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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, 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: 33-42337
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 12, 1998
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CAPSTEAD SECURITIES CORPORATION IV
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheet -- June 30, 1998 (Unaudited) and December 31, 1997....... 1
Statement of Operations -- Quarter and Six Months Ended
June 30, 1998 and 1997 (Unaudited)................................... 2
Statement of Cash Flows -- Six Months Ended
June 30, 1998 and 1997 (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>
<PAGE> 3
PART I. -- FINANCIAL INFORMATION
CAPSTEAD SECURITIES CORPORATION IV
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage securities collateral $ 356,536 $ 493,147
Cash and cash equivalents 217 8
Other assets 1,185 1,508
--------- ---------
$ 357,938 $ 494,663
========= =========
LIABILITIES
Collateralized mortgage securities $ 350,886 $ 485,633
Accrued expenses 46 40
--------- ---------
350,932 485,673
--------- ---------
STOCKHOLDER'S EQUITY
Common stock - $1.00 par value,
1 shares authorized,
issued and outstanding 1 1
Paid-in capital 7,253 8,989
Accumulated deficit (248) --
--------- ---------
7,006 8,990
--------- ---------
$ 357,938 $ 494,663
========= =========
</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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ------------------------
1998 1997 1998 1997
------ ------ ------- -----
<S> <C> <C> <C> <C>
Interest income:
Mortgage securities collateral $7,889 $13,671 $17,647 $29,419
Receivable from Parent 22 5 30 43
------ ------- ------- -------
Total interest income 7,911 13,676 17,677 29,462
------ ------- ------- -------
Interest expenses on collateralized
mortgage securities 7,855 12,676 17,220 27,548
------ ------- ------- -------
Net interest income 56 1,000 457 1,914
------ ------- ------- -------
Other income - gain on sale of released
mortgage securities collateral - 2,794 1,557 2,794
------ ------- ------- -------
Other expenses:
Management fees 2 2 5 5
Professional fees and other 22 29 50 66
Pool insurance 259 415 566 930
------ ------- ------- -------
Total other expenses 283 446 621 1,001
------ ------- ------- -------
Net income (loss) (227) 3,348 1,393 3,707
------ ------- ------- -------
Other comprehensive loss - (2,153) - (2,646)
------ ------- ------- -------
Comprehensive income (loss) $ (227) $ 1,195 $ 1,393 $ 1,061
====== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
---------------------------
1998 1997
------ -----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,393 $ 3,707
Noncash item - amortization of
discount and premium 641 367
Net change in other assets and
accrued expenses 329 799
Gain on sale of released mortgage
securities collateral (1,557) (2,794)
--------- ---------
Net cash provided by operating
activities 806 2,079
--------- ---------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 104,282 66,027
Decrease in accrued interest receivable 1,023 1,237
Increase in short-term investments (3,986) (1,591)
Sale of released mortgage securities collateral 37,048 117,261
--------- ---------
Net cash provided by investing
activities 138,367 182,934
--------- ---------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Principal payments on securities (134,082) (178,163)
Decrease in accrued interest payable (1,505) (1,478)
Capital contributions (distributions) (1,736) (8,043)
Dividends paid (1,641) -
--------- ---------
Net cash used by financing
activities (138,964) (187,684)
--------- ---------
Net change in cash and cash equivalents 209 (2,671)
Cash and cash equivalents at beginning
of period 8 2,675
--------- ---------
Cash and cash equivalents at end of
period $ 217 $ 4
======== =========
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(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, 1998 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 1998. 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,
1997.
On January 1, 1997 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting of comprehensive income and its
components in financial statements. As the term relates to the Company,
comprehensive income consists of net income plus the change in unrealized gains
and losses on debt securities classified as available-for-sale that is included
as a component of stockholders' equity. There were no securities classified as
available-for-sale at June 30, 1998, as the final such security was sold during
April 1997. The adoption of SFAS 130 has not had any impact on the results of
operations or financial position of the Company.
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.
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The following table summarizes fair value disclosures for mortgage securities
collateral (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Carrying amount $356,536 $493,147
Unrealized gains 10,036 13,280
Unrealized losses (121) (158)
-------- --------
Fair value $366,451 $506,269
======== ========
</TABLE>
All mortgage securities collateral is held-to-maturity. 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.
The following table summarizes disclosures related to the disposition of
released CMO collateral held-to-maturity at June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- ------- ------
<S> <C> <C> <C> <C>
Sale of released CMO collateral held-to-maturity:
Amortized cost $- $115,095 $35,076 $115,095
Gains - 2,794 1,557 2,794
</TABLE>
NOTE C -- NET INTEREST INCOME ANALYSIS
The following tables summarize the amount of interest income and interest
expense and the average effective interest rates for mortgage securities
collateral and collateralized mortgage securities (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30
---------------------------------------------------
1998 1997
-------------------- ----------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ------- ------ -------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $7,889 8.00% $13,671 8.49%
Interest expense on
collateralized mortgage securities 7,855 8.14 12,676 8.03
------ -------
Net interest income $ 34 $ 995
====== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
---------------------------------------------------
1998 1997
-------------------- ----------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ------- ------ -------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $17,647 8.21% $29,419 8.53%
Interest expense on
collateralized mortgage securities 17,220 8.19 27,548 8.14
------- -------
Net interest income $ 427 $ 1,871
======= =======
</TABLE>
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The following tables summarize 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, 1998, compared to the same periods in 1997
(in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1998
------------------------------------------------
RATE* VOLUME* TOTAL
---- ------- -----
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $(748) $(5,034) $(5,782)
Interest expense on
collateralized mortgage securities 167 (4,988) (4,821)
----- ------- -------
$(915) $ (46) $ (961)
===== ======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------
RATE* VOLUME* TOTAL
---- ------- -----
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $(1,056) $(10,716) $(11,772)
Interest expense on
collateralized mortgage securities 158 (10,486) (10,328)
------- -------- --------
$(1,214) $ (230) $ (1,444)
======= ======== ========
</TABLE>
* THE CHANGES IN INTEREST INCOME AND EXPENSE DUE TO BOTH VOLUME AND RATE HAVE
BEEN ALLOCATED TO VOLUME AND RATE CHANGES IN PROPORTION TO THE RELATIONSHIP
OF THE ABSOLUTE DOLLAR AMOUNTS OF THE CHANGE IN EACH.
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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 June 30, 1998, 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") resulted in losses of $247,000 and $189,000 for the quarter
and six months ended June 30, 1998, respectively, compared to earnings of
$551,000 and $875,000 for the same periods in 1997. 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 due primarily to a 32 basis
point decrease in collateral yields and a 37% decrease in the average holdings
of mortgage securities collateral during the six months ended June 30, 1998
compared to the same period in 1997. This was a result of run-off (prepayments
and scheduled payments) and the redemptions of CMO Series 1992-VI during the
fourth quarter of 1997 and 1991-VII during the first quarter of 1998. Average
holdings of mortgage securities collateral were $430 million during the six
months ended June 30, 1998, compared to $690 million for the corresponding prior
year period. As a result of lower outstanding balances, income earned from the
net interest spread was lower in the current quarter. The run-off rate was 44%
during the six months ended June 30, 1998, compared to 18% during the same
period in 1997.
The following table presents the weighted average yields for the periods shown:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ---------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Mortgage securities collateral 8.00% 8.49% 8.21% 8.53%
Collateralized mortgage securities 8.14 8.03 8.19 8.14
----- ---- ---- ----
Net interest spread (0.14)% 0.46% 0.02% 0.39%
===== ==== ==== ====
</TABLE>
Although net margins 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 margins to decline as lower-yielding,
shorter-term CMO bonds are paid off prior to longer-term bonds with relatively
higher interest rates. Additionally, two CMOs were redeemed
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<PAGE> 10
between June 30, 1997 and June 30, 1998. These series (CMO Series 1992-VI and
1991-VII), had collateral yielding 8.62% and 9.23% at the time of redemption,
respectively, contributing to the decline in average collateral yields.
During the first quarter of 1998, the Company redeemed the remaining outstanding
bonds of CMO Series 1991-VII totaling $35,922,000 pursuant to clean-up calls,
and sold the related released collateral of $35,492,000 for a gain of
$1,557,000.
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. On March 31, 1998 the Company paid to CMC a dividend equal to
first quarter earnings of $1,641,000. There were no dividends paid June 30, 1998
as the Company recorded a second quarter loss of $227,000. 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: August 12, 1998 By: /s/ RONN K. LYTLE
------------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
Date: August 12, 1998 By: /s/ ANDREW F. JACOBS
------------------------------------
Andrew F. Jacobs
Executive Vice President - Finance,
Treasurer and Secretary
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 217
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 357,938
<CURRENT-LIABILITIES> 46
<BONDS> 350,886
0
0
<COMMON> 1
<OTHER-SE> 7,005
<TOTAL-LIABILITY-AND-EQUITY> 357,938
<SALES> 0
<TOTAL-REVENUES> 19,234
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 621
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,220
<INCOME-PRETAX> 1,393
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,393
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
