<PAGE> 1
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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, 1997
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, 1998 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 20, 1998: 1,000
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
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<PAGE> 2
CMC SECURITIES CORPORATION IV
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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................ 4
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................... 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K..................................... 16
</TABLE>
<PAGE> 3
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 1994 and 1995. 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. The
Company did not issue any CMOs during 1996 or 1995. During 1997 the Company
issued two series of CMOs (Series 1997-NAMC 3 and 1997-2) with total obligations
(including accrued interest and premium) of $1.2 billion. The Company retained
no beneficial interest in these CMOs, and as such, no economic benefit will be
received and no related net income or loss will be recognized other than the
amortization of unrecovered shelf issuance costs. These issuances were accounted
for as financings. As of December 31, 1997, the Company had issued 5 series of
CMOs with an aggregate original principal balance of $2,003,125,000,
$173,179,000 of which were issued under the registration statement.
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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.
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, 1997 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
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<PAGE> 5
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 ? 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, 1997 Capstead Inc. was servicing
approximately 24% of the principal balance of the Company's mortgage loans.
During 1997, 1996 and 1995, Capstead Inc. retained fees from mortgage loan
payments for servicing mortgage loans of $1,174,000, $1,225,000 and $1,418,000,
respectively. In addition, CMC acts as administrator with respect to the
Company's Non-Agency Certificates. During 1997, 1996 and 1995, CMC retained fees
for administering the Non-Agency Certificates of $297,000, $341,000 and
$351,000, respectively.
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 both 1994 and
1997. The Company elected Real Estate Mortgage Investment Conduit ("REMIC")
status for tax purposes on these transactions. These issuances have been
accounted for as financings. 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 shelf
issuance costs. The Company's net losses are due to this amortization and
operational costs incurred (management fees and professional fees).
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<PAGE> 6
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.
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 service
mortgage loans, and manage the Company's affairs. The Manager has made and will
continue to make investments in its software systems and applications to ensure
the Company is Year 2000 compliant. In addition, the Manager has taken steps to
ensure that the vendors it utilizes in various capacities 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 mid-1998. The
financial impact of becoming Year 2000 compliant has not been and is not
expected to be material to the Company or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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<PAGE> 7
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,
1997 and 1996, and related statements of operations, stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Dallas, Texas
March 20, 1998
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CMC SECURITIES CORPORATION IV
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Mortgage securities collateral $ 1,728,030 $ 609,210
Cash and cash equivalents 2 --
----------- -----------
$ 1,728,032 $ 609,210
=========== ===========
LIABILITIES
Collateralized mortgage securities $ 1,727,766 $ 608,858
Accrued expenses 32 22
----------- -----------
1,727,798 608,880
----------- -----------
STOCKHOLDER'S EQUITY
Common stock - $1 par value, 1,000 shares
authorized, issued and outstanding 1 1
Paid-in capital 490 474
Accumulated deficit (257) (145)
----------- -----------
234 330
----------- -----------
$ 1,728,032 $ 609,210
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 9
CMC SECURITIES CORPORATION IV
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest income on
mortgage securities collateral $ 67,475 $ 55,193 $ 58,903
Interest expense on collateralized
mortgage securities 67,563 55,281 58,903
-------- -------- --------
Net interest expense (88) (88) --
-------- -------- --------
Other expenses:
Management fees 10 10 10
Professional fees and other 14 15 18
-------- -------- --------
Total other expenses 24 25 28
-------- -------- --------
Net loss $ (112) $ (113) $ (28)
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 10
CMC SECURITIES CORPORATION IV
STATEMENT OF STOCKHOLDER'S EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 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
Capital contribution -- -- 16 -- 16
Net loss -- -- -- (112) (112)
----- ----- ----- -----
Balance at
December 31, 1997 1 $ 1 $ 490 $(257) $ 234
===== ===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 11
CMC SECURITIES CORPORATION IV
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (112) $ (113) $ (28)
Net change in other assets and
accrued expenses 10 10 8
Noncash item - amortization
of discount and premium 61 66 201
----------- ----------- -----------
Net cash provided (used) by
operating activities (41) (37) 181
----------- ----------- -----------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Mortgage collateral acquired
from affiliate (1,187,085) -- --
Principal collections on collateral 81,555 77,716 49,207
Decrease (increase) in accrued
interest receivable (7,060) 484 305
Increase in short-term investments (2) (7) --
----------- ----------- -----------
Net cash provided (used) by
investing activities (1,112,592) 78,193 49,512
----------- ----------- -----------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Issuance of securities 1,187,085 -- --
Principal payments on securities (81,555) (77,716) (49,207)
Increase (decrease) in accrued
interest payable 7,089 (455) (506)
Capital contribution 16 13 19
----------- ----------- -----------
Net cash provided (used) by
financing activities 1,112,635 (78,158) (49,694)
----------- ----------- -----------
Net change in cash and cash equivalents 2 (2) (1)
Cash and cash equivalents at beginning
of year -- 2 3
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2 $ -- $ 2
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 12
CMC SECURITIES CORPORATION IV
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 then 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).
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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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.
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 are
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
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Mortgage collateral $ 1,749,592 $ 653,515
Short-term investments 9 7
Accrued interest receivable 10,945 3,885
----------- -----------
Total collateral 1,760,546 657,407
Unamortized discount (32,516) (48,197)
----------- -----------
Net collateral $ 1,728,030 $ 609,210
=========== ===========
</TABLE>
The weighted average effective interest rate for mortgage securities collateral
was 8.65% and 8.68% during 1997 and 1996, respectively.
During September and October of 1997, the Company acquired from affiliates
conventional mortgage loans with unpaid principal balances of $281 million and
$938 million as collateral for the issuances of CMO Series 1997-NAMC 3 and CMO
Series 1997-II, respectively (see Note D). These loans were acquired at an
amount equal to the net proceeds of the issuance.
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
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<PAGE> 14
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
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Collateralized mortgage securities $ 1,749,592 $ 653,514
Accrued interest payable 10,801 3,713
----------- -----------
Total obligation 1,760,393 657,227
Unamortized discount (32,627) (48,369)
----------- -----------
Net obligation $ 1,727,766 $ 608,858
=========== ===========
Range of average interest rate 6.36% to 8.16% 6.36% to 8.11%
Stated maturities 2024 to 2027 2024 to 2025
Number of series 5 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 8.66% and 8.69% during 1997 and 1996, respectively. Interest
payments on collateralized mortgage securities of $52,621,000, $47,853,000 and
$48,530,000 were made during 1997, 1996 and 1995, respectively.
During September and October of 1997, the Company issued CMO Series 1997-NAMC 3
and CMO Series 1997-II with 30-year stated maturities and total obligations
(including accrued interest and premium) of $287 million and $950 million,
respectively. The Company retained no beneficial interest in these CMOs and as
such, no economic benefit will be received and no related net income or loss
will be recognized other than the amortization of unrecovered shelf issuance
costs. These issuances were accounted for as financings. CMC retained a $126
million interest in the issuance of CMO Series 1997-II.
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
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<PAGE> 15
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 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, 1997 DECEMBER 31, 1996
------------------------ ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- ---------- -------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 2 $ 2 $ -- $ --
Mortgage securities collateral 1,728,030 1,791,145 609,210 646,009
LIABILITIES
Collateralized mortgage
securities 1,727,766 1,807,150 608,858 654,581
</TABLE>
The table above reflects the estimated fair value of mortgage securities
collateral and cash equivalents as of December 31, 1997 and 1996, which reflect
gross unrealized gains of $63.1 million and $36.8 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, 1997.
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.
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<PAGE> 16
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 ? of 1% per annum of
the outstanding principal balance of mortgage loans serviced. At December 31,
1997, Capstead Inc. serviced approximately 24% of the mortgage loans securing
collateralized mortgage securities. Servicing fees of $1,174,000, $1,225,000 and
$1,418,000 were retained by Capstead Inc. in 1997, 1996 and 1995, 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 $297,000, $341,000 and $351,000 in 1997, 1996
and 1995, respectively.
During 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, 1999.
-14-
<PAGE> 17
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>
1997 1996 1995
------------------------ ----------------------- ----------------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Interest income on
mortgage securities
collateral $ 67,475 8.65% $ 55,193 8.68% $ 58,903 8.40%
Interest expense on
collateralized
mortgage securities 67,563 8.66 55,281 8.69 58,903 8.40
-------- -------- --------
Net interest expense $ (88) $ (88) $ --
======== ======== ========
</TABLE>
The following is a summary of the amount of change in interest income and
interest expense due to changes in interest rates versus changes in volume (in
thousands):
<TABLE>
<CAPTION>
1997/1996
------------------------------------
RATE VOLUME TOTAL
-------- -------- --------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ (166) $ 12,448 $ 12,282
Interest expense on collateralized
mortgage securities (191) 12,473 12,282
-------- -------- --------
$ 25 $ (25) $ --
======== ======== ========
</TABLE>
<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)
======= ======= =======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-15-
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. The following financial statements of the Company are included in
ITEM 8:
Balance Sheet - December 31, 1997 and 1996 6
Statement of Operations - Three Years Ended
December 31, 1997 7
Statement of Stockholder's Equity -
Three Years Ended December 31, 1997 8
Statement of Cash Flows -
Three Years Ended December 31, 1997 9
Notes to Financial Statements - December 31, 1997 10
</TABLE>
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:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
1.1 Underwriting Agreement dated as of September 26, 1997 by and
among DLJSC, the Registrant and CMC(9)
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(10)
3.3 Bylaws of CMCSC IV-A(10)
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)
4.5 Form of Fourth Supplement to the Indenture(9)
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*
</TABLE>
-16-
<PAGE> 19
PART IV
ITEM 14. - CONTINUED
3. Exhibits (continued):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
27 Financial Data Schedule*
28.1 Computational Materials provided by Donaldson, Lufkin
and Jenrette Securities Corporation(8)
</TABLE>
(b) Reports on Form 8-K:
Current Report on Form 8-K dated October 28, 1997 to file the following:
Exhibit 28.1 - Computational Material provided by Donaldson, Lufkin and
Jenrette Securities Corporation.
Current Report on Form 8-K dated October 29, 1997 to file the following:
Exhibit 1.1 - Underwriting Agreement dated as of October 28, 1997 by and
among DLJSC, the Registrant and CMC.
Exhibit 4.5 - Series 1997-2 Supplement relating to the Series 1997-2
bonds.
Current Report on Form 8-K/A dated November 17, 1997 to file the
following:
Exhibit 99.1 - Schedule of Zip code Listings related to the Fourth
Supplement to the Indenture (Series 1997-NAMC 3).
(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
(8) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on September 26, 1997
(9) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on September 30, 1997
(10) Previously filed with the Commission as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
* Filed herewith.
-17-
<PAGE> 20
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 13, 1998 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.
<TABLE>
<S> <C> <C>
/s/ RONN K. LYTLE Chairman, Chief March 13, 1998
- ------------------------------- Executive Officer
(Ronn K. Lytle) and Director
/s/ ANDREW F. JACOBS Senior Vice President- March 13, 1998
- ------------------------------- Control, Treasurer,
(Andrew F. Jacobs) Secretary and Director
/s/ MAURICE MCGRATH Director March 20, 1998
- -------------------------------
(Maurice McGrath)
</TABLE>
-18-
<PAGE> 21
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> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1 Underwriting Agreement dated as of September 26, 1997 by and
among DLJSC, the Registrant and CMC(9)
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(10)
3.3 Bylaws of CMCSC IV-A(10)
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)
4.5 Form of Fourth Supplement to the Indenture(9)
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*
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
27 Financial Data Schedule*
28.1 Computational Materials provided by Donaldson, Lufkin
and Jenrette Securities Corporation(8)
</TABLE>
(b) Reports on Form 8-K:
Current Report on Form 8-K dated October 28, 1997 to file the following:
Exhibit 28.1 - Computational Material provided by Donaldson, Lufkin and
Jenrette Securities Corporation.
Current Report on Form 8-K dated October 29, 1997 to file the following:
Exhibit 1.1 - Underwriting Agreement dated as of October 28, 1997 by and
among DLJSC, the Registrant and CMC.
Exhibit 4.5 - Series 1997-2 Supplement relating to the Series 1997-2
bonds.
Current Report on Form 8-K/A dated November 17, 1997 to file the
following:
Exhibit 99.1 - Schedule of Zip code Listings related to the Fourth
Supplement to the Indenture (Series 1997-NAMC 3).
(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
(8) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on September 26, 1997
(9) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on September 30, 1997
(10) Previously filed with the Commission as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
* Filed herewith.
<PAGE> 1
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 21, 1998, 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, 1997.
ERNST & YOUNG LLP
Dallas, Texas
March 20, 1998
<TABLE> <S> <C>
<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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,728,032
<CURRENT-LIABILITIES> 32
<BONDS> 1,727,766
0
0
<COMMON> 1
<OTHER-SE> 233
<TOTAL-LIABILITY-AND-EQUITY> 1,728,032
<SALES> 0
<TOTAL-REVENUES> 67,475
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,563
<INCOME-PRETAX> (112)
<INCOME-TAX> 0
<INCOME-CONTINUING> (112)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (112)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
