<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: MARCH 31, 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.)
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 May 6, 1999
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CAPSTEAD SECURITIES CORPORATION IV
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheet -- March 31, 1999 and December 31, 1998.................................................. 1
Statement of Operations -- Quarter Ended March 31, 1999 and 1998....................................... 2
Statement of Cash Flows -- Quarter Ended March 31, 1999 and 1998....................................... 3
Notes to Financial Statements.......................................................................... 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................... 6
PART II. -- OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................. 7
ITEM 5. Other Information................................................................................. 7
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 7
SIGNATURES................................................................................................ 8
</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>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage securities collateral $ 338,606 $ 532,805
Cash and cash equivalents 8 325
Other assets 153 779
-------------- --------------
$ 338,767 $ 533,909
============== ==============
LIABILITIES
Collateralized mortgage securities $ 333,761 $ 524,321
Accrued expenses 53 50
-------------- --------------
333,814 524,371
-------------- --------------
STOCKHOLDER'S EQUITY
Common stock - $1.00 par value,
1 shares authorized,
issued and outstanding 1 1
Paid-in capital 1,337 5,029
Undistributed loss -- (327)
Accumulated other comprehensive income 3,615 4,835
-------------- --------------
4,953 9,538
-------------- --------------
$ 338,767 $ 533,909
============== ==============
</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 MARCH 31
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Interest income:
Mortgage securities collateral $ 7,402 $ 9,758
Receivable from Parent 22 8
---------- ----------
Total interest income 7,424 9,766
---------- ----------
Interest expense on collateralized
mortgage securities 7,018 9,365
---------- ----------
Net interest income 406 401
---------- ----------
Other revenue:
Gain on sale of released
mortgage securities collateral 2,644 1,907
Loss on redemption of collateralized
mortgage securities (872) (350)
---------- ----------
1,772 1,557
---------- ----------
Other expense:
Management fees 3 3
Professional fees and other 8 28
Pool insurance 358 307
---------- ----------
Total other expense 369 338
---------- ----------
Net income 1,809 1,620
---------- ----------
Other comprehensive loss (1,220) --
---------- ----------
Comprehensive income $ 589 $ 1,620
========== ==========
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,809 $ 1,620
Noncash item - amortization of
discount and premium (102) 273
Net change in other assets and
accrued expenses 629 198
Gain on sale of released mortgage
securities collateral (2,644) (1,907)
Loss on redemption of collateralized
mortgage securities 872 350
------------ ------------
Net cash provided by operating activities 564 534
------------ ------------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 73,634 42,178
Decrease in accrued interest receivable 1,274 576
Decrease (increase) in short-term investments 10,803 (3,209)
Sale of released mortgage securities
collateral 108,783 37,048
------------ ------------
Net cash provided by investing activities 194,494 76,593
------------ ------------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Principal payments on securities (188,533) (73,483)
Decrease in accrued interest payable (1,668) (776)
Capital contributions (distributions) (3,692) 145
Dividends paid (1,482) (1,641)
------------ ------------
Net cash used by financing activities (195,375) (75,755)
------------ ------------
Net change in cash and cash equivalents (317) 1,372
Cash and cash equivalents at beginning
of period 325 8
Cash and cash equivalents at end of ------------ ------------
period $ 8 $ 1,380
============ ============
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 ended March 31, 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 MARCH 31, 1999
------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Available-for-sale $ 250,283 $ 3,615 $ -- $ 253,898
Held-to-maturity 84,708 1,337 71 85,974
------------ ------------ ------------ ------------
$ 334,991 $ 4,952 $ 71 $ 339,872
============ ============ ============ ============
</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
MARCH 31
------------------
1999 1998
-------- --------
<S> <C> <C>
Sale of released CMO collateral held-to-maturity:
Amortized cost $106,139 $ 35,076
Gains 2,644 1,907
</TABLE>
NOTE C -- NET INTEREST INCOME ANALYSIS
The following table summarizes 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 MARCH 31
--------------------------------------------------
1999 1998
---------------------- -------------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $ 7,402 6.58% $ 9,758 8.33%
Interest expense on
collateralized mortgage
securities 7,018 6.27 9,365 8.17
---------- ----------
Net interest $ 384 $ 393
========== ==========
</TABLE>
The following table summarizes the amount of change in interest income and
interest expense due to changes in effective interest rates versus changes in
volume (in thousands):
<TABLE>
<CAPTION>
RATE* VOLUME* TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ (1,989) $ (367) $ (2,356)
Interest expense on
collateralized mortgage securities (2,127) (220) (2,347)
------------ ------------ ------------
$ 138 $ (147) $ (9)
============ ============ ============
</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 $8,665,000 and
$9,924,000 were made during the quarters ended March 31, 1999 and 1998,
respectively.
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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 March 31, 1999, the Company had issued 19 CMOs with an
aggregate initial principal balance of $4,572,644,000, 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 CMOs (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") recorded net
operating income of $18,000 for the quarter ended March 31, 1999, compared to
$58,000 for the same period in 1998. Operating results produced by CMO
Investments are 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 4% decline in
the average holdings of mortgage securities collateral during the quarter ended
March 31, 1999 compared to the same period in 1998. Average holdings of mortgage
securities collateral were $450 million during the current quarter compared to
$468 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 four CMOs during the quarter ended March 31, 1999. These
decreases were partially offset by the September 1998 issuance of a $346 million
CMO (Series 1998-III). The runoff rate was 15% during the current quarter
compared to 9% during the same quarter in 1998. The Company recorded gains of
$2,644,000 in conjunction with the redemption of the CMOs, partially offset by
the write-off of $842,000 of related bond discounts. The following table
presents the weighted average yields for the periods shown:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Mortgage securities collateral 6.58% 8.33%
Collateralized mortgage securities 6.27 8.17
---------- ----------
Net margin 0.31% 0.16%
========== ==========
</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 quarter ended March
31, 1999 were lower than in the same period in 1998 because of the issuance in
September 1998 of CMO Series 1998-III with an effective collateral yield of
6.51% at March 31, 1998 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 5.12% at
quarter-end and the redemption of relatively high rate bonds from older series
of CMOs.
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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 first quarter of 1999, the Company redeemed the
remaining outstanding bonds of four CMOs (Series 1992-I, 1992-II, 1992-IV and
1992-XII) totaling $122,995,000 pursuant to clean-up calls, and sold the related
released collateral of $106,139,000 for a gain of $2,644,000. Net income and
excess cash flows from CMO investments have allowed dividends of $1,482,000 and
$1,641,000 during the quarter ended March 31, 1999 and 1998, respectively, and
the return of $3,692,000 of capital during the first quarter of 1999. The
Company continues to qualify as a real estate investment trust subsidiary.
IMPACT OF 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 otherwise manage the Company's affairs. 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 the
necessary steps to become Year 2000 compliant. This process is expected to be
essentially complete by the end of the second 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 expects that all its
systems and applications will be Year 2000 compliant per the above schedule and
well prior to December 31, 1999, there can be no assurance that all of the
vendors it utilizes and institutions that it interfaces with will complete their
compliance efforts. The Manager will continue to monitor their efforts in this
regard and 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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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: May 6, 1999 By: /s/ RONN K. LYTLE
---------------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
Date: May 6, 1999 By: /s/ ANDREW F. JACOBS
---------------------------------------
Andrew F. Jacobs
Executive Vice President-Finance,
Treasurer and Secretary
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER 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
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-01-1999
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 338,767
<CURRENT-LIABILITIES> 53
<BONDS> 333,761
0
0
<COMMON> 1
<OTHER-SE> 4,952
<TOTAL-LIABILITY-AND-EQUITY> 338,767
<SALES> 0
<TOTAL-REVENUES> 9,196
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 369
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,018
<INCOME-PRETAX> 1,809
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,809
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,809
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
