<PAGE> 1
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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, 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)
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)
Registrant's telephone number, including area code (214) 874-2323
2711 N HASKELL AVENUE, SUITE 900, DALLAS, TX 75204
--------------------------------------------------
(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 August 10, 1999
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<PAGE> 2
CAPSTEAD SECURITIES CORPORATION IV
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. -- FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. Financial Statements
Balance Sheet -- June 30, 1999 and December 31, 1998................................................... 1
Statement of Operations -- Quarter and Six Months Ended
June 30, 1999 and 1998............................................................................... 2
Statement of Cash Flows -- Six Months Ended
June 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>
<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, 1999 DECEMBER 31, 1998
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage securities collateral $263,229 $532,805
Cash and cash equivalents 46 325
Other assets 68 779
-------- --------
$263,343 $533,909
======== ========
LIABILITIES
Collateralized mortgage securities $259,437 $524,321
Accrued expenses 55 50
-------- --------
259,492 524,371
-------- --------
STOCKHOLDER'S EQUITY
Common stock - $1.00 par value,
1 shares authorized,
issued and outstanding 1 1
Paid-in capital 779 5,029
Undistributed gain (loss) 364 (327)
Accumulated other comprehensive income 2,707 4,835
-------- --------
3,851 9,538
-------- --------
$263,343 $533,909
======== ========
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 4
CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Mortgage securities collateral $ 4,756 $ 7,889 $ 12,158 $ 17,647
Receivable from Parent 1 22 23 30
-------- -------- -------- --------
Total interest income 4,757 7,911 12,181 17,677
-------- -------- -------- --------
Interest expenses on collateralized
mortgage securities 4,567 7,855 11,585 17,220
-------- -------- -------- --------
Net interest income 190 56 596 457
-------- -------- -------- --------
Other revenue:
Gain on sale of released
mortgage securities collateral 431 -- 3,075 1,557
Loss on redemption of collateralized
mortgage securities -- -- (872) --
-------- -------- -------- --------
Total other revenue 431 -- 2,203 1,557
-------- -------- -------- --------
Other expense:
Management fees 2 2 5 5
Professional fees and other 29 22 37 50
Pool insurance 226 259 584 566
-------- -------- -------- --------
Total other expense 257 283 626 621
-------- -------- -------- --------
Net income (loss) 364 (227) 2,173 1,393
-------- -------- -------- --------
Other comprehensive loss (908) -- (2,128) --
-------- -------- -------- --------
Comprehensive income (loss) $ (544) $ (227) $ 45 $ 1,393
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 5
CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,173 $ 1,393
Noncash item - amortization of
discount and premium (179) 641
Net change in other assets and
accrued expenses 716 329
Gain on sale of released mortgage
securities collateral (3,075) (1,557)
Loss on redemption of collateralized
mortgage securities 872 -
--------- ---------
Net cash provided by operating
activities 507 806
--------- ---------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 124,201 104,282
Decrease in accrued interest receivable 1,759 1,023
Decrease (increase) in short-term investments 12,877 (3,986)
Sale of released mortgage securities collateral 129,602 37,048
--------- ---------
Net cash provided by investing
activities 268,439 138,367
--------- ---------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Principal payments on securities (261,369) (134,082)
Decrease in accrued interest payable (2,124) (1,505)
Capital distributions (4,250) (1,736)
Dividends paid (1,482) (1,641)
--------- ---------
Net cash used by financing
activities (269,225) (138,964)
--------- ---------
Net change in cash and cash equivalents (279) 209
Cash and cash equivalents at beginning
of period 325 8
Cash and cash equivalents at end of --------- ---------
period $ 46 $ 217
========= =========
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 6
CAPSTEAD SECURITIES CORPORATION IV
NOTES TO FINANCIAL STATEMENTS
JUNE 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 six months ended June 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 JUNE 30, 1999
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale $207,927 $ 2,707 $ -- $210,634
Held-to-maturity 52,595 273 61 52,807
-------- ---------- ---------- --------
$260,522 $ 2,980 $ 61 $263,441
======== ========== ========== ========
</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 tables summarize disclosures related to the disposition of
released CMO collateral held-to-maturity (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------- --------------------
1999 1998 1999 1998
------- ------- -------- --------
Sale of released CMO collateral held-to-maturity:
<S> <C> <C> <C> <C>
Amortized cost $20,388 $ -- $126,527 $ 35,076
Gains 431 -- 3,075 1,557
</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 JUNE 30
-------------------------------------------
1999 1998
------------------ ------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ------- ------ -------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $4,756 6.29% $7,889 8.00%
Interest expense on
collateralized mortgage securities 4,567 5.97 7,855 8.14
------ ------
Net interest income $ 189 $ 34
====== ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-------------------------------------------
1999 1998
------------------ ------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $12,158 6.41% $17,647 8.21%
Interest expense on
collateralized mortgage securities 11,585 6.10 17,220 8.19
------- -------
Net interest income $ 573 $ 427
======= =======
</TABLE>
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<PAGE> 8
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 JUNE 30, 1999
---------------------------------
RATE* VOLUME* TOTAL
------- ------- -------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $(1,503) $(1,630) $(3,133)
Interest expense on
collateralized mortgage securities (1,848) (1,440) (3,288)
------- ------- -------
$ 345 $ (190) $ 155
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
---------------------------------
RATE* VOLUME* TOTAL
------- ------- -------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $(3,573) $(1,916) $(5,489)
Interest expense on
collateralized mortgage securities (4,082) (1,553) (5,635)
------- ------- -------
$ 509 $ (363) $ 146
======= ======= =======
</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.
Interest payments on collateralized mortgage securities of $15,428,000 and
$19,366,000 were made during the six months ended June 30, 1999 and 1998,
respectively.
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<PAGE> 9
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 June 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 June 30, 1999, all but three of these CMO Series have been
redeemed pursuant to clean-up calls, leaving a remaining CMO outstanding
principal balance of $254 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 $66,000 and $48,000 for the quarter and
six months ended June 30, 1999, respectively, compared to losses of $247,000 and
$189,000 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 benefited from the redemptions during
1999 of five CMOs. In the month a CMO redemption is funded, the payment of
related bond interest expense ceases. This generally results in one month of
interest income on the collateral without offsetting bond expense, thus
improving operating results. Results also improved as several CMOs with
relatively low net interest margins were redeemed over the past 18 months. Refer
to the increase in the net margin as shown in the table below. These benefits
were partially offset by a 12% decline in the average holdings of mortgage
securities collateral and collateralized mortgage securities during the six
months ended June 30, 1999 compared to the same period in 1998. Average holdings
of mortgage securities collateral were $379 million during the six months ended
June 30, 1999, compared to $430 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 CMOs over the last 18 months,
including the five CMOs redeemed during 1999. The run-off rate was 64% during
the six months ended June 30, 1999, compared to 51% during the same period in
1998. The Company recorded gains of $3,075,000 in conjunction with the
redemption of CMOs, partially offset by the write-off of $872,000 of related
bond discounts.
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<PAGE> 10
The following tables present the weighted average yields for the periods shown:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Mortgage securities collateral 6.29% 8.00% 6.41% 8.21%
Collateralized mortgage securities 5.97 8.14 6.10 8.19
------ ------ ------ ------
Net margin 0.32% (0.14)% 0.31% 0.02%
====== ====== ====== ======
</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. However, collateral yields for the six months ended June
30, 1999 were lower than in the same period in 1998 because of the September
1998 issuance of CMO Series 1998-III with an effective collateral yield of 6.32%
at June 30, 1999 and the sale of relatively high yielding released CMO
collateral. Similarly, CMO bond rates were lower in 1999 because of the issuance
of CMO Series 1998-III floating rate bonds with an average rate of 5.94% at June
30, 1999 and the redemption of relatively high rate bonds from older series of
CMOs.
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 six months ended June 30, 1999, the Company
redeemed the remaining outstanding bonds of five CMOs (Series 1992-I, 1992-II,
1992-IV, 1992-XII and 1992-XIII) totaling $146,284,000 pursuant to clean-up
calls, and sold the related released collateral of $126,527,000 for a gain of
$3,075,000. Net income and excess cash flows from CMO investments have allowed
dividends of $1,482,000 and $1,641,000 during the six months ended June 30, 1999
and 1998, respectively, and the return of $4,250,000 and $1,736,000 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 and will continue to make
investments in its software systems and applications to ensure the Manager is
Year 2000 compliant. The Manager is also taking steps to ensure that the vendors
it utilizes and institutions that it interfaces with are also taking
-8-
<PAGE> 11
the necessary steps to become Year 2000 compliant. This process is expected to
be 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. Although the Manager believes that all its
systems and applications and those of its vendors are currently Year 2000
compliant, there can be no assurance that instances of non-compliance will not
occur. The Manager will take all prudent steps necessary to ensure operations
are not disrupted including the use of other vendors or other methodologies and
processes to transact the Company's business. The effect of any disruption to
the Company's operations of any such instances of non-compliance is presently
not determinable.
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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<PAGE> 12
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 10, 1999 By: /s/ RONN K. LYTLE
----------------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
Date: August 10, 1999 By: /s/ ANDREW F. JACOBS
----------------------------------------
Andrew F. Jacobs
Executive Vice President - Finance
-10-
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER ITEM
- ------- ----
<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
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 46
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 263,343
<CURRENT-LIABILITIES> 55
<BONDS> 259,437
1
0
<COMMON> 0
<OTHER-SE> 3,850
<TOTAL-LIABILITY-AND-EQUITY> 263,343
<SALES> 0
<TOTAL-REVENUES> 14,384
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 626
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,585
<INCOME-PRETAX> 2,173
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,173
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
