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").
Control of the Company within CMC's consolidated group 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, 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 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 primarily 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 Ginnie Mae certificates, Fannie Mac certificates, Freddie Mac certificates or mortgage pass-through ("Non-Agency") Certificates.
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, 1999, the Company had issued five series of CMOs (none since 1997) with an aggregate original principal balance of $2,003,125,000, $176,304,000 of which were issued outside the registration statement as private placements. 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. The Company has remaining capacity to issue $173,179,000 of CMOs under this shelf registration.
SPECIAL-PURPOSE FINANCE CORPORATION
Article III of the Company's Certificate of Incorporation limits the Company's purposes to (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.
COMPETITION
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
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 may elect, if they meet the Company's criteria for servicers, either to service the loans they sell or to sell the loans with no agreement with respect to servicing. The Company enters into servicing agreements with each servicer. As compensation for services rendered under the servicing agreements, 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.
In addition, CMC acts as administrator with respect to certain of the Company's Non-Agency Certificates and CMOs. During 2001, 2000 and 1999, CMC
retained fees for administering the Non-Agency Certificates and CMOs of $130,000, $154,000 and $180,000, respectively.
ITEM 2.
ITEM 2. PROPERTIES.
The Company conducts operations at CMC's offices in Dallas, Texas.
ITEM 3.
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.
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.
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. 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As discussed above, the Company will receive no economic benefit from the CMOs it has issued. Accordingly the Company has no appreciable exposure to market risks, including interest rate risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
Stockholder and Board of Directors CMC Securities Corporation IV
We have audited the accompanying balance sheets of CMC Securities Corporation IV (a wholly-owned subsidiary of Capstead Mortgage Corporation) as of December 31, 2001 and 2000, and the related statements of operations, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Dallas, Texas January 25, 2002
CMC SECURITIES CORPORATION IV BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes to financial statements.
CMC SECURITIES CORPORATION IV STATEMENTS OF OPERATIONS (IN THOUSANDS)
See accompanying notes to financial statements.
CMC SECURITIES CORPORATION IV STATEMENTS OF STOCKHOLDER'S EQUITY THREE YEARS ENDED DECEMBER 31, 2001 (IN THOUSANDS)
See accompanying notes to financial statements.
CMC SECURITIES CORPORATION IV STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes to financial statements.
CMC SECURITIES CORPORATION IV NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001
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.
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
recognized as an adjustment to interest expense by the interest method over the life of the related securities.
INCOME TAXES
Since its inception through December 21, 1995, the Company has 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.
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):
The weighted average effective interest rate for mortgage securities collateral was 7.94% and 7.76% during 2001 and 2000, respectively.
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):
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 7.94% and 7.77% during 2001 and 2000, respectively. Interest payments on collateralized mortgage securities of $48,081,000, $57,280,000 and $70,489,000 were made during 2001, 2000 and 1999, 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 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):
The table above reflects the estimated fair value of mortgage securities collateral, which reflect gross unrealized gains of $7.0 million and gross unrealized losses of $2.3 million as of December 31, 2001, and gross unrealized gains of $7.3 million and gross unrealized losses of $5.8 million as of December 31, 2000.
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, 2001.
Since 23% and 17% of mortgage securities collateral is secured by properties located in California and Virginia, respectively, the Company has a concentration of risk related to these markets. However, the Company's exposure arising from this concentration is reduced by the use of the senior/subordinate structure for securitizations.
NOTE G -- 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 H -- TRANSACTIONS WITH RELATED PARTIES
CMC acts as administrator in relation to certain of the Company's Non-Agency Certificates and CMOs in which it performs certain administrative functions. CMC 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 $130,000, $154,000 and $180,000 in 2001, 2000 and 1999, respectively.
The Company has a $1 million revolving subordinated promissory note with CMC under which interest accrues on amounts payable based on the annual federal short-term rate as published by the Internal Revenue Service. This note expires January 1, 2002. Repayments may be made as funds are available.
NOTE I -- NET INTEREST INCOME ANALYSIS (UNAUDITED)
The following 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):
The following summarizes the amount of change in interest income and interest expense due to changes in interest rates versus changes in volume (in thousands):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. The following financial statements of the Company are included in ITEM 8:
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 Incorporation(1) 3.2 Amendment to Certificate of Incorporation(4) 3.3 Bylaws(1) 3.4 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) 3.5 Bylaws of CMCSC IV-A(10) 3.6 Certificate of Incorporation of CMCSC IV-A, as filed with the Secretary of State of Delaware on December 13, 1995(10) 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) 4.5 Form of Fourth Supplement to the Indenture(8) 4.6 Form of Fifth Supplement to the Indenture(9) 10.1 Form of Pooling and Administrative Agreement(1) 10.2 Management Agreement between Registrant and Capstead Advisers, Inc. dated January 1, 1993(2) 10.3 Amended Management Agreement between Registrant and Capstead Advisers, Inc. dated October 1, 1993(3) 23 Consent of Ernst & Young LLP, Independent Auditors*
PART IV
ITEM 14. - CONTINUED
(b) Reports on Form 8-K: None.
- ---------- (1) Previously filed with the Commission as an exhibit 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 30, 1997
(9) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on October 29, 1997
(10) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 10-K for the year ended December 31, 1995
* Filed herewith.
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 22, 2002 By: /s/ ANDREW F. JACOBS -------------------------------- Andrew F. Jacobs Executive Vice President-Finance
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.
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.
INDEX TO EXHIBITS
- ---------- (1) Previously filed with the Commission as an exhibit 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 30, 1997
(9) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 8-K on October 29, 1997
(10) Previously filed with the Commission as an exhibit to the Registrant's Current Report on Form 10-K for the year ended December 31, 1995
* Filed herewith.