<PAGE> 1
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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, 1998
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: 33-5539
CMC SECURITIES CORPORATION I
(Exact name of Registrant as specified in its Charter)
NEVADA 75-2449544
(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, 1999 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES WAS: NOT APPLICABLE.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J (1)(a)
AND (b) OF FORM 10-K AND IS, THEREFORE, FILING THIS FORM WITH REDUCED DISCLOSURE
FORMAT.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 25, 1999: 10,000
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
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CMC SECURITIES CORPORATION I
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C>
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
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
ORGANIZATION
CMC Securities Corporation I (the "Company"), was incorporated in Nevada on May
7, 1986 as a special-purpose finance corporation and is a wholly-owned
subsidiary of Capstead Mortgage Corporation ("CMC"). The Company was acquired
from CMF Mortgage Funding Corporation ("CMF"), a former subsidiary of CMC, on
July 29, 1994 pursuant to an Agreement and Plan of Merger (see below). CMC is a
publicly-owned real estate investment trust that, until late in 1995, operated
as a mortgage conduit, purchasing and securitizing single-family residential
mortgage loans. The Company is managed by CMC (the "Manager").
Pursuant to the Agreement and Plan of Merger dated July 29, 1994 (the
"Agreement") between the Company and CMC Securities Corporation I-A ("CMCSC
I-A"), a newly formed and wholly-owned subsidiary of CMC with a corporate
charter and organizational structure that is identical in almost all respects to
that of the Company, the Company was merged with and into CMCSC I-A, whereby the
existence of the Company ceased and CMCSC I-A acquired all of the assets and
assumed all of the liabilities of the Company as the surviving entity. As a part
of the merger, CMCSC I-A changed its name to CMC Securities Corporation I, and
from July 29, 1994 forward has been referred to as the "Company."
The Company was formed primarily for the purpose of owning mortgage-backed,
pass-through certificates ("Certificates") financed through the issuance of
collateralized mortgage obligations ("CMOs"), which evidence an interest in a
pool of mortgage loans secured by single-family residences. On September 16,
1992 the Securities and Exchange Commission declared effective an amended
registration statement filed by the Company covering the offering of a maximum
of $1.732 billion aggregate principal amount of CMOs.
The Company issued its first series of CMOs under its amended registration
statement on October 30, 1992. For the purpose of this filing, October 30, 1992
is referred to as the commencement of operations of the Company. As of November
30, 1993, the Company had issued 10 series of CMOs with an aggregate original
principal balance of $1,727,627,000 essentially issuing the maximum amount of
securities provided for in the amended registration statement.
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; (iii)
transferring, pledging or assigning the rights to any amounts remitted or to be
remitted to the Company in relation to CMOs; and (iv) 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. The Company does not currently
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anticipate issuing additional CMOs as it has essentially issued the maximum
number of securities as provided for in its amended registration statement.
EMPLOYEES
At December 31, 1998 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
miscellaneous administrative expenses of the Manager 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 the Non-Agency Certificates may elect,
if they meet the Company's criteria for servicers, either to service the loans
they sell or to sell the loans with no agreement with respect to servicing. The
Company enters into servicing agreements with each servicer.
As compensation for services rendered under the servicing agreements, the
servicers retain a servicing fee, payable monthly, generally 1/4 of 1% per annum
of the outstanding principal balance of each mortgage loan serviced as of the
last day of each month. During 1998 Capstead Inc. serviced a significant number
of the Company's mortgage loans. This servicing was sold by Capstead Inc. in
December 1998 to an unaffiliated third party. During 1998, 1997 and 1996,
Capstead Inc. retained fees from mortgage loan payments for servicing mortgage
loans of $625,000, $779,000 and $822,000, respectively.
In addition CMC is the administrator with respect to certain of the Company's
Non-Agency Certificates and CMOs. During 1998, 1997 and 1996, CMC retained fees
for administering the Non-Agency Certificates and CMOs of $263,000, $296,000 and
$336,000, respectively.
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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.
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.
From October 30, 1992 to November 30, 1993 the Company issued 10 series of CMOs
with an aggregate original principal balance of $1,727,627,000. No CMOs have
been issued since November 30, 1993. The Company elected Real Estate Mortgage
Investment Conduit ("REMIC") status for tax purposes on these transactions. On 3
of the CMOs issued in 1992 totaling $407,206,000, the Company simultaneously
sold the right to receive all of the excess cash flows on the mortgage loans
pledged as collateral and the bonds issued (the residual investment) to outside
investors. Therefore, these 3 transactions were recorded as sales and the
collateral and bonds are not reflected on the Company's balance sheet. No gain
or loss was recognized on these sale transactions as the collateral was
transferred from CMF at fair value as established by the net proceeds received
from the underwriter of the CMO. The remaining two CMO issuances in 1992 and the
CMO issuances in 1993 were accounted for as financings because an affiliate of
the Company retained investments in the CMOs. As financings, CMO collateral and
bonds are reflected on the balance sheet.
Since the Company did not retain any investment in any of 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. The Company's net losses are due to
operational costs incurred (management fees and professional fees).
LIQUIDITY AND CAPITAL RESOURCES
All ongoing CMO expenses of the Company 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
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
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<PAGE> 6
or at the Year 2000. The Manager utilizes a number of software systems to
administer securitizations and otherwise manage the Company's affairs. In
addition, the Manager utilizes vendors in various capacities and interfaces with
various institutions. The Manager is exposed to the risk that its systems and
the systems of its vendors and institutions it interfaces with are not Year 2000
compliant.
State of Readiness. The Manager has made and will continue to make
investments in its software systems and applications to ensure the Manager is
Year 2000 compliant. The Manager is also taking steps to ensure that the vendors
it utilizes 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 the end of the second quarter of 1999.
Costs. The financial costs of the Manager becoming Year 2000 compliant is
the responsibility of the Manager.
Risks and Contingency Planning. Although the Manager expects that all its
systems and applications will be Year 2000 compliant per the above schedule and
well prior to December 31, 1999, there can be no assurance that all of the
vendors it utilizes and institutions that it interfaces with will complete their
compliance efforts. The Manager will continue to monitor their efforts in this
regard and will take all prudent steps necessary to ensure operations are not
disrupted including the use of other vendors or other methodologies and
processes to transact the Company's business. The effect of any disruption to
the Company's operations of any such instances of non-compliance is presently
not determinable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
Stockholder and Board of Directors
CMC Securities Corporation I
We have audited the accompanying balance sheet of CMC Securities Corporation I
(a wholly-owned subsidiary of Capstead Mortgage Corporation) as of December 31,
1998 and 1997, and related statements of operations, stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 1998.
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 I at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Dallas, Texas
February 4, 1999
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CMC SECURITIES CORPORATION I
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Mortgage securities collateral $ 380,790 $ 559,254
=========== ===========
LIABILITIES
Collateralized mortgage securities $ 380,790 $ 559,254
Accrued expenses 50 40
----------- -----------
380,840 559,294
----------- -----------
STOCKHOLDER'S EQUITY
Common stock - $1.00 par value, 10 shares
authorized, issued and outstanding 10 10
Paid-in capital 98 84
Undistributed loss (158) (134)
----------- -----------
(50) (40)
----------- -----------
$ 380,790 $ 559,254
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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CMC SECURITIES CORPORATION I
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ 35,202 $ 45,361 $ 51,372
Interest expense on
collateralized mortgage securities 34,085 43,902 49,728
-------- -------- --------
Net interest income 1,117 1,459 1,644
-------- -------- --------
Other expenses:
Management fees 10 10 10
Professional fees and other 13 13 12
Pool insurance 1,118 1,459 1,644
-------- -------- --------
Total other expenses 1,141 1,482 1,666
-------- -------- --------
Net loss $ (24) $ (23) $ (22)
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
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CMC SECURITIES CORPORATION I
STATEMENT OF STOCKHOLDER'S EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- PAID-IN UNDISTRIBUTED
SHARES AMOUNT CAPITAL INCOME (LOSS) TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1996 10 $ 10 $ 60 $ (89) $ (19)
Capital contribution -- -- 12 -- 12
Net loss -- -- -- (22) (22)
------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1996 10 10 72 (111) (29)
Capital contribution -- -- 12 -- 12
Net loss -- -- -- (23) (23)
------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1997 10 10 84 (134) (40)
Capital contribution -- -- 14 -- 14
Net loss -- -- -- (24) (24)
------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1998 10 $ 10 $ 98 $ (158) $ (50)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
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CMC SECURITIES CORPORATION I
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (24) $ (23) $ (22)
Noncash item - amortization of
discount and premium (90) (42) (35)
Net change in other assets and
accrued expenses 10 10 10
--------- -------- --------
Net cash used by
operating activities (104) (55) (47)
--------- -------- --------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 177,582 87,455 75,803
Decrease in accrued interest receivable 1,112 540 469
Decrease in short-term investments 30 5 5
--------- -------- --------
Net cash provided by
investing activities 178,724 88,000 76,277
--------- -------- --------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Principal payments on securities (177,582) (87,455) (75,803)
Decrease in accrued interest payable (1,052) (503) (439)
Capital contributions 14 12 12
--------- -------- --------
Net cash provided (used) by
financing activities (178,620) (87,946) (76,230)
--------- -------- --------
Net change in cash and cash equivalents -- (1) --
Cash and cash equivalents at
beginning of year -- 1 1
--------- -------- --------
Cash and cash equivalents at
end of year $ -- $ -- $ 1
========= ======== ========
</TABLE>
See accompanying notes to financial statements.
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CMC SECURITIES CORPORATION I
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE A -- BUSINESS
CMC Securities Corporation I (the "Company"), was incorporated in Nevada on May
7, 1986 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").
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 and by acquiring
mortgage pool insurance and special hazard insurance.
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
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recognized as an adjustment to interest expense by the interest method over the
life of the related securities.
INCOME TAXES
The Company was consolidated with CMF for income tax purposes through July 29,
1994 and had incurred losses through that date. Since July 29, 1994 the Company
has operated as a qualified real estate investment trust ("REIT") subsidiary of
CMC, which itself is a REIT, and is combined with CMC for federal income tax
purposes. REITs are not taxed at the corporate level provided that certain
requirements are met. Accordingly, no provision is required for federal income
taxes.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and highly liquid investments
with original maturities of 3 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 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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Mortgage collateral $ 377,871 $ 555,454
Short-term investments -- 25
Accrued interest receivable 2,286 3,402
---------- ----------
Total collateral 380,157 558,881
Unamortized premium 633 373
---------- ----------
Net collateral $ 380,790 $ 559,254
========== ==========
</TABLE>
The weighted average effective interest rate for mortgage securities collateral
was 7.49% and 7.53% during 1998 and 1997, respectively.
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. Substantially all classes of bonds (other than principal-only bonds)
are at a fixed rate of interest. Interest is payable 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 some or all
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other classes. Prior to that time, interest accrues on 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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Collateralized mortgage securities $ 377,870 $ 555,452
Accrued interest payable 2,583 3,634
------------ ------------
Total obligation 380,453 559,086
Unamortized premium 337 168
------------ ------------
Net obligation $ 380,790 $ 559,254
============ ============
Range of average interest rates 6.54% to 7.87% 6.55% to 7.85%
Range of stated maturities 2008 to 2023 2008 to 2023
Number of series 7 7
</TABLE>
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 7.26% and 7.29% during 1998 and 1997, respectively. Interest
payments on collateralized mortgage securities of $33,087,000, $43,023,000 and
$48,699,000 were made during 1998, 1997 and 1996, respectively.
NOTE E -- DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments have been determined by the
Company using available market information and appropriate valuation
methodologies; however, considerable judgment is required in interpreting market
data to develop these estimates. In addition, fair values fluctuate on a daily
basis. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The carrying amount of cash and cash equivalents and payables to affiliates
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.
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<PAGE> 15
The following table summarizes the fair value of financial instruments (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Mortgage securities collateral $ 380,790 $ 388,683 $ 559,254 $ 569,532
LIABILITIES
Accrued expenses 50 50 40 40
Collateralized mortgage
securities 380,790 389,866 559,254 571,271
</TABLE>
The fair values of mortgage securities collateral reflect unrealized gains of
$7.9 million at December 31, 1998, and unrealized gains of $11.0 million and
losses of $707,000 at December 31, 1997.
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, 1998.
Since approximately 58% 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 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.
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<PAGE> 16
NOTE H -- TRANSACTIONS WITH RELATED PARTIES
The Company had 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. Capstead Inc. sold this servicing to an
unaffiliated third party in December 1998. Under the servicing agreements,
Capstead Inc. retained from interest collected a servicing fee generally 1/4 of
1% per annum of the outstanding principal balance of mortgage loans serviced.
Servicing fees of $625,000, $779,000 and $822,000 were retained by Capstead Inc.
in 1998, 1997 and 1996, respectively.
CMC acts as administrator in relation to certain of the Company's Non-Agency
Certificates and CMOs in which it performs certain administrative functions. CMC
receives a fee of approximately 0.015% to 0.04% per annum of the outstanding
principal amount of the bonds, after deducting trustee fees. Such fees totaled
$263,000, $296,000 and $336,000 in 1998, 1997 and 1996, respectively.
During 1995 the Company had a $10 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
matured January 1, 1996 and was replaced with a $1 million note that matured
January 1, 1998, which was replaced with a $500,000 note with similar terms that
expires January 1, 2000. Repayments may be made as funds are available.
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):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income on
mortgage securities
collateral $ 35,202 7.49% $ 45,361 7.53% $ 51,372 7.58%
Interest expense on
collateralized
mortgage securities 34,085 7.26 43,902 7.29 49,728 7.34
--------- --------- ---------
Net interest income $ 1,117 $ 1,459 $ 1,644
========= ========= =========
</TABLE>
-14-
<PAGE> 17
The following tables summarize the amount of change in interest income and
interest expense due to changes in interest rates versus changes in volume (in
thousands):
<TABLE>
<CAPTION>
1998/1997
--------------------------------------
RATE VOLUME TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ (198) $ (9,961) $ (10,159)
Interest expense on collateralized
mortgage securities (168) (9,649) (9,817)
---------- ---------- ----------
$ (30) $ (312) $ (342)
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1997/1996
--------------------------------------
RATE VOLUME TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ (397) $ (5,614) $ (6,011)
Interest expense on collateralized
mortgage securities (383) (5,443) (5,826)
---------- ---------- ----------
$ (14) $ (171) $ (185)
========== ========== ==========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-15-
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
<TABLE>
<CAPTION>
1. The following financial statements of the Company
are included in ITEM 8: PAGE
----
<S> <C> <C>
Balance Sheet - December 31, 1998 and 1997 6
Statement of Operations - Three Years Ended
December 31, 1998 7
Statement of Stockholder's Equity -
Three Years Ended December 31, 1998 8
Statement of Cash Flows - Three Years Ended
December 31, 1998 9
Notes to Financial Statements - December 31, 1998 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:
</TABLE>
EXHIBIT
NUMBER
------
2.1 Agreement and Plan of Merger between the Company and
CMCSC I-A dated July 29, 1994(11)
3.1 Certificate of Incorporation of CMCSC I-A filed July
29, 1994 with the Secretary of State of Delaware(11)
3.2 Certificate of Merger of the Company with and into
CMCSC I-A, filed July 29, 1994 with the Secretary of
State of Delaware(11)
3.3 Bylaws for CMCSC I-A(12)
3.4 Charter of CMCSC I-A, which includes Articles of
Incorporation(12)
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(2)
4.3 Form of Second Supplement to the Indenture(3)
4.4 Form of Third Supplement to the Indenture(3)
4.5 Form of Fourth Supplement to the Indenture(4)
4.6 Form of Fifth Supplement to the Indenture(4)
4.7 Form of Sixth Supplement to the Indenture(6)
4.8 Form of Seventh Supplement to the Indenture(6)
4.9 Form of Eighth Supplement to the Indenture(6)
4.10 Form of Ninth Supplement to the Indenture(7)
4.11 Form of Tenth Supplement to the Indenture(8)
10.1 Form of Pooling and Administrative Agreement(1)
10.2 Form of Servicing Agreement(1)
10.3 Management Agreement between the Company and Capstead
Advisers, Inc. dated January 1, 1993(9)
-16-
<PAGE> 19
PART IV
ITEM 14. - CONTINUED
3. Exhibits (continued):
EXHIBIT
NUMBER
------
10.4 Amended Management Agreement between the Company and
Capstead Advisers, Inc. dated October 1, 1993(10)
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 Post-Effective
Amendment No. 2 to Registration Statement on Form S-11 (No. 33-5539)
filed June 9, 1989.
(2) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on October 30, 1992.
(3) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on November 30, 1992.
(4) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on December 23, 1992.
(5) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on February 26, 1993.
(6) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on April 30, 1993.
(7) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on June 30, 1993.
(8) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on November 30, 1993.
(9) 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.
(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, 1993.
(11) 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.
(12) 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-
<PAGE> 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 I
REGISTRANT
Date: March 25, 1999 By: /s/ ANDREW F. JACOBS
----------------------------------
Andrew F. Jacobs
Executive Vice President-Finance,
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 29, 1999
- ------------------------- Executive Officer
(Ronn K. Lytle) and Director
/s/ ANDREW F. JACOBS Executive Vice President - March 25, 1999
- ------------------------- Finance, Treasurer
(Andrew F. Jacobs) and Secretary
/s/ MAURICE MCGRATH Director March 26, 1999
- -------------------------
(Maurice McGrath)
-18-
<PAGE> 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.
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
2.1 Agreement and Plan of Merger between the Company and
CMCSC I-A dated July 29, 1994(11)
3.1 Certificate of Incorporation of CMCSC I-A filed July
29, 1994 with the Secretary of State of Delaware(11)
3.2 Certificate of Merger of the Company with and into
CMCSC I-A, filed July 29, 1994 with the Secretary of
State of Delaware(11)
3.3 Bylaws for CMCSC I-A(12)
3.4 Charter of CMCSC I-A, which includes Articles of
Incorporation(12)
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(2)
4.3 Form of Second Supplement to the Indenture(3)
4.4 Form of Third Supplement to the Indenture(3)
4.5 Form of Fourth Supplement to the Indenture(4)
4.6 Form of Fifth Supplement to the Indenture(4)
4.7 Form of Sixth Supplement to the Indenture(6)
4.8 Form of Seventh Supplement to the Indenture(6)
4.9 Form of Eighth Supplement to the Indenture(6)
4.10 Form of Ninth Supplement to the Indenture(7)
4.11 Form of Tenth Supplement to the Indenture(8)
10.1 Form of Pooling and Administrative Agreement(1)
10.2 Form of Servicing Agreement(1)
10.3 Management Agreement between the Company and Capstead
Advisers, Inc. dated January 1, 1993(9)
10.4 Amended Management Agreement between the Company and
Capstead Advisers, Inc. dated October 1, 1993(10)
27 Financial Data Schedule*
</TABLE>
- --------------
(1) Incorporated herein by reference to the Company's Post-Effective
Amendment No. 2 to Registration Statement on Form S-11 (No. 33-5539)
filed June 9, 1989.
(2) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on October 30, 1992.
(3) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on November 30, 1992.
(4) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on December 23, 1992.
(5) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on February 26, 1993.
(6) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on April 30, 1993.
(7) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on June 30, 1993.
(8) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on November 30, 1993.
(9) 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.
(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, 1993.
(11) 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.
(12) 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM CMC
SECURITIES CORPORATION I'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 380,790
<CURRENT-LIABILITIES> 50
<BONDS> 380,790
0
0
<COMMON> 10
<OTHER-SE> (60)
<TOTAL-LIABILITY-AND-EQUITY> 380,790
<SALES> 0
<TOTAL-REVENUES> 35,202
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,085
<INCOME-PRETAX> (24)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
