10-K 1 d04478e10vk.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR THE TRANSITION PERIOD FROM TO ------------ -------------- COMMISSION FILE NUMBER: 33-42337 CAPSTEAD SECURITIES CORPORATION IV (Exact name of Registrant as specified in its Charter) DELAWARE 75-2390594 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8401 NORTH CENTRAL EXPRESSWAY, SUITE 800, DALLAS, TX 75225 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 874-2323 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: None. INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K [ ] INDICATE BY CHECK MARK WHETHER REGISTRANT IS AN ACCELERATED FILER (AS DEFINED ON RULE 12b-2 OF THE ACT). YES [ ] NO [X] AS OF JUNE 28, 2002 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES WAS: NOT APPLICABLE. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J (1)(a) AND (b) OF FORM 10-K AND IS, THEREFORE, FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 25, 2003: 1,000 DOCUMENTS INCORPORATED BY REFERENCE: NONE. ================================================================================ CAPSTEAD SECURITIES CORPORATION IV 2002 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. BUSINESS........................................................................... 1 ITEM 2. PROPERTIES......................................................................... 2 ITEM 3. LEGAL PROCEEDINGS.................................................................. 2 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................................. 3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 3 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................................... 3 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................ 3 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................. 14 PART III ITEM 14. CONTROLS AND PROCEDURES............................................................ 14 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................................................. 15 SIGNATURES .................................................................................. 16 CERTIFICATIONS .............................................................................. 17
PART I ITEM 1. BUSINESS. ORGANIZATION Capstead Securities Corporation IV (the "Company") was incorporated in Delaware on August 16, 1991 as a special-purpose finance corporation and is a wholly-owned subsidiary of Capstead Mortgage Corporation ("CMC"). CMC is a publicly owned real estate investment trust that, until late 1995, operated a mortgage conduit, purchasing and securitizing single-family residential mortgage loans. The Company is managed by CMC (the "Manager"). The Company believes it has qualified as a qualified REIT subsidiary of CMC under the Internal Revenue Code of 1986 (the "Code"); therefore, for federal income tax purposes it is combined with CMC. Under applicable sections of the Code, REITs are required to distribute annually to stockholders at least 90% of their taxable income. It is the Company's and CMC's policy to distribute 100% of combined taxable income. The Company was formed primarily for the purpose of issuing and selling collateralized mortgage obligations ("CMOs"), collateralized by mortgage-backed, pass-through certificates ("Certificates") which evidence an interest in a pool of mortgage loans secured by single-family residences. The Certificates pledged as collateral for the CMOs are either contributed by CMC or purchased from third parties and are either Ginnie Mae Certificates, Fannie Mae Certificates, Freddie Mac Certificates or other privately-issued mortgage pass-through ("Non-Agency") Certificates. On August 21, 1991 the Securities and Exchange Commission declared effective a registration statement filed by the Company covering the offering of a maximum of $5 billion aggregate principal amount of CMOs. As of December 31, 2002, the Company has issued 19 series of CMOs with an aggregate original principal balance of $4,572,644,000, leaving remaining securitization capacity under this registration statement of $427,356,000. The Company has not issued any CMOs since September 30, 1998. Only CMO Series 1998-3 remains outstanding at December 31, 2002. SPECIAL-PURPOSE FINANCE CORPORATION The Company has not engaged, and will not engage in any business or investment activities other than (i) issuing and selling CMOs and receiving, owning, holding and pledging as collateral the related Certificates; (ii) investing cash balances on an interim basis in high quality short-term securities; and (iii) engaging in other activities which are necessary or expedient to accomplish the foregoing and are incidental thereto. COMPETITION In issuing CMOs, the Company competes with other issuers of these securities and the securities themselves compete with other investment opportunities available to prospective purchasers. EMPLOYEES The Manager provides all executive and administrative personnel required by the Company. -1- MANAGEMENT AGREEMENT Pursuant to a Management Agreement, the Manager advises the Company with respect to its investments and administers the day-to-day operations of the Company. The Management Agreement is nonassignable except by consent of the Company and the Manager. The Management Agreement may be terminated without cause at any time upon 90 days written notice. In addition, the Company has the right to terminate the Management Agreement upon the happening of certain specified events, including a breach by the Manager of any provision contained in the Management Agreement which remains uncured for 30 days after notice of such breach and the bankruptcy or insolvency of the Manager. The Manager is at all times subject to the supervision of the Company's Board of Directors and has only such functions and authority as the Company delegates to it. The Manager is responsible for the day-to-day operations of the Company and performs such services and activities relating to the assets and operations of the Company as may be appropriate. The Manager receives an annual basic management fee of $10,000 per year for managing the assets pledged to secure Bonds issued by the Company. The Manager is required to pay employment expenses of its personnel (including salaries, wages, payroll taxes, insurance, fidelity bonds, temporary help and cost of employee benefit plans), and other office expenses, travel and other expenses of directors, officers and employees of the Manager, accounting fees and expenses incurred in supervising and monitoring the Company's investments. The Company is required to pay all other expenses of operation (as defined in the Management Agreement). SERVICING AND ADMINISTRATION The originators of mortgage loans backing Non-Agency Certificates may elect, if they meet the Company's criteria for servicers, either to service the loans they sell or to sell the loans with no agreement with respect to servicing. The Company enters into servicing agreements with each servicer. As compensation for its services under a servicing agreement, the servicers retain a servicing fee, payable monthly, generally 1/4 of 1% of the outstanding principal balance of each mortgage loan serviced as of the last day of each month. CMC or an affiliate is the administrator with respect to the Non-Agency Certificates collateralizing CMOs. During 2002, 2001 and 2000 CMC retained fees, for administering these Non-Agency Certificates and related CMOs of $8,000, $14,000 and $21,000, respectively. ITEM 2. PROPERTIES. The Company conducts operations at CMC's offices in Dallas, Texas. ITEM 3. LEGAL PROCEEDINGS. As of the date hereof, there are no material legal proceedings outside the normal course of business to which the Company was a party or of which any of its property was the subject. -2- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. All of the Company's common stock is owned by CMC. Accordingly, there is no public trading market for its common stock. The Company may periodically distribute excess capital, if any, to its stockholder in the form of dividends. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. With the redemption of one CMO during 2001, only CMO Series 1998-3 remains outstanding at December 31, 2002. The Company elected Real Estate Mortgage Investment Conduit ("REMIC") status for tax purposes on the issuance of CMO Series 1998-3. This issuance was accounted for as a financing, and as a financing, CMO collateral and Bonds are reflected on the balance sheet; however, because the Company did not retain any investment in this CMO, no economic benefit was or will be recognized related to this CMO. The Company's net losses are due to operational costs incurred (management fees and professional fees). LIQUIDITY AND CAPITAL RESOURCES All ongoing cash CMO expenses are paid out of the excess cash flows on the CMOs issued before the residual holders receive their residual interest. The Company believes that the excess cash flows will be sufficient to pay ongoing cash CMO expenses. Cash flow requirements due to ongoing operational costs are funded by CMC. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company did not retain any economic interest in its last remaining CMO outstanding at December 31, 2002; therefore, the Company has no exposure to interest rate risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. -3- REPORT OF INDEPENDENT AUDITORS Stockholder and Board of Directors Capstead Securities Corporation IV We have audited the accompanying balance sheets of Capstead Securities Corporation IV (a wholly-owned subsidiary of Capstead Mortgage Corporation) as of December 31, 2002 and 2001, and the related statements of operations, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capstead Securities Corporation IV at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Dallas, Texas January 31, 2003 -4- CAPSTEAD SECURITIES CORPORATION IV BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31 ----------------------- 2002 2001 -------- -------- ASSETS Mortgage securities collateral $ 42,256 $ 72,309 Cash and cash equivalents 14 14 -------- -------- $ 42,270 $ 72,323 ======== ======== LIABILITIES Collateralized mortgage securities $ 41,724 $ 71,402 -------- -------- STOCKHOLDER'S EQUITY Common stock - $1.00 par value, 1 shares authorized, issued and outstanding 1 1 Paid-in capital 32 18 Undistributed income (loss) (14) - Accumulated other comprehensive income 527 902 -------- -------- 546 921 -------- -------- $ 42,270 $ 72,323 ======== ========
See accompanying notes to financial statements. -5- CAPSTEAD SECURITIES CORPORATION IV STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ------------------------------------------ 2002 2001 2000 ---------- ---------- ---------- Interest income: Mortgage securities collateral $ 3,206 $ 8,368 $ 12,735 Receivable from Parent -- 7 -- ---------- ---------- ---------- Total interest income 3,206 8,375 12,735 Interest expense on collateralized mortgage securities 3,032 7,986 12,272 ---------- ---------- ---------- Net interest income 174 389 463 ---------- ---------- ---------- Other operating revenue (expense): Gain on sale of released mortgage securities collateral -- 1,112 -- Loss on redemption of collateralized mortgage securities -- (259) -- Management fees (10) (10) (10) Professional fees and other (4) (22) (4) Pool insurance (174) (323) (465) ---------- ---------- ---------- Total other operating revenue (expense) (188) 498 (479) ---------- ---------- ---------- Net income (loss) $ (14) $ 887 $ (16) ========== ========== ==========
See accompanying notes to financial statements. -6- CAPSTEAD SECURITIES CORPORATION IV STATEMENTS OF STOCKHOLDER'S EQUITY THREE YEARS ENDED DECEMBER 31, 2002 (IN THOUSANDS)
ACCUMULATED COMMON STOCK OTHER ------------------ PAID-IN UNDISTRIBUTED COMPREHENSIVE SHARES AMOUNT CAPITAL INCOME (LOSS) INCOME (LOSS) TOTAL ------ ------ ------- ------------- ------------- ------ Balance at January 1, 2000 1 1 691 (14) 1,185 1,863 Capital contribution -- -- 2 -- -- 2 Net loss -- -- -- (16) -- (16) Other comprehensive loss: Change in unrealized gain on debt securities, net of reclassification amount -- -- -- -- (758) (758) ------ Total comprehensive loss (774) ------ ------ ------- ------------- ------------- ------ Balance at December 31, 2000 1 1 693 (30) 427 1,091 Capital distribution -- -- (675) -- -- (675) Net income -- -- -- 887 -- 887 Other comprehensive income: Change in unrealized gain on debt securities, net of reclassification amount -- -- -- -- 475 475 ------ Total comprehensive income 1,362 Dividends paid -- -- -- (857) -- (857) ------ ------ ------- ------------- ------------- ------ Balance at December 31, 2001 1 1 18 -- 902 921 Capital contribution -- -- 14 -- -- 14 Net loss -- -- -- (14) -- (14) Other comprehensive loss: Change in unrealized gain on debt securities, net of reclassification amount -- -- -- -- (375) (375) ------ ------ ------- ------------- ------------- ------ Total comprehensive loss (389) ------ Balance at December 31, 2002 1 $ 1 $ 32 $ (14) $ 527 $ 546 ====== ====== ======= ============= ============= ======
See accompanying notes to financial statements. -7- CAPSTEAD SECURITIES CORPORATION IV STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ------------------------------------ 2002 2001 2000 -------- -------- -------- OPERATING ACTIVITIES: Net income (loss) $ (14) $ 887 $ (16) Noncash item - amortization of discount and premium (170) (80) (149) Net change in other assets and accrued expenses -- (62) 11 Gain on sale of released mortgage securities collateral -- (1,112) -- Loss on redemption of collateralized mortgage securities -- 259 -- -------- -------- -------- Net cash used in operating activities (184) (108) (154) -------- -------- -------- INVESTING ACTIVITIES: Mortgage securities collateral: Principal collections on collateral 28,858 52,680 44,296 Decrease in accrued interest receivable 184 490 289 Decrease in short-term investments -- 413 91 Sale of released mortgage securities collateral -- 21,713 -- -------- -------- -------- Net cash provided by investing activities 29,042 75,296 44,676 -------- -------- -------- FINANCING ACTIVITIES: Collateralized mortgage securities: Principal payments on securities (28,858) (73,319) (44,363) Decrease in accrued interest payable (14) (443) (66) Capital contributions (distributions) 14 (675) 2 Dividends paid -- (857) -- -------- -------- -------- Net cash used in financing activities (28,858) (75,294) (44,427) -------- -------- -------- Net change in cash and cash equivalents -- (106) 95 Cash and cash equivalents at beginning of year 14 120 25 -------- -------- -------- Cash and cash equivalents at end of year $ 14 $ 14 $ 120 ======== ======== ========
See accompanying notes to financial statements. -8- CAPSTEAD SECURITIES CORPORATION IV NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 NOTE A -- BASIS OF PRESENTATION Capstead Securities Corporation IV (the "Company"), was incorporated in Delaware on August 16, 1991 as a special-purpose finance corporation primarily to issue bonds collateralized by whole loans or mortgage-backed securities. The Company is a wholly-owned subsidiary of Capstead Mortgage Corporation ("CMC" or "Parent"), and commenced operations with the issuance of its first collateralized mortgage obligation ("CMO") in December 1991. NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. DEBT SECURITIES Mortgage securities collateral held in the form of mortgage-backed securities are debt securities. Management determines the appropriate classification of debt securities at the time of purchase or securitization and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value with unrealized gains and losses reported as a separate component of stockholder's equity. Amortized cost is adjusted for amortization of premiums and discounts over the estimated life of the security using the interest method. Such amortization is included in related interest income. Mortgage securities collateral is subject to changes in value because of changes in interest rates and rates of prepayment, as well as failure of the mortgagor to perform under the mortgage agreement. The Company has limited its exposure to these risks by issuing collateralized mortgage securities, acquiring mortgage pool and special hazard insurance, and simultaneously selling collateral released from indentures upon redemption of the related bonds. ALLOWANCE FOR POSSIBLE LOSSES The Company provides for possible losses on its investments in amounts which it believes are adequate relative to the risk inherent in such investments. The Company does not provide for losses resulting from covered defaults on -9- investments with mortgage pool insurance and special hazard insurance (see Note F). COLLATERALIZED MORTGAGE SECURITIES Collateralized mortgage securities are carried at their unpaid principal balances, net of unamortized discount or premium. Any discount or premium is recognized as an adjustment to interest expense by the interest method over the life of the related securities. INCOME TAXES The Company believes it has qualified as a real estate investment trust ("REIT") subsidiary of CMC under the Internal Revenue Code of 1986 (the "Code"), and for federal income tax purposes is combined with CMC which is itself a REIT. Under applicable sections of the Code, a REIT is required to meet certain asset, income and stock ownership requirements as well as distribute at least 90% of its taxable income, the distribution of which may extend into the subsequent taxable year. It is CMC's policy to distribute 100% of taxable income within the time limits prescribed by the Code. Accordingly, no provision has been made for federal income taxes. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. NOTE C -- MORTGAGE SECURITIES COLLATERAL Mortgage securities collateral consists of conventional single-family mortgage loans that are pledged to secure repayment of the collateralized mortgage securities. All principal and interest payments on the collateral are remitted directly to a collection account maintained by a trustee. The trustee is responsible for reinvesting those funds in short-term investments. All collections on the collateral and the reinvestment income earned thereon is available for payment of principal and interest on the collateralized mortgage securities. The components of mortgage securities collateral are summarized as follows (in thousands):
DECEMBER 31 ------------------------- 2002 2001 ---------- ---------- Mortgage collateral $ 40,557 $ 69,415 Short-term investments 5 5 Accrued interest receivable 275 459 ---------- ---------- Total collateral 40,837 69,879 Unamortized premium 892 1,528 ---------- ---------- $ 41,729 $ 71,407 ========== ==========
The weighted average effective interest rate for mortgage securities collateral was 6.11% and 7.13% during 2002 and 2001, respectively. -10- NOTE D -- COLLATERALIZED MORTGAGE SECURITIES Collateralized mortgage securities consists of various classes. As of December 31, 2002, substantially all classes of bonds are at an adjustable rate of interest. Interest is payable monthly at specified rates for all classes. Generally, principal payments are made to each class in the order of their stated maturities so that no payment of principal will be made on any class until all classes having an earlier stated maturity have been paid in full. The components of collateralized mortgage securities are summarized as follows (dollars in thousands):
DECEMBER 31 -------------------------- 2002 2001 ---------- ---------- Collateralized mortgage securities $ 40,557 $ 69,415 Accrued interest payable 12 26 ---------- ---------- Total obligation 40,569 69,441 Unamortized premium 1,155 1,961 ---------- ---------- Net obligation $ 41,724 $ 71,402 ========== ========== Average interest rate (excludes interest-only bonds) 1.78% 2.29% Stated maturity 2025 2025 Number of series 1 1
The maturity of the securities is directly affected by the rate of principal prepayments on the related mortgage securities collateral. The securities are also subject to redemption at the Company's option provided that certain requirements specified in the related indenture have been met (referred to as "clean-up calls"). As a result, the actual maturity is likely to occur earlier than its stated maturity. The weighted average effective interest rate for all collateralized mortgage securities was 5.74% and 6.81% during 2002 and 2001, respectively. Interest payments on collateralized mortgage securities of $3,121,000, $8,367,000 and $11,220,000, were made during 2002, 2001, and 2000, respectively. NOTE E -- DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies; however, considerable judgment is required in interpreting market data to develop these estimates. In addition, fair values fluctuate on a daily basis. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amount of cash and cash equivalents approximates fair value. The fair value of mortgage securities collateral was estimated using either quoted market prices, when available, including quotes made by CMC's lenders in connection with designating collateral for repurchase arrangements. The fair value of collateralized mortgage securities is dependent upon the characteristics of the mortgage securities collateral pledged to secure the -11- issuance; therefore, fair value was based on the same method used for determining fair value for the underlying mortgage securities collateral, adjusted for credit enhancements. The following summarizes the fair value of financial instruments (in thousands):
DECEMBER 31, 2002 DECEMBER 31, 2001 ------------------------- ------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ---------- ---------- ---------- ---------- ASSETS Cash and cash equivalents $ 14 $ 14 $ 14 $ 14 Mortgage securities collateral 41,729 42,256 71,407 72,309 LIABILITIES Collateralized mortgage securities 41,232 41,232 71,402 71,871
The following summarizes fair value disclosures for mortgage securities collateral held available-for-sale and held-to-maturity (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- DECEMBER 31, 2002 Available-for-sale $ 41,729 $ 526 $ -- $42,256 DECEMBER 31, 2001 Available-for-sale $ 71,407 $ 902 $ -- $72,309
Upon the Company's redemption of remaining bonds outstanding pursuant to clean-up calls, released CMO collateral may be sold. Such sales are deemed maturities under the provisions of SFAS 115. The following summarizes disclosures related to the disposition of released CMO collateral (in thousands):
YEAR ENDED DECEMBER 31, 2001 COST BASIS GAINS ----------------- ---------- ------- Held-to-maturity $ 20,601 $ 1,112
NOTE F -- ALLOWANCE FOR POSSIBLE LOSSES The Company has limited exposure to losses on mortgage loans. Losses due to typical mortgagor default or fraud or misrepresentation during origination of the mortgage loan are substantially reduced by the acquisition of mortgage pool insurance from AAA-rated mortgage pool insurers. The amount of coverage under any such mortgage pool insurance policy is the amount (typically 10% to 12% of the aggregate amount in such pool of mortgage loans), determined by one or more Rating Agencies, necessary to allow the securities such pools are pledged to secure to be rated AAA, when combined with homeowner equity or other insurance coverage. Certain other risks, however, are not covered by mortgage pool insurance. These risks include special hazards which are not covered by standard hazard insurance policies. Special hazards are typically catastrophic events that are unable to be predicted (e.g., earthquakes). The -12- Company has limited its exposure to special hazard losses by acquiring special hazard insurance coverage from an insurer rated AAA. Because of its limited exposure to mortgage loan losses, the Company has determined that an allowance for losses is not warranted at December 31, 2002 and 2001. Since approximately 72% of the Company's mortgage loans are secured by properties located in California, the Company has a concentration of risk related to the California market. However, the Company has no exposure arising from this concentration because it has retained no economic interest in the remaining CMO outstanding at December 31, 2002. NOTE G -- MANAGEMENT AGREEMENT The Company operates under a $10,000 per year management agreement with CMC (the "Manager"). The agreement provides that the Manager will advise the Company with respect to all facets of its business and administer the day-to-day operations of the Company under the supervision of the Board of Directors. The Manager pays, among other things, salaries and benefits of its personnel, accounting fees and expenses, and other office expenses incurred in supervising and monitoring the Company's investments. The Management Agreement is nonassignable except by consent of the Company and the Manager. The Management Agreement may be terminated without cause at any time upon 90 days written notice. In addition, the Company has the right to terminate the Management Agreement upon the happening of certain specified events, including a breach by the Manager of any provision contained in the Management Agreement which remains uncured for 30 days after notice of such breach and the bankruptcy or insolvency of the Manager. NOTE H -- TRANSACTIONS WITH RELATED PARTY The Company signed a $1 million revolving subordinated promissory note with CMC under which interest accrued on amounts payable based on the annual federal short-term rate as published by the Internal Revenue Service. This note, which was not drawn upon as of December 31, 2002, matures January 1, 2004. Repayments may be made as funds are available. CMC or an affiliate is the administrator with respect to the Non-Agency Certificates collateralizing Series 1998-3 and related CMOs. During 2002, 2001 and 2000 CMC retained fees for administering these Non-Agency Certificates and related CMOs of $8,000, $14,000 and $21,000, respectively. On a monthly basis, the Company's excess cash is advanced to CMC for which the Company earns interest based on the annual federal short-term rate. At the end of each quarter, these advances are accounted for as distributions to CMC and treated as returns of capital. -13- NOTE I -- NET INTEREST INCOME ANALYSIS (UNAUDITED) The following summarizes interest income and interest expense and the average effective interest rate for mortgage securities collateral and collateralized mortgage securities (dollars in thousands):
2002 2001 2000 --------------------- ------------------- ---------------------- AVERAGE AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE AMOUNT RATE ------ ------- ------ ------- ------- ------- Interest income on mortgage securities collateral $3,206 6.11% $8,368 7.13% $12,735 7.63% Interest expense on collateralized mortgage securities 3,032 5.74 7,986 6.81 12,272 7.36 ------ ------ ------- Net interest income $ 174 $ 382 $ 463 ====== ====== =======
The following summarizes the amount of change in interest income and interest expense due to changes in interest rates versus changes in volume (in thousands):
2002/2001 -------------------------------------------------- RATE VOLUME TOTAL ------------ ------------ ------------ Interest income on mortgage securities collateral $ (1,065) $ (4,097) $ (5,162) Interest expense on collateralized mortgage securities (1,098) (3,856) (4,954) ------------ ------------ ------------ $ 33 $ (241) $ (208) ============ ============ ============
2001/2000 -------------------------------------------------- RATE VOLUME TOTAL ------------ ------------ ------------ Interest income on mortgage securities collateral $ (792) $ (3,575) $ (4,367) Interest expense on collateralized mortgage securities (868) (3,418) (4,286) ------------ ------------ ------------ $ 76 $ (157) $ (81) ============ ============ ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 14. CONTROLS AND PROCEDURES As of December 31, 2002, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Senior Vice President - Control ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2002. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2002. -14- PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: 1. The following financial statements of the Company are included in ITEM 8:
PAGE ---- Report of Independent Auditors 4 Balance Sheets - December 31, 2002 and 2001 5 Statement of Operations - Three Years Ended December 31, 2002 6 Statements of Stockholder's Equity - Three Years Ended December 31, 2002 7 Statements of Cash Flows - Three Years Ended December 31, 2002 8 Notes to Financial Statements - December 31, 2002 9
2. Financial statement schedules: None. All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. 3. Exhibits: EXHIBIT NUMBER 3.1 Certificate of Incorporation(1) 3.2 Bylaws(1) 4.1 Form of Indenture between the Registrant and Texas Commerce Bank, National Association, as Trustee(1) 4.2 Form of Nineteenth Supplement to the Indenture(4) 10.1 Form of Pooling and Administrative Agreement(1) 10.4 Management Agreement between the Company and Capstead Advisers, Inc. dated January 1, 1994(2) 10.5 Amended Management Agreement between the Company and Capstead Advisers, Inc. October 1, 1994(3) 23 Consent of Ernst & Young LLP, Independent Auditors* 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* (b) Reports on Form 8-K: None. (c) Exhibits - The response to this section of ITEM 14 is submitted as a separate section of this report. ---------- (1) Previously filed with the Commission as an exhibit to the Company's Registration Statement on Form S-3 (No. 33-42337) filed August 21, 1991. (2) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. (3) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. (4) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on October 9, 1998. * Filed herewith. -15- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPSTEAD SECURITIES CORPORATION IV REGISTRANT Date: March 28, 2003 By: /s/ ANDREW F. JACOBS ----------------------------------- Andrew F. Jacobs Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated below and on the dates indicated. /s/ ANDREW F. JACOBS Chairman, Chief Executive March 28, 2003 ------------------------------ Officer and President (Andrew F. Jacobs) /s/ PHILLIP A. REINSCH Senior Vice President - March 28, 2003 ------------------------------ Control (Phillip. A. Reinsch) /s/ MAURICE MCGRATH Director March 28, 2003 ------------------------------ (Maurice McGrath)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual report or proxy material has been sent to security holders. -16- CERTIFICATIONS I, Andrew F. Jacobs, certify that: 1. I have reviewed this annual report on Form 10-K of Capstead Securities Corporation IV; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within the entity, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 By: /s/ ANDREW F. JACOBS --------------------------------- Andrew F. Jacobs Chairman, Chief Executive Officer and President -17- CERTIFICATIONS I, Phillip A. Reinsch, certify that: 1. I have reviewed this annual report on Form 10-K of Capstead Securities Corporation IV; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within the entity, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 By: /s/ PHILLIP A. REINSCH -------------------------------- Phillip A. Reinsch Senior Vice President - Control -18- INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Certificate of Incorporation(1) 3.2 Bylaws(1) 4.1 Form of Indenture between the Registrant and Texas Commerce Bank, National Association, as Trustee(1) 4.2 Form of Nineteenth Supplement to the Indenture(4) 10.1 Form of Pooling and Administrative Agreement(1) 10.4 Management Agreement between the Company and Capstead Advisers, Inc. dated January 1, 1994(2) 10.5 Amended Management Agreement between the Company and Capstead Advisers, Inc. October 1, 1994(3) 23 Consent of Ernst & Young LLP, Independent Auditors* 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
---------- (1) Previously filed with the Commission as an exhibit to the Company's Registration Statement on Form S-3 (No. 33-42337) filed August 21, 1991. (2) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. (3) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. (4) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on October 9, 1998. * Filed herewith. -19-