<PAGE>
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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, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ______________
COMMISSION FILE NUMBER: 33-42337
CAPSTEAD SECURITIES CORPORATION IV
(Exact name of Registrant as specified in its Charter)
DELAWARE 75-2390594
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 NORTH HASKELL AVENUE 75204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 874-2323
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST
OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [ ]
AT MARCH 31, 1997 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 7, 1997: 1,000
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
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<PAGE>
CAPSTEAD SECURITIES CORPORATION IV
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 2
ITEM 3. LEGAL PROCEEDINGS............................................. 2
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS............................. 3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 4
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................... 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K......................................... 16
<PAGE>
PART I
ITEM 1. BUSINESS.
ORGANIZATION
Capstead Securities Corporation IV (the "Company") was incorporated in Delaware
on August 16, 1991 as a special-purpose finance corporation and is a wholly-
owned subsidiary of Capstead Mortgage Corporation ("CMC"). CMC is a publicly
owned real estate investment trust that, until late 1995, operated a mortgage
conduit, purchasing and securitizing single-family residential mortgage loans.
The Company is managed by CMC (the "Manager"). The Company believes it has
qualified as a REIT subsidiary of CMC under the Internal Revenue Code of 1986
(the "Code"); therefore, for federal income tax purposes it is combined with
CMC. Under applicable sections of the Code, REITs are required to distribute
annually to stockholders at least 95% of their taxable income. It is the
Company's and CMC's policy to distribute 100% of combined taxable income.
The Company was formed and exists solely for the purpose of issuing and selling
collateralized mortgage obligations ("CMOs"), collateralized by mortgage-backed,
pass-through certificates ("Certificates") which evidence an interest in a pool
of mortgage loans secured by single-family residences. The Certificates pledged
as collateral for the CMOs are either contributed by CMC or purchased from third
parties and are either Government National Mortgage Association Certificates,
Federal National Mortgage Association Certificates, Federal Home Loan Mortgage
Corporation Certificates or mortgage pass-through ("Non-Agency") Certificates.
On August 21, 1991 the Securities and Exchange Commission declared effective a
registration statement filed by the Company covering the offering of a maximum
of $5 billion aggregate principal amount of CMOs. As of December 31, 1996, the
Company has issued 18 series of CMOs with an aggregate original principal
balance of $4,226,812,000.
SPECIAL-PURPOSE FINANCE CORPORATION
The Company has not engaged, and will not engage in any business or investment
activities other than (i) issuing and selling CMOs and receiving, owning,
holding and pledging as collateral the related Certificates; (ii) investing cash
balances on an interim basis in high quality short-term securities; and (iii)
engaging in other activities which are necessary or expedient to accomplish the
foregoing and are incidental thereto.
COMPETITION
In issuing CMOs, the Company competes with other issuers of these securities and
the securities themselves compete with other investment opportunities available
to prospective purchasers.
EMPLOYEES
At December 31, 1996 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
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<PAGE>
Company and the Manager. The Management Agreement may be terminated without
cause at any time upon 90 days written notice. In addition, the Company has the
right to terminate the Management Agreement upon the happening of certain
specified events, including a breach by the Manager of any provision contained
in the Management Agreement which remains uncured for 30 days after notice of
such breach and the bankruptcy or insolvency of the Manager.
The Manager is at all times subject to the supervision of the Company's Board of
Directors and has only such functions and authority as the Company delegates to
it. The Manager is responsible for the day-to-day operations of the Company and
performs such services and activities relating to the assets and operations of
the Company as may be appropriate. The Manager receives an annual basic
management fee of $10,000 per year for managing the assets pledged to secure
Bonds issued by the Company.
The Manager is required to pay employment expenses of its personnel (including
salaries, wages, payroll taxes, insurance, fidelity bonds, temporary help and
cost of employee benefit plans), and other office expenses, travel and other
expenses of directors, officers and employees of the Manager, accounting fees
and expenses incurred in supervising and monitoring the Company's investments.
The Company is required to pay all other expenses of operation (as defined in
the Management Agreement).
SERVICING AND ADMINISTRATION
The originators of mortgage loans backing Non-Agency Certificates either service
the loans themselves or sell the loans with no agreement with respect to
servicing, in which event Capstead Inc., a subsidiary of CMC, may act as
servicer. The Company enters into servicing agreements with each servicer. The
terms and conditions of servicing agreements with Capstead Inc. are
substantially the same as those contained in servicing agreements with unrelated
third parties.
As compensation for its services under a servicing agreement, the servicers
retain a servicing fee, payable monthly, generally 1/4 of 1% of the outstanding
principal balance of each mortgage loan serviced as of the last day of each
month. In addition, CMC can act as administrator with respect to the Company's
Non-Agency Certificates. CMC does not currently service or act as administrator
with respect to CMOs issued by the Company.
ITEM 2. PROPERTIES.
The Company's operations are conducted primarily in Dallas, Texas on properties
leased by CMC.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, there are no material legal proceedings outside the
normal course of business to which the Company was a party or of which any of
its property was the subject.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All of the Company's common stock is owned by CMC. Accordingly, there is no
public trading market for its common stock. The Company paid no dividends
during 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
1996 COMPARED TO 1995
- ---------------------
Residual investments in collateralized mortgage obligations (represented by the
difference between the carrying value of mortgage securities collateral and
collateralized mortgage securities on the balance sheet; also referred to as
"CMO Investments") earned $2,238,000 in 1996, compared to $3,416,000 in 1995.
Operating results produced by CMO Investments is represented by the difference
between interest income on mortgage securities collateral and interest expense
and professional fees on collateralized mortgage securities and mortgage pool
insurance expense on mortgage securities collateral.
Operating results from CMO Investments declined in 1996 compared to 1995 due
primarily to the impact of run-off (prepayments and scheduled payments) and the
redemption of CMO Series 1991-VIII, 1992-III and 1992-IX on the average holdings
of mortgage securities collateral. Average holdings of mortgage securities
collateral were $941 million during 1996 compared to approximately $1.2 billion
during 1995. As a result of this lower outstanding balance, income earned from
the net interest spreads was lower in the current year. Run-off rates were 20%
during 1996 compared to 18% during 1995.
More than offsetting the 1996 decline in earnings on CMO Investments was
$2,460,000 of gains from sales to CMC of collateral released from the related
CMOs.
The following table presents the weighted average yields for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1996 1995
----- -----
<S> <C> <C>
Mortgage securities collateral 8.51% 8.50%
Collateralized mortgage securities 8.09 8.03
---- ----
Net interest spread 0.42% 0.47%
==== ====
</TABLE>
1995 COMPARED TO 1994
- ---------------------
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 $3,416,000 in 1995, compared to $371,000 in 1994.
Operating results from CMO Investments improved in 1995 compared to 1994 because
high levels of prepayments on mortgage securities collateral experienced in the
first quarter of 1994 moderated significantly during the remainder of 1994 and
remained relatively low in 1995 (principal collections on collateral totaled
$234 million in 1995, compared to $655 million in 1994). As a result of the
higher prepayments experienced in 1994, a significantly
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<PAGE>
higher proportional amount of bond discount was amortized to interest expense in
1994 than in 1995. Amortization of bond discount totaled $211,000 in 1995,
compared to $1,456,000 in 1994.
The following table presents the weighted average yields for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1995 1994
----- -----
<S> <C> <C>
Mortgage securities collateral 8.50% 8.02%
Collateralized mortgage securities 8.03 7.73
---- ----
Net interest spread 0.47% 0.29%
==== ====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are the receipt of excess cash flows on
CMOs (primarily the excess of principal and interest earned on the mortgage
securities collateral including reinvestment proceeds over the principal and
interest payable on the CMOs), proceeds from additional CMO issuances and
occasionally proceeds from the sale of collateral released from the related
CMOs. There have been no CMO issuances since January 1993. Net income and
excess cash flows from CMO Investments have allowed the return of $6,099,000 and
$5,571,000 of capital during 1996 and 1995, respectively. The Company continues
to qualify as a real estate investment trust subsidiary.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125
provides accounting and reporting standards for all types of securitization
transactions involving the transfer of financial assets including collateralized
borrowing arrangements. Under SFAS 125 most securitizations of financial assets
would be recorded as sales. The Company will adopt this pronouncement on
January 1, 1997. Since the Company generally acquires mortgage assets from
affiliates at market prices as determined by securitization proceeds, this
adoption is not expected to have a material impact on the results of operations
or financial position of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-4-
<PAGE>
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
Stockholder and Board of Directors
Capstead Securities Corporation IV
We have audited the accompanying balance sheet of Capstead Securities
Corporation IV (a wholly-owned subsidiary of Capstead Mortgage Corporation) as
of December 31, 1996 and 1995, and related statements of operations,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capstead Securities Corporation
IV at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Dallas, Texas
January 22, 1997
-5-
<PAGE>
CAPSTEAD SECURITIES CORPORATION IV
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1995
--------- -----------
<S> <C> <C>
ASSETS
Mortgage securities collateral $766,812 $1,102,620
Cash and cash equivalents 2,675 469
Other assets 2,493 3,504
-------- ----------
$771,980 $1,106,593
======== ==========
LIABILITIES
Collateralized mortgage securities $754,631 $1,087,262
Accrued expenses 30 20
-------- ----------
754,661 1,087,282
-------- ----------
STOCKHOLDER'S EQUITY
Common stock - $1 par value,
1,000 shares authorized,
issued and outstanding 1 1
Paid-in capital 17,713 23,812
Unrealized gain on debt securities 2,646 3,259
Accumulated deficit (3,041) (7,761)
-------- ----------
17,319 19,311
-------- ----------
$771,980 $1,106,593
======== ==========
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE>
CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Mortgage securities collateral $80,079 $103,457 $124,115
Receivable from Parent 32 29 45
------- -------- --------
Total interest income 80,111 103,486 124,160
Interest expense on collateralized
mortgage securities 74,842 96,202 117,892
------- -------- --------
Net interest income 5,269 7,284 6,268
------- -------- --------
OTHER INCOME:
Gains on sale of collateral 2,460 - -
Gain on sale of residual - - 48
------- -------- --------
Total other income 2,460 - 48
OTHER EXPENSES:
Management fees 10 10 10
Professional fees and other 128 134 243
Pool insurance 2,871 3,705 5,609
------- -------- --------
Total other expenses 3,009 3,849 5,862
------- -------- --------
Net income $ 4,720 $ 3,435 $ 454
======= ======== ========
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF STOCKHOLDER'S EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
-------------- PAID-IN ACCUMULATED GAIN ON DEBT
SHARES AMOUNT CAPITAL DEFICIT SECURITIES TOTAL
------ ------ --------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1994 1 $1 $ 40,583 $(11,650) $ - $ 28,934
Capital distributions - - (11,200) - - (11,200)
Net income - - - 454 - 454
-- --- -------- -------- ------ --------
Balance at
December 31, 1994 1 1 29,383 (11,196) - 18,188
Capital distributions - - (5,571) - - (5,571)
Unrealized gain on
debt securities - - - - 3,259 3,259
Net income - - - 3,435 - 3,435
-- --- -------- -------- ------ --------
Balance at
December 31, 1995 1 1 23,812 (7,761) 3,259 19,311
Capital distributions - - (6,099) - - (6,099)
Change in unrealized
gain on debt
securities - - - - (613) (613)
Net income - - - 4,720 - 4,720
-- --- -------- -------- ------ --------
Balance at
December 31, 1996 1 $1 $ 17,713 $ (3,041) $2,646 $ 17,319
== === ======== ======== ====== ========
</TABLE>
See accompanying notes to financial statements.
-8-
<PAGE>
CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,720 $ 3,435 $ 454
Noncash item - amortization of discount
and premium 845 808 2,553
Net change in other assets and accrued expenses 1,021 979 3,119
Gains on sale of released mortgage
securities collateral (2,460) - -
--------- --------- ---------
Net cash provided
by operating activities 4,126 5,222 6,126
--------- --------- ---------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 216,606 234,293 655,107
Decrease in accrued interest receivable 2,480 1,438 4,616
Decrease (increase) in short-term investments 8,568 (257) 112,267
Sale of released mortgage securities collateral 109,241 - -
--------- --------- ---------
Net cash provided
by investing activities 336,895 235,474 771,990
--------- --------- ---------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Principal payments on securities (329,694) (232,691) (758,931)
Decrease in accrued interest payable (3,022) (1,989) (8,327)
Capital distributions (6,099) (5,571) (11,200)
--------- --------- ---------
Net cash used by
financing activities (338,815) (240,251) (778,458)
--------- --------- ---------
Net change in cash and cash equivalents 2,206 445 (342)
Cash and cash equivalents at
beginning of year 469 24 366
--------- --------- ---------
Cash and cash equivalents at
end of year $ 2,675 $ 469 $ 24
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
-9-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
CAPSTEAD SECURITIES CORPORATION IV
DECEMBER 31, 1996
NOTE A -- BASIS OF PRESENTATION
Capstead Securities Corporation IV (the "Company"), was incorporated in Delaware
on August 16, 1991 as a special-purpose finance corporation primarily to issue
bonds collateralized by whole loans or mortgage-backed securities. The Company
is a wholly-owned subsidiary of Capstead Mortgage Corporation ("CMC"), which
commenced operations with the issuance of its first collateralized mortgage
obligation ("CMO") on December 23, 1991. Certain amounts for 1995 have been
reclassified to conform to the 1996 presentation.
NOTE B -- ACCOUNTING POLICIES
USE OF ESTIMATES
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
amortization of premiums and discounts on mortgage securities collateral and
collateralized mortgage securities is based on expectations of future movements
in interest rates and how resulting rates will impact prepayments on underlying
mortgage loans. It is possible that prepayments could rise to levels that would
adversely affect profitability if such levels are sustained for more than a
brief period of time.
DEBT SECURITIES
- ---------------
Mortgage securities collateral held in the form of mortgage-backed securities
are debt securities. Management determines the appropriate classification of
debt securities at the time of purchase or securitization and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value with
unrealized gains and losses, net of tax, reported as a separate component of
stockholder's equity.
Amortized cost is adjusted for amortization of premiums and discounts over the
estimated life of the security using the interest method. Such amortization is
included in related interest income.
Mortgage securities collateral is subject to changes in value because of changes
in interest rates and rates of prepayment, as well as failure of the mortgagor
to perform under the mortgage agreement. The Company has limited its exposure
to these risks by issuing collateralized mortgage securities, acquiring mortgage
pool and special hazard insurance, and simultaneously selling collateral
released from indentures upon redemption of the related bonds.
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).
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COLLATERALIZED MORTGAGE SECURITIES
- ----------------------------------
Collateralized mortgage securities are carried at their unpaid principal
balances, net of unamortized discount or premium. Any discount or premium is
recognized as an adjustment to interest expense by the interest method over the
life of the related securities.
INCOME TAXES
- ------------
The Company believes it has qualified as a real estate investment trust ("REIT")
subsidiary of CMC under the Internal Revenue Code of 1986 (the "Code"), and for
federal income tax purposes is combined with CMC. Under applicable sections of
the Code, a REIT is required to meet certain asset, income and stock ownership
requirements as well as distribute at least 95% of its taxable income, the
distribution of which may extend into the subsequent taxable year. It is the
Company's policy to distribute 100% of taxable income within the time limits
prescribed by the Code. Accordingly, no provision has been made for federal
income taxes.
CASH AND CASH EQUIVALENTS
- -------------------------
Cash and cash equivalents include cash on hand and highly liquid investments
with original maturities of three months or less.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125
provides accounting and reporting standards for all types of securitization
transactions involving the transfer of financial assets including collateralized
borrowing arrangements. Under SFAS 125 most securitizations of financial assets
would be recorded as sales. The Company will adopt this pronouncement on
January 1, 1997. Since the Company generally acquires mortgage assets from
affiliates at market prices as determined by securitization proceeds, this
adoption is not expected to have a material impact on the results of operations
or financial position of the Company.
NOTE C -- MORTGAGE SECURITIES COLLATERAL
Mortgage securities collateral consists of conventional single-family mortgage
loans that are pledged to secure repayment of the collateralized mortgage
securities. All principal and interest payments on the collateral are remitted
directly to a collection account maintained by a trustee. The trustee is
responsible for reinvesting those funds in short-term investments. All
collections on the collateral and the reinvestment income earned thereon is
available for payment of principal and interest on the collateralized mortgage
securities. The components of mortgage securities collateral are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
-------- ----------
<S> <C> <C>
Mortgage collateral $747,127 $1,070,260
Short-term investments 10,180 18,748
Accrued interest receivable 5,338 7,818
-------- ----------
Total collateral 762,645 1,096,826
Unamortized premium 1,521 2,535
Unrealized gain on debt securities
held available-for-sale 2,646 3,259
-------- ----------
Net collateral $766,812 $1,102,620
======== ==========
</TABLE>
-11-
<PAGE>
The weighted average effective interest rate for mortgage securities collateral
was 8.51% and 8.50% during 1996 and 1995, respectively.
In connection with the 1996 redemptions of Series 1991-VIII, 1992-III and 1992-
IX pursuant to clean-up calls (see Note D), the Company sold to CMC mortgage
loans released from the related indentures totaling $107.0 million for gains
totaling $2.5 million.
NOTE D -- COLLATERALIZED MORTGAGE SECURITIES
Each series of collateralized mortgage securities consists of various classes,
some of which may be deferred interest securities. Substantially all classes of
bonds are at a fixed rate of interest. Interest is payable quarterly or monthly
at specified rates for all classes other than the deferred interest securities.
Generally, principal payments on each series are made to each class in the order
of their stated maturities so that no payment of principal will be made on any
class until all classes having an earlier stated maturity have been paid in
full. Generally, payments of principal and interest on the deferred interest
securities will commence only upon payment in full of all other classes. Prior
to that time, interest accrues on the deferred interest securities and the
amount accrued is added to the unpaid principal balance.
The components of collateralized mortgage securities are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Collateralized mortgage securities $749,893 $1,079,587
Accrued interest payable 8,600 11,622
-------- ----------
Total obligation 758,493 1,091,209
Unamortized discount (3,862) (3,947)
-------- ----------
Net obligation $754,631 $1,087,262
======== ==========
Range of average interest rates 7.21% to 8.90% 7.36% to 8.90%
Range of stated maturities 2007 to 2023 2007 to 2023
Number of series 13 16
</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. In
1996, the Company redeemed the remaining outstanding bonds of three series of
collateralized mortgage securities (Series 1991-VIII, 1992-III and 1992-IX)
totaling $110,802,000 pursuant to clean-up calls.
The weighted average effective interest rate for all collateralized mortgage
securities was 8.09% and 8.03% during 1996 and 1995, respectively. Interest
payments on collateralized mortgage securities of $77,592,000, $97,981,000, and
$124,763,000 were made during 1996, 1995, and 1994, 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
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<PAGE>
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):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- ---------- ----------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,675 $ 2,675 $ 469 $ 469
Mortgage securities
collateral 766,812 780,933 1,102,620 1,121,391
LIABILITIES
Collateralized mortgage
securities 754,631 769,608 1,087,262 1,109,727
</TABLE>
In response to transition rules for adopting Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") released in November 1995, $195,474,000 of mortgage
securities collateral was transferred from held-to-maturity to available-for-
sale. These securities had a fair value of $198.7 million consisting of gross
unrealized gains of $3.6 million and gross unrealized losses of $335,000 on the
December 31, 1995 transfer date. The following table summarizes fair value
disclosures for mortgage securities collateral held available-for-sale and held-
to-maturity (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
- -----------------
Available-for-sale $ 81,539 $ 2,646 $ - $ 84,185
Held-to-maturity 682,627 14,327 206 696,748
DECEMBER 31, 1995
- -----------------
Available-for-sale 195,474 3,590 335 198,729
Held-to-maturity 903,888 19,928 1,154 922,662
</TABLE>
Upon the Company's redemption of remaining bonds outstanding pursuant to clean-
up calls, released CMO collateral may be sold. Such sales are deemed maturities
under the provisions of SFAS 115. There were no such sales prior to 1996. The
following table summarizes disclosures related to the disposition of released
CMO collateral held available-for-sale and held-to-maturity during 1996 (in
thousands):
<TABLE>
<CAPTION>
COST BASIS GAINS
---------- -------
<S> <C> <C>
Available-for-sale $61,449 $1,001
Held-to-maturity 45,077 1,459
</TABLE>
-13-
<PAGE>
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, 1996.
Since approximately 81% of the Company's mortgage loans are secured by
properties located in California, the Company has a concentration of risk
related to the California market. However, the Company's exposure arising from
this concentration is reduced by the acquisition of mortgage pool insurance and
special hazard insurance.
NOTE G -- MANAGEMENT AGREEMENT
The Company operates under a $10,000 per year management agreement with CMC (the
"Manager"). The agreement provides that the Manager will advise the Company
with respect to all facets of its business and administer the day-to-day
operations of the Company under the supervision of the Board of Directors. The
Manager pays, among other things, salaries and benefits of its personnel,
accounting fees and expenses, and other office expenses incurred in supervising
and monitoring the Company's investments.
NOTE H -- TRANSACTIONS WITH RELATED PARTY
The Company signed a $1 million revolving subordinated promissory note with CMC
under which interest accrued on amounts payable based on the annual federal
short-term rate as published by the Internal Revenue Service. This note matures
January 1, 1998. Repayments may be made as funds are available.
On a monthly basis, the Company's excess cash is advanced to CMC for which the
Company earns interest based on the annual federal short-term rate. At the end
of each quarter, these advances are accounted for as distributions to CMC and
treated as returns of capital.
-14-
<PAGE>
NOTE I -- 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):
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ -------------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income on
mortgage securities
collateral $80,079 8.51% $103,457 8.50% $124,115 8.02%
Interest expense on
collateralized
mortgage securities 74,842 8.09 96,202 8.03 117,892 7.73
------- -------- --------
Net interest income $ 5,237 $ 7,255 $ 6,223
======= ======== ========
</TABLE>
The following table summarizes the amount of change in interest income and
interest expense due to changes in interest rates versus changes in volume (in
thousands):
<TABLE>
<CAPTION>
1996/1995
----------------------------
RATE VOLUME TOTAL
------ -------- -------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ 122 $(23,500) $(23,378)
Interest expense on collateralized
mortgage securities 726 (22,086) (21,360)
------ -------- --------
$ (604) $ (1,414) $ (2,018)
====== ======== ========
<CAPTION>
1995/1994
----------------------------
RATE VOLUME TOTAL
------ -------- -------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $7,125 $(27,783) $(20,658)
Interest expense on collateralized
mortgage securities 4,382 (26,072) (21,690)
------ -------- --------
$2,743 $ (1,711) $ 1,032
====== ======== ========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-15-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. The following financial statements of the Company
are included in ITEM 8:
PAGE
----
Balance Sheet - December 31, 1996 and 1995 6
Statement of Operations - Three Years Ended
December 31, 1996 7
Statement of Stockholder's Equity - Three Years
Ended December 31, 1996 8
Statement of Cash Flows - Three Years Ended
December 31, 1996 9
Notes to Financial Statements - December 31, 1996 10
2. Financial statement schedules: None.
All schedules for which provision is made in the
applicable accounting regulation of the Securities
and Exchange Commission are not required under the
related instructions or are inapplicable and,
therefore, have been omitted.
3. Exhibits:
EXHIBIT
NUMBER
-------
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
4.1 Form of Indenture between the Registrant and
Texas Commerce Bank, National Association,
as Trustee(1)
4.2 Form of First Supplement to the Indenture(3)
4.3 Form of Second Supplement to the Indenture(4)
4.4 Form of Third Supplement to the Indenture(5)
4.5 Form of Fourth Supplement to the Indenture(6)
4.6 Form of Fifth Supplement to the Indenture(7)
4.7 Form of Sixth Supplement to the Indenture(7)
4.8 Form of Seventh Supplement to the Indenture(8)
4.9 Form of Eighth Supplement to the Indenture(9)
4.10 Form of Ninth Supplement to the Indenture(9)
4.11 Form of Tenth Supplement to the Indenture(10)
4.12 Form of Eleventh Supplement to the Indenture(11)
4.13 Form of Twelfth Supplement to the Indenture(10)
4.14 Form of Thirteenth Supplement to the Indenture(12)
4.15 Form of Fourteenth Supplement to the Indenture(13)
4.16 Form of Fifteenth Supplement to the Indenture(13)
4.17 Form of Sixteenth Supplement to the Indenture(14)
4.18 Form of Seventeenth Supplement to the Indenture(14)
4.19 Form of Eighteenth Supplement to the Indenture(15)
10.1 Form of Pooling and Administrative Agreement(1)
10.2 Form of Servicing Agreement(1)
10.4 Management Agreement between the Company and
Capstead Advisers, Inc. dated January 1, 1994(2)
-16-
<PAGE>
PART IV
ITEM 14. - CONTINUED
EXHIBIT
NUMBER
-------
10.5 Amended Management Agreement between the Company
and Capstead Advisers, Inc. October 1, 1994(16)
23 Consent of Ernst & Young LLP, Independent Auditors*
27 Financial Data Schedule*
(b) Reports on Form 8-K: None.
(c) Exhibits - The response to this section of ITEM 14 is
submitted as a separate section of this report.
- --------------------
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-3 (No. 33-42337) filed August 21, 1991.
(2) Previously filed with the Commission as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993.
(3) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on December 24, 1991.
(4) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on December 23, 1991.
(5) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on January 28, 1993.
(6) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on February 28, 1993.
(7) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on March 30, 1993.
(8) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on April 30, 1993.
(9) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on May 29, 1993.
(10) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on June 30, 1993.
(11) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on June 29, 1993.
(12) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on July 30, 1993.
(13) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on August 28, 1993.
(14) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on September 30, 1993.
(15) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on January 29, 1994.
(16) Previously filed with the Commission as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.
* Filed herewith.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CAPSTEAD SECURITIES CORPORATION IV
REGISTRANT
Date: March 7, 1997 By: /s/ ANDREW F. JACOBS
------------------------------
Andrew F. Jacobs
Senior Vice President-Control,
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated below and on the dates indicated.
/s/ RONN K. LYTLE Chairman, Chief March 7, 1997
- ------------------------------ Executive Officer
(Ronn K. Lytle) and Director
/s/ ANDREW F. JACOBS Senior Vice President- March 7, 1997
- ------------------------------ Control, Treasurer
(Andrew F. Jacobs) and Secretary
/s/ MAURICE MCGRATH Director March 7, 1997
- ------------------------------
(Maurice McGrath)
-18-
<PAGE>
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>
EXHIBIT 23
CAPSTEAD SECURITIES CORPORATION IV
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-42337) of Capstead Securities Corporation IV pertaining to the
issuance of a maximum $5 billion aggregate principal balance of collateralized
mortgage obligations and in the related prospectus and prospectus supplements of
our report dated January 22, 1997, with respect to the financial statements of
Capstead Securities Corporation IV included in this Annual Report (Form 10-K)
for the year ended December 31, 1996.
ERNST & YOUNG LLP
Dallas, Texas
March 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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, 1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 771,980
<CURRENT-LIABILITIES> 30
<BONDS> 754,631
0
0
<COMMON> 1
<OTHER-SE> 13,318
<TOTAL-LIABILITY-AND-EQUITY> 771,980
<SALES> 0
<TOTAL-REVENUES> 82,571
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,009
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,842
<INCOME-PRETAX> 4,720
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,720
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,720
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
