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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 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, DALLAS, TEXAS 75204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 874-2323
The Registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) for Form 10-Q and is therefore filing this Form under the reduced disclosure
format.
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Common Stock ($1.00 par value) 1,000 as of August 1, 1997
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CAPSTEAD SECURITIES CORPORATION IV
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
PAGE
----
PART I. -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheet -- June 30, 1997 and December 31, 1996............. 1
Statement of Operations -- Quarter and Six Months Ended
June 30, 1997 and 1996.......................................... 2
Statement of Cash Flows -- Six Months Ended
June 30, 1997 and 1996.......................................... 3
Notes to Financial Statements.................................... 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 6
PART II. -- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.......................... 7
SIGNATURES........................................................ 8
<PAGE>
PART I. -- FINANCIAL INFORMATION
CAPSTEAD SECURITIES CORPORATION IV
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage securities collateral $583,297 $766,812
Cash and cash equivalents 4 2,675
Other assets 1,699 2,493
-------- --------
$585,000 $771,980
======== ========
LIABILITIES
Collateralized mortgage securities $574,628 $754,631
Accrued expenses 35 30
-------- --------
574,663 754,661
-------- --------
STOCKHOLDER'S EQUITY
Common stock - $1 par value,
1,000 shares authorized,
issued and outstanding 1 1
Paid-in capital 10,336 17,713
Unrealized gain on debt securities - 2,646
Accumulated deficit - (3,041)
-------- --------
10,337 17,319
-------- --------
$585,000 $771,980
======== ========
</TABLE>
See accompanying notes to financial statements.
-1-
<PAGE>
CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Mortgage securities collateral $13,671 $20,680 $29,419 $43,071
Receivable from Parent 5 11 43 21
------- ------- ------- -------
Total interest income 13,676 20,691 29,462 43,092
------- ------- ------- -------
Interest expenses on collateralized
mortgage securities 12,676 19,452 27,548 40,464
------- ------- ------- -------
Net interest income 1,000 1,239 1,914 2,628
------- ------- ------- -------
Gains on sale of released
mortgage securities collateral 2,794 - 2,794 -
------- ------- ------- -------
Other expenses:
Management fees 2 2 5 5
Professional fees and other 29 36 66 70
Pool insurance 415 766 930 1,556
------- ------- ------- -------
Total other expenses 446 804 1,001 1,631
------- ------- ------- -------
Net income $ 3,348 $ 435 $ 3,707 $ 997
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE>
CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,707 $ 997
Noncash item - amortization of
discount and premium 367 544
Net change in other assets and
accrued expenses 799 452
Gains on sale of released mortgage
securities collateral (2,794) -
--------- ---------
Net cash provided by operating
activities 2,079 1,993
--------- ---------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 66,027 135,586
Decrease in accrued interest receivable 1,237 1,047
Decrease (increase) in short-term investments (1,591) 1,865
Sale of released mortgage securities collateral 117,261 -
--------- ---------
Net cash provided by investing
activities 182,934 138,498
--------- ---------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Principal payments on securities (178,163) (136,392)
Decrease in accrued interest payable (1,478) (1,493)
Capital distributions and dividends (8,043) (2,749)
--------- ---------
Net cash used by financing
activities (187,684) (140,634)
--------- ---------
Net change in cash and cash equivalents (2,671) (143)
Cash and cash equivalents at beginning
of period 2,675 469
--------- ---------
Cash and cash equivalents at end of
period $ 4 $ 326
========= =========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
CAPSTEAD SECURITIES CORPORATION IV
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter and six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 1997. For further information refer to the financial
statements and footnotes thereto included in the Capstead Securities Corporation
IV annual report on Form 10-K for the year ended December 31, 1996.
NOTE B -- DISCLOSURES REGARDING FAIR VALUES OF MORTGAGE SECURITIES COLLATERAL
The estimated fair values of mortgage securities collateral have been determined
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, estimates presented herein are not necessarily indicative of the
amounts that could be realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on estimated fair value amounts.
Fair values are estimated using quoted market prices, when available, including
quotes made by Capstead Mortgage Corporation's lenders in connection with
designating collateral for repurchase arrangements.
The following tables summarize fair value disclosures for mortgage securities
collateral held available-for-sale and held-to-maturity for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
JUNE 30, 1997:
Held-to-maturity $583,297 $14,849 $185 $597,961
======== ======= ==== ========
DECEMBER 31, 1996:
Available-for-sale
(CMO Series 1992-XIV) $ 81,539 $ 2,646 $ - $ 84,185
Held-to-maturity 682,627 14,327 206 696,748
-------- ------- ---- --------
$764,166 $16,973 $206 $780,933
======== ======= ==== ========
</TABLE>
The maturity of mortgage securities collateral is directly affected by the rate
of principal prepayments by mortgagors. In addition, upon redemption of
remaining bonds outstanding pursuant to clean-up calls, released collateral may
be sold. Such sales are deemed maturities under the provisions of Statement of
Financial Accounting Standards No. 115 (see Note C).
-4-
<PAGE>
NOTE C -- GAIN ON SALE OF RELEASED MORTGAGE SECURITIES COLLATERAL
During the second quarter of 1997, the Company funded the redemption of Series
1992-VIII and 1992-XIV outstanding bonds through the sale of the related
collateral to CMC. The following table summarizes released collateral sold and
related gains (in thousands):
<TABLE>
<CAPTION>
CMO SERIES COLLATERAL GAINS
------------ ---------- ------
<S> <C> <C>
1992-VIII $ 38,763 $1,328
1992-XIV 76,332 1,466
-------- ------
$115,095 $2,794
======== ======
</TABLE>
NOTE D -- NET INTEREST INCOME ANALYSIS
The following table summarizes interest income and interest expense and the
average effective interest rates for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30
-----------------------------------
1997 1996
---------------- -----------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
---------------- -------- -------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $13,671 8.49% $20,680 8.43%
Interest expense on
collateralized mortgage securities 12,676 8.03 19,452 8.06
------- -------
Net interest income $ 995 $ 1,228
======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-----------------------------------
1997 1996
---------------- -----------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------- -------- -------- -------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $29,419 8.53% $43,071 8.46%
Interest expense on
collateralized mortgage securities 27,548 8.14 40,464 8.08
------- -------
Net interest income $ 1,871 $ 2,607
======= =======
</TABLE>
The following table summarizes changes in interest income and interest expense
due to changes in effective interest rates, versus changes in volume for the
quarter and six months ended June 30, 1997, compared to the same periods in 1996
(in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1997
------------------------------
RATE* VOLUME* TOTAL
------- ---------- ---------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $156 $ (7,165) $ (7,009)
Interest expense on
collateralized mortgage securities (63) (6,713) (6,776)
---- -------- --------
$219 $ (452) $ (233)
==== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
------------------------------
RATE* VOLUME* TOTAL
------- ---------- ---------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $338 $(13,990) $(13,652)
Interest expense on
collateralized mortgage securities 303 (13,219) (12,916)
---- -------- --------
$ 35 $ (771) $ (736)
==== ======== ========
</TABLE>
* THE CHANGE IN INTEREST DUE TO BOTH VOLUME AND RATE HAS BEEN ALLOCATED TO
VOLUME AND RATE CHANGES IN PROPORTION TO THE RELATIONSHIP OF THE ABSOLUTE
DOLLAR AMOUNTS OF THE CHANGE IN EACH.
-5-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
- -------------------
Capstead Securities Corporation IV (the "Company") was incorporated on August
16, 1991, as a special-purpose finance subsidiary of Capstead Mortgage
Corporation ("CMC") and commenced operations on December 23, 1991 with the
issuance of its first collateralized mortgage obligation ("CMO"), Series 1991-
VIII. As of June 30, 1997, the Company had issued 18 CMOs with an aggregate
initial principal balance of $4,226,812,000, including two CMOs with an
aggregate initial principal balance of $551,537,000, which were recorded as
sales when issued in 1992.
RESULTS OF OPERATIONS
- ---------------------
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 $551,000 and $875,000 for the quarter and six months
ended June 30, 1997, respectively, compared to $426,000 and $981,000 for the
same periods 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.
Year-to-date operating results from CMO Investments declined due primarily to a
31% decrease in the average holdings of mortgage securities collateral during
the year compared to the same period in 1996. This was a result of run-off
(prepayments and scheduled payments) and the redemptions of CMO Series 1991-
VIII, 1992-III and 1992-IX during the fourth quarter of 1996, and CMO Series
1992-VIII and 1992-XIV during the second quarter of 1997. Average holdings of
mortgage securities collateral were $690 million for the six months ended June
30, 1997, compared to $1.0 billion for the same period in 1996. As a result of
lower outstanding balances, income earned from the net interest spread was lower
in the current year.
Operating results from CMO Investments increased for the quarter ended June 30,
1997 compared to the same period in 1996 despite having lower outstanding
balances. This is primarily due to a 9 basis point increase in the net interest
spread to 46 basis points during the second quarter of 1997 compared to 37 basis
points for the same quarter in 1996.
The following table presents the weighted average yields for the periods shown:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------- ------------------
1997 1996 1997 1996
------- ------ -------- --------
<S> <C> <C> <C> <C>
Mortgage securities collateral 8.49% 8.43% 8.53% 8.46%
Collateralized mortgage securities 8.03 8.06 8.14 8.08
---- ---- ---- ----
Net interest spread 0.46% 0.37% 0.39% 0.38%
==== ==== ==== ====
</TABLE>
Although net interest spreads can fluctuate depending on the timing of the
payoff of collateral and bonds with differing amounts of purchase premium and
bond discounts, the tendency is for CMO net interest spreads to decline as
-6-
<PAGE>
lower-yielding, shorter-term CMO bonds are paid off prior to longer-term bonds
with relatively higher interest rates. However, the redemptions of CMO Series
1992-IX in the fourth quarter of 1996 and 1992-XIV in the current quarter, which
were backed by relatively low-yielding adjustable-rate mortgage loans,
contributed to the improvement in spreads compared to the same periods in 1996.
During the current quarter the Company redeemed the remaining outstanding bonds
of Series 1992-VIII and 1992-XIV totaling $115,428,000 and sold the related
released collateral of $115,095,000 for gains totaling $2,794,000.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are the receipt of excess cash flows on
CMO Investments (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. Excess cash flows from CMO Investments and the sale of
released collateral have allowed the payment of a dividend of $666,000 and the
return of $7,377,000 of capital during the six months ended June 30, 1997. The
Company continues to qualify as a real estate investment trust subsidiary.
PART II. -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
Exhibit 27 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K: None.
-7-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTEAD SECURITIES CORPORATION IV
Date: August 1, 1997 By: /s/ RONN K. LYTLE
-----------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
Date: August 1, 1997 By: /s/ ANDREW F. JACOBS
-----------------------------------
Andrew F. Jacobs
Senior Vice President - Control
and Treasurer
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CAPSTEAD
SECURITIES CORPORATION IV'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 585,000
<CURRENT-LIABILITIES> 35
<BONDS> 574,628
0
0
<COMMON> 1
<OTHER-SE> 10,336
<TOTAL-LIABILITY-AND-EQUITY> 585,000
<SALES> 0
<TOTAL-REVENUES> 32,256
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,001
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,548
<INCOME-PRETAX> 3,707
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,707
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,707
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
