<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, 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 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
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 10, 2000
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CAPSTEAD SECURITIES CORPORATION IV
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I. -- FINANCIAL INFORMATION
<S> <C>
ITEM 1. Financial Statements
Balance Sheet -- March 31, 2000 and December 31, 1999.................................................. 1
Statement of Operations -- Quarter Ended March 31, 2000 and 1999....................................... 2
Statement of Cash Flows -- Quarter Ended March 31, 2000 and 1999....................................... 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, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage securities collateral $ 178,685 $ 193,490
Cash and cash equivalents 48 25
Other assets 8 9
-------------- --------------
$ 178,741 $ 193,524
============== ==============
LIABILITIES
Collateralized mortgage securities $ 178,393 $ 191,601
Accrued expenses 62 60
-------------- --------------
178,455 191,661
-------------- --------------
STOCKHOLDER'S EQUITY
Common stock - $1.00 par value,
1 shares authorized,
issued and outstanding 1 1
Paid-in capital 691 691
Undistributed loss (13) (14)
Accumulated other comprehensive
income (loss) (393) 1,185
-------------- --------------
286 1,863
-------------- --------------
$ 178,741 $ 193,524
============== ==============
</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
----------------------
2000 1999
------- -------
<S> <C> <C>
Interest income:
Mortgage securities collateral $ 3,379 $ 7,402
Receivable from Parent -- 22
------- -------
Total interest income 3,379 7,424
------- -------
Interest expense on collateralized
mortgage securities 3,244 7,018
------- -------
Net interest income 135 406
------- -------
Other operating revenue (expense):
Gain on sale of released
mortgage securities collateral -- 2,644
Loss on redemption of collateralized
mortgage securities -- (872)
Management fees (3) (3)
Professional fees and other (2) (8)
Pool insurance (129) (358)
------- -------
Total other operating revenue (expense) (134) 1,403
------- -------
Net income 1 1,809
------- -------
Other comprehensive loss (1,578) (1,220)
------- -------
Comprehensive income (loss) $(1,577) $ 589
======= =======
</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
------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1 $ 1,809
Noncash item - amortization of
discount and premium (40) (102)
Net change in other assets and
accrued expenses 3 629
Gain on sale of released mortgage
securities collateral -- (2,644)
Loss on redemption of collateralized
mortgage securities -- 872
--------- ---------
Net cash provided (used) by
operating activities (36) 564
--------- ---------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 12,798 73,634
Decrease in accrued interest receivable 83 1,274
Decrease in short-term investments 69 10,803
Sale of released mortgage securities
collateral -- 108,783
--------- ---------
Net cash provided by investing activities 12,950 194,494
--------- ---------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Principal payments on securities (12,863) (188,533)
Decrease in accrued interest payable (28) (1,668)
Capital distributions -- (3,692)
Dividends paid -- (1,482)
--------- ---------
Net cash used by financing activities (12,891) (195,375)
--------- ---------
Net change in cash and cash equivalents 23 (317)
Cash and cash equivalents at beginning
of period 25 325
--------- ---------
Cash and cash equivalents at end of
period $ 48 $ 8
========= =========
</TABLE>
See accompanying notes to financial statements.
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CAPSTEAD SECURITIES CORPORATION IV
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 ended March 31, 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 FINANCIAL INSTRUMENTS
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, 2000
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale $149,050 $ -- $ 393 $148,657
Held-to-maturity 30,028 -- 78 29,950
-------- -------- -------- --------
$179,078 $ -- $ 471 $178,607
======== ======== ======== ========
</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
MARCH 31
------------------
2000 1999
---- ----
<S> <C> <C>
Sale of released CMO collateral held-to-maturity:
Amortized cost $ -- $106,139
Gains -- 2,644
</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
----------------------------------------------
2000 1999
--------------------- --------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income on mortgage
securities collateral $ 3,379 7.36% $ 7,402 6.58%
Interest expense on
collateralized mortgage
securities 3,244 7.07 7,018 6.27
------- -------
Net interest $ 135 $ 384
======= =======
</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 for the quarter ended March 31, 2000 compared to the same period in 1999
(in thousands):
<TABLE>
<CAPTION>
RATE* VOLUME* TOTAL
------- ------- -------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ 795 $(4,818) $(4,023)
Interest expense on
collateralized mortgage securities 799 (4,573) (3,774)
------- ------- -------
$ (4) $ (245) $ (249)
======= ======= =======
</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 March 31, 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 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 $4,000 for the quarter ended March 31, 2000, compared to
$18,000 for the same period in 1999. 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 primarily to a 59% decline
in the average holdings of mortgage securities collateral during the quarter
ended March 31, 2000 compared to the same period in 1999. Average holdings of
mortgage securities collateral were $184 million during the current quarter
compared to $450 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 two CMOs since March 31, 1999. The runoff rate
was 27% during the current quarter compared to 59% during the same quarter in
1999. The following table presents the weighted average yields for the periods
shown:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
----------------------
2000 1999
------ ------
<S> <C> <C>
Mortgage securities collateral 7.36% 6.58%
Collateralized mortgage securities 7.07 6.27
------ ------
Net margin 0.29% 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.
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
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<PAGE> 9
the related CMOs. Net income and excess cash flows from CMO Investments allowed
dividends of $1,482,000 and the return of $3,692,000 of capital during the first
quarter of 1999. There were no dividends or return of capital during the first
quarter of 2000. 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 March 31, 2000
with related mortgage securities collateral of $30.0 million that supports bonds
of $29.3 million resulting in a retained CMO residual of $680,000 (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 $7,000 or decrease by $32,000,
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: May 10, 1999 By: /s/ ANDREW F. JACOBS
-------------------------------------------
Andrew F. Jacobs
Executive Vice President - Finance
Date: May 10, 1999 By: /s/ PHILLIP A. REINSCH
-------------------------------------------
Phillip A. Reinsch
Senior Vice President - Control
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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, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 48
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 178,741
<CURRENT-LIABILITIES> 62
<BONDS> 178,393
0
0
<COMMON> 1
<OTHER-SE> 285
<TOTAL-LIABILITY-AND-EQUITY> 178,741
<SALES> 0
<TOTAL-REVENUES> 3,379
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,244
<INCOME-PRETAX> 1
<INCOME-TAX> 0
<INCOME-CONTINUING> 1
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
