<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
----- ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
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: 33-47912
CMC SECURITIES CORPORATION IV
(Exact name of Registrant as specified in its Charter)
DELAWARE 75-2431915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 NORTH HASKELL AVENUE 75204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 874-2323
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
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
----- -----
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST
OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K
AT MARCH 31, 1997 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES WAS: NOT APPLICABLE.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J (1)(a)
AND (b) OF FORM 10-K AND IS, THEREFORE, FILING THIS FORM WITH REDUCED DISCLOSURE
FORMAT.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 7, 1997: 1,000
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
================================================================================
<PAGE>
CMC SECURITIES CORPORATION IV
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 3
ITEM 3. LEGAL PROCEEDINGS.............................................. 3
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS............................... 3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 3
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K........................................... 15
<PAGE>
PART I
ITEM 1. BUSINESS.
ORGANIZATION
CMC Securities Corporation IV (the "Company") was incorporated in Delaware on
May 6, 1992, as a special-purpose finance corporation and is a wholly-owned
subsidiary of Capstead Mortgage Corporation ("CMC"). CMC is a publicly-owned
real estate investment trust that, until late 1995, operated as a mortgage
conduit, purchasing and securitizing single-family residential mortgage loans.
The Company is managed by CMC (the "Manager").
Due to changing circumstances, control of the Company within CMC's consolidated
group was changed twice during the last 3 years. In August 1994, CMC sold all
the issued and outstanding shares of capital stock in the Company to Capstead
Inc., CMC's subsidiary formed primarily to service single-family mortgage loans.
On December 21, 1995, after CMC reached a decision to exit the mortgage conduit
business, the Company was merged with and into a newly formed and wholly-owned
subsidiary of CMC (with a corporate charter and organizational structure
identical in almost all respects to that of the Company) ("CMCSC IV-A") whereby
the existence of the Company ceased and CMCSC IV-A acquired all the assets and
assumed all the liabilities of the Company as the surviving entity. As merger
consideration to Capstead Inc., CMCSC IV-A paid an amount of $430,000 in cash
that had been contributed by CMC. As a part of the merger, CMCSC IV-A changed
its name to CMC Securities Corporation IV, and from December 21, 1995 forward
has been referred to as the "Company."
The Company was formed and exists solely for the purpose of issuing
collateralized mortgage obligations ("Bonds" or "CMOs"), collateralized by
mortgage-backed, pass-through certificates ("Certificates") that evidence an
interest in a pool of mortgage loans secured by single-family residences. The
Certificates pledged as collateral for the Bonds will either be contributed by
CMC or its affiliates or purchased from third parties and will either be
Government National Mortgage Association certificates, Federal National Mortgage
Association certificates, Federal Home Loan Mortgage Corporation certificates or
mortgage pass-through ("Non-Agency") Certificates. The Company's Certificate of
Incorporation requires that Bonds issued be rated in one of the two highest
rating categories established by one or more nationally recognized statistical
rating agencies.
On August 17, 1992 the Securities and Exchange Commission declared effective an
amended registration statement filed by the Company covering the offering of a
maximum of $2 billion aggregate principal amount of CMOs. The Company commenced
operations with the September 30, 1994 issuance of its first series of CMOs. As
of December 31, 1994, the Company had issued 3 series of CMOs with an aggregate
original principal balance of $783,930,000. The Company did not issue any CMOs
during 1996 or 1995.
SPECIAL-PURPOSE FINANCE CORPORATION
The Company has not engaged and will not engage in any business or investment
activities other than (i) issuing and selling CMOs, and receiving, owning,
holding and pledging as collateral the related Certificates, (ii) investing cash
balances on an interim basis in high quality short-term securities, and (iii)
engaging in other activities which are necessary or convenient to accomplish the
foregoing and are incidental thereto. Article III of the Company's Certificate
of Incorporation limits the Company's purposes to the above.
-1-
<PAGE>
COMPETITION
The Company's business is highly competitive. The Company competes with other
issuers of similar obligations, both with respect to the acquisition of mortgage
related collateral, securing the Bonds and the placement of the CMOs. The
Company also competes with entities that issue and/or market numerous other
competitive financial products.
EMPLOYEES
At December 31, 1996 the Company had no employees. The Manager provides all
executive and administrative personnel required by the Company.
MANAGEMENT AGREEMENT
Pursuant to a management agreement, the Manager advises the Company with respect
to its investments and administers the day-to-day operations of the Company.
The management agreement is nonassignable except by consent of the Company and
the Manager. The management agreement may be terminated without cause at any
time upon 90 days written notice. In addition, the Company has the right to
terminate the management agreement upon the happening of certain specified
events, including a breach by the Manager of any provision contained in the
management agreement which remains uncured for 30 days after notice of such
breach and the bankruptcy or insolvency of the Manager.
The Manager is at all times subject to the supervision of the Company's Board of
Directors and has only such functions and authority as the Company delegates to
it. The Manager is responsible for the day-to-day operations of the Company and
performs such services and activities relating to the assets and operations of
the Company as may be appropriate. The Manager receives an annual basic
management fee of $10,000 per year for managing the assets pledged to secure
Bonds issued by the Company.
The Manager is required to pay employment expenses of its personnel (including
salaries, wages, payroll taxes, insurance, fidelity bonds, temporary help and
costs of employee benefit plans), and other office expenses, travel and other
expenses of directors, officers and employees of the Manager, accounting fees
and expenses incurred in supervising and monitoring the Company's investments or
relating to performance by the Manager of its functions. The Company is
required to pay all other expenses of operation (as defined in the management
agreement).
SERVICING AND ADMINISTRATION
The originators of mortgage loans backing the Non-Agency Certificates either
service the loans themselves or Capstead Inc., a subsidiary of CMC, is the
servicer. Capstead Inc. services single-family mortgage loans and participates
in other mortgage banking activities. The Company enters into servicing
agreements with each servicer. The terms and conditions of servicing agreements
with Capstead Inc. are substantially the same as those contained in servicing
agreements with unrelated third parties.
As compensation for its services rendered under a servicing agreement, the
servicers retain a servicing fee, payable monthly, generally 1/4 of 1% per
annum of the outstanding principal balance of each mortgage loan serviced as of
the last day of each month. At December 31, 1996 Capstead Inc. was servicing
approximately 76% of the principal balance of the Company's mortgage loans.
During 1996, 1995 and 1994, Capstead Inc. retained fees from mortgage loan
payments for servicing mortgage loans of $1,225,000, $1,418,000 and $149,000,
respectively. In addition, CMC acts as administrator with respect to the
Company's Non-Agency Certificates. During 1996, 1995 and 1994, CMC retained
fees for administering the Non-Agency Certificates of $341,000, $351,000 and
$39,000, respectively.
-2-
<PAGE>
ITEM 2. PROPERTIES.
The Company's operations will be conducted primarily in Dallas, Texas on
properties leased by CMC.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, there are no material legal proceedings outside the
normal course of business to which the Company was a party or of which any of
its property was the subject.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All of the Company's common stock is owned by CMC. Accordingly, there is no
public trading market for its common stock. To date the Company has not paid
dividends.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company commenced operations on September 30, 1994 with the issuance of its
first series of CMOs. Two additional series of CMOs were issued in 1994. No
CMOs were issued during 1996 or 1995. The Company elected Real Estate Mortgage
Investment Conduit ("REMIC") status for tax purposes on these transactions.
These issuances have been accounted for as financings because an affiliate of
the Company retained investments in the CMOs. As financings, CMO collateral and
Bonds are reflected on the balance sheet.
Since the Company did not retain any investment in the CMOs issued, no economic
benefit was or will be received and thus no net income or loss was or will be
recognized related to these CMOs other than amortization of unreimbursed bond
issuance costs. The Company's net losses are due to this amortization and
operational costs incurred (management fees and professional fees).
LIQUIDITY AND CAPITAL RESOURCES
All ongoing cash CMO expenses are paid out of the excess cash flows on the CMOs
issued before the residual holders receive their residual interest. The Company
believes that the excess cash flows will be sufficient to pay ongoing cash CMO
expenses. Cash flow requirements due to ongoing operational costs are funded by
CMC.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125
provides accounting and reporting standards for all types of securitization
transactions involving the transfer of financial assets including collateralized
borrowing arrangements. Under SFAS 125 most securitizations of financial assets
would be recorded as sales. The Company will adopt this pronouncement on
January 1, 1997. Since the Company generally acquires mortgage assets from
affiliates at market prices as determined by securitization proceeds, this
adoption is not expected to have a material impact on the results of operations
or financial position of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-3-
<PAGE>
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
Stockholder and Board of Directors
CMC Securities Corporation IV
We have audited the accompanying balance sheet of CMC Securities Corporation IV
(a wholly-owned subsidiary of Capstead Mortgage Corporation) as of December 31,
1996 and 1995, and related statements of operations, stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CMC Securities Corporation IV
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Dallas, Texas
January 22, 1997
-4-
<PAGE>
CMC SECURITIES CORPORATION IV
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Mortgage securities collateral $609,210 $681,287
Cash and cash equivalents - 2
-------- --------
$609,210 $681,289
======== ========
LIABILITIES
Collateralized mortgage securities $608,858 $680,847
Accrued expenses 22 12
-------- --------
608,880 680,859
-------- --------
STOCKHOLDER'S EQUITY
Common stock - $1 par value, 1,000 shares
authorized, issued and outstanding 1 1
Paid-in capital 474 461
Accumulated deficit (145) (32)
-------- --------
330 430
-------- --------
$609,210 $681,289
======== ========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
CMC SECURITIES CORPORATION IV
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
INTEREST INCOME:
Mortgage securities collateral $55,193 $58,903 $7,183
Receivable from Parent - - 2
------- ------- ------
Total interest income 55,193 58,903 7,185
Interest expense on collateralized
mortgage securities 55,281 58,903 7,183
------- ------- ------
Net interest income (expense) (88) - 2
------- ------- ------
OTHER EXPENSES:
Management fees 10 10 3
Professional fees and other 15 18 3
------- ------- ------
Total other expenses 25 28 6
------- ------- ------
Net loss $ (113) $ (28) $ (4)
======= ======= ======
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE>
CMC SECURITIES CORPORATION IV
STATEMENT OF STOCKHOLDER'S EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ -------- ------------ -----
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1994 1 $1 $ 9 $ - $ 10
Conversion of note
payable to equity - - 698 - 698
Capital distribution - - (265) - (265)
Net loss - - - (4) (4)
- -- ----- ----- -----
Balance at
December 31, 1994 1 1 442 (4) 439
Capital contribution - - 19 - 19
Net loss - - - (28) (28)
- -- ----- ----- -----
Balance at
December 31, 1995 1 1 461 (32) 430
Capital contribution - - 13 - 13
Net loss - - - (113) (113)
- -- ----- ----- -----
Balance at
December 31, 1996 1 $1 $ 474 $(145) $ 330
= == ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
-7-
<PAGE>
CMC SECURITIES CORPORATION IV
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (113) $ (28) $ (4)
Noncash item - amortization
of discount and premium 66 201 90
Net change in other assets and
accrued expenses 10 8 271
-------- -------- ---------
Net cash provided (used) by
operating activities (37) 181 357
-------- -------- ---------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Mortgage investments transferred
from Parent - - (725,008)
Principal collections on collateral 77,716 49,207 3,492
Decrease (increase) in accrued
interest receivable 484 305 (4,675)
Increase in short-term investments (7) - -
-------- -------- ---------
Net cash provided (used) by
investing activities 78,193 49,512 (726,191)
-------- -------- ---------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Issuance of securities - - 725,008
Principal payments on securities (77,716) (49,207) (3,581)
Increase (decrease) in accrued
interest payable (455) (506) 4,674
Payments to Parent - - (2)
Contribution (distribution) of capital 13 19 (265)
-------- -------- ---------
Net cash provided (used) by
financing activities (78,158) (49,694) 725,834
-------- -------- ---------
Net change in cash and cash equivalents (2) (1) -
Cash and cash equivalents at beginning
of year 2 3 3
-------- -------- ---------
Cash and cash equivalents at end of year $ - $ 2 $ 3
======== ======== =========
Noncash conversion of note payable to
Parent to paid-in capital $ - $ - $ 698
======== ======== =========
</TABLE>
See accompanying notes to financial statements.
-8-
<PAGE>
CMC SECURITIES CORPORATION IV
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A - BUSINESS
CMC Securities Corporation IV (the "Company") was incorporated in Delaware on
May 6, 1992, as a special-purpose finance corporation primarily to issue bonds
collateralized by whole loans or mortgage-backed securities. Capstead Inc.
acquired the Company from Capstead Mortgage Corporation ("CMC"), the parent of
Capstead Inc., on August 10, 1994 pursuant to a Stock Purchase Agreement prior
to commencement of operations; however, control of the Company was transferred
back to CMC on December 21, 1995 pursuant to an Agreement and Plan of Merger
(see Note G). Certain amounts for 1995 have been reclassified to conform to the
1996 presentation.
NOTE B - ACCOUNTING POLICIES
USE OF ESTIMATES
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
SECURITIES HELD-TO-MATURITY
- ---------------------------
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-
maturity securities are stated at amortized cost.
MORTGAGE SECURITIES COLLATERAL
- ------------------------------
Mortgage securities collateral consists of debt securities classified as held-
to-maturity. Amortized cost is adjusted for amortization of premiums and
discounts over the estimated life of the security using the interest method.
Such amortization is included in related interest income.
Mortgage securities collateral is subject to changes in value because of changes
in interest rates and rates of prepayment, as well as failure of the mortgagor
to perform under the mortgage agreement. The Company has limited its exposure
to these risks by issuing collateralized mortgage securities, using a
senior/subordinate structure (see Note F).
ALLOWANCE FOR POSSIBLE LOSSES
- -----------------------------
The Company provides for possible losses on its investments in amounts which it
believes are adequate relative to the risk inherent in such investments.
COLLATERALIZED MORTGAGE SECURITIES
- ----------------------------------
Collateralized mortgage securities are carried at their unpaid principal
balances, net of unamortized discount or premium. Any discount or premium is
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<PAGE>
recognized as an adjustment to interest expense by the interest method over the
life of the related securities.
INCOME TAXES
- ------------
Since its inception through August 9, 1994, the Company operated as a qualified
real estate investment trust ("REIT") subsidiary of CMC, which itself is a REIT,
and was combined with CMC for federal income tax purposes. REITs are not taxed
at the corporate level provided that certain requirements are met. From August
10, 1994 through December 21, 1995 the Company was consolidated for income tax
purposes with Capstead Inc., which is not a REIT; however, due to losses
incurred during this period, no provision was made for federal income taxes.
Beginning December 21, 1995 the Company once again began operating as a
qualified REIT subsidiary of CMC.
CASH AND CASH EQUIVALENTS
- -------------------------
Cash and cash equivalents include cash on hand and highly liquid investments
with original maturities of three months or less.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125
provides accounting and reporting standards for all types of securitization
transactions involving the transfer of financial assets including collateralized
borrowing arrangements. Under SFAS 125 most securitizations of financial assets
would be recorded as sales. The Company will adopt this pronouncement on
January 1, 1997. Since the Company generally acquires mortgage assets from
affiliates at market prices as determined by securitization proceeds, this
adoption is not expected to have a material impact on the results of operations
or financial position of the Company.
NOTE C - MORTGAGE SECURITIES COLLATERAL
Mortgage securities collateral consists of conventional single-family mortgage
loans which are pledged to secure repayment of the collateralized mortgage
securities. All principal and interest payments on the collateral are remitted
directly to a collection account maintained by a trustee. The trustee is
responsible for reinvesting those funds in short-term investments. All
collections on the collateral and the reinvestment income earned thereon is
available for payment of principal and interest on the collateralized mortgage
securities. The components of mortgage securities collateral are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1995
-------- --------
<S> <C> <C>
Mortgage collateral $653,515 $731,231
Short-term investments 7 -
Accrued interest receivable 3,885 4,369
-------- --------
Total collateral 657,407 735,600
Unamortized discount (48,197) (54,313)
-------- --------
Net collateral $609,210 $681,287
======== ========
</TABLE>
The weighted average effective interest rate for mortgage securities collateral
was 8.68% and 8.40% during 1996 and 1995, respectively.
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<PAGE>
NOTE D - COLLATERALIZED MORTGAGE SECURITIES
Each series of collateralized mortgage securities consists of various classes,
some of which may be deferred interest, interest-only and principal-only
securities. Interest is payable monthly at specified rates for all classes
other than deferred interest securities. Generally, principal payments on each
series are made to each class in the order of their stated maturities so that no
payment of principal will be made on any class until all classes having an
earlier stated maturity have been paid in full. Generally, payments of
principal and interest on deferred interest securities will commence only upon
payment in full of some or all other classes. Prior to that time, interest
accrues on the deferred interest securities and the amount accrued is added to
the unpaid principal balance. Interest payments on interest-only bonds are
based on a specified notional amount used only for the calculation of interest
and no payments of principal are made. Principal-only bonds remit principal
payments and no interest is paid.
The components of collateralized mortgage securities are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995
----------- ----------
<S> <C> <C>
Collateralized mortgage securities $653,514 $731,230
Accrued interest payable 3,713 4,168
-------- --------
Total obligation 657,227 735,398
Unamortized discount (48,369) (54,551)
-------- --------
Net obligation $608,858 $680,847
======== ========
Range of average interest rate 6.36% to 8.11% 6.36% to 8.09%
Stated maturities 2024 to 2025 2024 to 2025
Number of series 3 3
</TABLE>
The maturity of each series of securities is directly affected by the rate of
principal prepayments on the related mortgage securities collateral. Each
series of securities is also subject to redemption at the Company's option
provided that certain requirements specified in the related indenture have been
met (referred to as "clean-up calls"). As a result, the actual maturity of any
series of securities is likely to occur earlier than its stated maturity.
The weighted average effective interest rate for collateralized mortgage
securities was 8.69% and 8.40% during 1996 and 1995, respectively. Interest
payments on collateralized mortgage securities of $47,853,000, $48,530,000 and
$2,100,000 were made during 1996, 1995 and 1994, respectively.
NOTE E - DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments have been determined by the
Company 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, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or
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<PAGE>
estimation methodologies may have a material effect on the estimated fair value
amounts.
The carrying amount of cash and cash equivalents approximates fair value. The
fair value of mortgage securities collateral was estimated using either quoted
market prices, when available, including quotes made by CMC's lenders in
connection with designating collateral for repurchase arrangements. The fair
value of collateralized mortgage securities is dependent upon the
characteristics of the mortgage securities collateral pledged to secure the
issuance. Therefore, fair value was based on the same method used for
determining fair value for the underlying mortgage securities collateral,
adjusted for credit enhancements.
The following table summarizes the fair value of financial instruments (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
CARRYING FAIR
AMOUNT VALUE
-------- ---------
<S> <C> <C>
ASSETS
Mortgage securities collateral $609,210 $646,009
LIABILITIES
Collateralized mortgage securities 608,858 654,581
DECEMBER 31, 1995
---------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
ASSETS
Cash and cash equivalents $ 2 $ 2
Mortgage securities collateral 681,287 725,158
LIABILITIES
Collateralized mortgage securities 680,847 743,850
</TABLE>
The tables above reflect the estimated fair value of mortgage securities
collateral and cash equivalents as of December 31, 1996 and 1995, which reflect
gross unrealized gains of $36.8 million and $43.9 million, respectively.
NOTE F - ALLOWANCE FOR POSSIBLE LOSSES
The Company has limited exposure to losses on mortgage securities collateral
because the Company's collateralized mortgage securities are issued in a
senior/subordinate structure where the investor in the subordinate classes
assumes the risks of losses due to typical mortgagor default and special
hazards. Special hazards are typically catastrophic events that are unable to
be predicted (e.g., earthquakes). Because of its limited exposure to losses,
the Company has determined that an allowance for possible losses is not
warranted at December 31, 1996.
Since 25% of mortgage securities collateral is secured by properties located in
California, the Company has a concentration of risk related to the California
market. However, the Company's exposure arising from this concentration is
reduced by the use of the senior/subordinate structure for securitizations.
-12-
<PAGE>
NOTE G - CHANGE IN CONTROL
On August 9, 1994, the Company amended its Certificate of Incorporation to
revise certain provisions thereof to meet current rating agency criteria and to
change its name to CMC Securities Corporation IV. Pursuant to a Stock Purchase
Agreement dated August 10, 1994, CMC sold all of the issued and outstanding
shares of capital stock in the Company to Capstead Inc. for $708,000. Such
amount was funded by an advance from CMC to Capstead Inc. under a revolving
credit facility between such companies.
Pursuant to an Agreement and Plan of Merger dated December 21, 1995 (the
"Agreement") between the Company and CMC Securities Corporation IV-A ("CMCSC IV-
A"), a newly formed and wholly-owned subsidiary of CMC with a corporate charter
and organizational structure identical in almost all respects to that of the
Company, the Company merged with and into CMCSC IV-A, whereby the existence of
the Company ceased and CMCSC IV-A acquired all of the assets and assumed all of
the liabilities of the Company as the surviving entity. CMCSC IV-A paid
Capstead Inc. $430,000 as merger consideration that had been contributed to
CMCSC IV-A by CMC. As a part of the merger, CMCSC IV-A changed its name to CMC
Securities Corporation IV.
NOTE H - MANAGEMENT AGREEMENT
The Company operates under a $10,000 per year management agreement with CMC (the
"Manager"). The agreement provides that the Manager will advise the Company
with respect to all facets of its business and administer the day-to-day
operations of the Company under the supervision of the Company's Board of
Directors. The Manager pays among other things, salaries and benefits of its
personnel, accounting fees and expenses, and other office expenses incurred in
supervising and monitoring the Company's investments.
NOTE I - TRANSACTIONS WITH RELATED PARTIES
The Company has entered into servicing agreements with Capstead Inc., a
subsidiary of CMC, the provisions of which are typical of such agreements in the
mortgage servicing industry. Under the servicing agreements, Capstead Inc.
retains from interest collected a servicing fee generally 1/4 of 1% per annum
of the outstanding principal balance of mortgage loans serviced. At December
31, 1996, Capstead Inc. serviced approximately 76% of the mortgage loans
securing collateralized mortgage securities. Servicing fees of $1,225,000,
$1,418,000 and $149,000 were retained by Capstead Inc. in 1996, 1995 and 1994,
respectively.
CMC acts as administrator ("Bond Administrator") in relation to the Company's
collateralized mortgage securities in which it performs certain administrative
functions. The Bond Administrator receives fees of approximately 0.015% to
0.04% per annum of the outstanding principal amount of the bonds, after
deducting trustee fees. Such fees totaled $341,000, $351,000 and $39,000 in
1996, 1995 and 1994, respectively.
During 1994 and 1995 the Company had a $20 million revolving subordinated
promissory note with Capstead Inc. under which interest accrued on amounts
payable based on the annual federal short-term rate as published by the Internal
Revenue Service. This note matured January 1, 1996 and has been replaced with a
$1 million note with CMC that contains similar terms and expires January 1,
1998.
-13-
<PAGE>
In connection with securitization activity in 1994, Capstead Inc. transferred
conventional mortgage loans to collateralize the issuances. These loans were
transferred at an amount equal to the net proceeds of the transactions.
Capstead Inc. absorbed issuance costs totaling $986,000. In connection with
these issuances, the Company sold $19,776,000 of interest-only, principal-only
and subordinate bonds to an affiliate.
NOTE J - NET INTEREST INCOME ANALYSIS (UNAUDITED)
The following table summarizes the amount of interest income and interest
expense and the average effective interest rate for mortgage securities
collateral and collateralized mortgage securities (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ----------------- ----------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Interest income on
mortgage securities
collateral $55,193 8.68% $58,903 8.40% $7,183 7.99%
Interest expense on
collateralized
mortgage securities 55,281 8.69 58,903 8.40 7,183 7.99
------- ------- ------
Net interest expense $ (88) $ - $ -
======= ======= ======
</TABLE>
The following table summarizes the amount of change in interest income and
interest expense due to changes in interest rates versus changes in volume (in
thousands):
<TABLE>
<CAPTION>
1996/1995
---------------------------
RATE VOLUME TOTAL
------- -------- --------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $1,909 $(5,619) $(3,710)
Interest expense on collateralized
mortgage securities 2,037 (5,659) (3,622)
------ ------- -------
$ (128) $ 40 $ (88)
====== ======= =======
1995/1994
--------------------------
RATE VOLUME TOTAL
------ ------- -------
Interest income on mortgage
securities collateral $ 382 $51,338 $51,720
Interest expense on collateralized
mortgage securities 380 51,340 51,720
------ ------- -------
$ 2 $ (2) $ -
====== ======= =======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-14-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
PAGE
----
1. The following financial statements of the
Company are included in ITEM 8:
Balance Sheet - December 31, 1996 and 1995 5
Statement of Operations - Three Years Ended
December 31, 1996 6
Statement of Stockholder's Equity -
Three Years Ended December 31, 1996 7
Statement of Cash Flows -
Three Years Ended December 31, 1996 and 1995 8
Notes to Financial Statements - December 31, 1996 9
2. Financial Statement Schedules: None.
All schedules for which provision is made in the
applicable accounting regulation of the Securities
and Exchange Commission are not required under the
related instructions or are inapplicable and,
therefore, have been omitted.
3. Exhibits:
EXHIBIT
NUMBER
-------
2.1 Stock Purchase Agreement dated as of August 10, 1994(4)
3.1 Certificate of Amendment of the Certificate of
Incorporation of the Company dated August 9, 1994(4)
3.2 Certificate of Incorporation(1)
3.3 Bylaws(1)
3.2 Certificate of Merger of the Company into CMCSC IV-A,
filed and Certified on December 21, 1995 with the
Secretary of State of Delaware*
3.3 Bylaws of CMCSC IV-A*
3.4 Certificate of Incorporation of CMCSC IV-A, as filed with
the Secretary of State of Delaware on December 13, 1995*
4.1 Form of Indenture between Registrant and Texas
Commerce Bank, National Association, as Trustee(1)
4.2 Form of First Supplement to the Indenture(5)
4.3 Form of Second Supplement to the Indenture(6)
4.4 Form of Third Supplement to the Indenture(7)
10.1 Form of Pooling and Administrative Agreement(1)
10.2 Form of Servicing Agreement(1)
10.4 Management Agreement between Registrant and
Capstead Advisers, Inc. dated January 1, 1993(2)
10.5 Amended Management Agreement between Registrant
and Capstead Advisers, Inc. dated October 1, 1993(3)
23 Consent of Ernst & Young LLP, Independent Auditors*
27 Financial Data Schedule*
-15-
<PAGE>
PART IV
ITEM 14. - CONTINUED
(b) Reports on Form 8-K: None.
(c) Exhibits - The response to this section of ITEM 14 is submitted as a
separate section of this report.
_________________
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-3 (No. 33-47912) filed May 14, 1992
(2) Previously filed with the Commission as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992
(3) Previously filed with the Commission as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
(4) Previously filed with the Commission as an Exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994
(5) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on September 30, 1994
(6) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on October 31,1994
(7) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on December 30, 1994
* Filed herewith.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CMC SECURITIES CORPORATION IV
REGISTRANT
Date: March 7, 1997 By: /s/ ANDREW F. JACOBS
---------------------------------
Andrew F. Jacobs
Senior Vice President-Control,
Treasurer, Secretary and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated below and on the dates indicated.
/s/ RONN K. LYTLE Chairman, Chief March 7, 1997
- ------------------------------- Executive Officer
(Ronn K. Lytle) and Director
/s/ ANDREW F. JACOBS Senior Vice President March 7, 1997
- ------------------------------- Control, Treasurer,
(Andrew F. Jacobs) Secretary and Director
/s/ MAURICE MCGRATH Director March 7, 1997
- -------------------------------
(Maurice McGrath)
-17-
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders.
<PAGE>
EXHIBIT 23
CMC SECURITIES CORPORATION IV
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-47912) of CMC Securities Corporation IV pertaining to the issuance of
a maximum $2 billion aggregate principal balance of collateralized mortgage
obligations and in the related prospectus and prospectus supplements of our
report dated January 22, 1997, with respect to the financial statements of CMC
Securities Corporation IV included in this Annual Report (Form 10-K) for the
year ended December 31, 1996.
ERNST & YOUNG LLP
Dallas, Texas
March 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CMC
SECURITIES CORPORATION IV'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 609,210
<CURRENT-LIABILITIES> 22
<BONDS> 608,858
0
0
<COMMON> 1
<OTHER-SE> 329
<TOTAL-LIABILITY-AND-EQUITY> 609,210
<SALES> 0
<TOTAL-REVENUES> 55,193
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,281
<INCOME-PRETAX> (113)
<INCOME-TAX> 0
<INCOME-CONTINUING> (113)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (113)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
