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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, 2000
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 NORTH CENTRAL EXPRESSWAY, SUITE 800, DALLAS, TX 75225
(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
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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, 2000
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CAPSTEAD SECURITIES CORPORATION IV
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheet -- June 30, 2000 and December 31, 1999................................................... 1
Statement of Operations -- Quarter and Six Months Ended
June 30, 2000 and 1999............................................................................... 2
Statement of Cash Flows -- Six Months Ended
June 30, 2000 and 1999............................................................................... 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........................................................................... 8
ITEM 5. Other Information........................................................................... 8
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>
JUNE 30, 2000 DECEMBER 31, 1999
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(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage securities collateral $ 165,003 $ 193,490
Cash and cash equivalents 72 25
Other assets 8 9
--------- ---------
$ 165,083 $ 193,524
========= =========
LIABILITIES
Collateralized mortgage securities $ 165,443 $ 191,601
Accrued expenses 65 60
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165,508 191,661
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STOCKHOLDER'S EQUITY
Common stock - $1.00 par value,
1 shares authorized,
issued and outstanding 1 1
Paid-in capital 692 691
Undistributed loss (19) (14)
Accumulated other comprehensive
income (loss) (1,099) 1,185
--------- ---------
(425) 1,863
--------- ---------
$ 165,083 $ 193,524
========= =========
</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 SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Mortgage securities collateral $ 3,206 $ 4,756 $ 6,585 $ 12,158
Receivable from Parent -- 1 -- 23
-------- -------- -------- --------
Total interest income 3,206 4,757 6,585 12,181
-------- -------- -------- --------
Interest expenses on collateralized
mortgage securities 3,088 4,567 6,332 11,585
-------- -------- -------- --------
Net interest income 118 190 253 596
-------- -------- -------- --------
Other operating revenue (expense):
Gain on sale of released
mortgage securities collateral -- 431 -- 3,075
Loss on redemption of collateralized
mortgage securities -- -- -- (872)
Management fees (2) (2) (5) (5)
Professional fees and other (1) (29) (3) (37)
Pool insurance (121) (226) (250) (584)
-------- -------- -------- --------
Total other operating revenue (expense) (124) 174 (258) 1,577
-------- -------- -------- --------
Net income (loss) (6) 364 (5) 2,173
-------- -------- -------- --------
Other comprehensive loss (706) (908) (2,284) (2,128)
-------- -------- -------- --------
Comprehensive income (loss) $ (712) $ (544) $ (2,289) $ 45
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ (5) $ 2,173
Noncash item - amortization of
discount and premium (91) (179)
Net change in other assets and
accrued expenses 6 716
Gain on sale of released mortgage
securities collateral -- (3,075)
Loss on redemption of collateralized
mortgage securities -- 872
--------- ---------
Net cash provided (used) by
operating activities (90) 507
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INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 25,640 124,201
Decrease in accrued interest receivable 168 1,759
Decrease (increase) in short-term investments (152) 12,877
Sale of released mortgage securities collateral -- 129,602
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Net cash provided by investing
activities 25,656 268,439
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FINANCING ACTIVITIES:
Collateralized mortgage securities:
Principal payments on securities (25,478) (261,369)
Decrease in accrued interest payable (42) (2,124)
Capital distributions 1 (4,250)
Dividends paid -- (1,482)
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Net cash used by financing
activities (25,519) (269,225)
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Net change in cash and cash equivalents 47 (279)
Cash and cash equivalents at beginning
of period 25 325
--------- ---------
Cash and cash equivalents at end of
period $ 72 $ 46
========= =========
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
(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, 2000 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 2000. 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,
1999.
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, 2000
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GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale $136,948 $ -- $ 1,099 $135,849
Held-to-maturity 29,154 -- 43 29,111
-------- -------- -------- --------
$166,102 $ -- $ 1,142 $164,960
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale $161,456 $ 1,185 $ -- $162,641
Held-to-maturity 30,849 -- 91 30,758
-------- -------- -------- --------
$192,305 $ 1,185 $ 91 $193,399
======== ======== ======== ========
</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
---------------------- ---------------------
2000 1999 2000 1999
------- -------- ------ --------
<S> <C> <C> <C> <C>
Sale of released CMO collateral held-to-maturity:
Amortized cost $ -- $ 20,388 $ -- $126,527
Gains -- 431 -- 3,075
</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
--------------------------------------------------
2000 1999
------------------- ---------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ------- ------ -------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $3,206 7.47% $4,756 6.29%
Interest expense on
collateralized mortgage securities 3,088 7.20 4,567 5.97
------ ------
Net interest income $ 118 $ 189
====== ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
--------------------------------------------------
2000 1999
------------------- ---------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ------- ------- -------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $6,585 7.42% $12,158 6.41%
Interest expense on
collateralized mortgage securities 6,332 7.14 11,585 6.10
------ -------
Net interest income $ 253 $ 573
====== =======
</TABLE>
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The following tables summarize the amount of change in interest income and
interest expense due to changes in interest rates versus changes in volume for
the quarter and six months ended June 30, 2000 compared to the same periods in
1999 (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 2000
---------------------------------------
RATE* VOLUME* TOTAL
---- ------- --------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $780 $ (2,330) $(1,550)
Interest expense on
collateralized mortgage securities 809 (2,288) (1,479)
---- ------- -------
$(29) $ (42) $ (71)
==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
----------------------------------------
RATE* VOLUME* TOTAL
------ ------- -------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $1,676 $(7,249) $(5,573)
Interest expense on
collateralized mortgage securities 1,712 (6,965) (5,253)
------ ------- -------
$ (36) $ (284) $ (320)
====== ======= =======
</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 ("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, 2000, 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 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 a loss of $4,000 and no income for the quarter
and six months ended June 30, 2000, respectively, compared to losses of $66,000
and $48,000 for the same periods in 1999. 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 improved due primarily to lower
prepayments in 2000 than in 1999, which caused collateral and bond premiums and
discounts to be amortized at a slower rate in 2000 than in 1999. Run-off rates
were 28% and 27% for the quarter and six months ended June 30, 2000,
respectively, compared to 40% and 49% for the same periods in 1999. Excluding
the effects of CMO Series 1998-III, issued September 28, 1998, amortization of
collateral and bond premiums and discounts resulted in a net expense of $27,000
and $46,000 during quarter ended June 30, 2000 and 1999 respectively, and
$130,000 and $461,000 during the six months ended June 30, 2000 and 1999,
respectively.
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Mortgage securities collateral 7.47% 6.29% 7.42% 6.41%
Collateralized mortgage securities 7.20 5.97 7.14 6.10
---- ---- ---- ----
Net margin 0.27% 0.32% 0.28% 0.31%
==== ==== ==== ====
</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.
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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. Net income and excess cash flows from CMO Investments allowed
dividends of $1,482,000 and the return of $4,250,000 of capital during the six
months ended June 30, 1999. During the six months ended June 30, 2000, there
were no dividends and a return of capital of $1,000. The Company continues to
qualify as a real estate investment trust subsidiary.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company only has one remaining non-REMIC CMO outstanding at June 30, 2000
with $29.1 million of related mortgage securities collateral that supports $28.5
million of bonds, resulting in a retained CMO residual of $654,000 (CMO Series
1993-1). The Company has exposure to interest rate risk related to this CMO
residual. If mortgage interest rates rise from current levels, mortgage
prepayments on the collateral are expected to decline allowing the Company to
earn the net interest spread and to amortize related collateral premiums and
bond discounts for a longer period of time. Conversely, if mortgage rates
decline, prepayments will likely increase and the period of time that a net
interest spread can be earned and related collateral premiums and bond discounts
can be amortized over will be shorter. If mortgage rates were to be 100 basis
points higher or lower, operating results of this residual for the subsequent 12
months can be expected to increase by $8,000 or decrease by $39,000,
respectively.
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: August 10, 2000 By: /s/ ANDREW F. JACOBS
----------------------------------
Andrew F. Jacobs
Executive Vice President - Finance
Date: August 10, 2000 By: /s/ PHILLIP A. REINSCH
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Phillip A. Reinsch
Senior Vice President - Control
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule (electronic filing only)
</TABLE>
