10-Q 1 d89876e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2001 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ______________ COMMISSION FILE NUMBER: 33-42337 CAPSTEAD SECURITIES CORPORATION IV (Exact name of Registrant as specified in its Charter) DELAWARE 75-2390594 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8401 NORTH CENTRAL EXPRESSWAY, SUITE 800, DALLAS, TX 75225 (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (214) 874-2323 The Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) for Form 10-Q and is therefore filing this Form under the reduced disclosure format. Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Common Stock ($1.00 par value) 1,000 as of August 10, 2001 ================================================================================ 2 CAPSTEAD SECURITIES CORPORATION IV FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001 INDEX

3 ITEM 1. FINANCIAL STATEMENTS PART I. -- FINANCIAL INFORMATION CAPSTEAD SECURITIES CORPORATION IV BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to financial statements. -1- 4 CAPSTEAD SECURITIES CORPORATION IV STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)

See accompanying notes to financial statements. -2- 5 CAPSTEAD SECURITIES CORPORATION IV STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

See accompanying notes to financial statements. -3- 6 CAPSTEAD SECURITIES CORPORATION IV NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) NOTE A -- BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2001. 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, 2000. NOTE B -- DISCLOSURES REGARDING FAIR VALUES OF MORTGAGE SECURITIES COLLATERAL The estimated fair values of mortgage securities collateral have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop these estimates. In addition, fair values fluctuate on a daily basis. Accordingly, estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts. Fair values are estimated using quoted market prices, when available, including quotes made by Capstead Mortgage Corporation's lenders in connection with designating collateral for repurchase arrangements. The following summarizes fair value disclosures for mortgage securities collateral held available-for-sale and held-to-maturity for the periods indicated (in thousands):

-4- 7 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. There was no collateral released during the first six months of 2001 or 2000. NOTE C -- NET INTEREST INCOME ANALYSIS The following summarizes interest income and interest expense and the average effective interest rates (dollars in thousands):

Changes in interest income and interest expense due to changes in interest rates versus changes in volume were as follows (in thousands):

* 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. -5- 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Capstead Securities Corporation IV (the "Company") was incorporated on August 16, 1991, as a special-purpose finance subsidiary of Capstead Mortgage Corporation ("CMC") and commenced operations on December 23, 1991 with the issuance of its first collateralized mortgage obligation ("CMO"), Series 1991-VIII. As of June 30, 2001, 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. The Company has not issued any CMOs since September 30, 1998. RESULTS OF OPERATIONS CMO investments (represented by the difference between the carrying value of mortgage securities collateral and collateralized mortgage securities on the balance sheet) produced an operating loss of $18,000 and $36,000 for the quarter and six months ended June 30, 2001, respectively, compared to an operating loss of $4,000 and no income for the same periods in 2000. Operating results produced by CMO investments is represented by the difference between interest income on mortgage securities collateral and interest expense on collateralized mortgage securities, mortgage pool insurance expense on mortgage securities collateral and professional fees. The Company has one CMO outstanding at June 30, 2001 in which it has retained a residual interest (CMO Series 1993-I) and one CMO outstanding in which it has not retained a residual interest (CMO Series 1998-III). CMO Series 1993-I consists of mortgage securities collateral of $23.8 million that supports bonds of $23.3 million resulting in a retained CMO residual of $537,000. Because the Company did not retain any investment in CMO Series 1998-III, no economic benefit was or will be received and thus no net income or loss was or will be recognized related to this CMO other than amortization of unreimbursed bond issuance costs. The operating results of the Company are primarily based on the performance of CMO Series 1993-I. Operating results from this residual declined due to a higher prepayment rate during the first quarter and six months ended June 30, 2001 than during the same periods in 2000, causing the related collateral premium and bond discount to be amortized at a faster rate in 2001 than in 2000. The runoff rates for CMO Series 1993-I was 28% and 24% for the quarter and six months ended June 30, 2001, respectively, compared to 15% and 12% for the same periods in 2000. As a result, net amortization expense was higher in 2001 than in 2000 at $41,000 and $27,000 for the quarter and six months ended June 30, 2001, respectively, compared to $27,000 and $46,000 during the same periods in 2000. The following presents the weighted average collateral yields and borrowing rates for the periods shown:

-6- 9 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 the related CMOs. During 2001, the Company returned capital of $40,000. The Company believes it continues to qualify as a real estate investment trust subsidiary. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has exposure to interest rate risk related to its residual in CMO Series 1993-I. 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 $50,000 or decrease by $86,000, respectively. PART II. -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPSTEAD SECURITIES CORPORATION IV Date: August 10, 2001 By: /s/ ANDREW F. JACOBS -------------------------------------- Andrew F. Jacobs Executive Vice President - Finance Date: August 10, 2001 By: /s/ PHILLIP A. REINSCH -------------------------------------- Phillip A. Reinsch Senior Vice President - Control -7-

CAPSTEAD SECURITIES CORPORATION IV 10-Q