-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HWt8yjg+wbrhSyF2tp8O/U/ALgQomMth3+EuPTdcjM0u+Aom2CxP79L3zKcNv2u4 q/KFmvpXUnLtiZgpyRdoEw== 0000950134-98-002277.txt : 19980324 0000950134-98-002277.hdr.sgml : 19980324 ACCESSION NUMBER: 0000950134-98-002277 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSTEAD SECURITIES CORPORATION IV CENTRAL INDEX KEY: 0000878517 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 752390594 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19477 FILM NUMBER: 98570779 BUSINESS ADDRESS: STREET 1: 2711 NORTH HASKELL AVENUE STREET 2: SUITE 900 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2147468000 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 ================================================================================ 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, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - ------- SECURITIES EXCHANGE ACT OF 1934 FOR 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.) 2711 NORTH HASKELL AVENUE 75204 (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 [ ] AT MARCH 31, 1998 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 20, 1998: 1,000 DOCUMENTS INCORPORATED BY REFERENCE: NONE. ================================================================================ 2 CAPSTEAD SECURITIES CORPORATION IV 1997 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................... 4 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................ 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................................................ 16
3 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 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 95% of their taxable income. It is the Company's and CMC's policy to distribute 100% of combined taxable income. The Company was formed and exists solely 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 Government National Mortgage Association Certificates, Federal National Mortgage Association Certificates, Federal Home Loan Mortgage Corporation Certificates or 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, 1997, the Company has issued 18 series of CMOs with an aggregate original principal balance of $4,226,812,000. 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 At December 31, 1997 the Company had no employees. The Manager provides all executive and administrative personnel required by the Company. -1- 4 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 either service the loans themselves or sell the loans with no agreement with respect to servicing, in which event Capstead Inc., a subsidiary of CMC, may act as servicer. The Company enters into servicing agreements with each servicer. The terms and conditions of servicing agreements with Capstead Inc. are substantially the same as those contained in servicing agreements with unrelated third parties. 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. In addition, CMC can act as administrator with respect to the Company's Non-Agency Certificates. CMC does not currently service or act as administrator with respect to CMOs issued by the Company. ITEM 2. PROPERTIES. The Company's operations are conducted primarily in Dallas, Texas on properties leased by CMC. 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- 5 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 paid no dividends during 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 1997 COMPARED TO 1996 Residual investments in collateralized mortgage obligations (represented by the difference between the carrying value of mortgage securities collateral and collateralized mortgage securities on the balance sheet; also referred to as "CMO Investments") earned $1,150,000 in 1997, compared to $2,238,000 in 1996. Operating results produced by CMO Investments is represented by the difference between interest income on mortgage securities collateral and interest expense and professional fees on collateralized mortgage securities and mortgage pool insurance expense on mortgage securities collateral. Operating results from CMO Investments declined in 1997 compared to 1996 due primarily to the impact of run-off (prepayments and scheduled payments) and the redemptions of CMO Series 1992-VI, 1992-VIII and 1992-XIV on the average holdings of mortgage securities collateral. Average holdings of mortgage securities collateral were $619 million during 1997 compared to $941 million during 1996. As a result of this 34% decrease in the outstanding balance, income earned from the net interest spreads was lower in the current year. The following table presents the weighted average yields for the periods shown:
YEAR ENDED DECEMBER 31 ---------------------- 1997 1996 ---- ---- Mortgage securities collateral 8.47% 8.51% Collateralized mortgage securities 8.17 8.09 ---- ---- Net interest spread 0.30% 0.42% ==== ====
Although net interest spreads can fluctuate depending on the timing of the payoff of collateral and bonds with different amounts of purchase premium and bond discounts, the tendency is for CMO net interest spreads to decline as lower-yielding, shorter-term CMO bonds are paid off prior to longer-term bonds with relatively higher interest rates. During 1997 the Company redeemed the remaining outstanding bonds of Series 1992-VI, 1992-VIII and 1992-XIV totaling $136,678,000 and sold the related released collateral of $134,339,000 for gains totaling $3,386,000. 1996 COMPARED TO 1995 Residual investments in collateralized mortgage obligations (represented by the difference between the carrying value of mortgage securities collateral and collateralized mortgage securities on the balance sheet; also referred to as "CMO Investments") earned $2,238,000 in 1996, compared to $3,416,000 in -3- 6 1995. Operating results produced by CMO Investments is represented by the difference between interest income on mortgage securities collateral and interest expense and professional fees on collateralized mortgage securities and mortgage pool insurance expense on mortgage securities collateral. Operating results from CMO Investments declined in 1996 compared to 1995 due primarily to the impact of run-off (prepayments and scheduled payments) and the redemption of CMO Series 1991-VIII, 1992-III and 1992-IX on the average holdings of mortgage securities collateral. Average holdings of mortgage securities collateral were $941 million during 1996 compared to approximately $1.2 billion during 1995. As a result of this lower outstanding balance, income earned from the net interest spreads was lower in the current year. Run-off rates were 20% during 1996 compared to 18% during 1995. More than offsetting the 1996 decline in earnings on CMO Investments was $2,460,000 of gains from sales to CMC of collateral released from the related CMOs. The following table presents the weighted average yields for the periods shown:
YEAR ENDED DECEMBER 31 ---------------------- 1996 1995 ---- ---- Mortgage securities collateral 8.51% 8.50% Collateralized mortgage securities 8.09 8.03 ---- ---- Net interest spread 0.42% 0.47% ==== ====
LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are the receipt of excess cash flows on CMOs (primarily the excess of principal and interest earned on the mortgage securities collateral including reinvestment proceeds over the principal and interest payable on the CMOs), proceeds from additional CMO issuances, and occasionally proceeds from the sale of collateral released from the related CMOs. There have been no CMO issuances since January 1993. Net income and excess cash flows from CMO Investments have allowed a dividend of $1,556,000 during 1997 and the return of $8,724,000 and $6,099,000 of capital during 1997 and 1996, respectively. The Company continues to qualify as a real estate investment trust subsidiary. IMPACT OF YEAR 2000 Many existing computer software programs use only two digits to identify the year in date fields and, as such, could fail or create erroneous results by or at the Year 2000. The Manager utilizes a number of software systems to service mortgage loans, and manage the Company's affairs. The Manager has made and will continue to make investments in its software systems and applications to ensure the Company is Year 2000 compliant. In addition, the Manager has taken steps to ensure that the vendors it utilizes in various capacities and institutions that it interfaces with are also taking the necessary steps to become Year 2000 compliant. This process is expected to be essentially complete by mid-1998. The financial impact of becoming Year 2000 compliant has not been and is not expected to be material to the Company or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. -4- 7 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS Stockholder and Board of Directors Capstead Securities Corporation IV We have audited the accompanying balance sheet of Capstead Securities Corporation IV (a wholly-owned subsidiary of Capstead Mortgage Corporation) as of December 31, 1997 and 1996, and related statements of operations, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Dallas, Texas March 20, 1998 -5- 8 CAPSTEAD SECURITIES CORPORATION IV BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31 ----------------------- 1997 1996 --------- --------- ASSETS Mortgage securities collateral $ 493,147 $ 766,812 Cash and cash equivalents 8 2,675 Other assets 1,508 2,493 --------- --------- $ 494,663 $ 771,980 ========= ========= LIABILITIES Collateralized mortgage securities $ 485,633 $ 754,631 Accrued expenses 40 30 --------- --------- 485,673 754,661 --------- --------- STOCKHOLDER'S EQUITY Common stock - $1 par value, 1,000 shares authorized, issued and outstanding 1 1 Paid-in capital 8,989 17,713 Unrealized gain on debt securities -- 2,646 Accumulated deficit -- (3,041) --------- --------- 8,990 17,319 --------- --------- $ 494,663 $ 771,980 ========= =========
See accompanying notes to financial statements. -6- 9 CAPSTEAD SECURITIES CORPORATION IV STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 ---------------------------------- 1997 1996 1995 -------- -------- -------- Interest income: Mortgage securities collateral $ 52,411 $ 80,079 $103,457 Receivable from Parent 71 32 29 -------- -------- -------- Total interest income 52,482 80,111 103,486 Interest expense on collateralized mortgage securities 49,544 74,842 96,202 -------- -------- -------- Net interest income 2,938 5,269 7,284 -------- -------- -------- Other income - gains on sale of released mortgage securities collateral 3,386 2,460 -- -------- -------- -------- Other expenses: Management fees 10 10 10 Professional fees and other 104 128 134 Pool insurance 1,613 2,871 3,705 -------- -------- -------- Total other expenses 1,727 3,009 3,849 -------- -------- -------- Net income $ 4,597 $ 4,720 $ 3,435 ======== ======== ======== Net income per share $ 4,597 $ 4,720 $ 3,435 Number of shares outstanding 1,000 1,000 1,000 Cash dividends paid per share $ 1,556 $ -- $ --
See accompanying notes to financial statements. -7- 10 CAPSTEAD SECURITIES CORPORATION IV STATEMENT OF STOCKHOLDER'S EQUITY THREE YEARS ENDED DECEMBER 31, 1997 (IN THOUSANDS)
COMMON STOCK UNREALIZED --------------------- PAID-IN ACCUMULATED GAIN ON DEBT SHARES AMOUNT CAPITAL DEFICIT SECURITIES TOTAL -------- -------- -------- ----------- ------------- -------- Balance at January 1, 1995 1 $ 1 $ 29,383 $(11,196) $ -- $ 18,188 Capital distributions -- -- (5,571) -- -- (5,571) Unrealized gain on debt securities -- -- -- -- 3,259 3,259 Net income -- -- -- 3,435 -- 3,435 -------- -------- -------- -------- -------- -------- Balance at December 31, 1995 1 1 23,812 (7,761) 3,259 19,311 Capital distributions -- -- (6,099) -- -- (6,099) Unrealized loss on debt securities -- -- -- -- (613) (613) Net income -- -- -- 4,720 -- 4,720 -------- -------- -------- -------- -------- -------- Balance at December 31, 1996 1 1 17,713 (3,041) 2,646 17,319 Capital distributions -- -- (8,724) -- -- (8,724) Unrealized loss on debt securities -- -- -- -- (2,646) (2,646) Net income -- -- -- 4,597 -- 4,597 Dividends paid -- -- -- (1,556) -- (1,556) -------- -------- -------- -------- -------- -------- Balance at December 31, 1997 1 $ 1 $ 8,989 $ -- $ -- $ 8,990 ======== ======== ======== ======== ======== ========
See accompanying notes to financial statements. -8- 11 CAPSTEAD SECURITIES CORPORATION IV STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 --------------------------------------- 1997 1996 1995 --------- --------- --------- OPERATING ACTIVITIES: Net income $ 4,597 $ 4,720 $ 3,435 Noncash item - amortization of discount and premium 772 845 808 Net change in other assets and accrued expenses 995 1,021 979 Gain on sale of released mortgage securities collateral (3,386) (2,460) -- --------- --------- --------- Net cash provided by operating activities 2,978 4,126 5,222 --------- --------- --------- INVESTING ACTIVITIES: Mortgage securities collateral: Principal collections on collateral 138,618 216,606 234,293 Decrease in accrued interest receivable 1,911 2,480 1,438 Decrease (increase) in short-term investments (4,502) 8,568 (257) Sale of released mortgage securities collateral 137,725 109,241 -- --------- --------- --------- Net cash provided by investing activities 273,752 336,895 235,474 --------- --------- --------- FINANCING ACTIVITIES: Collateralized mortgage securities: Principal payments on securities (266,508) (329,694) (232,691) Decrease in accrued interest payable (2,609) (3,022) (1,989) Capital distributions (8,724) (6,099) (5,571) Dividends paid (1,556) -- -- --------- --------- --------- Net cash used by financing activities (279,397) (338,815) (240,251) --------- --------- --------- Net change in cash and cash equivalents (2,667) 2,206 445 Cash and cash equivalents at beginning of year 2,675 469 24 --------- --------- --------- Cash and cash equivalents at end of year $ 8 $ 2,675 $ 469 ========= ========= =========
See accompanying notes to financial statements. -9- 12 NOTES TO FINANCIAL STATEMENTS CAPSTEAD SECURITIES CORPORATION IV DECEMBER 31, 1997 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"), which commenced operations with the issuance of its first collateralized mortgage obligation ("CMO") on December 23, 1991. NOTE B -- ACCOUNTING POLICIES USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles 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. The amortization of premiums and discounts on mortgage securities collateral and collateralized mortgage securities is based on expectations of future movements in interest rates and how resulting rates will impact prepayments on underlying mortgage loans. It is possible that prepayments could rise to levels that would adversely affect profitability if such levels are sustained for more than a brief period of time. 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, net of tax, 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. -10- 13 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 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. 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 95% of its taxable income, the distribution of which may extend into the subsequent taxable year. It is the Company'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 ------------------------- 1997 1996 -------- -------- Mortgage collateral $474,194 $747,127 Short-term investments 14,682 10,180 Accrued interest receivable 3,427 5,338 -------- -------- Total collateral 492,303 762,645 Unamortized premium 844 1,521 Unrealized gain on debt securities held available-for-sale -- 2,646 -------- -------- Net collateral $493,147 $766,812 ======== ========
-11- 14 The weighted average effective interest rate for mortgage securities collateral was 8.47% and 8.51% during 1997 and 1996, respectively. In connection with the 1997 redemptions of Series 1992-VI, 1992-VIII and 1992-XIV pursuant to clean-up calls (see Note D), the Company sold to CMC mortgage loans released from the related indentures totaling $134,339,000 for gains totaling $3,386,000. NOTE D -- COLLATERALIZED MORTGAGE SECURITIES Each series of collateralized mortgage securities consists of various classes, some of which may be deferred interest securities. Substantially all classes of bonds are at a fixed rate of interest. Interest is payable quarterly or monthly at specified rates for all classes other than the deferred interest securities. Generally, principal payments on each series 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. Generally, payments of principal and interest on the deferred interest securities will commence only upon payment in full of all other classes. Prior to that time, interest accrues on the deferred interest securities and the amount accrued is added to the unpaid principal balance. The components of collateralized mortgage securities are summarized as follows (dollars in thousands):
DECEMBER 31 --------------------------------- 1997 1996 ------ ------ Collateralized mortgage securities $483,385 $749,893 Accrued interest payable 5,991 8,600 -------- -------- Total obligation 489,376 758,493 Unamortized discount (3,743) (3,862) -------- -------- Net obligation $485,633 $754,631 ======== ======== Range of average interest rates 7.60% to 8.90% 7.21% to 8.90% Range of stated maturities 2007 to 2023 2007 to 2023 Number of series 10 13
The maturity of each series of securities is directly affected by the rate of principal prepayments on the related mortgage securities collateral. Each series of securities is 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 of any series of securities is likely to occur earlier than its stated maturity. In 1997, the Company redeemed the remaining outstanding bonds of three series of collateralized mortgage securities (Series 1992-VI, 1992-VIII and 1992-XIV) totaling $136,678,000 pursuant to clean-up calls. The weighted average effective interest rate for all collateralized mortgage securities was 8.17% and 8.09% during 1997 and 1996, respectively. Interest payments on collateralized mortgage securities of $51,577,000, $77,592,000, and $97,981,000 were made during 1997, 1996, and 1995, respectively. -12- 15 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 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 table summarizes the fair value of financial instruments (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------- --------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- ASSETS Cash and cash equivalents $ 8 $ 8 $ 2,675 $ 2,675 Mortgage securities collateral 493,147 506,269 766,812 780,933 LIABILITIES Collateralized mortgage securities 485,633 501,465 754,631 769,608
The following table summarizes fair value disclosures for mortgage securities collateral held available-for-sale and held-to-maturity (in thousands):
GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- DECEMBER 31, 1997 Held-to-maturity $493,147 $13,280 $158 $506,269 DECEMBER 31, 1996 Available-for-sale 81,539 2,646 -- 84,185 Held-to-maturity 682,627 14,327 206 696,748
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. -13- 16 The following table summarizes disclosures related to the disposition of released CMO collateral held available-for-sale and held-to-maturity (in thousands):
COST BASIS GAINS ---------- ----- DECEMBER 31, 1997 Available-for-sale $75,901 $1,466 Held-to-maturity 58,414 1,920 DECEMBER 31, 1996 Available-for-sale 61,449 1,001 Held-to-maturity 45,077 1,459
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 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, 1997. Since approximately 55% 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's exposure arising from this concentration is reduced by the acquisition of mortgage pool insurance and special hazard insurance. 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. 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 matures January 1, 1999. Repayments may be made as funds are available. -14- 17 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. NOTE I -- NET INTEREST INCOME ANALYSIS (UNAUDITED) The following table summarizes interest income and interest expense and the average effective interest rate for mortgage securities collateral and collateralized mortgage securities (dollars in thousands):
1997 1996 1995 --------------------- --------------------- ---------------------- AVERAGE AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE AMOUNT RATE ------ ------- ------ ------- ------ ------- Interest income on $52,411 8.47% $80,079 8.51% $103,457 8.50% mortgage securities collateral Interest expense on collateralized mortgage securities 49,544 8.17 74,842 8.09 96,202 8.03 ------- ------- -------- Net interest income $ 2,867 $ 5,237 $ 7,255 ======= ======= ========
The following table summarizes the amount of change in interest income and interest expense due to changes in interest rates versus changes in volume (in thousands):
1997/1996 ------------------------------------ RATE VOLUME TOTAL -------- -------- -------- Interest income on mortgage securities collateral $ (356) $(27,312) $(27,668) Interest expense on collateralized mortgage securities 760 (26,058) (25,298) -------- -------- -------- $ (1,116) $ (1,254) $ (2,370) ======== ======== ========
1996/1995 ------------------------------------ RATE VOLUME TOTAL -------- -------- -------- Interest income on mortgage securities collateral $ 122 $(23,500) $(23,378) Interest expense on collateralized mortgage securities 726 (22,086) (21,360) -------- -------- -------- $ (604) $ (1,414) $ (2,018) ======== ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. -15- 18 PART IV ITEM 14. 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 ---- Balance Sheet - December 31, 1997 and 1996 6 Statement of Operations - Three Years Ended December 31, 1997 7 Statement of Stockholder's Equity - Three Years Ended December 31, 1997 8 Statement of Cash Flows - Three Years Ended December 31, 1997 9 Notes to Financial Statements - December 31, 1997 10
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 First Supplement to the Indenture(3) 4.3 Form of Second Supplement to the Indenture(4) 4.4 Form of Third Supplement to the Indenture(5) 4.5 Form of Fourth Supplement to the Indenture(6) 4.6 Form of Fifth Supplement to the Indenture(7) 4.7 Form of Sixth Supplement to the Indenture(7) 4.8 Form of Seventh Supplement to the Indenture(8) 4.9 Form of Eighth Supplement to the Indenture(9) 4.10 Form of Ninth Supplement to the Indenture(9) 4.11 Form of Tenth Supplement to the Indenture(10) 4.12 Form of Eleventh Supplement to the Indenture(11) 4.13 Form of Twelfth Supplement to the Indenture(10) 4.14 Form of Thirteenth Supplement to the Indenture(12) 4.15 Form of Fourteenth Supplement to the Indenture(13) 4.16 Form of Fifteenth Supplement to the Indenture(13) 4.17 Form of Sixteenth Supplement to the Indenture(14) 4.18 Form of Seventeenth Supplement to the Indenture(14) 4.19 Form of Eighteenth Supplement to the Indenture(15) 10.1 Form of Pooling and Administrative Agreement(1) 10.2 Form of Servicing Agreement(1) 10.4 Management Agreement between the Company and Capstead Advisers, Inc. dated January 1, 1994(2) -16- 19 PART IV ITEM 14. - CONTINUED 3. Exhibits (continued): EXHIBIT NUMBER 10.5 Amended Management Agreement between the Company and Capstead Advisers, Inc. October 1, 1994(16) 23 Consent of Ernst & Young LLP, Independent Auditors* 27 Financial Data Schedule* (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) Incorporated herein by reference 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 Current Report on Form 8-K on December 24, 1991. (4) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on December 23, 1991. (5) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on January 28, 1993. (6) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on February 28, 1993. (7) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on March 30, 1993. (8) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on April 30, 1993. (9) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on May 29, 1993. (10) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on June 30, 1993. (11) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on June 29, 1993. (12) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on July 30, 1993. (13) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on August 28, 1993. (14) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on September 30, 1993. (15) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on January 29, 1994. (16) 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. * Filed herewith. -17- 20 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 13, 1998 By: /s/ ANDREW F. JACOBS ------------------------------- Andrew F. Jacobs Senior Vice President-Control, Treasurer and Secretary 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/ RONN K. LYTLE Chairman, Chief March 13, 1998 - ------------------------------ Executive Officer (Ronn K. Lytle) and Director /s/ ANDREW F. JACOBS Senior Vice President- March 13, 1998 - ------------------------------- Control, Treasurer (Andrew F. Jacobs) and Secretary /s/ MAURICE MCGRATH Director March 20, 1998 - ------------------------------- (Maurice McGrath)
-18- 21 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. 22 Exhibit Index
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 First Supplement to the Indenture(3) 4.3 Form of Second Supplement to the Indenture(4) 4.4 Form of Third Supplement to the Indenture(5) 4.5 Form of Fourth Supplement to the Indenture(6) 4.6 Form of Fifth Supplement to the Indenture(7) 4.7 Form of Sixth Supplement to the Indenture(7) 4.8 Form of Seventh Supplement to the Indenture(8) 4.9 Form of Eighth Supplement to the Indenture(9) 4.10 Form of Ninth Supplement to the Indenture(9) 4.11 Form of Tenth Supplement to the Indenture(10) 4.12 Form of Eleventh Supplement to the Indenture(11) 4.13 Form of Twelfth Supplement to the Indenture(10) 4.14 Form of Thirteenth Supplement to the Indenture(12) 4.15 Form of Fourteenth Supplement to the Indenture(13) 4.16 Form of Fifteenth Supplement to the Indenture(13) 4.17 Form of Sixteenth Supplement to the Indenture(14) 4.18 Form of Seventeenth Supplement to the Indenture(14) 4.19 Form of Eighteenth Supplement to the Indenture(15) 10.1 Form of Pooling and Administrative Agreement(1) 10.2 Form of Servicing 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(16) 23 Consent of Ernst & Young LLP, Independent Auditors* 27 Financial Data Schedule*
23 - ----------------- (1) Incorporated herein by reference 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 Current Report on Form 8-K on December 24, 1991. (4) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on December 23, 1991. (5) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on January 28, 1993. (6) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on February 28, 1993. (7) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on March 30, 1993. (8) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on April 30, 1993. (9) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on May 29, 1993. (10) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on June 30, 1993. (11) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on June 29, 1993. (12) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on July 30, 1993. (13) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on August 28, 1993. (14) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on September 30, 1993. (15) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on January 29, 1994. (16) 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. * Filed herewith. EX-23 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CAPSTEAD SECURITIES CORPORATION IV CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-42337) of Capstead Securities Corporation IV pertaining to the issuance of a maximum $5 billion aggregate principal balance of collateralized mortgage obligations and in the related prospectus and prospectus supplements of our report dated January 21, 1998, with respect to the financial statements of Capstead Securities Corporation IV included in this Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP Dallas, Texas March 20, 1998 EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from CMC Securities Corporation IV's Annual Report on Form 10-K for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 8 0 0 0 0 0 0 0 494,663 40 485,663 0 0 1 8,989 494,663 0 55,868 0 0 1,727 0 49,544 4,597 0 4,597 0 0 0 4,597 0 0
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