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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: September 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
(Former name, former address and former fiscal year, if changed from last
report)
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 November 13, 1997
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CAPSTEAD SECURITIES CORPORATION IV
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheet -- September 30, 1997 (Unaudited)
and December 31, 1996....................................................................... 1
Statement of Operations -- Quarter and Nine Months Ended
September 30, 1997 and 1996 (Unaudited)..................................................... 2
Statement of Cash Flows -- Nine Months Ended
September 30, 1997 and 1996 (Unaudited)..................................................... 3
Notes to Financial Statements (Unaudited).................................................... 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................... 7
PART II. -- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................................... 8
SIGNATURES.................................................................................... 9
</TABLE>
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PART I. FINANCIAL INFORMATION
CAPSTEAD SECURITIES CORPORATION IV
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, 1997 DECEMBER 31, 1996
------------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Mortgage securities collateral $551,085 $766,812
Cash and cash equivalents 69 2,675
Other assets 1,631 2,493
-------- --------
$552,785 $771,980
======== ========
LIABILITIES
Collateralized mortgage securities $542,768 $754,631
Accrued expenses 37 30
-------- --------
542,805 754,661
-------- --------
STOCKHOLDER'S EQUITY
Common stock -- $1 par value,
1,000 shares authorized,
issued and outstanding 1 1
Paid-in capital 9,979 17,713
Unrealized gain on debt securities - 2,646
Accumulated deficit - (3,041)
-------- --------
9,980 17,319
-------- --------
$552,785 $771,980
======== ========
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
September 30 SEPTEMBER 30
---------------- -----------------
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest income:
Mortgage securities collateral $11,990 $19,476 $41,409 $62,547
Receivable from Parent 17 9 60 30
------- ------- ------- -------
Total interest income 12,007 19,485 41,469 62,577
------- ------- ------- -------
Interest expenses on
collateralized mortgage
securities 11,485 18,211 39,033 58,675
------- ------- ------- -------
Net interest income 522 1,274 2,436 3,902
------- ------- ------- -------
Gain on sale of released
mortgage securities collateral - - 2,794 -
------- ------- ------- -------
Other expenses:
Management fees 3 3 8 8
Professional fees and other 19 32 85 102
Pool insurance 353 701 1,283 2,257
------- ------- ------- -------
Total other expenses 375 736 1,376 2,367
------- ------- ------- -------
Net income $ 147 $ 538 $ 3,854 $ 1,535
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,854 $ 1,535
Noncash item - amortization of
discount and premium 580 695
Net change in other assets and
accrued expenses 869 625
Gain on sale of released mortgage
securities collateral (2,794) -
--------- ---------
Net cash provided by operating
activities 2,509 2,855
--------- ---------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 97,900 181,654
Decrease in accrued interest receivable 1,470 1,393
Decrease (increase) in short-term
investments (1,537) 6,797
Sale of released mortgage
securities collateral 117,261 -
--------- ---------
Net cash provided by investing
activities 215,094 189,844
--------- ---------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Principal payments on securities (209,767) (187,018)
Decrease in accrued interest payable (1,895) (2,010)
Capital distributions and dividends (8,547) (3,832)
--------- ---------
Net cash used by financing
activities (220,209) (192,860)
--------- ---------
Net change in cash and cash equivalents (2,606) (161)
Cash and cash equivalents at beginning
of period 2,675 469
--------- ---------
Cash and cash equivalents at end of
period $ 69 $ 308
========= =========
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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 (the "Company") 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>
SEPTEMBER 30, 1997:
Held-to-maturity $551,085 $13,989 $171 $564,903
======== ======= ==== ========
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
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may be sold. Such sales are deemed maturities under the provisions of Statement
of Financial Accounting Standards No. 115 (see Note C).
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 SEPTEMBER 30
------------------------------------
1997 1996
----------------- -----------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $11,990 8.50% $19,476 8.44%
Interest expense on
collateralized mortgage
securities 11,485 8.32 18,211 8.03
------- -------
Net interest income $ 505 $ 1,265
======= =======
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------
1997 1996
----------------- -----------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------- ------- ------- --------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $41,409 8.49% $62,547 8.46%
Interest expense on
collateralized mortgage
securities 39,033 8.16 58,675 8.06
------- -------
Net interest income $ 2,376 $ 3,872
======= =======
</TABLE>
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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 nine months ended September 30, 1997, compared to the same periods
in 1996 (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1997
---------------------------------
RATE* VOLUME* TOTAL
----- ------- -----
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ 131 $ (7,617) $ (7,486)
Interest expense on
collateralized mortgage securities 634 (7,360) (6,726)
----- -------- ----------
$(503) $ (257) $ (760)
===== ======== ==========
<CAPTION>
Nine Months Ended September 30, 1997
------------------------------------
Rate* VOLUME* TOTAL
----- -------- -------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ 221 $(21,359) $ (21,138)
Interest expense on
collateralized mortgage securities 676 (20,318) (19,642)
----- -------- ----------
$(455) $ (1,041) $ (1,496)
===== ======== ==========
</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.
NOTE E ___ SUBSEQUENT EVENT
On November 5, 1997 the Company redeemed the remaining outstanding bonds of CMO
Series 1992-VI totaling $21.2 million and sold the related released collateral
of $19.7 million to its parent, Capstead Mortgage Corporation, for a gain of
$591,000.
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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 September 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 $133,000 and $1,008,000 for the quarter and nine
months ended September 30, 1997, respectively, compared to $532,000 and
$1,513,000 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
34% 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 $564 million and $651 million for the
quarter and nine months ended September 30, 1997, respectively, compared to $923
million and $986 million for the same periods in 1996. As a result of lower
outstanding balances, income earned from the net interest spread was lower in
the current year.
The following table presents the weighted average yields for the periods shown:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
September 30 SEPTEMBER 30
--------------- ------------------
1997 1996 1997 1996
------- ------ --------- -------
<S> <C> <C> <C> <C>
Mortgage securities collateral 8.50% 8.44% 8.49% 8.46%
Collateralized mortgage securities 8.32 8.03 8.16 8.06
---- ---- ---- ----
Net interest spread 0.18% 0.41% 0.33% 0.40%
==== ==== ==== ====
</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
lower-yielding, shorter-term CMO bonds are paid off prior to longer-term bonds
with relatively higher interest rates.
During the second quarter of 1997 the Company redeemed the remaining outstanding
bonds of Series 1992-VIII and 1992-XIV totaling $115,428,000 and
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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 $813,000 and the
return of $7,734,000 of capital during the nine months ended September 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.
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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: November 13, 1997 By /s/ RONN K. LYTLE
------------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
Date: November 13, 1997 By /s/ ANDREW F. JACOBS
------------------------------------
Andrew F. Jacobs
Senior Vice President - Control
and Treasurer
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<TABLE> <S> <C>
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<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
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 69
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 552,785
<CURRENT-LIABILITIES> 37
<BONDS> 542,768
1
0
<COMMON> 0
<OTHER-SE> 9,979
<TOTAL-LIABILITY-AND-EQUITY> 552,785
<SALES> 0
<TOTAL-REVENUES> 44,263
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,033
<INCOME-PRETAX> 3,854
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,854
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
