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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, 1999
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)
<TABLE>
<S> <C>
DELAWARE 75-2390594
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 N CENTRAL EXPRESSWAY, SUITE 800, DALLAS, TX 75225
(Address of principal executive offices) (Zip Code)
</TABLE>
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 November 10, 1999
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CAPSTEAD SECURITIES CORPORATION IV
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheet -- September 30, 1999 and December 31, 1998.............................................. 1
Statement of Operations -- Quarter and Nine Months Ended
September 30, 1999 and 1998.......................................................................... 2
Statement of Cash Flows -- Nine Months Ended
September 30, 1999 and 1998.......................................................................... 3
Notes to Financial Statements.......................................................................... 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................... 7
PART II. -- OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................................... 9
ITEM 5. Other Information............................................................................... 9
ITEM 6. Exhibits and Reports on Form 8-K................................................................ 9
SIGNATURES................................................................................................ 10
</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, 1999 DECEMBER 31, 1998
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage securities collateral $ 213,684 $ 532,805
Cash and cash equivalents 81 325
Other assets 10 779
------------------ ------------------
$ 213,775 $ 533,909
================== ==================
LIABILITIES
Collateralized mortgage securities $ 210,659 $ 524,321
Payable to Parent 487 --
Accrued expenses 57 50
------------------ ------------------
211,203 524,371
------------------ ------------------
STOCKHOLDER'S EQUITY
Common stock - $1.00 par value,
1 shares authorized,
issued and outstanding 1 1
Paid-in capital 314 5,029
Undistributed gain (loss) -- (327)
Accumulated other comprehensive income 2,257 4,835
------------------ ------------------
2,572 9,538
------------------ ------------------
$ 213,775 $ 533,909
================== ==================
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Mortgage securities collateral $ 3,951 $ 6,352 $ 16,109 $ 23,999
Receivable from Parent 2 20 25 50
---------- ---------- ---------- ----------
Total interest income 3,953 6,372 16,134 24,049
---------- ---------- ---------- ----------
Interest expenses on collateralized
mortgage securities 3,885 6,069 15,470 23,289
---------- ---------- ---------- ----------
Net interest income 68 303 664 760
---------- ---------- ---------- ----------
Other revenue:
Gain on sale of released
mortgage securities collateral 242 1,331 3,317 2,888
Loss on redemption of collateralized
mortgage securities -- -- (872) --
---------- ---------- ---------- ----------
Total other revenue 242 1,331 2,445 2,888
---------- ---------- ---------- ----------
Other expense:
Management fees 3 3 8 8
Professional fees and other 5 19 42 69
Pool insurance 179 228 763 794
---------- ---------- ---------- ----------
Total other expense 187 250 813 871
---------- ---------- ---------- ----------
Net income 123 1,384 2,296 2,777
Other comprehensive loss (450) -- (2,578) --
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (327) $ 1,384 $ (282) $ 2,777
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,296 $ 2,777
Noncash item - amortization of
discount and premium (99) 996
Net change in other assets and
accrued expenses 776 692
Gain on sale of released mortgage
securities collateral (3,317) (2,888)
Loss on redemption of collateralized
mortgage securities 872 --
---------- ----------
Net cash provided by operating
activities 528 1,577
---------- ----------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Purchases of collateral -- (353,442)
Principal collections on collateral 157,110 141,375
Decrease (increase) in accrued
interest receivable 2,075 (625)
Decrease (increase) in short-term
investments 13,385 5,069
Sale of released mortgage
securities collateral 144,541 87,216
---------- ----------
Net cash provided (used) by
investing activities 317,111 (120,407)
---------- ----------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Issuance of securities -- 355,568
Principal payments on securities (309,343) (227,271)
Decrease in accrued interest payable (2,343) (2,747)
Increase in payable to Parent 487 1,136
Capital distributions (4,715) (4,898)
Dividends paid (1,969) (2,777)
---------- ----------
Net cash provided (used) by
financing activities (317,883) 119,011
---------- ----------
Net change in cash and cash equivalents (244) 181
Cash and cash equivalents at beginning
of period 325 8
---------- ----------
Cash and cash equivalents at end of
period $ 81 $ 189
========== ==========
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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, 1999 are
not necessarily indicative of the results that may be expected for the calendar
year ending December 31, 1999. 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,
1998.
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>
AS OF SEPTEMBER 30, 1999
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale $178,680 $ 2,257 $ -- $180,937
Held-to-maturity 32,747 -- 53 32,694
-------- -------- -------- --------
$211,427 $ 2,257 $ 53 $213,631
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale $300,208 $ 4,835 $ -- $305,043
Held-to-maturity 227,762 5,985 86 233,661
-------- -------- -------- --------
$527,970 $ 10,820 $ 86 $538,704
======== ======== ======== ========
</TABLE>
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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 provided the collateral has paid down to within 15% of its original
issue amount. 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 (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sale of released CMO collateral held-to-maturity:
Amortized cost $ 14,697 $ 48,836 $141,224 $ 84,328
Gains 242 1,331 3,317 2,888
</TABLE>
NOTE C -- NET INTEREST INCOME ANALYSIS
The following tables summarize 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 SEPTEMBER 30
------------------------------------------------
1999 1998
--------------------- ---------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $ 3,951 6.66% $ 6,352 8.29%
Interest expense on
collateralized mortgage
securities 3,885 6.46 6,069 8.10
-------- --------
Net interest $ 66 $ 283
======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------
1999 1998
-------------------- --------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $ 16,109 6.42% $ 23,999 8.25%
Interest expense on
collateralized mortgage
securities 15,470 6.13 23,289 8.18
-------- --------
Net interest $ 639 $ 710
======== ========
</TABLE>
The following tables summarize 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 SEPTEMBER 30, 1999
----------------------------------
RATE * VOLUME* TOTAL
-------- -------- --------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ (1,120) $ (1,281) $ (2,401)
Interest expense on
collateralized mortgage securities (1,109) (1,075) (2,184)
-------- -------- --------
$ (11) $ (206) $ (217)
======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------
RATE* VOLUME* TOTAL
-------- -------- --------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ (4,864) $ (3,026) $ (7,890)
Interest expense on
collateralized mortgage securities (5,363) (2,456) (7,819)
-------- -------- --------
$ 499 $ (570) $ (71)
======== ======== ========
</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.
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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 (the "Manager") and commenced operations on December 23, 1991 with
the issuance of its first collateralized mortgage obligation ("CMO"), Series
1991-VIII. As of September 30, 1999, the Company had issued 19 CMOs with an
aggregate initial principal balance of $4.6 billion and can issue an additional
$427 million under its existing registration with the Securities and Exchange
Commission. As of September 30, 1999, all but two of these CMO Series have been
redeemed pursuant to clean-up calls, leaving a remaining CMO outstanding
principal balance of $206 million.
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 $118,000 and $166,000 for the quarter
and nine months ended September 30, 1999, respectively, compared to earnings of
$36,000 and losses of $153,000 for the same periods in 1998. 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 in part to a 14% decline in
the average holdings of mortgage securities collateral during the nine months
ended September 30, 1999 compared to the same period in 1998. Average holdings
of mortgage securities collateral were $334 million during the nine months ended
September 30, 1999, compared to $388 million for the corresponding prior year
period. The decrease in average holdings was the result of runoff (prepayments
and scheduled payments) and the redemptions of six CMOs during the year. The
runoff rate was 42% during the nine months ended September 30, 1999, compared to
40% during the same period in 1998. The Company recorded gains of $3,317,000 in
conjunction with the redemption of the CMOs, partially offset by the write-off
of $872,000 of related bond discounts.
The following tables present the weighted average yields for the periods shown:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Mortgage securities collateral 6.66% 8.29% 6.42% 8.25%
Collateralized mortgage securities 6.46 8.10 6.13 8.18
------ ------ ------ ------
Net margin 0.20% 0.19% 0.29% 0.07%
====== ====== ====== ======
</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,
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<PAGE> 10
shorter-term CMO bonds are paid off prior to longer-term bonds with relatively
higher interest rates.
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. During the nine months ended September 30, 1999, the Company
redeemed the remaining outstanding bonds of six CMOs (Series 1992-I, 1992-II,
1992-IV, 1992-XII, 1992-XIII and 1992-XV) totaling $162,027,000 pursuant to
clean-up calls, and sold the related released collateral of $141,224,000 for a
gain of $3,317,000. Net income and excess cash flows from CMO investments have
allowed dividends of $1,969,000 and $2,777,000 during the nine months ended
September 30, 1999 and 1998, respectively, and the return of $4,715,000 and
$4,898,000 of capital during the same periods. The Company continues to qualify
as a real estate investment trust subsidiary.
IMPACT OF THE YEAR 2000
Many existing computer software programs use only two digits to identify the
year in date fields and, as such, could fail or create erroneous results by or
at the Year 2000. The Manager utilizes a number of software systems to
administer securitizations and manage the Company's mortgage assets. In
addition, the Manager utilizes vendors in various capacities and interfaces with
various institutions. The Manager is exposed to the risk that its systems and
the systems of its vendors and institutions it interfaces with are not Year 2000
compliant.
State of Readiness. The Manager has made investments in its software
systems and applications to ensure the Manager is Year 2000 compliant. The
Manager has also taken steps to ensure that the vendors it utilizes and
institutions that it interfaces with have also taken the necessary steps to
become Year 2000 compliant. This process was completed in the third quarter of
1999.
Costs. The financial costs of the Manager becoming Year 2000 compliant are
the responsibility of the Manager.
Risks and Contingency Planning. The Manager considers all its systems and
applications to be Year 2000 compliant, and has taken steps to ensure that all
of the vendors it utilizes and institutions that it interfaces have completed
their compliance efforts. Nonetheless, the Manager will continue to monitor Year
2000 compliance and has drafted contingency plans for all critical processes to
help ensure the impact on the Company's operations, or that of customers or
vendors will be minimized if an event of non-compliance occurs. These plans
include arranging for the use of other vendors or other methodologies and
processes to transact the Company's business. The effect of any such disruption
to the Company's operations is not presently determinable.
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PART II. -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS: None.
ITEM 5. OTHER INFORMATION: None.
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 10, 1999 By: /s/ RONN K. LYTLE
----------------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
Date: November 10, 1999 By: /s/ ANDREW F. JACOBS
----------------------------------------
Andrew F. Jacobs
Executive Vice President - Finance
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule (electronic filing only).
</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
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 81
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 213,775
<CURRENT-LIABILITIES> 544
<BONDS> 210,659
0
0
<COMMON> 1
<OTHER-SE> 2,571
<TOTAL-LIABILITY-AND-EQUITY> 213,775
<SALES> 0
<TOTAL-REVENUES> 18,579
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,470
<INCOME-PRETAX> 2,296
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,296
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,296
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
