands)Net unrealized losses on mortgage-backed securities available-for-sale
    
    $
    (70,534
    )
    
    $
    (69,297
    )Net deferred realized and unrealized gains on cash flow hedges
    
    
    3,155
    
    
    
    7,929Accumulated other comprehensive loss
    
    $
    (67,379
    )
    
    $
    (61,368
    )
 NOTE 10DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
   EstimatedFair Value(in thousands)Eurodollar futures contracts sold short
    
    $
    2,749Interest rate swap contracts
    
    
    2,290Swaption contracts
    
    
    975
  EstimatedFair Value(in thousands)Eurodollar futures contracts sold short
    
    $
    (1,073
    )Interest rate swap contracts
    
    
    7,900
 Cash Flow Hedging Strategies
  20




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Free Standing Derivatives
  21




---



##### Table of Contents



NOTE 11PREFERRED SECURITIES OF SUBSIDIARY TRUST AND JUNIOR SUBORDINATED NOTES
     22




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##### Table of Contents



The following discussion of our financial condition and results of operations should be read
in conjunction with the financial statements and notes to those statements included elsewhere in
this Form 10-Q Report. This discussion may contain forward-looking statements that involve risks
and uncertainties. The words believe, expect, anticipate, estimate, may, will, or
could and similar expressions or the negatives of these words or phrases are intended to identify
forward-looking statements. As a result of many factors, such as those set forth under Risk
Factors and elsewhere in this Form 10-Q Report, our actual results may differ materially from
those anticipated in such forward-looking statements.
 General
    
    
    interest rate trends;
    
    rates of prepayment on our mortgage loans and the mortgages underlying
our mortgage-backed securities;
    
    highly competitive markets for investment opportunities; and
    
    other market developments.
  
    
    overall leverage of our portfolio;
    
    access to funding and adequate borrowing capacity;
    
    increases in our borrowing costs;
    
    the ability to use derivatives to mitigate our interest rate and prepayment risks;
    
    the market value of our investments; and
    
    compliance with REIT requirements and the requirements to qualify for
an exemption under the Investment Company Act of 1940.
 23




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Critical Accounting Policies
  Classifications of Investment Securities
  Valuations of Mortgage-backed Securities
     Interest Income Recognition
 Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases
 24




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##### Table of Contents



Recognition of Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets
 Accounting for Derivative Financial Instruments and Hedging Activities
       25




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Management Incentive Compensation Expense
  Accounting for Stock-based Compensation Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
     26




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##### Table of Contents



Financial Condition
  Mortgage-Backed Securities
     27




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##### Table of Contents



June 30, 2005
    
    December 31, 2004Weighted-
    
    
    
    
    
    Weighted-Average Final
    
    
    
    
    
    Average FinalAsset
    
    Maturity
    
    % of Total
    
    Maturity
    
    % of TotalAdjustable-Rate MBS
    
    
    2033
    
    
    
    2.0
    %
    
    
    2033
    
    
    
    2.6
    %Hybrid Adjustable-Rate MBS
    
    
    2034
    
    
    
    95.4
    
    
    
    2034
    
    
    
    96.3Balloon MBS
    
    
    2008
    
    
    
    1.0
    
    
    
    2008
    
    
    
    1.1Other MBS
    
    
    2037
    
    
    
    1.6
    
    
    
    n/a
    
    
    
    n/a
  Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    Amortized Cost
    
    Coupon(in thousands)Less than one year
    
    $
    650,068
    
    
    $
    641,026
    
    
    
    3.73
    %Greater than one year and less than five years
    
    
    4,458,971
    
    
    
    4,397,598
    
    
    
    4.45Greater than five years
    
    
    61,330
    
    
    
    61,211
    
    
    
    5.18Total
    
    $
    5,170,369
    
    
    $
    5,099,835
    
    
    
    4.37
    %
  Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    Amortized Cost
    
    Coupon(in thousands)Less than one year
    
    $
    211,475
    
    
    $
    215,099
    
    
    
    3.76
    %Greater than one year and less than five years
    
    
    4,616,480
    
    
    
    4,682,154
    
    
    
    4.24Greater than five years
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,827,955
    
    
    $
    4,897,253
    
    
    
    4.22
    %
    28




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##### Table of Contents



Equity Securities
  Unsettled Securities Purchases
  Other Assets
  29




---



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Hedging Instruments
     Liabilities
  30




---



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Stockholders Equity
   31




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TotalStockholders
    
    Book Value perEquity
    
    Share(1)(in thousands, except per share amounts)Total stockholders equity (GAAP)
    
    $
    431,254
    
    
    $
    10.74Addback/(Subtract)Accumulated other comprehensive loss on mortgage-backed securities
    
    
    70,534
    
    
    
    1.76Accumulated other comprehensive income on interest rate swap contracts
    
    
    (2,097
    )
    
    
    (0.05
    )Total stockholders equity, excluding accumulated other comprehensive income and
loss on mortgage-backed securities and interest rate swap contracts (NON-GAAP)
    
    $
    499,691
    
    
    $
    12.45
 
 (1)
    
    Based on 40,151,117 shares outstanding at June 30, 2005.  TotalStockholders
    
    Book Value perEquity
    
    Share(1)(in thousands, except per share amounts)Total stockholders equity (GAAP)
    
    $
    405,503
    
    
    $
    10.93Addback/(Subtract)Accumulated other comprehensive loss on mortgage-backed securities
    
    
    69,298
    
    
    
    1.86Accumulated other comprehensive income on interest rate swap contracts
    
    
    (7,748
    )
    
    
    (0.21
    )Total stockholders equity, excluding accumulated other comprehensive income and
loss on mortgage-backed securities and interest rate swap contracts (NON-GAAP)
    
    $
    467,053
    
    
    $
    12.58
 
 (1)
    
    Based on 37,113,011 shares outstanding at December 31, 2004.  Results of Operations
   32




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##### Table of Contents



Percentage
    
    
    
    
    
    PercentageThree Months
    
    of Average
    
    Six Months
    
    of AverageEnded
    
    Repurchase
    
    Ended
    
    RepurchaseJune 30,
    
    Agreement
    
    June 30,
    
    Agreement2005
    
    Liabilities
    
    2005
    
    Liabilities(in thousands)Interest expense on repurchase agreement liabilities
    
    $
    30,789
    
    
    
    2.84
    %
    
    $
    57,287
    
    
    
    2.66
    %Net hedge ineffectiveness (gains)/losses on futures
and interest rate swap contracts
    
    
    120
    
    
    
    0.01
    
    
    
    (472
    )
    
    
    (0.02
    )Amortization of net realized (gains)/losses on
futures contracts
    
    
    2,534
    
    
    
    0.23
    
    
    
    (2,194
    )
    
    
    (0.10
    )Net interest income on interest rate swap contracts
    
    
    (2,380
    )
    
    
    (0.22
    )
    
    
    (3,199
    )
    
    
    (0.15
    )Interest expense on junior subordinated notes
    
    
    1,027
    
    
    
    0.10
    
    
    
    1,205
    
    
    
    0.05Other
    
    
    8
    
    
    nm
    
    
    10
    
    
    nmTotal interest expense
    
    $
    32,098
    
    
    
    2.96
    %
    
    $
    52,637
    
    
    
    2.44
    %
 
  Percentage
    
    
    
    
    
    PercentageThree Months
    
    of Average
    
    Six Months
    
    of AverageEnded
    
    Repurchase
    
    Ended
    
    RepurchaseJune 30,
    
    Agreement
    
    June 30,
    
    Agreement2004
    
    Liabilities
    
    2004
    
    Liabilities(in thousands)Interest expense on repurchase agreement liabilities
    
    $
    10,248
    
    
    
    1.21
    %
    
    $
    17,060
    
    
    
    1.19
    %Net hedge ineffectiveness gains on futures and interest
rate swap contracts
    
    
    (1,997
    )
    
    
    (0.24
    )
    
    
    (1,983
    )
    
    
    (0.14
    )Amortization of net realized losses on futures contracts
    
    
    412
    
    
    
    0.05
    
    
    
    412
    
    
    
    0.03Net interest expense on interest rate swap contracts
    
    
    511
    
    
    
    0.06
    
    
    
    511
    
    
    
    0.04Other
    
    
    16
    
    
    nm
    
    
    17
    
    
    nmTotal interest expense
    
    $
    9,190
    
    
    
    1.08
    %
    
    $
    16,017
    
    
    
    1.12
    %
 
   33




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34




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For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,(in thousands)
    
    2005
    
    2004
    
    2005
    
    2004GAAP net income
    
    $
    6,174
    
    
    $
    14,954
    
    
    $
    25,143
    
    
    $
    25,754Adjustments to GAAP net income:Amortization of organizational costs
    
    
    (8
    )
    
    
    (8
    )
    
    
    (16
    )
    
    
    (16
    )Addback of stock compensation expense for unvested stock options
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    4Addback of stock compensation expense for unvested restricted
common stock
    
    
    505
    
    
    
    280
    
    
    
    1,012
    
    
    
    441Subtract stock compensation expense for vested restricted common
stock
    
    
    (197
    )
    
    
    
    
    
    
    (303
    )
    
    
    Subtract net hedge ineffectiveness gains on futures and interest
rate swap contracts
    
    
    (69
    )
    
    
    (1,422
    )
    
    
    (777
    )
    
    
    (1,412
    )Addback change in fair value of swaption contracts
    
    
    899
    
    
    
    
    
    
    
    899
    
    
    
    Subtract dividend equivalent rights on restricted stock
    
    
    (131
    )
    
    
    (37
    )
    
    
    (313
    )
    
    
    (49
    )Addback (subtract) amortization of net realized (gains)/losses on
futures contracts
    
    
    2,534
    
    
    
    412
    
    
    
    (2,194
    )
    
    
    Addback (subtract) net realized gains/(losses) on futures contracts
    
    
    (11
    )
    
    
    1,922
    
    
    
    (15
    )
    
    
    1,922Net adjustments to GAAP net income
    
    
    3,523
    
    
    
    1,149
    
    
    
    (1,705
    )
    
    
    890REIT taxable net income
    
    $
    9,697
    
    
    $
    16,103
    
    
    $
    23,438
    
    
    $
    26,644
 35




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For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,(in thousands, except per share data)
    
    2005
    
    2004
    
    2005
    
    2004Undistributed REIT taxable net income, beginning of
period
    
    $
    1,944
    
    
    $
    400
    
    
    $
    1,791
    
    
    $
    281REIT taxable net income earned during period
    
    
    9,697
    
    
    
    16,103
    
    
    
    23,438
    
    
    
    26,644Distributions declared during period, net of
dividend equivalent rights on restricted common
stock
    
    
    (10,710
    )
    
    
    (15,830
    )
    
    
    (24,298
    )
    
    
    (26,252
    )Undistributed REIT taxable net income, end of period
    
    $
    931
    
    
    $
    673
    
    
    $
    931
    
    
    $
    673Cash distributions per share declared during period
    
    $
    0.27
    
    
    $
    0.43
    
    
    $
    0.63
    
    
    $
    0.85Percentage of REIT taxable net income distributed
    
    
    110.4
    %
    
    
    98.3
    %
    
    
    103.7
    %
    
    
    98.5
    %
  Contractual Obligations and Commitments
  Off-Balance Sheet Arrangements
  Liquidity and Capital Resources
    36




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Inflation
  37




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Risk Factors
 As used in this Quarterly Report, Luminent, Company, we, our, and us, refer to
Luminent Mortgage Capital, Inc. and its subsidiaries, except where the context otherwise requires.
The occurrence of one or more of these risk factors could adversely impact our results of
operations or financial condition.
 General Risks Related to our Business
 We might not be able to find mortgage loans or mortgage-backed securities that meet our investment
criteria, which would adversely impact our results of operations or financial condition.
  Our mortgage loans and mortgage-backed securities are subject to prepayments, and increased
prepayment rates could adversely impact our results of operations or financial condition.
    Our mortgage loans and mortgage-backed securities are subject to defaults, which could adversely
impact our results of operations or financial condition.
  38




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Our mortgage loans and mortgage-backed securities are subject to interest rate caps and resets
which could adversely impact our results of operations or financial condition.
   We purchase subordinated mortgage-backed securities, which could adversely impact our results of
operations or financial condition.
  39




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Our mortgage loans and mortgage-backed securities are subject to potential illiquidity, which
might prevent us from selling them at reasonable prices which could adversely impact our results
of operations or financial condition.
  Our mortgage loans and mortgage-backed securities are subject to the overall health of the U.S.
economy, and a national or regional economic slowdown could adversely impact our results of
operations or financial condition .
  We might not be able to obtain financing for our mortgage loans or mortgage-backed securities,
which would adversely impact our results of operations or financial condition.
  Our investment strategies employ a significant amount of leverage, and are subject to daily
fluctuations in market pricing and margin calls, which could adversely impact our results of
operations or financial condition.
    40




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##### Table of Contents



Interest rate mismatches between our mortgage loans and mortgage-backed securities and our
borrowings could adversely impact our results of operations or financial condition.
  Our use of certain types of financing may give our lenders greater rights in the event that
either we or any of our lenders file for bankruptcy.
  Our hedging activities might be unsuccessful and adversely impact our results of operations and
book value.
  Accounting for Derivative Instruments and Hedging
Activities
 Our stockholders equity or book value is volatile and is subject to changes in interest rates.
  41




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Our mortgage loans may not be serviced effectively, which might adversely impact our results of
operations or financial condition.
    The representations and warranties that we will make in our securitizations may subject us to
liability, which could adversely impact our results of operations or financial condition.
  42




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##### Table of Contents



Risks Related to Seneca
 Seneca might fail to comply with the terms of the Management Agreement, manage our Spread
portfolio poorly, or lose key personnel that are important to our Spread portfolio, which could
adversely impact our results of operations or financial condition.
  Because Seneca is entitled to a fee that may be significant if we terminate the Management
Agreement, economic considerations might preclude us from terminating the Management Agreement in
the event that Seneca fails to meet our expectations.
   Senecas liability is limited under the Management Agreement, and we have agreed to indemnify
Seneca against certain liabilities.
  Legal and Tax Risks
 If we are disqualified as a REIT, we will be subject to tax as a regular corporation and face
substantial tax liability.
  43




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##### Table of Contents




    
    we would be taxed as a regular domestic corporation, which, among other things, means
that we would be unable to deduct distributions to our stockholders in computing taxable
income and we would be subject to U.S. federal income tax on our taxable income at regular
corporate rates;
    
    any resulting tax liability could be substantial, would reduce the amount of cash
available for distribution to our stockholders, and could force us to liquidate assets at
inopportune times, causing lower income or higher losses than would result if these assets
were not liquidated; and
    
    unless we were entitled to relief under applicable statutory provisions, we would be
disqualified from treatment as a REIT for the subsequent four taxable years following the
year during which we lost our qualification and, thus, our cash available for distribution
to our stockholders would be reduced for each of the years during which we did not qualify
as a REIT.
  Complying with REIT requirements might cause us to forego otherwise attractive opportunities.
   Complying with REIT requirements may limit our ability to hedge effectively.
  Complying with the REIT requirements may force us to borrow to make distributions to our
stockholders.
  44




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Complying with the REIT requirements may force us to liquidate otherwise attractive
investments.
  Failure to maintain an exemption from the Investment Company Act would harm our results of
operations.
    Misplaced reliance on legal opinions or statements by issuers of mortgage-backed securities
could result in a failure to comply with REIT income or assets tests.
  One-action rules may harm the value of the underlying property.
  45




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##### Table of Contents



We may be harmed by changes in various laws and regulations.
  We may incur excess inclusion income that would increase the tax liability of our
stockholders.
   Risks Related to Investing in Our Securities
 The timing and amount of our cash distributions may be volatile over time.
  Our declared cash distributions may force us to liquidate mortgage loans or mortgage-backed
securities or borrow additional funds.
  46




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Future offerings of debt securities by us, which would be senior to our common stock upon
liquidation, or equity securities, which would dilute our existing stockholders and may be senior
to our common stock for the purposes of distributions, may harm the value of our common stock.
  Changes in yields may harm the market price of our common stock.
  The market price and trading volume of our common stock may be volatile; broad market fluctuations
could harm the market price of our common stock.
   The market price of our common stock may be adversely affected by future sales of a substantial
number of shares of our common stock in the public market or the availability of such shares for
sale.
   Issuance of large amounts of our stock could cause our price to decline.
 47




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Restrictions on ownership of a controlling percentage of our capital stock might limit your
opportunity to receive a premium on our stock.
  Certain provisions of Maryland law and our charter and bylaws could hinder, delay or prevent a
change in control of our company.
  
    
    Classified Board of Directors.Our board of directors is divided into three classes
with staggered terms of office of three years each. The classification and staggered terms
of office of our directors make it more difficult for a third party to gain control of our
board of directors. At least two annual meetings of stockholders, instead of one, generally
would be required to effect a change in a majority of our board of directors.
    
    Removal of Directors.Under our charter, subject to the rights of one or more classes
or series of preferred stock to elect one or more directors, a director may be removed only
for cause and only by the affirmative vote of at least two-thirds of all votes entitled to
be cast by our stockholders generally in the election of directors.
    
    Number of Directors, Board Vacancies, Term of Office.We have elected to be subject to
certain provisions of Maryland law that vest in our board of directors the exclusive right
to determine the number of directors and the exclusive right, by the affirmative vote of a
majority of the remaining directors, to fill vacancies on the board even if the remaining
directors do not constitute a quorum. These provisions of Maryland law, which are
applicable even if other provisions of Maryland law or our charter or bylaws provide to the
contrary, also provide that any director elected to fill a vacancy shall hold office for
the remainder of the full term of the class of directors in which the vacancy occurred,
rather than the next annual meeting of stockholders as would otherwise be the case, and
until his or her successor is elected and qualifies.
    
    Preferred Stock.Under our charter, our board of directors has authority to issue
preferred stock from time to time in one or more series and to establish the terms,
preferences and rights of any such series of preferred stock, all without approval of our
stockholders.
    
    Duties of Directors with Respect to Unsolicited Takeovers.Maryland law provides
protection for Maryland corporations against unsolicited takeovers by limiting, among other
things, the duties of the directors in
 48




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##### Table of Contents



unsolicited takeover situations. The duties of
directors of Maryland corporations do not require them to (1) accept, recommend or respond
to any proposal by a person seeking to acquire control of the corporation, (2) authorize
the corporation to redeem any rights under, or modify or render inapplicable, any
stockholder rights plan, (3) make a determination under the Maryland Business Combination
Act or the Maryland Control Share Acquisition Act, or (4) act or fail to act solely because
of the effect the act or failure to act may have on an acquisition or potential acquisition
of control of the corporation or the amount or type of consideration that may be offered or
paid to the stockholders in an acquisition. Moreover, under Maryland law, the act of the
directors of a Maryland corporation relating to or affecting an acquisition or potential
acquisition of control is not subject to any higher duty or greater scrutiny than is
applied to any other act of a director. Maryland law also contains a statutory presumption
that an act of a director of a Maryland corporation satisfies the applicable standards of
conduct for directors under Maryland law.
    
    Ownership Limit.In order to preserve our status as a REIT under the Internal Revenue
Code, our charter generally prohibits any single stockholder, or any group of affiliated
stockholders, from beneficially owning more than 9.8% of our outstanding common and
preferred stock unless our board of directors waives or modifies this ownership limit.
    
    Maryland Business Combination Act.The Maryland Business Combination Act provides
that, unless exempted, a Maryland corporation may not engage in business combinations,
including mergers, dispositions of 10% or more of its assets, certain issuances of shares
of stock and other specified transactions, with an interested stockholder or an affiliate
of an interested stockholder for five years after the most recent date on which the
interested stockholder became an interested stockholder, and thereafter unless specified
criteria are met. An interested stockholder is generally a person owning or controlling,
directly or indirectly, 10% or more of the voting power of the outstanding stock of a
Maryland corporation. Our board of directors has adopted a resolution exempting our company
from this statute. However, our board of directors may repeal or modify this resolution in
the future, in which case the provisions of the Maryland Business Combination Act would be
applicable to business combinations between our company and interested stockholders.
    
    Maryland Control Share Acquisition Act.Maryland law provides that control shares of
a corporation acquired in a control share acquisition shall have no voting rights except
to the extent approved by a vote of two-thirds of the votes eligible to be cast on the
matter under the Maryland Control Share Acquisition Act. Control shares means shares of
stock that, if aggregated with all other shares of stock previously acquired by the
acquirer, would entitle the acquirer to exercise voting power in electing directors within
one of the following ranges of the voting power: one-tenth or more but less than one-third,
one-third or more but less than a majority or a majority or more of all voting power. A
control share acquisition means the acquisition of control shares, subject to certain
exceptions. If voting rights of control shares acquired in a control share acquisition are
not approved at a stockholders meeting, then, subject to certain conditions and
limitations, the corporation may redeem any or all of the control shares for fair value. If
voting rights of such control shares are approved at a stockholders meeting and the
acquirer becomes entitled to vote a majority of the shares of stock entitled to vote, all
other stockholders may exercise appraisal rights. Our bylaws contain a
provision exempting acquisitions of our shares from the Maryland Control Share Acquisition
Act. However, our board of directors may amend our bylaws in the future to repeal or modify
this exemption, in which case any control shares of our company acquired in a control share
acquisition will be subject to the Maryland Control Share Acquisition Act.
 
   49




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Interest Rate Risk
  Effect on Net Interest Income
   Extension Risk
  Adjustable-Rate and Hybrid Adjustable-Rate Mortgage-Backed Security Interest Rate Cap Risk
  50




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##### Table of Contents



Interest Rate Mismatch Risk
   Prepayment Risk
  Effect on Fair Value
   51




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Interest Rates
    
    
    
    
    
    Interest Rates
    
    Interest RatesFall 100
    
    
    
    
    
    Rise 100
    
    Rise 200Basis Points
    
    Unchanged
    
    Basis Points
    
    Basis Points(in millions)Adjustable-Rate Mortgage-Backed
SecuritiesFair value
    
    $
    103.2
    
    
    $
    102.1
    
    
    $
    100.5
    
    
    $
    98.4Change in fair value
    
    $
    1.1
    
    
    
    
    
    
    $
    (1.6
    )
    
    $
    (3.7
    )Change as a percent of fair value
    
    
    1.1
    %
    
    
    
    
    
    
    (1.6
    )%
    
    
    (3.6
    )%Hybrid Adjustable-Rate
Mortgage-Backed SecuritiesFair value
    
    $
    4,924.5
    
    
    $
    4,863.4
    
    
    $
    4,766.3
    
    
    $
    4,644.8Change in fair value
    
    $
    61.1
    
    
    
    
    
    
    $
    (97.1
    )
    
    $
    (218.6
    )Change as a percent of fair value
    
    
    1.3
    %
    
    
    
    
    
    
    (2.0
    )%
    
    
    (4.5
    )%Balloon Mortgage-Backed SecuritiesFair value
    
    $
    54.4
    
    
    $
    53.6
    
    
    $
    52.7
    
    
    $
    51.6Change in fair value
    
    $
    0.8
    
    
    
    
    
    
    $
    (0.9
    )
    
    $
    (2.0
    )Change as a percent of fair value
    
    
    1.5
    %
    
    
    
    
    
    
    (1.7
    )%
    
    
    (3.7
    )%Other Mortgage-Backed SecuritiesFair value
    
    $
    84.6
    
    
    $
    80.7
    
    
    $
    77.6
    
    
    $
    74.4Change in fair value
    
    
    3.9
    
    
    
    
    
    
    
    (3.1
    )
    
    
    (6.3
    )Change as a percent of fair value
    
    
    4.8
    %
    
    
    
    
    
    
    (3.8
    )%
    
    
    (7.8
    )%Total Mortgage-Backed SecuritiesFair value
    
    $
    5,166.7
    
    
    $
    5,099.8
    
    
    $
    4,997.1
    
    
    $
    4,869.2Change in fair value
    
    
    66.9
    
    
    
    
    
    
    
    (102.7
    )
    
    $
    (230.6
    )Change as a percent of fair value
    
    
    1.3
    %
    
    
    
    
    
    
    (2.0
    )%
    
    
    (4.5
    )%Repurchase Agreements (1)Fair value
    
    $
    4,191.0
    
    
    $
    4,191.0
    
    
    $
    4,191.0
    
    
    $
    4,191.0Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change as a percent of fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Junior Subordinated NotesFair value
    
    $
    54.3
    
    
    $
    52.1
    
    
    $
    50.0
    
    
    $
    48.1Change in fair value
    
    
    2.2
    
    
    
    
    
    
    
    (2.1
    )
    
    
    (4.0
    )Change as a percent of fair value
    
    
    4.2
    %
    
    
    
    
    
    
    (4.0
    )%
    
    
    (7.7
    )%Hedge InstrumentsFair value
    
    $
    (17.6
    )
    
    $
    5.0
    
    
    $
    27.0
    
    
    $
    48.4Change in fair value
    
    $
    (22.6
    )
    
    
    
    
    
    $
    22.0
    
    
    $
    43.4Change as a percent of fair value
    
    nm
    
    
    
    
    
    nm
    
    nm
 
 (1)
    
    The fair value of the repurchase agreements would not change materially due to the
short-term nature of these instruments .   52




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##### Table of Contents



Risk Management
  
    
    monitoring and adjusting, if necessary, the reset index and interest rate related to
our mortgage-backed securities and our borrowings;
    
    attempting to structure our borrowing agreements to have a range of different
maturities, terms, amortizations and interest rate adjustment periods;
    
    using derivatives, financial futures, swaps, options, caps, floors and forward sales to
adjust the interest rate sensitivity of our mortgage-backed securities and our borrowings;
and
    
    actively managing, on an aggregate basis, the interest rate indices, interest rate
adjustment periods and gross reset margins of our mortgage-backed securities and the
interest rate indices and adjustment periods of our borrowings.
 
  Conclusion Regarding Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  53




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##### Table of Contents



(i)
    
    Each of the following persons was elected as a Class II director, whose terms will expire at
our annual meeting of stockholders in 2008:
 Name
    
    For
    
    WithheldGail P. Seneca, Ph.D.
    
    
    36,398,165
    
    
    
    282,942Leonard Auerbach, Ph.D.
    
    
    36,416,829
    
    
    
    264,278Robert B. Goldstein
    
    
    35,229,018
    
    
    
    1,382,089
 (ii)
    
    The Amended 2003 Stock Incentive Plan was approved as follows:
 For
    
    Against
    
    Abstain11,683,228
    
    
    9,647,915
    
    
    
    112,939
 (iii)
    
    The Amended 2003 Outside Advisors Stock Incentive Plan was approved as follows:
 For
    
    Against
    
    Abstain11,676,380
    
    
    9,637,347
    
    
    
    130,356
 
   
   54




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##### Table of Contents



SIGNATURES
  LUMINENT MORTGAGE CAPITAL, INC.(Registrant)By:
    
    /s/ GAIL P. SENECAGail P. SenecaChief Executive Officer(Principal Executive Officer)Date:
    
    August 9, 2005By:
    
    /s/ CHRISTOPHER J. ZYDAChristopher J. ZydaChief Financial Officer(Principal Financial and Accounting Officer)Date:
    
    August 9, 2005
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EXHIBIT INDEX
   ExhibitNumber
    
    Description3.1
    
    Second Articles of Amendment and Restatement (4)3.2
    
    Third Amended and Restated Bylaws (1)4.1
    
    Form of Common Stock Certificate (1)4.2
    
    Registration Rights Agreement, dated as of June 11, 2003, by and between the Registrant and Friedman,
Billings, Ramsey & Co., Inc. (for itself and for the benefit of the holders from time to time of
registrable securities issued in the Registrants June 2003 private offering) (1)10.1
    
    Amended and Restated Management Agreement, dated as of March 1, 2005, by and between the Registrant and
Seneca Capital Management LLC (7)10.2
    
    Cost-Sharing Agreement, dated as of June 11, 2003, by and between the Registrant and Seneca (1)10.3*
    
    2003 Stock Incentive Plan, as amended10.4
    
    Form of Incentive Stock Option under the 2003 Stock Incentive Plan (1)10.5
    
    Form of Non Qualified Stock Option under the 2003 Stock Incentive Plan (1)10.6*
    
    2003 Outside Advisors Stock Incentive Plan, as amended10.7
    
    Form of Non-Qualified Stock Option under the 2003 Outside Advisors Stock Incentive Plan (1)10.8
    
    Form of Indemnity Agreement (1)10.9
    
    Employment Agreement dated as of August 4, 2003 by and between the Registrant and Christopher J. Zyda (1)10.10
    
    Form of Restricted Stock Award Agreement for Christopher J. Zyda (1)10.11
    
    Form of Restricted Stock Award Agreement for Seneca (3)10.12
    
    Controlled Equity Offering Sales Agreement dated February 7, 2005 between Luminent Mortgage Capital, Inc.
and Cantor Fitzgerald & Co. (6)10.13
    
    Letter Agreement dated March 8, 2005 between Luminent Mortgage Capital, Inc. and S. Trezevant Moore, Jr. (8)31.1*
    
    Certification of Gail P. Seneca, Chairman of the Board of Directors and Chief Executive Officer of the
Registrant, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2*
    
    Certification of Christopher J. Zyda, Chief Financial Officer of the Registrant, pursuant to Rule 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of Gail P. Seneca, Chairman of the Board of Directors and Chief Executive Officer of the
Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2*
    
    Certification of Christopher J. Zyda, Chief Financial Officer of the Registrant, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 56




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##### Table of Contents



(1)
    
    Incorporated by reference to our Registration Statement on Form S-11 (Registration No. 333-107984)
which became effective under the Securities Act of 1933, as amended, on December 18, 2003.(2)
    
    Incorporated by reference to our Current Report on Form 8-K filed on December 23, 2003.(3)
    
    Incorporated by reference to our Registration Statement on Form S-11 (Registration No.
333-107981), which became effective under the Securities Act of 1933, as amended, on February 13,
2004.(4)
    
    Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.(5)
    
    Incorporated by reference to our registration statement on Form S-11 (Registration No. 333-113493)
which became effective under the Securities Act of 1933, as amended, on March 30, 2004.(6)
    
    Incorporated by reference to our Current Report on Form 8-K filed on February 8, 2005.(7)
    
    Incorporated by reference to our Current Report on Form 8-K filed on April 1, 2005.(8)
    
    Incorporated by reference to our Current Report on Form 8-K filed on March 14, 2005.(9)
    
    Incorporated by reference to our Current Report on Form 8-K
filed on August 9, 2005.*
    
    Filed herewith.
    
    Denotes a management contract or compensatory plan.
 57