-----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, Qt8ei7MeJcX0aHQwYOXz65m/ZoGNoKgmNRYwg4laRVaolvR9YOnC1VjWccBmcFFc X777mc9PSPm6gqGa1l0fNA== 0000950134-98-002276.txt : 19980324 0000950134-98-002276.hdr.sgml : 19980324 ACCESSION NUMBER: 0000950134-98-002276 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: CMC SECURITIES CORP IV CENTRAL INDEX KEY: 0000887507 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 752431915 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20208 FILM NUMBER: 98570778 BUSINESS ADDRESS: STREET 1: 2711 N HASKELL AVE STREET 2: STE 900 CITY: DALLAS STATE: TX ZIP: 75204 BUSINESS PHONE: 2148742323 FORMER COMPANY: FORMER CONFORMED NAME: CAPSTEAD SECURITIES CORPORATION V DATE OF NAME CHANGE: 19930328 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: 33-47912 CMC SECURITIES CORPORATION IV (Exact name of Registrant as specified in its Charter) DELAWARE 75-2431915 (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 CMC SECURITIES CORPORATION IV 1997 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. BUSINESS................................................... 1 ITEM 2. PROPERTIES................................................. 3 ITEM 3. LEGAL PROCEEDINGS.......................................... 3 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 CMC Securities Corporation IV (the "Company") was incorporated in Delaware on May 6, 1992, 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 as a mortgage conduit, purchasing and securitizing single-family residential mortgage loans. The Company is managed by CMC (the "Manager"). Due to changing circumstances, control of the Company within CMC's consolidated group was changed twice during 1994 and 1995. In August 1994, CMC sold all the issued and outstanding shares of capital stock in the Company to Capstead Inc., CMC's subsidiary formed primarily to service single-family mortgage loans. On December 21, 1995, after CMC reached a decision to exit the mortgage conduit business, the Company was merged with and into a newly formed and wholly-owned subsidiary of CMC (with a corporate charter and organizational structure identical in almost all respects to that of the Company) ("CMCSC IV-A") whereby the existence of the Company ceased and CMCSC IV-A acquired all the assets and assumed all the liabilities of the Company as the surviving entity. As merger consideration to Capstead Inc., CMCSC IV-A paid an amount of $430,000 in cash that had been contributed by CMC. As a part of the merger, CMCSC IV-A changed its name to CMC Securities Corporation IV, and from December 21, 1995 forward has been referred to as the "Company." The Company was formed and exists solely for the purpose of issuing collateralized mortgage obligations ("Bonds" or "CMOs"), collateralized by mortgage-backed, pass-through certificates ("Certificates") that evidence an interest in a pool of mortgage loans secured by single-family residences. The Certificates pledged as collateral for the Bonds will either be contributed by CMC or its affiliates or purchased from third parties and will either be Government National Mortgage Association certificates, Federal National Mortgage Association certificates, Federal Home Loan Mortgage Corporation certificates or mortgage pass-through ("Non-Agency") Certificates. The Company's Certificate of Incorporation requires that Bonds issued be rated in one of the two highest rating categories established by one or more nationally recognized statistical rating agencies. On August 17, 1992 the Securities and Exchange Commission declared effective an amended registration statement filed by the Company covering the offering of a maximum of $2 billion aggregate principal amount of CMOs. The Company commenced operations with the September 30, 1994 issuance of its first series of CMOs. The Company did not issue any CMOs during 1996 or 1995. During 1997 the Company issued two series of CMOs (Series 1997-NAMC 3 and 1997-2) with total obligations (including accrued interest and premium) of $1.2 billion. The Company retained no beneficial interest in these CMOs, and as such, no economic benefit will be received and no related net income or loss will be recognized other than the amortization of unrecovered shelf issuance costs. These issuances were accounted for as financings. As of December 31, 1997, the Company had issued 5 series of CMOs with an aggregate original principal balance of $2,003,125,000, $173,179,000 of which were issued under the registration statement. -1- 4 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 convenient to accomplish the foregoing and are incidental thereto. Article III of the Company's Certificate of Incorporation limits the Company's purposes to the above. COMPETITION The Company's business is highly competitive. The Company competes with other issuers of similar obligations, both with respect to the acquisition of mortgage related collateral, securing the Bonds and the placement of the CMOs. The Company also competes with entities that issue and/or market numerous other competitive financial products. EMPLOYEES At December 31, 1997 the Company had no employees. The Manager provides all executive and administrative personnel required by the Company. 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 costs 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 or relating to performance by the Manager of its functions. 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 the Non-Agency Certificates either service the loans themselves or Capstead Inc., a subsidiary of CMC, is the -2- 5 servicer. Capstead Inc. services single-family mortgage loans and participates in other mortgage banking activities. 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 rendered under a servicing agreement, the servicers retain a servicing fee, payable monthly, generally ? of 1% per annum of the outstanding principal balance of each mortgage loan serviced as of the last day of each month. At December 31, 1997 Capstead Inc. was servicing approximately 24% of the principal balance of the Company's mortgage loans. During 1997, 1996 and 1995, Capstead Inc. retained fees from mortgage loan payments for servicing mortgage loans of $1,174,000, $1,225,000 and $1,418,000, respectively. In addition, CMC acts as administrator with respect to the Company's Non-Agency Certificates. During 1997, 1996 and 1995, CMC retained fees for administering the Non-Agency Certificates of $297,000, $341,000 and $351,000, respectively. ITEM 2. PROPERTIES. The Company's operations will be 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. 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. To date the Company has not paid dividends. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Company commenced operations on September 30, 1994 with the issuance of its first series of CMOs. Two additional series of CMOs were issued in both 1994 and 1997. The Company elected Real Estate Mortgage Investment Conduit ("REMIC") status for tax purposes on these transactions. These issuances have been accounted for as financings. As financings, CMO collateral and Bonds are reflected on the balance sheet. Since the Company did not retain any investment in the CMOs issued, no economic benefit was or will be received and thus no net income or loss was or will be recognized related to these CMOs other than amortization of unreimbursed shelf issuance costs. The Company's net losses are due to this amortization and operational costs incurred (management fees and professional fees). -3- 6 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. 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 CMC Securities Corporation IV We have audited the accompanying balance sheet of CMC 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 CMC 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 CMC SECURITIES CORPORATION IV BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31 ---------------------------- 1997 1996 ----------- ----------- ASSETS Mortgage securities collateral $ 1,728,030 $ 609,210 Cash and cash equivalents 2 -- ----------- ----------- $ 1,728,032 $ 609,210 =========== =========== LIABILITIES Collateralized mortgage securities $ 1,727,766 $ 608,858 Accrued expenses 32 22 ----------- ----------- 1,727,798 608,880 ----------- ----------- STOCKHOLDER'S EQUITY Common stock - $1 par value, 1,000 shares authorized, issued and outstanding 1 1 Paid-in capital 490 474 Accumulated deficit (257) (145) ----------- ----------- 234 330 ----------- ----------- $ 1,728,032 $ 609,210 =========== ===========
See accompanying notes to financial statements. -6- 9 CMC SECURITIES CORPORATION IV STATEMENT OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ------------------------------------ 1997 1996 1995 -------- -------- -------- Interest income on mortgage securities collateral $ 67,475 $ 55,193 $ 58,903 Interest expense on collateralized mortgage securities 67,563 55,281 58,903 -------- -------- -------- Net interest expense (88) (88) -- -------- -------- -------- Other expenses: Management fees 10 10 10 Professional fees and other 14 15 18 -------- -------- -------- Total other expenses 24 25 28 -------- -------- -------- Net loss $ (112) $ (113) $ (28) ======== ======== ========
See accompanying notes to financial statements. -7- 10 CMC SECURITIES CORPORATION IV STATEMENT OF STOCKHOLDER'S EQUITY THREE YEARS ENDED DECEMBER 31, 1997 (IN THOUSANDS)
COMMON STOCK -------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ ------- ----------- ----- Balance at January 1, 1995 1 $ 1 $ 442 $ (4) $ 439 Capital contribution -- -- 19 -- 19 Net loss -- -- -- (28) (28) ----- ----- ----- ----- ----- Balance at December 31, 1995 1 1 461 (32) 430 Capital contribution -- -- 13 -- 13 Net loss -- -- -- (113) (113) ----- ----- ----- ----- ----- Balance at December 31, 1996 1 1 474 (145) 330 Capital contribution -- -- 16 -- 16 Net loss -- -- -- (112) (112) ----- ----- ----- ----- Balance at December 31, 1997 1 $ 1 $ 490 $(257) $ 234 ===== ===== ===== ===== =====
See accompanying notes to financial statements. -8- 11 CMC SECURITIES CORPORATION IV STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 --------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- OPERATING ACTIVITIES: Net loss $ (112) $ (113) $ (28) Net change in other assets and accrued expenses 10 10 8 Noncash item - amortization of discount and premium 61 66 201 ----------- ----------- ----------- Net cash provided (used) by operating activities (41) (37) 181 ----------- ----------- ----------- INVESTING ACTIVITIES: Mortgage securities collateral: Mortgage collateral acquired from affiliate (1,187,085) -- -- Principal collections on collateral 81,555 77,716 49,207 Decrease (increase) in accrued interest receivable (7,060) 484 305 Increase in short-term investments (2) (7) -- ----------- ----------- ----------- Net cash provided (used) by investing activities (1,112,592) 78,193 49,512 ----------- ----------- ----------- FINANCING ACTIVITIES: Collateralized mortgage securities: Issuance of securities 1,187,085 -- -- Principal payments on securities (81,555) (77,716) (49,207) Increase (decrease) in accrued interest payable 7,089 (455) (506) Capital contribution 16 13 19 ----------- ----------- ----------- Net cash provided (used) by financing activities 1,112,635 (78,158) (49,694) ----------- ----------- ----------- Net change in cash and cash equivalents 2 (2) (1) Cash and cash equivalents at beginning of year -- 2 3 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 2 $ -- $ 2 =========== =========== ===========
See accompanying notes to financial statements. -9- 12 CMC SECURITIES CORPORATION IV NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE A - BUSINESS CMC Securities Corporation IV (the "Company") was incorporated in Delaware on May 6, 1992, as a special-purpose finance corporation primarily to issue bonds collateralized by whole loans or mortgage-backed securities. Capstead Inc. acquired the Company from Capstead Mortgage Corporation ("CMC"), the then parent of Capstead Inc., on August 10, 1994 pursuant to a Stock Purchase Agreement prior to commencement of operations; however, control of the Company was transferred back to CMC on December 21, 1995 pursuant to an Agreement and Plan of Merger (see Note G). 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. SECURITIES HELD-TO-MATURITY Management determines the appropriate classification of debt securities at the time of purchase 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. MORTGAGE SECURITIES COLLATERAL Mortgage securities collateral consists of debt securities classified as held-to-maturity. 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, using a senior/subordinate structure (see Note F). 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. COLLATERALIZED MORTGAGE SECURITIES Collateralized mortgage securities are carried at their unpaid principal balances, net of unamortized discount or premium. Any discount or premium is -10- 13 recognized as an adjustment to interest expense by the interest method over the life of the related securities. INCOME TAXES Since its inception through August 9, 1994, the Company operated as a qualified real estate investment trust ("REIT") subsidiary of CMC, which itself is a REIT, and was combined with CMC for federal income tax purposes. REITs are not taxed at the corporate level provided that certain requirements are met. From August 10, 1994 through December 21, 1995 the Company was consolidated for income tax purposes with Capstead Inc., which is not a REIT; however, due to losses incurred during this period, no provision was made for federal income taxes. Beginning December 21, 1995 the Company once again began operating as a qualified REIT subsidiary of CMC. 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 which 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 are 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 $ 1,749,592 $ 653,515 Short-term investments 9 7 Accrued interest receivable 10,945 3,885 ----------- ----------- Total collateral 1,760,546 657,407 Unamortized discount (32,516) (48,197) ----------- ----------- Net collateral $ 1,728,030 $ 609,210 =========== ===========
The weighted average effective interest rate for mortgage securities collateral was 8.65% and 8.68% during 1997 and 1996, respectively. During September and October of 1997, the Company acquired from affiliates conventional mortgage loans with unpaid principal balances of $281 million and $938 million as collateral for the issuances of CMO Series 1997-NAMC 3 and CMO Series 1997-II, respectively (see Note D). These loans were acquired at an amount equal to the net proceeds of the issuance. NOTE D - COLLATERALIZED MORTGAGE SECURITIES Each series of collateralized mortgage securities consists of various classes, some of which may be deferred interest, interest-only and principal-only securities. Interest is payable monthly at specified rates for all -11- 14 classes other than 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 deferred interest securities will commence only upon payment in full of some or 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. Interest payments on interest-only bonds are based on a specified notional amount used only for the calculation of interest and no payments of principal are made. Principal-only bonds remit principal payments and no interest is paid. The components of collateralized mortgage securities are summarized as follows (dollars in thousands):
DECEMBER 31 ---------------------------- 1997 1996 ----------- ----------- Collateralized mortgage securities $ 1,749,592 $ 653,514 Accrued interest payable 10,801 3,713 ----------- ----------- Total obligation 1,760,393 657,227 Unamortized discount (32,627) (48,369) ----------- ----------- Net obligation $ 1,727,766 $ 608,858 =========== =========== Range of average interest rate 6.36% to 8.16% 6.36% to 8.11% Stated maturities 2024 to 2027 2024 to 2025 Number of series 5 3
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. The weighted average effective interest rate for collateralized mortgage securities was 8.66% and 8.69% during 1997 and 1996, respectively. Interest payments on collateralized mortgage securities of $52,621,000, $47,853,000 and $48,530,000 were made during 1997, 1996 and 1995, respectively. During September and October of 1997, the Company issued CMO Series 1997-NAMC 3 and CMO Series 1997-II with 30-year stated maturities and total obligations (including accrued interest and premium) of $287 million and $950 million, respectively. The Company retained no beneficial interest in these CMOs and as such, no economic benefit will be received and no related net income or loss will be recognized other than the amortization of unrecovered shelf issuance costs. These issuances were accounted for as financings. CMC retained a $126 million interest in the issuance of CMO Series 1997-II. 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 -12- 15 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 $ 2 $ 2 $ -- $ -- Mortgage securities collateral 1,728,030 1,791,145 609,210 646,009 LIABILITIES Collateralized mortgage securities 1,727,766 1,807,150 608,858 654,581
The table above reflects the estimated fair value of mortgage securities collateral and cash equivalents as of December 31, 1997 and 1996, which reflect gross unrealized gains of $63.1 million and $36.8 million, respectively. NOTE F - ALLOWANCE FOR POSSIBLE LOSSES The Company has limited exposure to losses on mortgage securities collateral because the Company's collateralized mortgage securities are issued in a senior/subordinate structure where the investor in the subordinate classes assumes the risks of losses due to typical mortgagor default and special hazards. Special hazards are typically catastrophic events that are unable to be predicted (e.g., earthquakes). Because of its limited exposure to losses, the Company has determined that an allowance for possible losses is not warranted at December 31, 1997. Since 25% of mortgage securities collateral is 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 use of the senior/subordinate structure for securitizations. -13- 16 NOTE G - CHANGE IN CONTROL On August 9, 1994, the Company amended its Certificate of Incorporation to revise certain provisions thereof to meet current rating agency criteria and to change its name to CMC Securities Corporation IV. Pursuant to a Stock Purchase Agreement dated August 10, 1994, CMC sold all of the issued and outstanding shares of capital stock in the Company to Capstead Inc. for $708,000. Such amount was funded by an advance from CMC to Capstead Inc. under a revolving credit facility between such companies. Pursuant to an Agreement and Plan of Merger dated December 21, 1995 (the "Agreement") between the Company and CMC Securities Corporation IV-A ("CMCSC IV-A"), a newly formed and wholly-owned subsidiary of CMC with a corporate charter and organizational structure identical in almost all respects to that of the Company, the Company merged with and into CMCSC IV-A, whereby the existence of the Company ceased and CMCSC IV-A acquired all of the assets and assumed all of the liabilities of the Company as the surviving entity. CMCSC IV-A paid Capstead Inc. $430,000 as merger consideration that had been contributed to CMCSC IV-A by CMC. As a part of the merger, CMCSC IV-A changed its name to CMC Securities Corporation IV. NOTE H - 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 Company's 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 I - TRANSACTIONS WITH RELATED PARTIES The Company has entered into servicing agreements with Capstead Inc., a subsidiary of CMC, the provisions of which are typical of such agreements in the mortgage servicing industry. Under the servicing agreements, Capstead Inc. retains from interest collected a servicing fee generally ? of 1% per annum of the outstanding principal balance of mortgage loans serviced. At December 31, 1997, Capstead Inc. serviced approximately 24% of the mortgage loans securing collateralized mortgage securities. Servicing fees of $1,174,000, $1,225,000 and $1,418,000 were retained by Capstead Inc. in 1997, 1996 and 1995, respectively. CMC acts as administrator ("Bond Administrator") in relation to the Company's collateralized mortgage securities in which it performs certain administrative functions. The Bond Administrator receives fees of approximately 0.015% to 0.04% per annum of the outstanding principal amount of the bonds, after deducting trustee fees. Such fees totaled $297,000, $341,000 and $351,000 in 1997, 1996 and 1995, respectively. During 1995 the Company had a $20 million revolving subordinated promissory note with Capstead Inc. under which interest accrued on amounts payable based on the annual federal short-term rate as published by the Internal Revenue Service. This note matured January 1, 1996 and has been replaced with a $1 million note with CMC that contains similar terms and expires January 1, 1999. -14- 17 NOTE J - NET INTEREST INCOME ANALYSIS (UNAUDITED) The following table summarizes the amount of 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 mortgage securities collateral $ 67,475 8.65% $ 55,193 8.68% $ 58,903 8.40% Interest expense on collateralized mortgage securities 67,563 8.66 55,281 8.69 58,903 8.40 -------- -------- -------- Net interest expense $ (88) $ (88) $ -- ======== ======== ========
The following is a summary of 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 $ (166) $ 12,448 $ 12,282 Interest expense on collateralized mortgage securities (191) 12,473 12,282 -------- -------- -------- $ 25 $ (25) $ -- ======== ======== ========
1996/1995 --------------------------------- RATE VOLUME TOTAL ------- ------- ------- Interest income on mortgage securities collateral $ 1,909 $(5,619) $(3,710) Interest expense on collateralized mortgage securities 2,037 (5,659) (3,622) ------- ------- ------- $ (128) $ 40 $ (88) ======= ======= =======
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:
PAGE ---- 1. The following financial statements of the Company are included in ITEM 8: 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 ------- 1.1 Underwriting Agreement dated as of September 26, 1997 by and among DLJSC, the Registrant and CMC(9) 2.1 Stock Purchase Agreement dated as of August 10, 1994(4) 3.1 Certificate of Amendment of the Certificate of Incorporation of the Company dated August 9, 1994(4) 3.2 Certificate of Incorporation(1) 3.3 Bylaws(1) 3.2 Certificate of Merger of the Company into CMCSC IV-A, filed and Certified on December 21, 1995 with the Secretary of State of Delaware(10) 3.3 Bylaws of CMCSC IV-A(10) 3.4 Certificate of Incorporation of CMCSC IV-A, as filed with the Secretary of State of Delaware on December 13, 1995* 4.1 Form of Indenture between Registrant and Texas Commerce Bank, National Association, as Trustee(1) 4.2 Form of First Supplement to the Indenture(5) 4.3 Form of Second Supplement to the Indenture(6) 4.5 Form of Fourth Supplement to the Indenture(9) 4.4 Form of Third Supplement to the Indenture(7) 10.1 Form of Pooling and Administrative Agreement(1) 10.2 Form of Servicing Agreement(1) 10.4 Management Agreement between Registrant and Capstead Advisers, Inc. dated January 1, 1993(2) 10.5 Amended Management Agreement between Registrant and Capstead Advisers, Inc. dated October 1, 1993(3) 23 Consent of Ernst & Young LLP, Independent Auditors*
-16- 19 PART IV ITEM 14. - CONTINUED 3. Exhibits (continued):
EXHIBIT NUMBER ------- 27 Financial Data Schedule* 28.1 Computational Materials provided by Donaldson, Lufkin and Jenrette Securities Corporation(8)
(b) Reports on Form 8-K: Current Report on Form 8-K dated October 28, 1997 to file the following: Exhibit 28.1 - Computational Material provided by Donaldson, Lufkin and Jenrette Securities Corporation. Current Report on Form 8-K dated October 29, 1997 to file the following: Exhibit 1.1 - Underwriting Agreement dated as of October 28, 1997 by and among DLJSC, the Registrant and CMC. Exhibit 4.5 - Series 1997-2 Supplement relating to the Series 1997-2 bonds. Current Report on Form 8-K/A dated November 17, 1997 to file the following: Exhibit 99.1 - Schedule of Zip code Listings related to the Fourth Supplement to the Indenture (Series 1997-NAMC 3). (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. 33-47912) filed May 14, 1992 (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, 1992 (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, 1993 (4) Previously filed with the Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (5) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on September 30, 1994 (6) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on October 31,1994 (7) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on December 30, 1994 (8) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on September 26, 1997 (9) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on September 30, 1997 (10) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 * 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. CMC SECURITIES CORPORATION IV REGISTRANT Date: March 13, 1998 By: /s/ ANDREW F. JACOBS -------------------------------- Andrew F. Jacobs Senior Vice President-Control, Treasurer, Secretary and Director 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) Secretary and Director /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 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Underwriting Agreement dated as of September 26, 1997 by and among DLJSC, the Registrant and CMC(9) 2.1 Stock Purchase Agreement dated as of August 10, 1994(4) 3.1 Certificate of Amendment of the Certificate of Incorporation of the Company dated August 9, 1994(4) 3.2 Certificate of Incorporation(1) 3.3 Bylaws(1) 3.2 Certificate of Merger of the Company into CMCSC IV-A, filed and Certified on December 21, 1995 with the Secretary of State of Delaware(10) 3.3 Bylaws of CMCSC IV-A(10) 3.4 Certificate of Incorporation of CMCSC IV-A, as filed with the Secretary of State of Delaware on December 13, 1995* 4.1 Form of Indenture between Registrant and Texas Commerce Bank, National Association, as Trustee(1) 4.2 Form of First Supplement to the Indenture(5) 4.3 Form of Second Supplement to the Indenture(6) 4.5 Form of Fourth Supplement to the Indenture(9) 4.4 Form of Third Supplement to the Indenture(7) 10.1 Form of Pooling and Administrative Agreement(1) 10.2 Form of Servicing Agreement(1) 10.4 Management Agreement between Registrant and Capstead Advisers, Inc. dated January 1, 1993(2) 10.5 Amended Management Agreement between Registrant and Capstead Advisers, Inc. dated October 1, 1993(3) 23 Consent of Ernst & Young LLP, Independent Auditors*
23
EXHIBIT NUMBER ------- 27 Financial Data Schedule* 28.1 Computational Materials provided by Donaldson, Lufkin and Jenrette Securities Corporation(8)
(b) Reports on Form 8-K: Current Report on Form 8-K dated October 28, 1997 to file the following: Exhibit 28.1 - Computational Material provided by Donaldson, Lufkin and Jenrette Securities Corporation. Current Report on Form 8-K dated October 29, 1997 to file the following: Exhibit 1.1 - Underwriting Agreement dated as of October 28, 1997 by and among DLJSC, the Registrant and CMC. Exhibit 4.5 - Series 1997-2 Supplement relating to the Series 1997-2 bonds. Current Report on Form 8-K/A dated November 17, 1997 to file the following: Exhibit 99.1 - Schedule of Zip code Listings related to the Fourth Supplement to the Indenture (Series 1997-NAMC 3). (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. 33-47912) filed May 14, 1992 (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, 1992 (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, 1993 (4) Previously filed with the Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (5) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on September 30, 1994 (6) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on October 31,1994 (7) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on December 30, 1994 (8) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on September 26, 1997 (9) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on September 30, 1997 (10) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 * Filed herewith. EX-23 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CMC SECURITIES CORPORATION IV CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-47912) of CMC Securities Corporation IV pertaining to the issuance of a maximum $2 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 CMC 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 2 0 0 0 0 0 0 0 1,728,032 32 1,727,766 0 0 1 233 1,728,032 0 67,475 0 0 24 0 67,563 (112) 0 (112) 0 0 0 (112) 0 0
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