SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JUNE 27, 1997
(To Prospectus dated June 27, 1997)
$100,000,000
Dynex Capital, Inc.
% Senior Notes due July , 2002
------
Interest Payable and
------
The % Senior Notes Due July , 2002 (the "Notes") offered hereby are being
issued by Dynex Capital, Inc., a Virginia corporation (the "Company"), in an
aggregate principal amount equal to $100 million.
Interest on the Notes will be payable semi-annually in arrears on and ,
commencing , 1998. The Notes are redeemable at any time at the option of the
Company, in whole or in part, at a redemption price equal to the sum of (i) the
principal amount of the Notes being redeemed plus accrued interest to the
redemption date; and (ii) the Make-Whole Amount (as defined herein), if any. See
"Description of the Notes - Optional Redemption" herein. The Notes will mature
on July , 2002. In the event of a Change of Control Triggering Event (as defined
herein), holders of the Notes will have the option to cause the Company to
repurchase all or a portion of the Notes then outstanding at 101% of the
principal amount thereof, plus accrued interest to the date of repurchase.
The Notes will be senior, unsecured obligations of the Company and will rank
prior to all subordinated indebtedness of the Company and pari passu with all
other senior unsecured indebtedness of the Company outstanding on the date of
the issuance of the Notes.
The Notes constitute a separate series of debt securities which will be
represented by a global note in book-entry form ( "Global Note") registered in
the name of a nominee of The Depository Trust Company ("DTC"). Beneficial
interests in the Global Note will be shown on, and transfers thereof will be
effected only through, records maintained by DTC (with respect to beneficial
interest of beneficial owners). Owners of beneficial interests in the Global
Note will be entitled to physical delivery of Notes in certificated form equal
in principal amount to their respective beneficial interests only under the
limited circumstances described under "Description of the Notes - Book-Entry
System." Settlement for the Notes will be made in immediately available funds.
The Notes will trade in DTC's Same-Day Funds Settlement System until maturity or
earlier redemption, as the case may be, or until the Notes are issued in
certificated form, and secondary market trading activity in the Notes will
therefore settle in immediately available funds. All payments of principal and
interest in respect of the Notes will be made by the Company in immediately
available funds. See "Description of the Notes - Same-Day Settlement and
Payment."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Price to Underwriting Proceeds to
Public (1) Discounts an Commissions (2) Company (3)
- --------------------------------------------------------------------------------------------------------------------------------
Per Note % % %
...................................................
- ---------------------------------------------------------------------------------------------------------------------------------
Total...................................$ $ $
==================================================================================================================================
<FN>
(1) Plus accrued interest, if any, from ____________, 1997 to the date of delivery.
(2) See "Underwriting."
(3) Before deducting expenses estimated at $ which are payable by the Company.
</FN>
</TABLE>
________________________
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to their right
to reject orders in whole or in part. It is expected that delivery of the Notes
will be made in New York City on or about July , 1997.
________________________
PaineWebber Incorporated Smith Barney Inc.
________________________
The date of this Prospectus Supplement is June , 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
________________________
THE COMPANY
Dynex Capital, Inc. and its Subsidiaries and Affiliates (together, the
"Company" unless the context otherwise requires) is a mortgage and consumer
finance company which uses its loan production operations to create investments
for its portfolio. Currently, the Company's primary production operations
include the origination of mortgage loans secured by multi-family properties and
the origination of loans secured by manufactured homes. The Company has recently
expanded its production activities to include commercial real estate loans and
may expand into other financial products in the future. The Company will
generally securitize the loans funded as collateral for collateralized bonds,
limiting its credit risk and providing long-term financing for its portfolio.
Dynex Capital, Inc. and its Subsidiaries (together, "Dynex REIT") have elected
to be treated as a real estate investment trust ("REIT") for federal income tax
purposes and, as such, must distribute substantially all of its taxable income
to shareholders and will generally not be subject to federal income tax. See
"Federal Income Tax Considerations" in the accompanying Prospectus. The Company
changed its name to Dynex Capital, Inc. from Resource Mortgage Capital, Inc.,
effective subsequent to the annual shareholders' meeting in April 1997.
Dynex REIT has elected REIT status primarily for the tax advantages
associated with the REIT structure. Management believes that the REIT structure
is the most desirable structure for owning its investment portfolio due to the
elimination of corporate-level income taxation. In addition, because the Company
is not structured as a traditional lender which accepts deposits, it is subject
to substantially less regulatory oversight and incurs lower compliance expenses
compared to banks, thrifts and many other lenders and investors. The Company
believes that by issuing collateralized bonds, it has an advantage over its
competitors who securitize pools of loans as pass-through securities. Through
the issuance of collateralized bonds, the Company earns net interest income over
the life of these pools of loans, which is not subject to income tax because of
Dynex REIT's status as a REIT. By contrast, many of its competitors generate
immediate and fully taxable gain on sale income through the issuance of
pass-through securities.
The Company's principal source of earnings is net interest income on its
investment portfolio. The Company's investment portfolio consists principally of
collateral for collateralized bonds, adjustable-rate mortgage ("ARM") securities
and loans held for securitization. The Company funds its portfolio investments
with both borrowings and cash raised from the issuance of equity capital. For
the portion of the portfolio investments funded with borrowings, the Company
generates net interest income to the extent that there is a positive spread
between the yield on the earning assets and the cost of borrowed funds. For that
portion of the balance sheet that is funded with equity capital, net interest
income is primarily a function of the yield generated from the interest-earning
asset. The cost of the Company's borrowings may be increased or decreased by
interest rate swap, cap, or floor agreements.
USE OF PROCEEDS
The net proceeds from the sale of the Notes are estimated to be $ million.
The Company intends to initially use the net proceeds to reduce short-term debt
used to finance loans held for securitization during the accumulation period. In
the future, the Company intends to use the proceeds to support the accumulation
of additional loans held for securitization or for general corporate purposes
which may include financing future acquisitions, capital expenditures and
working capital.
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited
financial statements of the Company at and for the years ended December 31,
1996, 1995, 1994, 1993 and 1992 and from the unaudited financial information at
and for the three months ended March 31, 1997 and 1996. The data should be read
in conjunction with, and is qualified by reference to, the more detailed
information contained in the Consolidated Financial Statements and Notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996, and the Quarterly Report on Form 10-Q for the three months ended March
31, 1997, which are herein incorporated by reference. The results for the three
months ended March 31, 1997, as reported, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
-------------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------------- ------------ ----------- ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands, except per
share data)
Operating Data:
Total interest income $ 77,061 $ 72,165 $312,067 $ 253,882 $ 227,306 $172,256 $ 150,088
Total interest and related expense 56,431 54,346 237,160 211,463 182,942 131,629 126,731
---------- ----------- ---------- ------------ ------------- ------------- -----------
Net interest margin 20,630 17,819 74,907 42,419 44,364 40,627 23,357
Gain on sale of single-family - - 17,285 - - - -
mortgage operations
Net gain on sale of assets 2,487 201 503 9,651 27,723 27,977 28,941
Other income 412 616 1,116 2,963 1,454 734 426
General and administrative expenses 5,219 5,951 20,763 18,123 21,284 15,211 14,555
=========== =========== ========== ========= =========== =========== =========
Net income $ 18,310 $ 12,685 $ 73,048 $ 36,910 $ 52,257 $ 54,127 $ 38,169
=========== ========== ========== ========= ========== =========== =========
Total revenue $ 79,960 $ 72,982 $ 330,971 $266,496 $256,483 $200,967 $179,455
=========== =========== =========== ========= =========== ============ =========
Total expenses $ 61,650 $ 60,297 $ 257,923 229,586 $204,226 146,840 $141,286
============= =========== =========== ========= ============ ============ ==========
Net income per common share (1)
Primary $ 0.35 $ 0.26 $ 1.54 $ 0.85 $ 1.32 $ 1.56 $ 1.37
Fully-diluted (2) 0.35 - 1.48 - - - -
Balance Sheet Data (as of
period end):
Portfolio assets: (3)
Collateral for collateralized
bonds $ 2,498,964 $1,576,171 $2,702,294 $1,028,935 $ 441,222 $ 434,698 $ 571,567
Mortgage securities 911,973 2,073,726 892,037 2,149,416 2,579,759 2,300,949 1,401,578
Other 118,628 24,927 96,236 27,585 16,859 - -
Loans held for securitization 388,077 335,808 265,537 220,048 501,272 777,769 123,627
-------------- ---------------------------------------------------------------- ---------------
Total investments $ 3,917,642 $4,010,632 $3,956,104 $3,425,984 $ 3,539,112 $3,513,416 $2,096,772
Total assets $ 3,949,866 $4,082,140 $3,987,457 $3,490,038 $ 3,600,596 $3,726,762 $2,239,656
Collateralized bonds (4) $ 2,325,372 $1,468,925 $2,519,708 $ 949,139 $ 424,800 $ 432,677 $ 561,441
Repurchase agreements 842,167 2,003,263 756,448 1,983,358 2,804,946 2,754,166 1,315,334
Total liabilities 3,444,917 3,706,805 3,483,840 3,135,215 3,403,125 3,473,730 2,062,219
Shareholders' equity (5) 446,469 361,720 439,215 359,582 270,149 253,032 177,437
Selected Ratios and Data:
Net interest spread 1.76% 1.71% 1.58% 1.06% 1.12% 1.55% 1.47%
Return on average common 18.8% 15.1% 21.6% 12.5% 19.2% 25.8% 27.7%
shareholders' equity (5)
Ratio of available earnings to 1.89x 1.34x 1.56x 1.26x 1.35x 1.69x 1.80x
fixed charges (6)
Ratio of available earnings to
combined fixed charges and 1.75x 1.32x 1.52x 1.25x 1.35x 1.69x 1.80x
preferred stock dividends(6)
<FN>
(1) Net income per share has been adjusted to reflect the two-for-one split of
the Company's common stock effective May 5, 1997.
(2) Fully-diluted net income per common share is not presented for 1995 and
for the three months ended March 31, 1996, respectively, as the Company's
cumulative convertible preferred stock and Stock Appreciation Rights
(`SARs') outstanding were anti-dilutive. Prior to 1995, no preferred
stock was outstanding, and all SARs outstanding were anti-dilutive.
(3) Collateral for collateralized bonds and mortgage securities are shown at
fair value as of March 31, 1997 and 1996, December 31, 1996, 1995 and
1994 and at amortized cost as of December 31, 1993 and 1992
(4) Substantially all of this debt is non-recourse to the Company
(5) Excludes unrealized gain/loss on investments available-for-sale
(6) For purposes of computing the ratios, "available earnings" consist of net
income before income tax plus interest and debt expense and excludes fixed
charges related to those collateralized bonds issued by the Company which
are non-recourse to the Company. The sum is divided by fixed charges, which
consists of total interest and debt expense, and, where applicable, the
requirements to cover the preferred
stock dividend.
</FN>
</TABLE>
Results of Operations
For the three months ended March 31, 1997 compared to the three months ended
March 31, 1996
The increase in the Company's earnings during the three months ended March
31, 1997 as compared to the same period in 1996 is primarily the result of an
increase in net interest margin, an increase in the gain on sale of assets and
reduction in general and administrative expenses.
Net interest margin for the three months ended March 31, 1997 increased to
$20.6 million, or 16%, over the net interest margin of $17.8 million for the
same period for 1996. This increase was the result of the increased contribution
from the net investment in collateralized bonds issued during 1996 and the
increase in the Company's investment in other mortgage securities during the
past several quarters. These increases were partially offset by a decrease in
the contribution from ARM securities as a result of the securitization of
several ARM securities in a collateralized bond issued in September 1996.
For the three months ended March 31, 1997, the Company recorded a net gain on
sale of assets of $2.5 million which was primarily the result of receiving
premiums of $2.4 million on $400 million notional amount of call options which
expired unexercised during the first quarter. The net gain on sale of assets for
the three months ended March 31, 1997 represents an increase of $2.3 million
from $0.2 million for the three months ended March 31, 1996.
General and administrative expenses decreased $0.7 million, or 12%, to $5.2
million for the three months ended March 31, 1997 as compared to the same period
for 1996. The decrease is a result of the sale of the Company's single-family
loan origination and servicing operations on May 13, 1996, offset partially by
the growth in the infrastructure of the current multi-family and manufactured
housing production operations. General and administrative expenses should
increase on a quarter by quarter basis during 1997 as the Company continues to
build its production infrastructure.
1996 compared to 1995
Net income and net income per common share increased for 1996 as compared to
1995 primarily as a result of the increase in net interest margin and the gain
on sale of the single-family mortgage operations. This increase was offset
partially by a decline in the gain on sale of assets and an increase in general
and administrative expenses.
Net interest margin for 1996 increased to $74.9 million, or 76.6%, over net
interest margin of $42.4 million for 1995. The increase in net interest margin
resulted from the overall increase in the net interest spread on all
interest-earning assets, which increased to 1.58% for 1996 versus 1.06% for
1995. The increase in net interest margin also resulted from the increased
contribution from the Company's net investment in collateralized bonds. The
0.52% increase in the net interest spread is attributable to the ARM securities
being fully-indexed during 1996 and the more favorable interest rate environment
which benefitted interest costs associated with collateralized bonds and
borrowings related to the ARM securities. During 1995, as a result of rising
short-term rates during both 1994 and early 1995, the Company's ARM securities
were generally not fully-indexed throughout the year.
The sale of the Company's single-family mortgage operations in 1996 generated
a net gain of $17.3 million. Previously, the single-family mortgage operations
had contributed to the Company's earnings through the securitization and sale of
loans funded through its production activities as pass-through securities,
recorded as gain on sale of assets, and through the funding of loans which were
securitized in collateralized bonds. In 1995, the Company recorded a net gain on
sale of assets related to the securitization and sale of loans amounting to $4.7
million. No gain on securitization or sale of loans was recorded in 1996. Net
gain on sale of assets during 1996 resulted primarily from the sale of certain
portfolio assets totaling approximately $2.0 million, offset partially by the
write-down of certain assets for permanent impairment totaling $1.5 million. In
1995, the Company sold portfolio assets for a net gain of $3.8 million and
recorded no write-downs. The Company also sold previously purchased mortgage
servicing rights for a gain of $1.2 million in 1995.
<PAGE>
In 1996, general and administrative expenses increased $2.6 million, or
14.6%, to $20.8 million, as the Company continued to build its infrastructure
for its manufactured housing operations. General and administrative expenses
also increased from 1995 as a result of the Company's continued expansion of its
wholesale origination capabilities for its single-family mortgage operations
prior to its sale. The Company continues to expand its manufactured housing
operations, and in August 1996, acquired Multi-Family Capital Markets ("MCM") to
expand its multi-family and commercial real estate lending businesses. The
growth of the production operations should continue to cause general and
administrative expenses to increase in 1997.
1995 compared to 1994
The decrease in the Company's earnings for 1995 as compared to 1994 was
primarily the result of the decrease in net gain on sale of assets and the
decrease in net interest margin. These decreases were partially offset by a
decrease in general and administrative expenses.
The net gain on sale of assets decreased $18.0 million, or 65.2%, to $9.7
million in 1995 from $27.7 million in 1994. This decrease resulted from the
combined effect of (i) the Company's change in securitization strategy in 1995
to the issuance of collateralized bonds which were accounted for as financing
transactions, versus the use of pass-through mortgage security structures used
in 1994, which were accounted for as sales, (ii) the lower mortgage loan funding
levels by the Company as a result of a decrease in overall industry-wide
mortgage loan originations, resulting from a higher level of price competition
for mortgage loans and (iii) the flatter yield curve, which had an adverse
impact on the Company's production of ARM loans.
Net interest margin decreased $2.0 million, or 4.4%, to $42.4 million in 1995
from $44.4 million for 1994. This decrease resulted primarily from the change in
the net interest spread on the interest-earning assets, which declined from
1.12% in 1994 to 1.06% in 1995. The decline in the net interest spread was
attributable to a temporary reduction in the net interest spread in ARM
securities. This temporary reduction resulted from the interest rate on
borrowings increasing at a faster rate than the ARM securities which
collateralize these borrowings. In December 1995, the net interest spread had
increased to 1.18% as a result of the upward resets on the ARM securities and
the more favorable short-term interest rate environment. Net interest margin
also declined as a result of the increase in the provision for credit losses,
which was $2.9 million and $2.1 million in 1995 and 1994, respectively.
General and administrative expenses decreased 14.9%, to $18.1 million for
1995 from $21.3 million for 1994. This decline resulted primarily from the
Company's effort to reduce costs in line with the reduced level of mortgage loan
originations.
Subsequent Events
At the annual shareholders' meeting on April 24, 1997, the shareholders
approved a two-for-one split of the issued and outstanding shares of the
Company's common stock which became effective May 5, 1997. Additionally, on June
12, 1997, the Company announced its second quarter dividend of $0.335 per share
for the common stock, which was a 3% increase from the first quarter dividend on
a post-split basis.
The Company securitized approximately $1.0 billion in loans and other
collateral on June 25, 1997. The total amount of bonds issued in that
securitzation were $984 million.
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company
at March 31, 1997, and as adjusted to give effect to the issuance of the Notes
and the application of the estimated net proceeds therefrom as described under
"Use of Proceeds" as described herein.
<TABLE>
<CAPTION>
March 31, 1997
---------------------------------------------
(dollars in thousands) Actual As Adjusted
------------------- -----------------
<S> <C> <C>
Total Debt:
Collateralized bonds (1)............................................. $ 2,325,372 $ 2,325,372
Repurchase agreements................................................ 842,167 842,167
Notes payable........................................................ 199,153 99,153
Senior Notes payable as adjusted..................................... 44,000 144,000
------------------- -----------------
Total debt......................................................... $ 3,410,692 $ 3,410,692
------------------- -----------------
Shareholders' Equity:
Preferred Stock, par value $.01 per share,
50,000,000 shares authorized;
Series A Cumulative Convertible Preferred Stock, $24 per share
liquidation value, 1,499,300 shares issued and outstanding $ 34,245 $ 34,245
Series B Cumulative Convertible Preferred Stock, $24.50 per share
liquidation value, 2,106,743 shares issued and outstanding 49,316 49,316
Series C Cumulative Convertible Preferred Stock, $30 per share
liquidation value, 1,840,000 shares issued and outstanding 52,740 52,740
Common stock, par value $.01 per share, 100,000,000 shares
authorized; 42,053,042 (2) issued and outstanding .............. 421 421
Additional paid in capital........................................... 301,045 301,045
Net unrealized gain on investments available-for-sale................ 58,480 58,480
Retained earnings.................................................... 8,702 8,702
------------------- -----------------
Total shareholders' equity......................................... 504,949 504,949
------------------- -----------------
Total capitalization............................................. $ 3,915,641 $ 3,915,641
=================== =================
<FN>
(1)Collateralized bonds are non-recourse to the Company. As of March 31, 1997,
$350 million of various classes of collateralized bonds have been retained
by the Company and have been pledged as security for $365 million of
repurchase agreements, which are recourse to the Company. These repurchase
agreement amounts have been included in collateralized bonds in the above
table.
(2)Adjusted to reflect the two-for-one split of the Company's common stock
effective May 5, 1997.
</FN>
</TABLE>
<PAGE>
BUSINESS
Business Focus and Strategy
The Company's overall level of earnings is dependent upon (i) the spread
between interest earned on its investment portfolio, and the cost of borrowed
funds to finance those assets; and (ii) the aggregate amount of interest-earning
assets that the Company has on its balance sheet. The Company strives to create
a diversified portfolio of investments that in the aggregate generates stable
income in a variety of interest rate and prepayment rate environments and
preserves the capital base of the Company. In many instances, the Company's
investment strategy has involved not only the creation or acquisition of the
asset, but also structuring the related borrowings through the securitization
process to create a stable yield profile.
Lending Strategies
The Company generally adheres to the following business strategies in its
lending operations:
develop production capabilities to originate and acquire financial assets
in order to create attractively priced investments for its portfolio,
generally at a lower cost than if investments with comparable risk profiles
were purchased in the secondary market;
focus on loan products that maximize the advantages of the REIT tax
election;
emphasize direct relationships with the borrower and minimize, to the
extent practical, the use of origination intermediaries;
use internally generated guidelines to underwrite loans for all product
types and maintain centralized loan pricing;
perform the servicing function for loans on which the Company has credit
exposure; emphasize the use of early intervention, aggressive collection
and loss mitigation techniques in the servicing process to manage and seek
to reduce delinquencies and to minimize losses in its securitized loan
pools; and
vertically integrate the loan origination process by performing the
sourcing, underwriting, funding and servicing of loans to maximize
efficiency and provide superior customer service.
Investment Portfolio Strategies
The Company adheres to the following business strategies in managing its
investment portfolio:
use its loan origination capabilities to provide assets for its investment
portfolio, generally at a lower effective cost than if investments of
comparable risk profiles where purchased in the secondary market;
securitize its loan production to provide long-term financing and to reduce
the Company's liquidity, interest rate and credit risk for these long-term
assets;
utilize leverage to finance purchases of loans and investments in line with
prudent capital allocation guidelines which are designed to balance the
risk in certain assets, thereby increasing potential returns to
shareholders while seeking to protect the Company's equity base;
structure borrowings to have interest rate adjustment indices and interest
rate adjustment periods that, on an aggregate basis, generally correspond
(within a range of one to six months) to the interest rate adjustment
indices and interest rate adjustment periods of the related asset; and
utilize interest rate caps, swaps and similar instruments and
securitization vehicles with such instruments embodied in the structure to
mitigate the risk of the cost of its variable rate liabilities increasing
at a faster rate than the earnings on its assets during a period of rising
interest rates.
Generally, the Company does not seek gain-on-sale treatment in accounting
for its securitizations for financial accounting or tax reporting purposes.
Rather, the Company generally finances its assets through structured debt
vehicles (i.e., collateralized bonds) where the emphasis is on earning net
interest income over the life of the associated assets and not gains from the
sales of assets. The Company's strategy is to build and hold a portfolio of
investments that generates net interest margin over time and allows the Company
to take full advantage of its REIT status. While securitizing and selling assets
(generally through a security where a REMIC election has been made) results in
greater earnings and taxable income during the period of production (assuming
constant portfolio assumptions) due to the current income recognition of the
present value of future cash flows (i.e. the gain-on-sale), management believes
that over the long term the Company will produce a tax-advantaged stream of
income and a more stable dividend flow to shareholders because its earnings will
be dependent on the size of the Company's investment portfolio, rather than on
its quarterly loan production level. Gain-on-sale accounting for such sales
presents as current income the expected future cash flows from the loans. Actual
resulting cash flows are subject to revision due to loan pool performance
(should actual losses and prepayment experience differ from the assumed levels),
while net interest margin accounting records income essentially as cash flow is
received. Additionally, while management intends to aggressively manage costs in
all production cycles, net interest margin accounting provides management more
flexibility to reduce its loan production rate during periods in which
management believes the market conditions for loan production are unattractive,
without necessarily experiencing an immediate decline in net income. Companies
utilizing gain-on-sale accounting will typically experience a more exaggerated
decline in net income during periods of declining loan origination volume.
Production Operations
The Company's current production operations consist primarily of the
origination or purchase of loans and the securitization of such loans. The
production operations have historically enabled the Company to enhance its
return on shareholders' equity ("ROE") by earning a favorable net interest
spread while loans are being accumulated for securitization and creating
investments for its portfolio at a lower cost than if such investments were
purchased from third parties. The creation of investments involves the issuance
of collateralized bonds or pass-through securities collateralized by the loans
generated from the Company's production activities and the retention of one or
more classes of the collateralized bonds or securities relating to such
issuance. The issuance of collateralized bonds and pass-through securities
generally limits the Company's credit and interest rate risk in contrast to
retaining loans in its investment portfolio in whole-loan form.
Until May 1996, the Company's production operations were comprised mainly
of its single-family mortgage operations that concentrated on the
"non-conforming" segment of the residential loan market. The Company funded its
single-family loans directly through mortgage brokers (wholesale) and purchased
loans through a network of mortgage companies (correspondents). The
single-family loans which were originated or purchased by the Company were
secured by properties throughout the United States. The Company built this
single-family production operation from a start-up in 1988, funding $18.2
billion in principal amount of loans since inception. Loans originated through
the Company's former single-family mortgage operations constitute the majority
of loans underlying the securities that comprise the Company's current
investment portfolio.
On May 13, 1996, the Company sold its single-family mortgage operations to
Dominion Mortgage Services, Inc. ("Dominion"), a wholly-owned subsidiary of
Dominion Resources, Inc. (NYSE:D), for $68 million. Included in the sale of the
single-family mortgage operations were the Company's single-family
correspondent, wholesale and servicing operations. The sale resulted in a gain
of $17.3 million, which was net of a provision of $31.0 million for possible
losses on single-family loans where the Company has retained a portion of the
credit risk and where prior to the sale the Company had serviced such
single-family loans. The terms of the sale included an initial cash payment of
$20.5 million, with the remainder of the purchase price to be paid evenly over
the next five years pursuant to a note agreement. As a result of the sale, the
Company is precluded from originating certain types of single-family mortgage
loans through either correspondents or a wholesale network for a period of five
years from the date of sale. The Company may acquire, however, single-family
sub-prime mortgage loans through bulk purchases of $25 million or more.
Since the sale of the single-family mortgage operations to Dominion described
above, the Company's primary production operations have been focused on
multi-family and manufactured housing lending. The Company has recently
broadened its multi-family lending capabilities to include other types of
commercial real estate loans and expanded its manufactured housing lending to
include inventory financing to manufactured housing dealers. The Company may
also purchase single-family loans on a "bulk" basis from time to time and may
originate such loans on a retail basis.
The Company believes that it has been successful in operating its production
activities. Since its initial public offering in February 1988, the Company's
average total ROE has been 17%. The Company estimates that its ROE has averaged
4% higher than it would have been otherwise as a result of its production
operations. For purposes of the above percentages, ROE was calculated on a
weighted average basis prior to unrealized gains or losses on available-for-sale
mortgage securities. The single-family operations contributed $62 million to the
Company's net earnings from 1988 through the sale in 1996, including the $17.3
million of net gain recorded in May 1996, and produced a positive mark-to-market
on related single-family investments of $54.6 million as of March 31, 1997.
While there can be no assurances in this regard, the Company believes that
its future production activities will continue to have a favorable impact on its
ROE and to create investments for its portfolio at a lower all-in cost than if
investments with comparable risk profiles were purchased from third parties.
Multi-family Lending Operations
The Company currently originates multi-family mortgage loans which are
secured by apartment properties that have qualified for low-income housing tax
credits ("LIHTCs") under Section 42 of the Internal Revenue Code of 1986, as
amended. Since 1992, the Company has funded approximately $403 million of
multi-family and commercial mortgage loans through a brokerage arrangement with
Multi-Family Capital Markets ("MCM"), a Richmond, Virginia-based company which
the Company acquired in August 1996 for $4 million. The Company believes the
acquisition of MCM will accelerate the Company's efforts of expanding its
multi-family lending activities and improving its competitive position in the
marketplace for such loans. During the first quarter of 1997, the Company
broadened its income property lending beyond LIHTC apartment properties to
include commercial industrial warehouse properties. Future commercial lending
efforts may include apartment properties that have not received LIHTCs, assisted
living and retirement housing, limited and full service hotels, urban or
suburban office buildings, retail shopping strips and centers, other light
industrial buildings and manufactured housing parks. The Company contemplates
that it would service and securitize such loans from its multi-family production
operations.
As of May 31, 1997, the Company had $256 million in principal balance of
multi-family loans held for securitization. The Company has commitments to fund
loans over the next 20 months of approximately $523 million, as of May 31, 1997.
As of such date, the Company had 24 employees directly involved in its
multi-family lending operations.
Current federal law provides that LIHTCs are allocated under two methods. For
apartment properties that are not financed through the issuance of tax-exempt
bonds, each state receives an annual allocation of LIHTCs. Each state then
allocates portions of its LIHTC allocation to various developers for the purpose
of constructing or rehabilitating low-income housing apartment properties. Based
upon current allocation amounts, approximately 110,000 apartment units
nationwide are constructed or rehabilitated annually as a result of such LIHTCs.
For property owners to be eligible for, and remain in compliance with the LIHTC
regulations, owners must "set aside" at least 20% of the units for rental to
families with income of 50% or less of the median income for the locality as
determined by the Department of Housing and Urban Development ("HUD"), or at
least 40% of the units to families with income of 60% or less of the HUD median
income. Most owners elect the "40-60 set-aside" and designate 100% of the units
in the project as LIHTC units. Additionally, rents cannot exceed 30% of the
annual HUD median income adjusted for the unit's designated "family size."
Assuming the apartment properties are eligible for and remain in compliance with
the LIHTC regulations, the property owner receives a tax credit for each year of
a ten year period equal to approximately 9% of the eligible basis of the
apartment property (the "9% Credits").
For apartment properties that are financed through the issuance of tax-exempt
bonds, there is no allocation, and, subject to compliance with certain initial
and on-going requirements and restrictions that are similar to those set forth
in the prior paragraph, each apartment property automatically qualifies for
LIHTCs for each year of a ten year period, equal to approximately 4% of the
eligible basis of the apartment property (the "4% Credits").
Generally, the LIHTCs are sold by the developers to investors prior to
construction in order to provide additional equity for the project. The sale of
the 9% Credits typically provides funds equal to approximately 50% of the
construction costs of the project; the sale of the 4% Credits typically provides
funds equal to approximately 20% of the construction costs of the project. The
multi-family loans made by the Company normally fund the difference between the
project cost (including a fee to the developer) and the funds generated from the
sale of the 9% Credits. Recently, the Company has entered into a "master
commitment" with a large investor in apartment properties with 4% Credits to
purchase the tax-exempt bonds related to such properties, and may administer the
construction process relating to certain of those properties. In addition to
providing substantial equity for the apartment project, the Company believes the
LIHTCs provide a strong on-going incentive to the owner of the property to
maintain the property and meet its debt service obligations, since the owner,
upon foreclosure, would lose any LIHTCs not already taken and may be subject to
recapture of a portion of the LIHTCs already taken.
With the acquisition of MCM, the Company's multi-family originations are now
sourced directly through the Company's relationships with developers and
syndicators, rather than through correspondent or broker relationships. Once a
sufficient volume of multi-family loans are accumulated, the Company plans to
securitize such loans through the issuance of collateralized bonds, or, in the
case of tax-exempt bonds, through the issuance of a pass-through security. The
Company anticipates that the issuance of the collateralized bonds and
pass-through securities will limit the Company's future credit and interest rate
risk on such multi-family originations. The Company presently intends to
accumulate approximately $250 million of multi-family loans for a series of
collateralized bonds to be issued during the last two quarters of 1997. The
Company has previously issued one series of collateralized bonds backed by
multi-family loans. The Company has not issued any pass-through securities
backed by tax-exempt bonds. See "Securitization Strategy" below.
Underwriting. The Company underwrites all of its multi-family originations.
Among other criteria, the Company underwrites each multi-family loan or bond to
a minimum debt service coverage ratio of 1.15 times the property's net operating
income, with a maximum loan to value of 80% of appraised value, or in the case
of a bond, to 85% of appraised value. The Company believes that such criteria
are consistent with general underwriting standards for LIHTC multi-family
properties used in the industry. These underwriting criteria are designed to
assess the particular property's current and future capacity to meet all debt
service payments on a current basis and to ensure that adequate collateral value
exists to support the principal amount of the loan or bond in the event the
Company is required to foreclose on such properties. Prior to committing to make
and fund such loans, the Company's internal loan committee, a majority of whose
members are not directly involved in such activities, reviews and approves such
lending transactions.
Because the Company funds such loans or bonds at fixed-interest rates and
also commits to funding future loans or bonds at fixed-interest rates, the
Company is exposed to interest rate risk to the extent that interest rates
increase in the future. The Company strives to mitigate such risk by the use of
futures contracts and forward contracts on United States treasury securities
with duration characteristics similar to the multi-family loans, bonds and
commitments.
Manufactured Housing Lending Operations
The Company began to build the infrastructure of its manufactured housing
lending operations during the fourth quarter of 1995 and commenced funding loans
on manufactured homes during the second quarter of 1996. The Company believes
that manufactured housing is a growing market with strong customer demand. The
Company entered this business primarily to diversify its existing product line
and to increase its overall production. Manufactured housing lending complements
the Company's residential lending and securitization expertise.
A manufactured home is distinguished from a traditional single-family home in
that the housing unit is constructed in a plant, transported to the site and
secured to a foundation, whereas a single-family home is built on the site.
Loans on manufactured homes may take the form of a consumer installment loan
(i.e., a personal property loan) when the borrower rents the lot underlying the
manufactured home or owns the lot and finances it separately, or a traditional
mortgage loan when the borrower finances both the lot and the manufactured home.
To date, the Company has only originated consumer installment loans on
manufactured homes, but plans to originate mortgage loans on manufactured homes
before the end of 1997. The Company offers both fixed and adjustable rate loans
with terms ranging from 7 to 30 years. As of May 31, 1997, the Company had $106
million in principal balance of manufactured housing loans in inventory. The
average funded amount per loan was approximately $37,500. As of May 31, 1997,
the Company had commitments outstanding of approximately $81.6 million. As of
such date, the Company had 87 employees directly involved in its manufactured
housing lending operations. The Company securitized approximately $108 million
of the manufactured housing production in a securitization on June 25, 1997.
The rising cost of site built single-family housing in the United States has
shifted consumer demand toward manufactured housing as an affordable alternative
to traditional single-family homes. According to the December 1996 Manufacturing
Report by the Manufactured Housing Institute, manufactured home sales,
approximately 52% of which were multi-section homes, represented an estimated
24% of all new housing units produced in the United States in 1996 compared to
17% in 1991. During 1996, approximately 363,000 manufactured homes were shipped
to retailers (i.e., dealers) which then sell the homes to consumers, with the
majority of such sales being financed as personal property loans using an
installment sales contract. As the manufactured home is generally transported on
public roads, each home is usually titled with the respective state department
of motor vehicles.
The Company's manufactured housing lending business is operated out of the
Company's main office in Glen Allen, Virginia (the "home" office) and is
supported currently with regional offices in North Carolina, Georgia, Texas,
Michigan and Washington state. Each regional office supports three to four
district sales managers who establish and maintain relationships with
manufactured housing dealers. By using the home/regional/district office
structure, the Company has created a decentralized customer service and loan
origination organization with centralized controls and support functions. The
Company believes that this approach also provides the Company with a greater
ability to maintain customer service, to respond to market conditions, to enter
and exit local markets and to test new products.
The Company's current originations are sourced through its dealer network and
direct marketing to consumers. In the future, the Company plans to expand its
sources of origination to nearly all sources for manufactured housing loans by
establishing relationships with park owners, developers of manufactured housing
communities, manufacturers of manufactured homes, brokers and correspondents.
The Company currently advertises in trade publications to reach dealers and
solicits loans through direct mail and telemarketing.
The Company's dealer qualification criteria includes minimum equity
requirements, minimum years of experience for principal officers, acceptable
historical financial performance and various business references. The dealer
application package is submitted by the dealer to the regional office manager
for review and approval. As of May 31, 1997, the Company had 727 approved
dealers with 1,359 sales locations. The Company plans to continue to expand its
dealer network.
Inventory Financing. In 1997, the Company began offering inventory financing,
or "lines of credit," to retail dealers for the purpose of purchasing
manufactured housing inventory to display and sell to customers. Under such
arrangements, the Company lends against the dealer's line of credit when an
invoice representing the purchase of a manufactured home by a dealer is
presented to the Company by the manufacturer of the manufactured home. Prior to
approval of the line of credit for the dealer, the Company performs a financial
review of the manufacturer as well as the dealer. The Company also performs
monthly inspections of the dealer's inventory, financed by the Company, and
annual reviews of both the dealer and the manufacturer. Entrance into this area
of financing is consistent with the Company's strategy to be a "full-service"
provider to the manufactured housing industry.
Underwriting. The Company underwrites 100% of the manufactured housing
loans it originates. The loans are underwritten at the regional offices based on
guidelines established by the Company. Home office approvals are required when
loan amounts exceed specified lines of credit authority. Turnaround for
approvals are within four to twenty-four hours, with fundings usually within
twenty-four to forty-eight hours of receipt of complete documentation.
Because of the decentralization of the Company's manufactured housing
business, in addition to the Company's underwriting process and dealer approval
program, the Company also currently performs regional office reviews on a
periodic basis to ensure that required procedures are being followed. These
reviews include the collections area, the remarketing of foreclosed or
repossessed homes, underwriting, dealer performance and quality control. The
periodic regional quality control reviews are performed to ensure that the
underwriting guidelines are consistently applied. The Company also performs
customer audits both before and after funding of the loan.
Manufactured housing loans are primarily fixed-interest rate with some
adjustable-rate and step-rate loans. The Company will seek to mitigate interest
rate risk associated with fixed-rate products through the use of forward sales,
futures and/or swaps until the pool of loans is securitized. As of May 31, 1997,
95.4% of the loans were fixed-rate.
The Company perfects its security interest on the loans that are in the form
of installment sales contracts by filing title with the department of motor
vehicles or Uniform Commercial Code financing statements with the respective
state. Such loans are eligible REIT assets.
Single-family Lending
Pursuant to the terms of the sale of the Company's single-family operations
to Dominion during the second quarter of 1996, the Company is precluded from
originating or purchasing certain types of single-family loans through a
wholesale or correspondent network through April 2001. However, the Company may
purchase any type of single-family loans on a "bulk" basis (i.e., in blocks of
$25 million or more) and may originate loans on a retail basis. The Company
intends to purchase single-family loans in bulk to the extent that the Company
can generate a favorable return on investment upon securitization. Due to the
sale of its single-family operations, the Company does not currently have the
internal capability to directly underwrite or service single-family mortgage
loans. In the future, the Company may re-establish an internal underwriting and
servicing capability for single-family mortgage loans, similar to that which
existed prior to the sale of its single-family operations. In the interim, the
Company plans to occasionally purchase "A" quality loans in bulk and the Company
may utilize independent contractors to assist in the underwriting and servicing
of such loans. During the first two quarters of 1997, the Company has purchased
$801 million of single-family loans through such bulk loan purchases and has
securitized substantially the entire amount through a securitization on June 25,
1997.
Other Production Activities
In addition to the production activities described above, the Company makes
secured loans against single-family homes that serve as model homes for its
builder and also extends leases on such homes that it has bought from the
builder. As of May 31, 1997, the Company had $84.2 million of homes leased to
builders and $6.5 million of loans to builders. Prior to providing such a loan
or purchasing a model home which is leased back to the builder, the Company has
an appraisal conducted on each model home and will limit the amount of the loan
or purchase price for such a house to a predetermined percentage of the home's
appraised value. When the Company purchases a model home, it will simultaneously
enter into a lease with the home builder for a lease term of generally twelve to
eighteen months. At the end of the lease term, the builder may assist in selling
the model home, at the option of the Company. The lease rates are typically
based on one-month London Interbank Offered Rate ("LIBOR") plus a spread. When
the Company provides a loan, the model home serves as collateral for the loan.
The loan generally has a term of twelve to eighteen months with an interest rate
based on one-month LIBOR plus a spread.
In the future, the Company may enter into other forms of lending or leasing
activities, where it feels it can use its tax status as a REIT as a competitive
advantage. The Company may engage in these activities through internal growth or
through acquisition.
Loan Servicing
During 1996, the Company established the capability to service both
multi-family and manufactured housing loans funded through its production
operations. The purpose of servicing the loans funded through the production
operations is to better manage the Company's credit exposure while the loans are
held for securitization, as well as the exposure which is usually generated when
the Company retains a portion of the credit risk on a pool of the mortgage loans
after securitization. The multi-family servicing function is located in Glen
Allen, Virginia and includes collection and remittance of principal and interest
payments, administration of tax and insurance accounts, management of the
replacement reserve funds, collection of certain insurance claims and, if the
loan defaults, the resolution of such defaulted loan through either a
modification or the foreclosure and sale of the property.
The manufactured housing servicing function is operated in Fort Worth, Texas.
As servicer of such manufactured housing loans, the Company is responsible for
the collection of monthly payments, and if the loan defaults, the resolution of
such defaulted loan through either a modification or the repossession and sale
of the related property. Minimizing the time between the date the loan goes in
default and the time that the manufactured home is repossessed and sold is
critical to mitigating losses on these loans.
Securitization Strategy
When a sufficient volume of loans is accumulated, the Company will generally
securitize these loans through the issuance of collateralized bonds. The Company
believes that securitization is an efficient and cost effective way for the
Company to (i) reduce capital otherwise required to own the loans in whole loan
form; (ii) limit the Company's exposure to credit risk on the loans; (iii) lower
the overall cost of financing the loans; and (iv) depending on the
securitization structure, limit the Company's exposure to interest rate and/or
valuation risk. As a result of the reduction in the availability of mortgage
pool insurance, and the Company's desire to reduce both its recourse borrowings
as a percentage of its overall borrowings as well as the variability of its
earnings, the Company has utilized the collateralized bond structure for
securitizing substantially all of its loan production since the beginning of
1995. Prior to 1995, the Company issued pass-through securities, in a
senior-subordinated structure or with pool insurance.
The Company plans to securitize multi-family tax-exempt bonds through the
issuance of pass-through securities, as the tax-exempt nature of the interest
income must be "passed through" to the holders of such securities. As with other
classes of its assets, the Company believes that such a securitization will be
an efficient and cost effective way for the Company to (i) reduce capital
otherwise required to be maintained; (ii) limit the Company's exposure to credit
risk on the bonds; and (iii) limit the Company's exposure to interest rate
and/or valuation risk. As of the date hereof, the Company has not purchased or
securitized any tax-exempt bonds.
All securities are structured by the Company so that a substantial portion of
the securities are rated in one of the two highest rating categories by at least
one of the nationally recognized rating agencies (for example, AAA or AA by
Standard and Poor's Ratings Services). Credit enhancement for these securities
may take the form of over-collateralization, subordination, reserve funds,
mortgage pool insurance, bond insurance, third-party limited guaranties or any
combination of the foregoing. The Company strives to use the most cost effective
security structure and form of credit enhancement available at the time of
securitization. Securities issued by the Company are not generally guaranteed by
a federal agency. Each series of securities is expected to be fully payable from
the collateral pledged to secure the series. Regardless of the form of credit
enhancement, the Company may retain a limited portion of credit risk related to
the loans or bonds after securitization.
<PAGE>
Master Servicing
The Company performs the function of master servicer for certain of the
securities it has issued, including all of the securities it issued since 1995.
The master servicer's function typically includes monitoring and reconciling the
loan payments remitted by the servicers of the loans, determining the payments
due on the securities and determining that the funds are correctly sent to a
trustee or investors for each series of securities. Master servicing
responsibilities also include monitoring the servicers' compliance with its
servicing guidelines. As master servicer, the Company is paid a monthly fee
based on the outstanding principal balance of each loan master serviced by the
Company as of the last day of each month. The Company has been master servicing
mortgage loans since November 1993.
Investment Portfolio
Strategy
The core of the Company's earnings is derived from its investment portfolio.
The Company's strategy for its investment portfolio is to create a diversified
portfolio of high quality assets that in the aggregate generates stable income
for the Company in a variety of interest rate and prepayment environments and
preserves the capital base of the Company. In many instances, the Company's
investment strategy involves not only the creation of the asset, but structuring
the related borrowing through the securitization process to create a stable
yield profile.
At March 31, 1997, the Company's investments included the following amounts
at their carrying basis:
<TABLE>
<CAPTION>
Balance % of Total
------------------- -----------------
<S> <C> <C>
(dollars in thousands)
Investments:
Portfolio assets:
Collateral for collateralized bonds........... $2,498,964 63.8%
Mortgage securities:
Adjustable-rate mortgage 756,736 19.3
securities.......................
Fixed-rate mortgagesecurities..... 24,212 0.6
securities...............
Other mortgage securities..... 131,025 3.3
---------------- ------------
Total mortgage securities............... 911,973 23.2
Other portfolio assets.................. 118,628 3.0
Total portfolioassets.................... 3,529,565 90.0
Loans held for securitization........................ 388,077 10.0
---------------- --------------
Total investments......................... $3,917,642 100.0%
. ================= ==============
</TABLE>
The following amounts represent the distribution of the above total
investments by product type at March 31, 1997:
<TABLE>
<CAPTION>
% of
Balance Total
----------------- ------------
<S> <C> <C>
(dollars in thousands)
Single-family.............................................. $3,410,784 87.1%
Manufactured housing....................................... 67,979 1.7
Multi-family............................................... 302,471 7.7
Commercial................................................. 14,122 0.4
Model homes................................................ 79,136 2.0
Installment note .......................................... 38,000 1.0
Other...................................................... 5,150 0.1
------------- ------------
TotalInvestments......................................... $3,917,642 100.0%
============= ============
</TABLE>
The Company continuously monitors the aggregate projected net yield of its
investment portfolio under various interest rate and prepayment environments.
While certain investments may perform poorly in an increasing interest rate
environment, certain investments may perform well, and others may not be
impacted at all. Generally, the Company adds investments to its portfolio which
are designed to increase the diversification and reduce the variability of the
yield produced by the portfolio in different interest rate environments. The
Company may add new types of investments to its portfolio in the future.
Approximately $3.0 billion of the Company's portfolio assets as of March 31,
1997 are comprised of loans or securities that have coupon rates which adjust
over time (subject to certain periodic and lifetime limitations) in conjunction
with changes in short-term interest rates. Generally, during a period of rising
interest rates, the Company's net interest spread earned on its investment
portfolio will decrease. The decrease of the net interest spread results from
(i) the lag in resets of the ARM loans underlying the ARM securities and certain
collateral for collateralized bonds relative to the rate resets on the
associated borrowings and (ii) rate resets on the ARM loans which are generally
limited to 1% every six months, while the associated borrowings have no such
limitation. As interest rates stabilize and the ARM loans reset, the net
interest margin may be restored to its former level as the yields on the ARM
loans adjust to market conditions. Conversely, net interest margin may increase
following a fall in short-term interest rates. This increase may be temporary as
the yields on the ARM loans adjust to the new market conditions after a lag
period. In each case, however, the Company expects that any increase or decrease
in the net interest spread due to changes in the short-term interest rates will
be temporary. The net interest spread may also be increased or decreased by the
cost or proceeds of interest rate swap, cap or floor agreements.
Because of the 1% periodic cap nature of the ARM loans underlying the ARM
securities, these securities may decline in market value in a rising interest
rate environment. In a rapidly increasing rate environment, as was experienced
in 1994, a decline in value may be significant enough to impact the amount of
funds available under repurchase agreements to borrow against these securities.
In order to maintain liquidity, the Company may be required to sell certain
securities. To mitigate this potential liquidity risk, the Company strives to
maintain excess liquidity to cover any additional margin required in a rapidly
increasing interest rate environment, defined as a 3% increase in short-term
interest rates over a twelve-month time period. The Company has also entered
into an interest rate swap transaction aggregating $1.02 billion notional
amount, which is designed to protect the Company's cash flow and earnings on the
ARM securities and certain collateral on collateralized bonds in a rapidly
rising interest rate environment. Under the terms of this interest rate swap
agreement, the Company receives payment if one-month LIBOR increases by 1% or
more in any six-month period. Finally, the Company has purchased $1.5 billion
notional amount of interest rate cap agreements to reduce the risk of the
lifetime interest rate limitation on the ARM securities and on certain
collateralized bonds owned by the Company. Liquidity risk also exists with all
other investments pledged as collateral for repurchase agreements, but to a
lesser extent.
The remaining portion of the Company's portfolio assets as of March 31, 1997,
approximately $0.5 billion, are comprised of loans or securities that have
coupon rates that are either fixed or do not reset within the next 15 months.
The Company has limited its interest rate risk on such investments through (i)
the issuance of fixed-rate collateralized bonds and notes payable, (ii) interest
rate swap agreements (Company receives floating, pays fixed) and (iii) equity,
which in the aggregate totals approximately $0.8 billion as of the same date.
Overall, the Company's interest rate risk is primarily related to the rate of
change in short term interest rates, not the level of short term interest rates.
Investment in collateralized bonds. Collateral for collateralized bonds
represents the single largest investment in the Company's portfolio. Interest
margin on the net investment in collateralized bonds (defined as the principal
balance of collateral for collateralized bonds less the principal balance of the
collateralized bonds outstanding) is derived primarily from the difference
between (i) the cash flow generated from the mortgage collateral pledged to
secure the collateralized bonds and (ii) the amounts required for payment on the
collateralized bonds and related insurance and administrative expenses.
Collateralized bonds are generally non-recourse to the Company. The Company's
yield on its net investment in collateralized bonds is affected primarily by
changes in interest rates and prepayment rates and, to a lesser extent, credit
losses on the underlying loans. The Company may retain for its investment
portfolio certain classes of the collateralized bonds issued and pledge such
classes as collateral for repurchase agreements.
ARM securities. Another segment of the Company's portfolio is the investments
in ARM securities. The interest rates on the majority of the Company's ARM
securities reset every six months and the rates are subject to both periodic and
lifetime limitations. Generally, the repurchase agreements, which finance a
portion of the ARM securities, have a fixed rate of interest over a term that
ranges from 30 to 90 days and, therefore, are not subject to repricing
limitations. As a result, the net interest margin on the ARM securities could
decline if the spread between the yield on the ARM security versus the interest
rate on the repurchase agreement were to be reduced. The Company may increase
its return on equity by pledging the ARM securities as collateral for repurchase
agreements.
Fixed-rate mortgage securities. Fixed-rate mortgage securities consist of
securities that have a fixed-rate of interest for specified periods of time.
Certain fixed-rate mortgage securities have a fixed interest rate for the first
three, five or seven years and an interest rate that adjusts at six- or
twelve-month intervals thereafter, subject to periodic and lifetime interest
rate caps. The Company's yields on these securities are primarily affected by
changes in prepayment rates. Such yields will decline with an increase in
prepayment rates and will increase with a decrease in prepayment rates. The
Company generally borrows against its fixed-rate mortgage securities through the
use of repurchase agreements.
Other mortgage securities. Other mortgage securities consist primarily of
interest-only securities ("I/Os"), principal-only securities ("P/Os") and
residual interests which were either purchased or were created through the
Company's production operations. An I/O is a class of a collateralized bond or a
mortgage pass-through security that pays to the holder substantially all
interest. A P/O is a class of a collateralized bond or a mortgage pass-through
security that pays to the holder substantially all principal. Residual interests
represent the excess cash flows on a pool of mortgage collateral after payment
of principal, interest and expenses of the related mortgage-backed security or
repurchase arrangement. Residual interests may have little or no principal
amount and may not receive scheduled interest payments. Included in the residual
interests at March 31, 1997 was $89.0 million of equity ownership in residual
trusts which own collateral financed with repurchase agreements. The collateral
consists of primarily agency ARM securities. The Company's borrowings against
its other mortgage securities is limited by certain loan covenants to 3% of
shareholders' equity. The yields on these securities are affected primarily by
changes in prepayment rates and by changes in short-term interest rates.
Other portfolio assets. Other portfolio assets consists of an installment
note from Dominion received as part of the consideration for the sale of the
single-family mortgage operations, single-family homes leased to home builders
and other financing lease receivables. The installment note received totaled
$47.5 million in the aggregate and bears interest at a rate of 6.5%, which is
paid quarterly. The principal balance of the note is being paid in five equal
installments of $9.5 million which began January 2, 1997. The single-family
homes leased to builders at March 31, 1997 totaled $66.3 million. The leases
average twelve to eighteen months with the Company selling the home at the end
of the lease. The lease rates are typically based on one-month LIBOR plus a
spread.
Loans held for securitization. Loans held for securitization consist
primarily of loans originated or purchased through the Company's production
operations that have not been securitized. During the accumulation period, the
Company is exposed to risks of interest rate fluctuations and may enter into
hedging transactions to reduce the change in value of such loans caused by
changes in interest rates. The Company is also at risk for credit losses on
these loans during accumulation. This risk is managed through the application of
loan underwriting and risk management standards and procedures and the
establishment of reserves.
Hedging and other portfolio transactions. As part of its asset/liability
management process, the Company enters into interest rate agreements such as
interest rate caps and swaps and financial futures contracts ("hedges"). These
agreements are used to reduce interest rate risk which arises from the lifetime
interest rate caps on the ARM securities, the mismatched repricing of portfolio
investments versus borrowed funds and assets repricing on indices such as the
prime rate which are different than the related borrowing indices. The
agreements are designed to protect the portfolio's cash flow and to stabilize
the portfolio's yield profile in a variety of interest rate environments.
Risks Inherent in the Company's Investment Portfolio
The Company is exposed to three types of risks inherent in its investment
portfolio. These risks include credit risk (inherent in the security structure
and underlying loan), prepayment/interest rate risk (inherent in the underlying
loan) and margin call risk (inherent in the security if it is used as collateral
for borrowings). The Company is exposed to credit risk while loans are held for
securitization as well as after securitization. The Company's credit risk is
managed primarily through applying loan underwriting and risk management
standards and procedures that the Company believes to be conservative, as well
as through establishing a reserve for potential losses. The Company's credit
risk on a pool of loans is generally limited when the loans are securitized.
The Company has historically securitized its loan production in
collateralized bond or pass-through securitization structures. With either
structure, the Company may use overcollateralization, subordination, reserve
funds, bond insurance, mortgage pool insurance or any combination of the
foregoing for credit enhancement. Regardless of the form of credit enhancement,
the Company may retain a limited portion of the direct credit risk of the
securitization. This risk can include credit risk on the overcollateralization
in a collateralized bond structure, credit risk from special hazard losses or
fraud losses not covered by pool insurance or credit risk through retention of
subordinated securities for which losses exceed the protection provided by
reserve funds or pool insurance. The Company has established reserves and
discounts for estimated losses on both the credit risk during the accumulation
period and the credit risk resulting from the securitization. The total of those
reserves and discounts as of March 31, 1997 was $93.5 million.
For prepayment/interest rate risk and margin call risk, the Company has
developed analytical tools and risk management strategies to monitor and address
these risks, including (i) weekly mark-to-market of a representative basket of
securities within the portfolio, (ii) monthly analysis using advanced
option-adjusted spread (OAS) methodology to calculate the expected change in the
market value of various representative securities within the portfolio under
various extreme scenarios and (iii) monthly static cash flow and yield
projections under forty-nine different scenarios. Such tools allow the Company
to continually monitor and evaluate its exposure to these risks and to manage
the risk profile of the investment portfolio in response to changes in the risk
profile. While the Company may use such tools, there can be no assurance the
Company will accomplish the goal of adequately managing the risk profile of the
investment portfolio.
The Company also views its hedging activities as a tool to manage these
identified risks. For the risks associated with the periodic and lifetime
interest rate caps on the ARM securities and certain collateral for
collateralized bonds, the Company uses interest rate cap and interest rate swap
agreements. The purpose of these transactions is to protect the Company in the
event that interest rates increase to levels higher on the index than the
periodic and/or lifetime caps on the underlying ARM loans will allow the ARM
loans to reset. The caps effectively lift the lifetime cap on a portion of the
ARM securities and certain collateral for collateralized bonds in the Company's
portfolio while the various interest rate swap agreements limit the Company's
exposure to changes in the financing rates on a portion of these securities.
Eurodollar financial futures and options contracts may be utilized to hedge
the risks associated with financing a portion of the investment portfolio with
variable-rate repurchase agreements. These instruments synthetically lengthen
the duration of the repurchase agreement financing, typically from one month to
three and six months. The Company will receive additional cash flow if the
related Eurodollar index increases above the contracted rates. If, however, the
Eurodollar index decreases below contracted rates, the Company will pay
additional cash flow. During the first quarter of 1997, the Company had settled
several such positions which effectively extended the maturity of approximately
$500 million of its repurchase agreements through the second quarter of 1998.
As the Company uses repurchase agreements to finance a portion of its ARM
investment portfolio, the Company is exposed to liquidity risk in the form of
margin calls if the market value of the securities pledged as collateral for the
repurchase agreements decline. The Company has established equity requirements
for each type of investment to take into account the price volatility and
liquidity of each such investment. The Company models and plans for the margin
call risk related to its repurchase borrowings through the use of its OAS model
to calculate the projected change in market value of its investments that are
pledged as collateral for repurchase borrowings under various adverse scenarios.
The Company generally maintains enough immediate or available liquidity to meet
margin call requirements if short-term interest rates were to increase by up to
300 basis points over a one-year period. At March 31, 1997, the Company had
total repurchase agreements outstanding of $1.1 billion. As of March 31, 1997,
$350 million of various classes of collateralized bonds issued by the Company
have been retained by the Company and have been pledged as security for $365
million of repurchase agreements. For financial statement presentation purposes,
the Company classified the $365 million of repurchase agreements, secured by
collateralized bonds, as collateralized bonds outstanding. The remainder of the
repurchase agreements are secured by ARM securities, fixed-rate mortgage
securities and other mortgage securities at their market values of $716.3
million, $20.5 million and $9.7 million, respectively.
To a lesser extent, the Company also has liquidity risk inherent to its
investment in certain residual trusts. These trusts are subject to margin calls
and the Company, at its option, can provide additional equity to the trust to
meet the margin call. Should the Company not provide the additional equity, the
assets of the trust could be sold to meet the trusts' obligation, resulting in a
potential loss to the Company.
During 1996, the Company structured all of its ARM loan securitizations as
collateralized bonds, with the financing, in effect, incorporated into the bond
structure. This structure eliminates the need for repurchase agreements,
consequently eliminating the margin call risk and to a lesser degree the
interest rate risk. During 1996, the Company issued approximately $2.04 billion
in collateralized bonds, primarily collateralized by ARM loans. The Company
plans to continue to use collateralized bonds as its primary securitization
vehicle.
REIT Status
Dynex REIT has elected to be treated as a REIT for federal income tax
purposes. A REIT must distribute annually substantially all of its taxable
income to shareholders. The Company and its qualified REIT subsidiaries
generally will not be subject to federal income tax to the extent that certain
REIT qualifications are met. Certain other affiliated entities which are
consolidated with Dynex REIT for financial reporting purposes, are not
consolidated for federal income tax purposes because such entities are not
qualified REIT subsidiaries. All taxable income of these affiliated entities is
subject to federal and state income taxes, where applicable. See "Federal Income
Tax Considerations" in the accompanying Prospectus.
<PAGE>
DESCRIPTION OF THE NOTES
The following description of the specific terms of the Notes offered hereby
supplements, and to the extent is inconsistent therewith replaces, the
description of the general terms and provisions of "Debt Securities" set forth
in the accompanying Prospectus under the caption "Description of Securities."
Capitalized terms not otherwise defined herein shall have the meanings given to
them in the accompanying Prospectus.
The Notes constitute a separate series of debt securities (which are more
fully described in the accompanying Prospectus) each to be issued pursuant to an
indenture (the "Indenture") dated as of July , 1997, among the Company and Texas
Commerce Bank National Association, as trustee (the "Trustee"), and will be
limited to an aggregate principal amount of $100 million. The terms of the Notes
include those provisions contained in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Notes are subject to all such terms, and holders of
Notes are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below.
The Notes will be senior, unsecured obligations of the Company and will rank
prior to all subordinated indebtedness of the Company and pari passu with all
other senior unsecured indebtedness of the Company outstanding on the date of
the issuance of these Notes. The Notes will be recourse to all of the
unencumbered assets of the Company.
Subject to certain limitations set forth in the Indenture, under Article
Eight, entitled "Consolidation, Merger, Sale, Lease or Conveyance", and in
addition as described below under "Limitations on Incurrence of Indebtedness and
Issuance of Disqualified Stock," the Indenture will permit the Company to incur
additional secured and unsecured indebtedness.
As of July , 1997, the Company, on a consolidated basis, will have
approximately $ million of senior, secured indebtedness other than
collateralized bonds, and, on a pro forma basis and, assuming the completion of
the offering of the Notes, $ million of senior, unsecured indebtedness,
including the Notes. In addition, the Company funds its operations through the
issuance of collateralized bonds, which are payable solely from the collateral
for collateralized bonds and are otherwise non-recourse to the Company, and by
entering into repurchase agreements, which are secured by mortgage securities
and loans held for securitization and are generally recourse to the Company. See
"Capitalization" herein.
The Notes will mature on July , 2002 (the "Maturity Date"). The Notes are not
subject to any sinking fund provisions. The Notes will be issued only in
book-entry form without coupons, in denominations of $1,000 and integral
multiples thereof, except under the limited circumstances described below under
"Book-Entry System."
Except as set forth below under "Consolidation, Merger, Sale, Lease or
Conveyance", and, in addition, as described below under "Limitations on
Incurrence of Indebtedness and Issuance of Disqualified Stock," the Indenture
does not contain any provisions that would limit the ability of the Company to
incur indebtedness or that would afford holders of the Notes protection in the
event of: (i) a highly leveraged or similar transaction involving the Company or
(ii) a reorganization, restructuring, merger or similar transaction involving
the Company that may adversely affect the holders of the Notes. However, certain
restrictions on the ownership and transfer of shares of Common Stock designed to
preserve Dynex REIT's status as a REIT may act to prevent or hinder a change of
control. See "Description of Securities - Repurchase of Shares and Restrictions
on Transfer" in the accompanying Prospectus. The Company and its management have
no present intention of engaging in a highly leveraged or similar transaction
involving the Company.
The provision of Article Fourteen of the Indenture with respect to defeasance
and covenant defeasance shall apply to the Notes.
Principal and Interest
The Notes will bear interest at % per annum and from July ,1997 or from the
immediately preceding Interest Payment Date (as defined below) to which interest
has been paid, payable semi-annually in arrears on each and , commencing , 1998
(each, an "Interest Payment Date"), and on the applicable Maturity Date, to the
persons (the "Holders") in whose names the applicable Notes are registered in
the Security Register applicable to the Notes as provided in the Indenture.
Interest on the Notes will be computed on the basis of a 360-day year of twelve
30-day months.
The principal of each Note payable on the Maturity Date will be paid against
presentation and surrender of such Note at the corporate trust office of the
Trustee, located initially at 712 Main Street, Houston, Texas, in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts.
If any Interest Payment Date or the Maturity Date falls on a day that is not
a Business Day, the required payment shall be made on the next Business Day as
if it were made on the date such payment was due and no interest shall accrue on
the amount so payable for the period from and after such Interest Payment Date
or the Maturity Date, as the case may be. "Business Day" means any day, other
than a Saturday or Sunday, that is neither a legal holiday nor a day on which
banking institutions in New York City are authorized or required by law,
regulation or executive order to close.
Repurchase at Option of Holders Upon a Change of Control Triggering Event
Upon the occurrence of a Change of Control Triggering Event, each Holder
of Notes shall have the right, at the Holder's option, to require the Company to
repurchase all of such Holder's Notes, or any portion thereof that is an
integral multiple of $1,000, for cash on the date (the "Repurchase Date") that
is not more than 45 days after the date of the Company Notice (as defined
below), which date shall be set so as to comply with all applicable requirements
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
including regulations thereunder regarding prompt payment to Holders of the
Notes, at a price equal to 101% of the principal amount of the Notes to be
repurchased (the "Repurchase Price"), together with the accrued interest to the
Repurchase Date.
In the event the Company became obligated to repurchase some of or all of
the Notes, the Company anticipates that it would either finance the Repurchase
Price with its available cash and short-term investments, through available bank
credit facilities, or through a public or private issuance of debt or equity
securities. There can be no assurance, however, that such financing would be
available.
Within 30 days after the occurrence of a Change of Control Triggering
Event, the Company is obligated to mail to all Holders of record of the Notes a
notice (the "Company Notice") of the occurrence of such Change of Control
Triggering Event and of the repurchase right arising as a result thereof. The
Company must deliver a copy of the Company Notice to the Trustee and cause a
copy or a summary of such notice to be published in a newspaper of general
circulation in the City of New York. To exercise the repurchase right a Holder
of Notes must deliver on or before the 30th day after the date of the Company
Notice a written notice (which notice shall be irrevocable except as otherwise
required by applicable law) to the Trustee of the Holder's exercise of such
right, specifying the amount of Notes owned by the Holder for which the right is
being exercised, duly signed by the Holder. The Company will comply with all
applicable tender offer rules under the Exchange Act in the event that a Change
of Control Triggering Event occurs under these Change of Control provisions and
the Company is required to repurchase Notes as described above.
The phrase "substantially all of the assets of the Company" as used in the
definition of Change of Control will be interpreted under New York law. Under
New York law, the definition of such term is subjective and there might be
circumstances in which it would not be clear if a particular transaction
constituted a Change of Control. Failure by the Company to repurchase the Notes
when required will result in an Event of Default with respect to the Notes.
Section 14(e) of the Exchange Act and Regulation 14F promulgated
thereunder impose certain requirements in connection with a tender offer. Such
requirements may apply in the event that the repurchase option becomes available
to Holders of the Notes. The Company will comply with these rules and any other
securities laws and regulations to the extent applicable at that time.
The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of highly leveraged or other transaction involving the
Company that may adversely affect Holders. Management of the Company could
initiate certain transactions not constituting a Change of Control that could
cause a material decline in credit quality. Notwithstanding the foregoing, the
Change of Control repurchase provisions of the Notes may in certain
circumstances make more difficult, discourage or delay a takeover of the Company
and the removal of incumbent management in connection with any takeover attempt.
If any of the Change of Control provisions are inconsistent with
applicable law, such law shall govern.
Merger, Consolidation or Sale of Assets
The Indenture will provide that the Company will not consolidate with or
merge with or into any other person or sell, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets to any
person, unless: (1) the Company is the surviving person or the surviving person
is a corporation organized or existing under the laws of the United States; (2)
the surviving person assumes, by supplemental indenture in a form reasonably
satisfactory to the Trustee, all of the Company's obligations under the
Indenture; and (3) immediately after giving effect to such transaction, no
Default or Event of Default exists.
Certain Covenants
In addition to the covenants set forth in the Indenture, the Resolutions of
the Board of Directors of the Company, setting forth the terms of the Notes
pursuant to the Indenture, provide that the Notes will be subject to the
following additional covenants.
Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock.
The Indenture will provide that the Company will not, and will not permit any of
its Subsidiaries or Affiliates to, incur any Indebtedness (including Acquired
Indebtedness), other than Permitted Indebtedness, or issue any shares of
Disqualified Stock, unless immediately after giving effect to the incurrence of
such Indebtedness or the issuance of such Disqualified Stock, the Company's
Adjusted Consolidated Indebtedness would not exceed 150% of the Company's
Adjusted Consolidated Tangible Net Worth.
In addition, the Indenture will provide that the Company may not and will not
permit any of its Subsidiaries or Affiliates to incur any Unsecured Indebtedness
if the ratio of Income Available for Interest Payments to Interest Expense for
the four consecutive fiscal quarters most recently ended prior to the date such
additional Indebtedness is to be incurred shall have been less than 2 to 1 on a
pro forma basis, after giving effect thereto and the application of proceeds
therefrom.
Limitation on Restricted Payments. The Indenture will provide that the
Company will not, and will not permit any of its Subsidiaries or Affiliates, to
directly or indirectly, make any Restricted Payments unless (i) at the time of
such Restricted Payments after giving pro forma effect to such Restricted
Payments, no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof under any Indebtedness of the Company,
including under the Indenture and (ii) the aggregate amount of all such
Restricted Payments does not exceed the sum of (a) the cumulative real estate
investment trust taxable income of the Company earned for tax years ending after
December 31, 1996 as determined by Section 857(b)(2) of the Code, but without
giving effect to the dividends paid deduction defined in Section 561 of the
Code, (b) the aggregate net proceeds to the Company from sales of its Capital
Stock since the date of the Indenture and (c) $25 million; provided, however,
that the foregoing limitations shall not apply to any distribution which is
necessary to maintain the Company's status as a REIT under the Code.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) (a) the redemption, repurchase, retirement or other acquisition of
any Equity Interests (the "Retired Capital Stock") or Subordinated
Indebtedness of the Company in exchange for, or out of the proceeds of the
substantially concurrent sale of, Equity Interests of the Company (other than
any Disqualified Stock) (the "Refunding Capital Stock"), and (b) the
declaration and payment of dividends on the Refunding Capital Stock in an
aggregate amount per year no greater than the aggregate amount of dividends
per annum that was declarable and payable on such Retired Capital Stock
immediately prior to such retirement;
(iii) the redemption, repurchase or other acquisition or retirement of any
Subordinated Indebtedness of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, new Indebtedness of the
Company so long as (A) the principal amount of such new Indebtedness does not
exceed the principal amount of the Subordinated Indebtedness being so
redeemed, repurchased, acquired or retired for value (plus the amount of any
premium required to be paid under the terms of the instrument governing the
Subordinated Indebtedness being so redeemed, repurchased, acquired or
retired), (B) such Indebtedness is subordinated to the Notes at least to the
same extent as such Subordinated Indebtedness so redeemed, repurchased,
acquired or retired for value, (C) such Indebtedness has a final scheduled
maturity date equal to or later than the final scheduled maturity date of the
Subordinated Indebtedness being so redeemed, repurchased, acquired or retired
and (D) such Indebtedness has a Weighted Average Life to Maturity equal to or
greater than the remaining Weighted Average Life to Maturity of the
Subordinated Indebtedness being so redeemed, repurchased, acquired or
retired; and
(iv) (A) the declaration and payment of dividends to holders of any class
or series of Preferred Stock (including Disqualified Stock) and (B) the
declaration and payment of dividends on Refunding Capital Stock in excess of
the dividends declarable and payable thereon pursuant to clause (ii);
provided, however, that for the most recently ended four consecutive fiscal
quarters immediately preceding the date of the declaration of such dividends,
after giving effect to such declaration on a pro forma basis, the Company on
a consolidated basis would have had a Coverage Ratio of at least 2 to 1;
provided, however, that at the time of and after giving effect to any
Restricted Payment permitted under clauses (ii), (iii) and (iv) of this
paragraph, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and provided further,
that for purposes of determining the aggregate amount expended for Restricted
Payments under the initial paragraph under this covenant "Limitation on
Restricted Payments", any amounts expended or set aside under (i) - (iv)
shall be excluded.
Limitation on Transactions with Affiliates. The Indenture will provide that
the Company will not, and will not permit any of its Subsidiaries or Affiliates
to, directly or indirectly, enter into or suffer to exist any transaction or
series of related transactions (including, without limitation, the sale,
purchase, exchange or lease of assets, property or services) with any Related
Person (other than a Subsidiary or an Affiliate) unless (a) such transaction or
series of transactions is on terms that are no less favorable to the Company or
such Subsidiary or Affiliate, as the case may be, than would be available in a
comparable transaction with an unrelated third party and (b)(1) where such
transaction or series of transactions involves aggregate consideration in excess
of $5 million, such transaction or series of transactions is approved by a
majority of the Board of Directors of the Company, including the approval of a
majority of the independent, disinterested directors, as evidenced by a
resolution relating thereto of the Board of Directors filed with the Trustee and
(2) where such transaction or series of transactions involves aggregate
consideration in excess of $15 million, the Company also delivers to the Trustee
an opinion from a nationally recognized investment banking firm as to the
fairness of such transaction or series of transactions to the Company or such
Subsidiary from a financial point of view. Notwithstanding the foregoing, this
provision will not apply to (A) compensation or employee benefit arrangements
with any officer or director of the Company; and (B) any transaction entered
into in the ordinary course of business by the Company, Subsidiary or Affiliate
with a Subsidiary or an Affiliate.
Provision of Financial Information. Whether or not the Company is subject to
Section 13 or 15(d) of the Exchange Act, the Company must, to the extent
permitted under the Exchange Act, file with the Securities and Exchange
Commission (the "SEC") the annual reports, quarterly reports and other documents
which the Company would have been required to file with the SEC pursuant to such
Section 13 or 15(d) (the "Financial Statements") if the Company were so subject,
on or prior to the respective dates (the "Required Filing Dates") by which the
Company would have been required to file such documents. The Company must also
in any event: (i) within 15 days after each Required Filing Date (a) transmit by
mail to all Holders of Notes, as their names and addresses appear in the
Security Register, without cost to such Holders, copies of the annual reports
and quarterly reports which the Company would have been required to file with
the SEC pursuant to Section 13 or 15(d) of the Exchange Act if the Company were
subject to such Sections; and (ii) if filing such documents by the Company with
the SEC is not permitted under the Exchange Act, promptly upon written request
and payment of the reasonable cost of duplication and delivery, supply copies of
such documents to any prospective Holder of the Notes.
Definitions. As used herein,
"Acquired Indebtedness" means (i) with respect to any Person that becomes a
Subsidiary (or is merged into the Company or any of its Subsidiaries) or an
Affiliate after the date of the Indenture, Indebtedness of such Person or any of
its subsidiaries existing at the time such Person becomes a Subsidiary (or is
merged into the Company or any of its Subsidiaries or Affiliates) that was not
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary (or merged into the Company or any of its Subsidiaries) or an
Affiliate; and (ii) with respect to the Company, any Subsidiary or any
Affiliate, any Indebtedness assumed by the Company, any Subsidiary or any
Affiliate in connection with the acquisition of any asset from another Person,
which Indebtedness was not incurred by such other Person in connection with, or
in contemplation of, such acquisition.
"Adjusted Consolidated Indebtedness" of the Company means the sum of the
aggregate principal amount of all Indebtedness of the Company, on a consolidated
basis, minus the aggregate principal amount of Indebtedness described in clauses
(ii), (iii) and (iv) of the definition of Permitted Indebtedness and with
respect to clause (v) of the definition or Permitted Indebtedness, those amounts
other than amounts described with respect to clause (i).
"Adjusted Consolidated Tangible Net Worth" of the Company means, as of any
date all amounts that would be included under shareholders' equity determined on
a consolidated balance sheet of the Company and in accordance with generally
accepted accounting principles, minus the sum of (i) all intangible assets,
determined in accordance with generally accepted accounting principles and (ii)
minority interests in any joint venture, partnership or other similar
arrangement, whether in corporate, partnership or other legal form, that is not
a Subsidiary or Affiliate. For the purposes of this definition, loan servicing
rights of the Company are not considered intangible assets.
"Affiliate" of the Company means (i) any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such specified Person; or (ii) any other Person in which such specified Person
has a non-controlling ownership interest exceeding 50%. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of Voting Stock, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Beneficial Owner" shall be determined in accordance with Rule 13d-3
promulgated by the SEC under the Exchange Act, as in effect on the date of the
execution of the Indenture.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights or other equivalents of or interests in
(however designated) equity of such person, including any Preferred Stock and if
such Person is a partnership, partnership interests (whether general or limited)
and any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
such partnership.
"Cash Equivalents" means, at any time, (a) any evidence of Indebtedness with
a maturity of 180 days or less from the date of acquisition issued or directly
and fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof); (b) certificates of deposit,
money market deposit accounts and acceptances with a maturity of 180 days or
less from the date or acquisition of any financial institution that is a member
of the Federal Reserve System having combined capital and surplus and undivided
profits of not less than $500 million; (c) commercial paper with a maturity of
180 days or less from the date of acquisition issued by a corporation that is
not an Affiliate of the Company and is organized under the laws of any state of
the United States or the District of Columbia whose debt rating, at the time as
of which such investment is made, is at least "A-1" by Standard & Poor's Ratings
Services or at least "P-1" by Moody's Investors Service, Inc. or rated at least
an equivalent rating category of another nationally recognized securities rating
agency; (d) repurchase agreements and reverse repurchase agreements having a
term of not more than 30 days for underlying securities of the types described
in clause (a) above entered into with a financial institution meeting the
qualifications described in clause (b) above; (e) any security, maturing not
more than 180 days after the date of acquisition, backed by standby or direct
pay letters of credit issued by a bank meeting the qualifications described in
clause (b) above; and (f) any security, maturing not more than 180 days after
the date of acquisition, issued or fully guaranteed by any state, commonwealth,
or territory of the United States of America, or by any political subdivision
thereof, and rated at least "A" by Standard & Poor's Ratings Services or at
least "A" by Moody's Investors Service, Inc. or rated at least an equivalent
rating category of another nationally recognized securities rating agency.
"Change of Control" means any event or series of events by which (i) any
"Person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the Beneficial Owner, directly or indirectly, through a purchase,
merger or other acquisition transaction or series of transactions, of shares of
Capital Stock of the Company entitling such Person to exercise 50% or more of
the total voting power of all shares of Voting Stock of the Company; (ii) any
consolidation of the Company with, or merger of the Company into, any other
Person, any consolidation of any other Person with, or merger of another Person
into, the Company, in any such event pursuant to a transaction in which the
Voting Stock of the Company outstanding immediately prior to the effectiveness
thereof is cancelled or changed into or exchanged for cash, securities or other
property (other than a transaction where (a) the outstanding Voting Stock of the
Company is changed into or exchanged for Voting Stock of the surviving
corporation that is not Disqualified Stock, and (b) the holders of the Voting
Stock of the Company immediately prior to such transaction own, directly or
indirectly, more than 50% of the total voting power of all shares of Voting
Stock of the surviving corporation immediately after such transaction); (iii)
any sale, conveyance, transfer or lease (in one transaction or a series of
transactions) of all or substantially all of the assets of the Company to
another Person; (iv) the shareholders of the Company approve any plan of
liquidation or dissolution of the Company; or (v) Continuing Directors cease to
constitute at least a majority of the Board of Directors of the Company.
"Change of Control Triggering Event" means the occurrence of both a Change of
Control and a Rating Decline.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means Dynex Capital, Inc.
"Continuing Director" means a director who either was a member of the Board
of Directors of the Company on the date that the Indenture became effective or
who became a director of the Company subsequent to such date and whose election,
or nomination for election by the Company's shareholders, was duly approved by a
majority of the Continuing Directors then on the Board of Directors of the
Company, either by a specific vote or by approval of the proxy statement issued
by the Company on behalf of the entire Board of Directors of the Company in
which such individual is named as a nominee for director.
"Coverage Ratio" means the ratio of (i) the sum of (a) Income Available for
Interest Payments plus (b) any dividends payable to holders of any series of
classes of Preferred Stock to (ii) the sum of (a) Interest Expense plus (b) any
dividends payable to holders of any series or classes of Preferred Stock.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default
"Disqualified Stock" means, with respect to any person, any capital stock or
partnership interest of such person which by the terms of such capital stock or
partnership interest (or by the terms of any security into which it is
convertible or for which it is exchangeable or exercisable), upon the occurrence
of any event or otherwise: (i) matures or is mandatory redeemable, pursuant to a
sinking fund obligation or otherwise; (ii) is convertible into or exchangeable
or exercisable for Indebtedness or Disqualified Stock; or (iii) is redeemable at
the option of the holder thereof, in whole or in part, in each case on or prior
to the maturity of the relevant series of Notes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding Indebtedness that is convertible
into, or exchangeable for, the Company's Capital Stock and warrants, options or
other rights to acquire the Company's Capital Stock, including Stock
Appreciation Rights, issuable or granted under the Company's existing Stock
Incentive Plan).
"Guarantee" means any guarantee of the obligations of the Company under the
Indenture and the Notes by any Person in accordance with the provisions of the
Indenture. No Guarantees will be issued with the initial offering and sale of
the Notes.
"Hedging Obligations" means the Company's obligations incurred in the normal
course of its business under (i) currency exchange or interest rate swap
agreements, currency exchange or interest rate cap agreements and currency
exchange or interest rate collar agreements and (ii) other agreements or
arrangements designed to protect the Company against fluctuations in currency
exchange or interest rates.
"Income Available for Interest Payments" for any periods means Net Income
plus Interest Expense; minus (i) extraordinary gains and losses; (ii) any other
gains and losses that do not otherwise relate to the sale or securitization of
Assets in the ordinary course of business; and (iii) the effect of any non-cash
charge resulting from a change in accounting principles in determining Net
Income for such period.
"Indebtedness" of the Company means any indebtedness of the Company, whether
or not contingent, in respect of: (i) borrowed money or other indebtedness
evidenced by bonds, notes, debentures or similar instruments; (ii) indebtedness
secured by any mortgage, pledge, lien, charge, encumbrance or any security
interest existing on property owned by the Company, including but not limited to
collateralized bonds and collateralized repurchase agreements; (iii) letters of
credit or amounts representing the balance deferred and unpaid of the purchase
price of any property except any such balance that constitutes an accrued
expense or trade payable; (iv) the principal amount of all obligations of the
Company with respect to redemption, repayment or other repurchase of any
Disqualified Stock; or (v) any lease of property by the Company as lessee which
is reflected on the Company's consolidated balance sheet as a capitalized lease
in accordance with generally accepted accounting principles; in the case of
items in indebtedness under (i) through (iii) above to the extent that any such
items (other than letters of credit) would appear as a liability on the
Company's consolidated balance sheet in accordance with generally accepted
accounting principles, and also includes, to the extent not otherwise included,
any obligation of the Company to be liable for, or to pay, as obligor, guarantor
or otherwise (other than for purposes of collection in the ordinary course of
business), indebtedness of another person (other than the Company), it being
understood that Indebtedness shall be deemed to be incurred by the Company,
whenever the Company or such Subsidiary shall create, assume, guarantee or
otherwise become liable in respect thereof.
"Interest Expense" means for any period, the sum of (a) interest and related
expense relating solely to Unsecured Indebtedness of the Company on a
consolidated basis (including, but not limited to, amortization of original
issue discount or premium, as the case may be, non-cash interest payments, the
interest component of any deferred payment obligations, commissions, discounts
and other fees and charges incurred in respect of letters of credit or bankers'
acceptances financings and net payments (if any) pursuant to obligations under
hedging instruments but excluding amortization of deferred financing fees) and
(b) capitalized interest relating to Unsecured Indebtedness of the Company,
whether paid or accrued, all as determined on a consolidated basis and in
accordance with generally accepted accounting principles.
"Investments" means with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of loans (including
guarantees), advances or capital contributions (excluding advances to customers,
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities issued by any other Person
and investments that are required by generally accepted accounting principles to
be classified on the balance sheet of the Company in the same manner as the
other investments included in this definition to the extent such transactions
involve the transfer of cash or other property.
"Net Income" means net income as presented in the consolidated financial
statements of the Company as determined in accordance with generally accepted
accounting principles, and is calculated excluding the deduction for dividends
on Preferred Stock.
"Permitted Indebtedness" means (i) all indebtedness of the Company at the
time of closing of the issuance and sale of the Notes, (ii) indebtedness under
any loan repurchase agreements or repurchase facilities entered into in the
ordinary course of business with an original maturity not to exceed 180 days,
(iii) indebtedness under any warehouse line of credit, letter of credit or
similar facility secured primarily by loans held for sale or securitization,
(iv) collateralized bond obligations that are non-recourse to the Company and
(v) the incurrence by the Company of Indebtedness which serves to refund,
refinance or restructure any Indebtedness incurred as permitted under clauses
(i) - (iv) above, or any Indebtedness issued to so refund, refinance or
restructure such Indebtedness including additional Indebtedness incurred to pay
premiums and fees in connection therewith (the "Refinancing Indebtedness") prior
to its respective maturity, provided that, with respect to the refinancing of
Indebtedness referred to in clause (i) above, such Refinancing Indebtedness (a)
does not increase the principal amount of total Permitted Indebtedness at the
time of the issuance and sale of the Notes, (b) has a Weighted Average Life to
Maturity at the time such Refinancing Indebtedness is incurred which is not less
than the remaining Weighted Average Life to Maturity of Indebtedness being
refunded or refinanced, (c) to the extent that such Refinancing Indebtedness
refinances Indebtedness that is either secured or unsecured, such Refinancing
Indebtedness is likewise, either secured or unsecured, respectively or (d) to
the extent such Refinancing Indebtedness refinances Indebtedness subordinated or
pari passu to the Notes, such Refinancing Indebtedness is subordinated or pari
passu to the Notes at least to the same extent as the Indebtedness being
refinanced or refunded.
"Permitted Investments" means (a) any Investment in the Company or any Wholly
Owned Subsidiary; (b) any Investment in cash and Cash Equivalents; (c) any
Investment in financial assets not constituting Cash or Cash Equivalents made in
the ordinary course of business, including but not limited to portfolio assets
(such as collateral for collateralized bonds, mortgage securities, other
portfolio assets and available-for-sale investments), loans held for
securitization, all as determined in accordance with generally accepted
accounting principles; (d) any Investment by the Company, any Subsidiary or any
Affiliate in a Person if as a result of such Investment (i) such Person becomes
a Wholly Owned Subsidiary or (ii) such person, in one transaction or a series of
related transactions, is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or a Wholly Owned Subsidiary; (e) any Investment existing on the
date of the closing date for the sale and original issuance of the Notes under
the Indenture; (f) advances to employees not in excess of $1 million outstanding
at any one time in the aggregate; (g) any Investment acquired by the Company,
any Subsidiary or any Affiliate (i) in exchange for any other Permitted
Investment or (ii) as a result of a foreclosure by the Company, any Subsidiary
or any Affiliate with respect to any secured Investment; (h) Hedging
Obligations; (i) loans and advances to officers, directors and employees for
business related travel expenses, moving expenses and other similar expenses, in
each case, incurred in the ordinary course of business; and (j) Investments the
payment for which consists of Equity Interests of the Company (exclusive of
Disqualified Stock).
"Person" means an individual, partnership, corporation, business trust, joint
stock company, trust, unincorporated association, joint venture, governmental
authority or other entity of whatever nature.
"Preferred Stock" as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred to
as the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Rating Agencies" means both (i) Standard & Poor's Ratings Services or any
successor ("S&P") and (ii) Moody's Investors Service, Inc. or any successor
("Moody's") or (iii) if S&P or Moody's or both shall not make a rating of the
Notes publicly available, a nationally recognized securities rating agency or
agencies, as the case may be, selected by the Company, which shall be
substituted for S&P or Moody's or both, as the case may be.
"Rating Decline" means the occurrence of one of the following on, or within
90 days after, the date of public notice of the occurrence of a Change of
Control or of the intention by the Company to effect a Change of Control (which
period shall be extended so long as the rating of the Notes is under publicly
announced surveillance or review, with possible negative implication): (a) a
downgrading in the rating by one of the Rating Agencies by one or more
gradations (each gradation for S&P being measured by a "+" or "-" and each
gradation for Moody's being measured by "1", "2" or "3" or their equivalent if
the gradation system used by the Rating Agency in question is changed) or (b)
the public announcement by one of the Rating Agencies that it has under
surveillance or review, with possible negative implications, its rating of the
Notes. In determining whether the rating of the Notes has decreased by one or
more gradations, gradations within the rating categories of the Rating Agencies
("+" and "-" for S&P; "1", "2" and `3" for Moody's, or the equivalent gradations
for another Rating Agency) shall be taken into account (e.g., with respect to
S&P, a decline in a rating from BB+ to BB, as well as from BB- to B+, will
constitute a decrease of one gradation).
"Related Person" means (a) any Affiliate of the Company, (b) any Person who
directly or indirectly holds 5% or more of any class of Voting Stock of the
Company, (c) any Person who is an executive officer or director of the Company
and (d) any Affiliate of or any relative by blood, marriage or adoption not more
remote than first cousin of any such Person referred to in clause (b) or (c)
above.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Payments" means any of the following actions by the Company; (i)
the declaration or payment of any dividends or the making of any distribution on
account of the Company's Equity Interests, including any dividend or
distribution payable in connection with any merger or consolidation (other than
(A) dividends or distributions by the Company payable in Equity Interests (other
than Disqualified Stock) of the Company or (B) dividends or distributions by a
Subsidiary or an Affiliate, so long as in the case of any dividend or
distribution payable on or in respect of any class of series of securities
issued by a Subsidiary or an Affiliate, as the case may be, the Company, a
Subsidiary or an Affiliate, as the case may be, receives at least its pro rata
share of such dividend or distribution in accordance with its Equity Interests
in such class or series of securities); (ii) the purchase, redemption,
defeasance or, otherwise, acquisition or retirement for value of any Equity
Interests of the Company, excluding the conversion of any security into an
Equity Interest (other than Disqualified Stock) or redemption thereof with an
Equity Interest (other than Disqualified Stock); (iii) the making of any
principal payments on, or redemption, repurchase, defeasance or, otherwise,
acquisition or retirement for value (unless with an Equity Interest other than
Disqualified Stock) in each case, prior to any scheduled repayment, or maturity,
of any Subordinated Indebtedness; or (iv) the making of any Restricted
Investment.
"Subordinated Indebtedness" means (a) with respect to the Notes, any
Indebtedness of the Company which is by its terms subordinated in right of
payment to the Notes and (b) with respect to any Guarantee, any Indebtedness of
the applicable Guarantor which is by its terms subordinated in right of payment
to such Guarantee.
"Subsidiary" means a corporation, a majority of the outstanding Voting Stock,
of which is owned directly or indirectly, by the Company or by one or more other
Subsidiaries of the Company.
"Unsecured Indebtedness" as of any date means the sum of any Indebtedness of
the Company that is not secured or collateralized by any mortgage, lien, charge,
pledge or other security interest, determined on a consolidated basis in
accordance with generally accepted accounting principles, excluding (i) any
amounts owed under accrued interest payable and (ii) any letters of credit that
are secured or will be secured by other than Assets in the event such letters of
credit are drawn upon.
"Voting Stock" means all outstanding classes of Capital Stock of any entity
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Disqualified Stock, as the case may be, at any date, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the date of each successive scheduled principal payment of such
Indebtedness or redemption or similar payment with respect to such Disqualified
Stock , as the case may be, multiplied by the amount of such payment, by (ii)
the sum of all such payments.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person 95%
of the outstanding Capital Stock or other ownership interest of which (other
than directors' qualifying shares) shall at the time be owned by such Person or
by one or more Wholly Owned Subsidiaries of such Person.
Reference is made to Article Ten of the Indenture, entitled "Covenants" for a
description of additional covenants applicable to the Notes.
Events of Default
The Indenture will provide that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of the principal or of premium, if any,
on the Notes; (iii) failure by the Company for 60 days after notice to comply
with any of its other agreements in the Indenture or the Notes; (iv) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness for money borrowed
by the Company, any of its Subsidiaries or any of its Affiliates in an amount in
excess of $10 million, which results in the acceleration of such Indebtedness;
(v) failure by the Company, any of its Subsidiaries or any of its Affiliates to
pay final judgments aggregating in excess of $10 million, which judgments are
not paid, discharged or stayed for a period of 60 days; and (vi) certain events
of bankruptcy or insolvency with respect to the Company, any of its Subsidiaries
or any of its Affiliates.
Reference is made to the accompanying Prospectus and Article Five of the
Indenture for a description of certain remedies available to Holders of Notes in
the event of an Event of Default.
Optional Redemption
The Notes may be redeemed at any time at the option of the Company, in whole
or from time to time in part, at a redemption price equal to the sum of: (i) the
principal amount of the Notes being redeemed plus accrued interest thereon to
the redemption date; and (ii) the Make-Whole Amount (as defined below), if any,
with respect to such Notes (the "Redemption Price").
If notice of redemption has been given as provided in the Indenture and funds
for the redemption of any Notes called for redemption shall have been made
available on the redemption date referred to in such notice, such Notes will
cease to bear interest on the date fixed for such redemption specified in such
notice and the only right of the Holders of the Notes from and after the
redemption date will be to receive payment of the Redemption Price upon
surrender of such Notes in accordance with such notice.
Notice of any optional redemption of any Notes will be given to Holders at
their addresses, as shown in the Security Register for the Notes, not more than
60 nor less than 30 days prior to the date fixed for redemption as defined in
the Indenture. The notice of redemption will specify, among other items, the
Redemption Price and principal amount of the Notes held by such Holder to be
redeemed.
<PAGE>
If less than all the Notes are to be redeemed at the option of the Company, the
Company will notify the Trustee at least 60 days prior to giving notice of
redemption (or such shorter period as may be satisfactory to the Trustee) of the
aggregate principal amount of Notes to be redeemed and their redemption date.
The Trustee shall select, in such manner as it shall deem fair and appropriate,
Notes to be redeemed in whole or in part.
Definitions: As used herein:
"Make-Whole Amount" means, in connection with any optional redemption of any
Notes, the excess, if any, of: (i ) the aggregate present value as of the date
of such redemption of each dollar of principal being redeemed and the amount of
interest (exclusive of interest accrued to the date of redemption) that would
have been payable in respect of each such dollar if such redemption had not been
made, determined by discounting, on a semi-annual basis, such principal and
interest at the Reinvestment Rate (determined on the third Business Day
preceding the date notice of such redemption is given) from the respective dates
on which such principal and interest would have been payable if such redemption
had not been made, to the date of redemption; over (ii) the aggregate principal
amount of the Notes being redeemed.
"Reinvestment Rate" means the yield on Treasury securities at a constant
maturity corresponding to the remaining life (as of the date of redemption, and
rounded to the nearest month) to Stated Maturity of the principal being redeemed
(the "Treasury Yield"), plus 0.25%. For purposes hereof, the Treasury Yield
shall be equal to the arithmetic mean of the yields published in the Statistical
Release (as defined below) under the heading "Week Ending" for "U.S. Government
Securities -- Treasury Constant Maturities" with a maturity equal to such
remaining life; provided, that if no published maturity exactly corresponds to
such remaining life, then the Treasury Yield shall be interpolated or
extrapolated on a straight-line basis from the arithmetic means of the yields
for the next shortest and next longest published maturities. For purposes of
calculating the Reinvestment Rate, the most recent Statistical Release published
prior to the date of determination of the Make-Whole Amount shall be used. If
the format or content of the Statistical Release changes in a manner that
precludes determination of the Treasury Yield in the above manner, then the
Treasury yield shall be determined in the manner that most closely approximates
the above manner, as reasonably determined by the Company.
"Statistical Release" means the statistical release designated "H.15 (519)"
or any successor publication which is published weekly by the Federal Reserve
System and which reports yields on actively traded United States government
securities adjusted to constant maturities, or, if such statistical release is
not published at the time of any determination under the Indenture, then such
other reasonably comparable index which shall be designated by the Company.
Book-Entry System
The following are summaries of certain rules and operating procedures of DTC
that affect the payment of principal and interest and transfers in the Global
Note. Upon issuance, the Notes will only be issued in the form of a Global Note
which will be deposited with, or on behalf of, DTC and registered in the name of
Cede & Co., as nominee of DTC. Unless and until it is exchanged in whole or in
part for Notes in definitive form under the limited circumstances described
below, the Global Note may not be transferred except as a whole: (i) by DTC to a
nominee of DTC; (ii) by a nominee of DTC to DTC or another nominee of DTC; or
(iii) by DTC or any such nominee to a successor or a nominee of such successor.
Ownership of beneficial interests in the Global Note will be limited to
persons that have accounts with DTC for such Global Note ("participants") or
persons that may hold interests through participants. Upon the issuance of the
Global Note, DTC will credit, on its book-entry registration and transfer
system, the participants' accounts with the respective principal amounts of the
Notes represented by such Global Note beneficially owned by such participants.
Ownership of beneficial interests in such Global Note will be shown on, and the
transfer of such ownership interests will be effected only through, records
maintained by DTC (with respect to interests of participants) and on the records
of participants (with respect to interests of persons holding through
participants). The laws of some states may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may limit or impair the ability to own, transfer or pledge beneficial
interests in the Global Note.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or its nominee, as the case may be, will be considered the sole owner or Holder
of the Notes represented by such Global Note for all purposes under the
Indenture. Except as set forth below, owners of beneficial interests in a Global
Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of such Notes in certificated form and will not be considered the
registered owners or Holders thereof under the Indenture. Accordingly, each
person owning a beneficial interest in a Global Note must rely on the procedures
of DTC and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a Holder under the Indenture. The Company understands that under existing
industry practices, if the Company requests any action of Holders or if an owner
of a beneficial interest in a Global Note desires to give or take any action
that a Holder is entitled to give or take under the Indenture, DTC would
authorize the participants holding the relevant beneficial interests to give or
take such action, and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instructions of beneficial owners holding through them. In the case of
an Event of Default under the Indenture, DTC, acting upon instructions furnished
to DTC by the participants holding the relevant beneficial interests in a Global
Note, may institute proceedings in respect of such Event of Default in
accordance with the terms of the Indenture.
Principal and interest payments on interests represented by the Global Note
will be made to DTC or its nominee, as the case may be, as the registered owner
of such Global Note. None of the Company, the Trustee or any agent of the
Company or agent of the Trustee will have any responsibility or liability for
any aspect of the records relating to or payment made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company expects that DTC, upon receipt of any payment of principal or
interest in respect of the Global Note, will immediately credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in such Global Note as shown on the records of DTC. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Note held through such participants will be governed by standing customer
instructions and customary practice, as is now the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such participants.
If DTC is at any time unwilling or unable to continue as depository for the
Notes and the Company fails to appoint a successor depository registered as a
clearing agency under the Exchange Act within 90 days, the Company will issue
the Notes in definitive form in exchange for the Global Note. Any Notes issued
in definitive form in exchange for the Global Note will be registered in such
name or names, and will be issued in denominations of $1,000 and such integral
multiples thereof, as DTC shall instruct the Trustee. It is expected that such
instructions will be based upon directions received by DTC from participants
with respect to ownership of beneficial interests in the Global Note.
DTC has advised the Company of the following information regarding DTC. DTC
is a limited-purpose trust company organized under the Banking Law of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC was created to hold securities of its participants and to facilitate
the clearance and settlement of transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC's participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
which (and/or their representatives) own DTC. Access to the DTC book-entry
system is also available to others, such as banks, brokers and dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
Same-Day Settlement and Payment
Settlement for the Notes will be made by the Underwriters (as defined herein)
in immediately available funds. All payments of principal and interest in
respect of the Notes will be made by the Company in immediately available funds.
The Notes will trade in DTC's Same-Day Funds Settlement System until maturity
or until the Notes are issued in certificated form, and secondary market trading
activity in the Notes will therefore be required by DTC to settle in immediately
available funds. No assurance can be given as to the effect, if any, of
settlement in immediately available funds on trading activity in the Notes.
Trustee
The Trustee has other banking, depository, custodian and lending
relationships in the ordinary course of business with the Company.
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement (the
"Underwriting Agreement") dated July , 1997 between the Company and the
Underwriters, to purchase from the Company the principal amount of the Notes set
forth opposite their respective names below:
<TABLE>
<CAPTION>
Principal
Amount of
Underwriter Notes
--------------- ---------------
<S> <C>
PaineWebber Incorporated ............................. $
Smith Barney Inc. .....................................
---------------
Total .......................................... $ 100,000,000
===============
</TABLE>
The Underwriting Agreement provides that the obligation of the several
Underwriters to purchase the Notes are subject to the certain conditions
contained therein, and that if any of the Notes are purchased by the
Underwriters pursuant to the Underwriting Agreement, all the Notes agreed to be
purchased by the Underwriters must be so purchased.
The Company has been advised that the Underwriters propose to offer the Notes
directly to the public at the public offering price set forth on the cover page
of this Prospectus Supplement, and to certain selected dealers (who may include
the Underwriters) at such price less a concession not in excess of % of the
principal amount of the Notes. The selected dealers may reallow a concession to
certain other dealers not in excess of % of the principal amount of the Notes.
After the initial public offering, the public offering price, the concession to
selected dealers and the reallowance may be changed.
Settlement for the Notes will be made in immediately available funds and
all secondary trading in the Notes will settle in immediately available funds.
See "Description of the Notes--Same-Day Settlement and Payment."
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Company does not intend to apply for listing of the Notes on any national
securities exchange, but has been advised by the Underwriters that they
presently intend to make a market in the Notes, as permitted by applicable laws
and regulations. The Underwriters are not obligated, however, to make a market
in the Notes and any such market making may be discontinued at any time at the
sole discretion of the Underwriters. Accordingly, no assurance can be given as
to the liquidity of, or the existence of trading markets for, the Notes.
Until the distribution of the Notes is completed, rules of the SEC may limit
the ability of the Underwriters to bid for and purchase the Notes. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Notes. Such transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Notes.
PaineWebber has from time to time performed various investment banking
services for the Company for which customary compensation has been received.
PaineWebber expects to continue to perform investment banking services for the
Company in the future.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Notes.
Specifically, the Underwriters may overallot the offering, creating a syndicate
short position. Underwriters may bid for and purchase Notes in the open market
to cover syndicate short positions. In addition, the Underwriters may bid for
and purchase Notes in the open market to stabilize the price of the Notes. These
activities may stabilize or maintain the market price of the Notes above
independent market levels. The Underwriters are not required to engage in these
activities, and may end these activities at any time.
LEGAL MATTERS
Certain legal matters in connection with the offering of the Notes are being
passed upon for the Company by Venable, Baetjer and Howard, LLP, Baltimore,
Maryland. Certain legal matters are being passed upon for the Underwriters by
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York.
<PAGE>
PROSPECTUS
Dynex Capital, Inc.
Common Stock, Preferred Stock, Debt Securities Warrants to
Purchase Common Stock, Warrants to Purchase Preferred
Stock and Warrants to Purchase Debt Securities
_________________
Dynex Capital, Inc., a Virginia corporation (the "Company"), directly or
through agents, dealers or underwriters designated from time to time, may issue
and sell from time to time one or more of the following types of its securities
(the "Securities"): (i) shares of its common stock, par value $0.01 per share
("Common Stock"); (ii) shares of its preferred stock, no par value, in one or
more series ("Preferred Stock"); (iii) debt securities, in one or more series,
any series of which may be either senior debt securities or subordinated debt
securities (collectively, "Debt Securities" and, as appropriate, "Senior Debt
Securities" or "Subordinated Debt Securities"); (iv) warrants to purchase shares
of Common Stock ("Common Stock Warrants"); (v) warrants to purchase Preferred
Stock ("Preferred Stock Warrants"); (vi) warrants to purchase debt securities
("Debt Warrants"); and (vii) any combination of the foregoing, either
individually or as units consisting of one or more of the foregoing types of
Securities. The Securities offered pursuant to this Prospectus may be issued in
one or more series, in amounts, at prices and on terms to be determined at the
time of the offering of each such series. The Securities offered by the Company
pursuant to this Prospectus will be limited to $450,000,000 aggregate initial
public offering price, including the exercise price of any Common Stock
Warrants, Preferred Stock Warrants and Debt Warrants (collectively, "Securities
Warrants").
The specific terms of each offering of Securities in respect of which this
Prospectus is being delivered are set forth in an accompanying Prospectus
Supplement (each, a "Prospectus Supplement") relating to such offering of
Securities. Such specific terms include, without limitation, to the extent
applicable the following: (1) in the case of any series of Preferred Stock, the
specific designations, rights, preferences, privileges and restrictions of such
series of Preferred Stock, including the dividend rate or rates or the method
for calculating same, dividend payment dates, voting rights, liquidation
preferences, and any conversion, exchange, redemption or sinking fund
provisions; (2) in the case of any series of Debt Securities, the specific
designations, rights and restrictions of such series of Debt Securities,
including without limitation whether the Debt Securities are Senior Debt
Securities or Subordinated Debt Securities, the currency in which such Debt
Securities are denominated and payable, the aggregate principal amount, stated
maturity, method of calculating and dates for payment of interest and premium,
if any, and any conversion, exchange, redemption or sinking fund provisions; (3)
in the case of the Securities Warrants, the Debt Securities, Preferred Stock or
Common Stock, as applicable, for which each such warrant is exercisable, and the
exercise price, duration, detachability and call provisions of each such
warrant; and (4) in the case of any offering of Securities, to the extent
applicable, the initial public offering price or prices, listing on any
securities exchange, certain federal income tax consequences and the agents,
dealers or underwriters, if any, participating in the offering and sale of the
Securities. If so specified in the applicable Prospectus Supplement, any series
of Securities may be issued in whole or in part in the form of one or more
temporary or permanent Global Securities, as defined herein.
_________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
_________________
The Company may sell all or a portion of any offering of its Securities
through agents, to or through underwriters or dealers, or directly to other
purchasers. See "Plan Distribution." The related Prospectus Supplement for each
offering of Securities sets forth the name of any agents, underwriters or
dealers involved in the sale of such Securities and any applicable fee,
commission, discount or indemnification arrangement with any such party. See
"Use of Proceeds."
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement. The delivery in any jurisdiction of this
Prospectus together with a Prospectus Supplement relating to specific Securities
shall not constitute an offer in such jurisdiction of any other Securities
covered by this Prospectus but not described in such Prospectus Supplement.
The date of this Prospectus is June 27, 1997
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
AGENT OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT NOR ANY DISTRIBUTION OF SECURITIES BEING OFFERED PURSUANT
TO THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION
CONTAINED HEREIN OR THEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE HEREOF
OR THEREOF. THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE
SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
_________________
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, NW, Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's following regional offices: Midwest Regional Office, Citicorp
Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511; and
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, NW, Judiciary
Plaza, Washington, D.C. 20549. The Common Stock of the Company is listed on the
New York Stock Exchange ("NYSE") and such reports, proxy statements and other
information concerning the Company may also be inspected at the offices of such
Exchange at 20 Broad Street, New York, New York 10005. The Commission maintains
a Web site that contains reports, proxy and information statements and other
information regarding the Company at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
Securities offered hereby, reference is made to the Registration Statement and
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents of any contract or other documents are not necessarily complete,
and in each instance, reference is made to the copy of such contract or
documents filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by the Company
are incorporated in this Prospectus by reference: Annual Report on Form 10-K for
the year ended December 31, 1996; Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997; and the description of the Company's Common Stock
contained in the Company's Registration Statement on Form 8-A under the Exchange
Act, including any amendment or report filed to update the description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of all Securities shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any accompanying Prospectus Supplement relating to a
specific offering of Securities or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus or any accompanying Prospectus Supplement. Subject to the foregoing,
all information appearing in this Prospectus is qualified in its entirety by the
information appearing in the documents incorporated herein by reference.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any and all of the documents described above under "Incorporation of
Certain Documents by Reference", other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference therein. Written
requests should be directed to: Dynex Capital, Inc., 10900 Nuckols Road, 3rd
Floor, Glen Allen, Virginia, 23060, Attention: Investor Relations, Telephone:
(804) 217-5800 or through the website at
http://[email protected].
THE COMPANY
Dynex Capital, Inc. (the "Company") is a mortgage and consumer finance
company, which uses its production operations to create investments for its
portfolio. Currently, the Company's primary production operations include the
origination of mortgage loans secured by multi-family properties and the
origination of loans secured by manufactured homes. From its inception in 1987
through May 13, 1996, the Company's principal production operations included the
purchase or origination of single-family loans. The Company sold such operations
on May 13, 1996 to Dominion Mortgage Services, Inc., a wholly-owned subsidiary
of Dominion Resources, Inc. (NYSE: D).
The Company will generally securitize the loans funded as collateral for
collateralized bonds, limiting its credit risk and providing long-term financing
for its portfolio. The majority of the Company's current investment portfolio is
comprised of loans or securities (ARM loans or ARM securities) that have coupon
rates which adjust over time (subject to certain limitations) in conjunction
with changes in short-term interest rates. The Company intends to expand its
production sources in the future to include other financial products, such as
commercial real estate loans. The Company has elected to be treated as a real
estate investment trust (REIT) for federal income tax purposes and as such must
distribute substantially all of its taxable income to shareholders, and will
generally not be subject to federal income tax.
The Company's principal sources of earnings are net interest income on its
investment portfolio. The Company's investment portfolio consists principally of
collateral for collateralized bonds, ARM securities and loans held for
securitization. The Company funds its portfolio investments with both borrowings
and cash raised from the issuance of equity capital. For the portion of the
portfolio investments funded with borrowings, the Company generates net interest
income to the extent that there is a positive spread between the yield on the
earning assets and the cost of borrowed funds. For that portion of the balance
sheet that is funded with equity capital, net interest income is primarily a
function of the yield generated from the interest-earning asset. The cost of the
Company's borrowings may be increased or decreased by interest rate swap, cap,
or floor agreements.
Generally, during a period of rising interest rates, the Company's net
interest spread earned on its investment portfolio will decrease. The decrease
of the net interest spread results from (i) the lag in resets of the ARM loans
underlying the ARM securities and collateral for collateralized bonds and (ii)
the fact that the resets on the ARM loans are limited to generally 1% every six
months, while the associated borrowings have no such limitation. As interest
rates stabilize and the ARM loans reset, the net interest margin may be restored
to its former level as the yields on the ARM loans adjust to market conditions.
Conversely, net interest margin may increase following a fall in short-term
interest rates; this increase may be temporary as the yields on the ARM loans
adjust to the new market conditions after a lag period. In each case, however,
the Company expects that the increase or decrease in the net interest spread due
to changes in the short-term interest rates is temporary. The net interest
spread may also be increased or decreased by the cost or proceeds of the
interest rate swap, cap or floor agreements.
The Company seeks to generate growth in earnings and dividends per share in a
variety of ways, including (i) adding investments to its portfolio when
opportunities in the market are favorable, (ii) developing production
capabilities to originate and acquire financial assets in order to create
investments for the portfolio at a lower effective cost then if such assets were
purchased and (iii) increasing the efficiency with which the Company utilizes
its equity capital over time.
The Company elects to be taxed as a real estate investment trust and, as a
result, is required to distribute substantially all of its earnings annually to
its shareholders. In order to grow its equity base, the Company may issue
additional preferred or common stock. Management strives to issue such
additional shares when it believes existing shareholders are likely to benefit
from such offerings through higher earnings and dividends per share than as
compared to the level of earnings and dividends the Company would likely
generate without such offerings.
Other Information
The Company, and its qualified REIT subsidiaries, have elected to be treated
as a REIT for federal income tax purposes. A REIT must distribute annually
substantially all of its income to shareholders. The Company and its qualified
REIT subsidiaries (collectively, "Dynex REIT") generally will not be subject to
federal income tax to the extent that certain REIT qualifications are met.
Certain other affiliated entities which are consolidated with the Company for
financial reporting purposes, are not consolidated for federal income tax
purposes because such entities are not qualified REIT subsidiaries. All taxable
income of these affiliated entities are subject to federal and state income
taxes, where applicable. See "Federal Income Tax Considerations."
The principal executive office of the Company is located at 10900 Nuckols
Road, 3rd Floor, Glen Allen, Virginia 23060, telephone number (804) 217-5800.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement for any
offering of Securities, the net proceeds from the sale of Securities offered by
the Company will be available for the general corporate purposes of the Company.
These general corporate purposes may include, without limitation, repayment of
maturing obligations, redemption of outstanding indebtedness, financing future
acquisitions (including acquisitions of loans and other related products),
capital expenditures and working capital. Pending any such uses, the Company may
invest the net proceeds from the sale of any Securities or may use them to
reduce short-term indebtedness. If the Company intends to use the net proceeds
from a sale of Securities to finance a significant acquisition, the related
Prospectus Supplements will describe the material terms of such acquisition.
If Debt Securities are issued to one or more persons in exchange for the
Company's outstanding debt securities, the accompanying Prospectus Supplement
related to such offering of Debt Securities will set forth the aggregate
principal amount of the outstanding debt securities which the Company will
receive in such exchange and which will cease to be outstanding, the residual
cash payment, if any, which the Company may receive from such persons or which
such persons may receive from the Company, as appropriate, the dates from which
the Company will pay interest accrued on the outstanding debt securities to be
exchanged for the offered Debt Securities and an estimate of the Company's
expenses in respect of such offering of the Debt Securities.
RATIO OF AVAILABLE EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios of earnings to fixed
charges of the Company for the periods indicated:
<TABLE>
<CAPTION>
Three months
ended March 31, Year ended December 31,
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992
------------------------ ---------- ------------------------------
Ratio of earnings to 1.89:1 1.56:1 1.26:1 1.35:1 1.69:1 1.80:1
fixed charges (1)
<FN>
(1) For purposes of computing the ratios, "earnings" consist of net income
before income taxes plus interest and debt expense and excludes fixed charges
related to collateralized bonds issued by the Company which are nonrecourse to
the Company. This sum is divided by fixed charges, which consists of total
interest and debt expense, to determine the ratio of available earnings to fixed
charges.
</FN>
</TABLE>
DESCRIPTION OF SECURITIES
The following is a brief description of the material terms of the Company's
securities which may be offered under this prospectus. This description does not
purport to be complete and is subject in all respects to applicable Virginia law
and to the provisions of the Company's Articles of Incorporation and Bylaws,
copies of which are on file with the Commission as described under "Available
Information" and are incorporated by reference herein.
General
The Company may offer under this Prospectus one or more of the following
categories of its Securities: (i) shares of its Common Stock, par value $0.01
per share; (ii) shares of its Preferred Stock, par value $0.01 per share, in one
or more series; (iii) Debt Securities, in one or more series, any series of
which may be either Senior Debt Securities or Subordinated Debt Securities; (iv)
Common Stock Warrants; (v) Preferred Stock Warrants; (vi) Debt Warrants; and
(vii) any combination of the foregoing, either individually or as units
consisting of one or more of the types of Securities described in clauses (i)
through (vi). The terms of any specific offering of Securities, including the
terms of any units offered, will be set forth in a Prospectus Supplement
relating to such offering.
<PAGE>
The Company's authorized equity capitalization consists of 100 million shares
of Common Stock, par value $0.01 per share and 50 million shares of Preferred
Stock, par value $0.01 per share. Neither the holders of the Common Stock nor of
any Preferred Stock, now or hereafter authorized, will be entitled to any
preemptive or other subscription rights. The Common Stock is listed on the New
York Stock Exchange. The Company intends to list any additional shares of its
Common Stock which are issued and sold hereunder. The Company may list any
series of its Preferred Stock which are offered and sold hereunder, as described
in the Prospectus Supplement relating to such series of Preferred Stock.
Common Stock
At the annual shareholders' meeting, on April 24, 1997, the shareholders of
the Company approved a two-for-one split of the issued and outstanding shares of
its common stock which was effective May 5, 1997. As of May 31, 1997, there were
42,609,054 outstanding shares of Common Stock held by 3,477 holders of record.
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor.
Dividends on any outstanding shares of preferred stock must be paid in full
before payment of any dividends on the Common Stock. Upon liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in assets available for distribution after payment of all debts
and other liabilities and subject to the prior rights of any holders of any
preferred stock then outstanding.
Holders of Common Stock are entitled to one vote per share with respect to
all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the Common Stock entitled
to vote in any election of directors may elect all of the directors standing for
election, subject to the voting rights (if any) of any series of preferred stock
that may be outstanding from time to time. The Company's Articles of
Incorporation and Bylaws contain no restrictions on the repurchase by the
Company of shares of the Common Stock. All the outstanding shares of Common
Stock are validly issued, fully paid and nonassessable.
Preferred Stock
As of May 31, 1997, there were 1,489,260 shares of Series A Cumulative
Convertible Preferred Stock, 2,076,643 shares of Series B Cumulative Convertible
Preferred Stock, and 1,839,000 shares of Series C Cumulative Convertible
Preferred Stock (together, the "Preferred Stock") issued and outstanding.
The Board of Directors is authorized to designate with respect to each series
of Preferred Stock the number of shares in each such series, the dividend rates
and dates of payment, voluntary and involuntary liquidation preferences,
redemption prices, whether or not dividends shall be cumulative and, if
cumulative, the date or dates from which the same shall be cumulative, the
sinking fund provisions, if any, for redemption or purchase of shares, the
rights, if any, and the terms and conditions on which shares can be converted
into or exchanged for shares of another class or series, and the voting rights,
if any.
All preferred shares issued will rank prior to the Common Stock as to
dividends and as to distributions in the event of liquidation, dissolution or
winding up of the Company. The ability of the Board of Directors to issue
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting powers of holders of Common Stock.
Securities Warrants
General
The Company may issue Securities Warrants for the Purchase of Common Stock,
Preferred Stock or Debt Securities. Such warrants are referred to herein as
Common Stock Warrants, Preferred Stock Warrants or Debt Warrants, as
appropriate. Securities Warrants may be issued independently or together with
any other Securities covered by the Registration Statement and offered by this
Prospectus and any accompanying Prospectus Supplement and may be attached to or
separate from such other Securities. Each series of Securities Warrants will be
issued under a separate agreement (each, a "Securities Warrant Agreement") to be
entered into between the Company and a bank or trust company, as agent (each, a
"Securities Warrant Agent"), all as set forth in the Prospectus Supplement
relating to the particular issue of offered Securities Warrants. Each issue of
Securities Warrants will be evidenced by warrant certificates (the "Securities
Warrant Certificates"). The Securities Warrant Agent will act solely as an agent
of the Company in connection with the Securities Warrant Certificates and will
not assume any obligation or relationship of agency or trust for or with any
holders of Securities Warrant Certificates or beneficial owners of Securities
Warrants. Copies of the definitive Securities Warrant Agreements and Securities
Warrant Certificates will be filed with the Commission by means of a Current
Report on Form 8-K in connection with the offering of such series of Securities
Warrants.
If Securities Warrants are offered, the applicable Prospectus Supplement will
describe the terms of such Securities Warrants, including in the case of
Securities Warrants for the purchase of Debt Securities, the following where
applicable: (i) the offering price; (ii) the currencies in which such Debt
Warrants are being offered; (iii) the designation, aggregate principal amount,
currencies, denominations and terms of the series of Debt Securities purchasable
upon exercise of such Debt Warrants; (iv) the designation and terms of any
Securities with which such Debt Warrants are being offered and the number of
such Debt Warrants being offered with each such Security; (v) the date on and
after which such Debt Warrants and the related Securities will be transferable
separately; (vi) the principal amount of the series of Debt Securities
purchasable upon exercise of each such Debt Warrant and the price at which the
currencies in which such principal amount of Debt Securities of such series may
be purchased upon such exercise; (vii) the date on which the right to exercise
such Debt Warrants shall commence and the date on which such right shall expire
(the "Expiration Date"); (viii) whether the Debt Warrant will be issued in
registered or bearer form; (ix) certain federal income tax consequences; and (x)
any other material terms of such Debt Warrants.
In the case of Securities Warrants for the purchase of Preferred Stock or
Common Stock, the applicable Prospectus Supplement will describe the terms of
such Securities Warrants, including the following where applicable: (i) the
offering price; (ii) the aggregate number of shares purchasable upon exercise of
such Securities Warrants, and in the case of Securities Warrants for Preferred
Stock, the designation, aggregate number and terms of the series of Preferred
Stock purchasable upon exercise of such Securities Warrants; (iii) the
designation and terms of the Securities with which such Securities Warrants are
being offered and the number of such Securities Warrants being offered with each
such Security; (iv) the date on and after which such Securities Warrants and the
related Securities will be transferable separately; (v) the number of shares of
Preferred Stock or shares of Common Stock purchasable upon exercise of each such
Securities Warrant and the price at which such number of shares of Preferred
Stock of such series or shares of Common Stock may be purchased upon such
exercise; (vi) the date on which the right to exercise such Securities Warrants
shall commence and the Expiration Date on which such right shall expire; (vii)
certain federal income tax consequences; and (viii) any other material terms of
such Securities Warrants.
Securities Warrant Certificates may be exchanged for new Securities Warrant
Certificates of different denominations, may (if in registered form) be
presented for registration of transfer, and may be exercised at the corporate
trust office of the appropriate Securities Warrant Agent or other office
indicated in the applicable Prospectus Supplement. Prior to the exercise of any
Securities Warrant to purchase Debt Securities, holders of such Debt Warrants
will not have any of the rights of Holders of the Debt Securities purchasable
upon such exercise, including the right to receive payments of principal,
premium, if any, or interest, if any, on the Debt Securities purchasable upon
such exercise or to enforce covenants in the applicable Indenture. Prior to the
exercise of any Securities Warrants to purchase Preferred Stock or Common Stock,
holders of such Preferred Stock Warrants or Common Stock Warrants will not have
any rights of holders of the respective Preferred Stock or Common Stock
purchasable upon such exercise, including the right to receive payments of
dividends, if any, on the Preferred Stock or Common Stock purchasable upon such
exercise or to exercise any applicable right to vote.
Exercise of Securities Warrants
Each Securities Warrant will entitle the holder thereof to purchase such
principal amount of Debt Securities or number of shares of Preferred Stock or
shares of Common Stock, as the case may be, at such exercise price as shall in
each case be set forth in, or calculable from, the Prospectus Supplement
relating to the offered Securities Warrants. After the close of business on the
Expiration Date (or such later date to which such Expiration Date may be
extended by the Company), unexercised Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities Warrant
Agent payment, as provided in the applicable Prospectus Supplement, of the
amount required to purchase the applicable Debt Securities, Preferred Stock or
Common Stock purchasable upon such exercise together with certain information
set forth on the reverse side of the Securities Warrant Certificate. Upon
receipt of such payment and the definitive Securities Warrant Certificates
properly completed and duly executed at the corporate trust office of the
Securities Warrant Agent or any other office indicated in the applicable
Prospectus Supplement, the Company will, as soon as practicable, issue and
deliver the applicable Debt Securities, Preferred Stock or Common Stock
purchasable upon such exercise. If fewer than all of the Securities Warrants
represented by such Securities Warrant Certificate are exercised, a new
Securities Warrant Certificate will be issued for the remaining amount of
Securities Warrants.
<PAGE>
Amendments and Supplements to Securities Warrant Agreements
Each Securities Warrant Agreement may be amended or supplemented without the
consent of the holders of the Securities Warrants issued thereunder to effect
changes that are not inconsistent with the provisions of the Securities Warrants
and that do not adversely affect the interests of the holders of the Securities
Warrants.
Common Stock Warrant Adjustments
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of shares of Common Stock covered by, a Common
Stock Warrant are subject to adjustment in certain events, including: (i) the
issuance of Common Stock as a dividend or distribution on the Common Stock; (ii)
subdivisions and combinations of the Common Stock; (iii) the issuance to all
holders of Common Stock of certain rights or warrants entitling them to
subscribe for or purchase Common Stock within the number of days, specified in
the applicable Prospectus Supplement, after the date fixed for the determination
of the stockholders entitled to receive such rights or warrants, at less than
the current market price (as defined in the Securities Warrant Agreement
governing such series of Common Stock Warrants); and (iv) the distribution to
all holders of Common Stock of evidences of indebtedness or assets of the
Company (excluding certain cash dividends and distributions described below).
The terms of any such adjustment will be specified in the related Prospectus
Supplement for such Common Stock Warrants.
No Rights as Stockholders
Holders of Common Stock Warrants will not be entitled by virtue of being such
holders, to vote, to consent, to receive dividends, to receive notice as
stockholders with respect to any meeting of stockholders for the election of
directors of the Company of any other matter, or to exercise any rights
whatsoever as stockholders of the Company.
Existing Securities Holders
The Company may issue, as a dividend at no cost, such Securities Warrants to
holders of record of the Company's Securities or any class thereof on the
applicable record date. If Securities Warrants are so issued to existing holders
of Securities, the applicable Prospectus Supplement will describe, in addition
to the terms of the Securities Warrants and the Securities issuable upon
exercise thereof, the provisions, if any, for a holder of such Securities
Warrants who validly exercises all Securities Warrants issued to such holder to
subscribe for unsubscribed Securities (issuable pursuant to unexercised
Securities Warrants issued to other holders) to the extent such Securities
Warrants have not been exercised.
Debt Securities
General
The Company may offer one or more series of its Debt Securities representing
general, unsecured obligations of the Company. Any series of Debt Securities may
either (1) rank prior to all subordinated indebtedness of the Company and pari
passu with all other unsecured indebtedness of the Company outstanding on the
date of the issuance of such Debt Securities ("Senior Debt Securities") or (2)
be subordinated in light of payments to certain other obligations of the Company
outstanding on the date of issuance ("Subordinated Debt Securities"). In this
Prospectus, any indenture relating to Subordinated Debt Securities is referred
to as a "Subordinated Indenture" and the term "Indenture" refers to Senior and
Subordinated Indentures, collectively.
The aggregate principal amount of Debt Securities which may be issued by the
Company will be set from time to time by the Board of Directors. Further, the
amount of Debt Securities which may be offered by this Prospectus will be
subject to the aggregate initial offering price of Securities specified in the
Registration Statement. Each Indenture will permit the issuance of an unlimited
amount of Debt Securities thereunder from time to time in one or more series.
Additional debt securities may be issued pursuant to another registration
statement for issuance under any Indenture. Any offering of Debt Securities may
be denominated in any currency composite designated by the Company.
The following description of the Debt Securities which may be offered by the
Company hereunder describes certain general terms and provisions of the Debt
Securities to which any Prospectus Supplement may relate. The particular terms
and provisions of the Debt Securities and the extent to which the following
general provisions may apply to such offering of Debt Securities will be
described in the accompanying Prospectus Supplement relating to such offering of
Debt Securities. The following descriptions of certain provisions of the
Indentures do not purport to be complete and are qualified in their entirety by
reference to the form of Senior Indenture or Subordinated Indenture, as
appropriate. The definitive Indenture relating to each offering of Debt
Securities will be filed with the Commission by means of a Current Report on
Form 8-K in connection with the offering of such Debt Securities. All article
and section references appearing herein are references to the articles and
sections of the appropriate Indenture and, unless defined herein, all
capitalized terms have the respective meanings specified in the appropriate
Indenture.
The Prospectus Supplement relating to any offering of Debt Securities will
set forth the following terms and other information to the extent applicable
with respect to the Debt Securities being offered thereby; (1) the designation,
aggregate principal amount, authorized denominations and priority of such Debt
Securities; (2) the price (expressed as a percentage of the aggregate principal
amount of such Debt Securities) at which such Debt Securities will be issued;
(3) the currency or currency units for which the Debt Securities may be
purchased and in which the principal of, and any interest on such Debt
Securities may be payable; (4) the stated maturity of such Debt Securities or
means by which a maturity date may be determined; (5) the rate at which such
Debt Securities will bear interest or the method by which such rate of interest
is to be calculated (which rate may be zero in the case of certain Debt
Securities issued at a price representing a discount from the principal amount
payable at maturity); (6) the periods during which such interest will accrue,
the dates on which such interest will be payable (or the method by which such
dates may be determined, including without limitation that such rate of interest
may bear an inverse relationship to some index or standard) and the
circumstances under which the Company may defer payment of interest; (7)
redemption provisions, including any optional redemption, required repayment or
mandatory sinking fund provisions; (8) any terms by which such Debt Securities
may be convertible into shares of the Company's Common Stock, Preferred Stock or
any other Securities of the Company, including a description of the Securities
into which any such Debt Securities are convertible; (9) any terms by which the
principal of such Debt Securities will be exchangeable for any other Securities
of the Company; (10) whether such Debt Securities are issuable as definitive
Fully-Registered Securities (as defined below) or Global Securities and, if
Global Securities are to be issued, the terms thereof, including the manner in
which interest thereon will be payable to the beneficial owners thereof and
other book-entry procedures, any terms for exchange of such Global Securities
into definitive Fully-Registered Securities (as defined below) and any
provisions relating to the issuance of a temporary Global Security; (11) any
additional restrictive covenants included for the benefit of the holders of such
Debt Securities; (12) any additional events of default provided with respect to
such Debt Securities; (13) the terms of any Securities being offered together
with such Debt Securities, (14) whether such Debt Securities represent general,
unsecured obligations of the Company and (15) any other material terms of such
Debt Securities.
If any of the Debt Securities are sold for foreign currency units, the
restrictions, elections, tax consequences, specific terms, and other information
with respect to such issue of Debt Securities and such currencies or currency
units will be set forth in the Prospectus Supplement relating to thereto.
Indenture Provisions
The Debt Securities may be issued in definitive, fully registered form
without coupons ("Fully Registered Securities"), or in a form registered as to
principal only with coupons or in bearer form with coupons. Unless otherwise
specified in the Prospectus Supplement, the Debt Securities will only be Fully
Registered Securities. In addition, Debt Securities of a series may be issuable
in the form of one or more Global Securities, which will be denominated in an
amount equal to all or a portion of the aggregate principal amount of such Debt
Securities. See "Global Securities" below.
One or more series of Debt Securities may be sold at a substantial discount
below their stated principal amount, bearing no interest or interest at a rate
that at the time of issuance is below market rates. Federal income tax
consequences and special considerations applicable to any such series will be
described in the Prospectus Supplement relating thereto.
Unless otherwise indicated in the related Prospectus Supplement for a series
of Debt Securities, there are no provisions contained in the Indentures that
would afford holders of Debt Securities protection in the event of a highly
leveraged transaction involving the Company.
Global Securities. Any series of Debt Securities may be issued in whole or in
part in the form of one or more Global Securities that will be deposited with,
or on behalf of, the Depositary identified in the Prospectus Supplement relating
to such series. Unless and until it is exchanged in whole or in part for Debt
Securities in individually certificated form, a Global Security may not be
transferred except as a whole to a nominee of the Depositary for such Global
Security, or by a nominee for the Depositary to the Depositary, or to a
successor of the Depositary or a nominee of such successor.
The specific terms of the Depositary arrangement with respect to any series
of Debt Securities and the rights of, and limitations on, owners of beneficial
interests in a Global Security representing all or a portion of a series of Debt
Securities will be described in the Prospectus Supplement relating to such
series.
Modification of Indentures. Unless otherwise specified in the related
Prospectus Supplement, each Indenture, the rights and obligations of the
Company, and the rights of the Holders may be modified with respect to one or
more series of Debt Securities issued under such Indenture with the consent of
the Holders of not less than a majority in principal amount of the outstanding
Debt Securities of each such series affected by the modification or amendment.
No modification of the terms of payment of principal or interest, and no
modification reducing the percentage required for modification, is effective
against any Holder without his consent.
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, each Indenture, will provide that the following are Events of
Default with respect to any series of Debt Securities issued thereunder: (1)
default in the payment of the principal of any Debt Security of such series when
and as the same shall be due and payable; (2) default in making a sinking fund
payment, if any, when and as the same shall be due and payable by the terms of
the Debt Securities of such series; (3) default for 30 days in payment of any
installment of interest on any Debt Securities of such series; (4) default for a
specified number of days after notice in the performance of any other covenants
in respect of the Debt Securities of such series contained in the Indenture; (5)
certain events of bankruptcy, insolvency or reorganization, or court appointment
of a receiver, liquidator, or trustee of the Company or its property; and (6)
any other Event of Default provided in the applicable supplemental indenture
under which such series of Debt Securities is issued. An Event of Default with
respect to a particular series of Debt Securities issued under an Indenture will
not necessarily constitute an Event of Default with respect to any other series
of Debt Securities issued under such Indenture. The trustee under an Indenture
may withhold notice to the Holders of any series of Debt Securities of any
default with respect to such series (except in the payment of principal or
interest) if it considers such withholding in the interests of such Holders.
If an Event of Default with respect to any series of Debt Securities shall
have occurred and be continuing, the appropriate trustee under the Indenture or
the Holders of not less than 25% in the aggregate principal amount of the Debt
Securities of such series may declare the principal, or in the case of
discounted Debt Securities, such portion thereof as may be described in the
Prospectus Supplement, of all the Debt Securities of such series to be due and
payable immediately.
Within four months after the close of each fiscal year, the Company will file
with each trustee under the indentures a certificate, signed by specified
officers, stating whether or not such officers have knowledge of any default,
and, if so, specifying each such default and the nature thereof.
Subject to provisions relating to its duties in case of default, a trustee
under the Indentures shall be under no obligation to exercise any of its rights
or powers under the applicable Indenture at the request, order, or direction of
any Holder, unless such Holders shall have offered to such trustee reasonable
indemnity. Subject to such provisions for indemnification, the Holders of a
majority in principal amount of the Debt Securities of any series may direct the
time, method, and place of conducting any proceeding for any remedy available to
the appropriate trustee, or exercising any trust or power conferred upon such
trustee, with respect to the Debt Securities of such series.
Payment and Transfer. Principal of, and premium and interest, if any, on,
fully Registered Securities will be payable at the Place of Payment as specified
in the applicable Prospectus Supplement, provided that payment of interest, if
any, may be made, unless otherwise provided in the applicable Prospectus
Supplement, by check mailed to the person in whose names such Debt Securities
are registered at the close of business on the day or days specified in the
Prospectus Supplement or transfer to an account maintained by the payee located
inside the United States. The principal of, and premium and interest, if any,
on, Debt Securities in other forms will be payable in the manner and at the
place or places as designated by the Company and specified in the applicable
Prospectus Supplement. Unless otherwise provided in the Prospectus Supplement,
payment of interest may be made, in the case of Bearer Security by transfer to
an account maintained by the payee with a bank outside the United States.
Fully Registered Securities may be transferred or exchanged at the corporate
trust office of the trustee or any other office or agency maintained by the
Company for such purposes, subject to the limitations in the applicable
Indenture, without the payment of any service charge except for any tax or
governmental charge incidental thereto. Provisions with respect to the transfer
and exchange of Debt Securities in other forms will be set forth in the
applicable Prospectus Supplement.
Defeasance. The Indentures provide that each will cease to be of further
effect with respect to a certain series of Debt Securities (except for certain
obligations to register the transfer or exchange of Securities) if (a) the
Company delivers to the Trustee for the Securities of such series for
cancellation of all Securities of all series and the coupons, if any,
appertaining thereto, or (b) if the Company deposits into trust with the Trustee
money or United States government obligations, that, through the payment of
interest thereon and principal thereof in accordance with their terms, will
provide money in an amount sufficient to pay all of the principal of, and
interest on, the Securities of such series on the dates such payments are due or
redeemable in accordance with the terms of such Securities.
<PAGE>
Certain Charter and Virginia Law Provisions
Unless the amendment effects an extraordinary transaction, the Articles of
Incorporation of the Company may be amended with the approval of the holders of
a majority of the outstanding shares of Common Stock, subject to the voting
rights (if any) of any series of Preferred Stock that may be outstanding from
time to time. Amendments that effect extraordinary transactions, which include
mergers, share exchanges, a sale of substantially all the assets of the Company,
the dissolution of the Company or the share ownership restrictions described
below, require the approval of the holders of more than two-thirds of the
outstanding shares of Common Stock (subject to any voting rights of any series
of Preferred Stock outstanding).
Special meetings of the shareholders of the Company may be called by a
majority of the Board of Directors, a majority of the unaffiliated directors,
the Chairman of the Board, the President or generally by shareholders holding at
least 25% of the outstanding shares of Common Stock entitled to be voted at the
meeting.
Virginia law and the Articles of Incorporation of the Company provide that
the directors and officers of the Company shall have no liability to the Company
or its shareholders in certain actions brought by or on behalf of shareholders
of the Company unless such officer or director has engaged in willful misconduct
or violations of federal or state securities laws and certain other activities.
Repurchase of Shares and Restrictions on Transfer
Two of the requirements for qualification for the tax benefits accorded a
REIT under the Internal Revenue Code of 1986, as amended ("the Code"), are that
(i) during the last half of each taxable year not more than 50% of the
outstanding shares may be owned directly or indirectly by five or fewer
individuals and (ii) there must be at least 100 shareholders for at least 335
days in each taxable year. Those requirements apply for all taxable years after
the year in which a REIT elects REIT status.
The Articles of Incorporation prohibit any person or group of persons from
acquiring or holding, directly or indirectly, ownership of a number of shares of
Common Stock in excess of 9.8% of the outstanding shares. Shares of Common Stock
owned by a person or group of persons in excess of such amounts are referred to
as "Excess Shares." For this purpose the term "ownership" is defined in
accordance with the Code, the constructive ownership provisions of Section 544
of the Code and Rule 13d-3 promulgated under the Exchange Act, and the term
"group" is defined to have the same meaning as that term has for purposes of
Section 13(d)(3) of the Exchange Act. Accordingly, shares of Common Stock owned
or deemed to be owned by a person who individually owns less than 9.8% of the
shares outstanding may nevertheless be Excess Shares.
For purposes of determining whether a person holds Excess Shares, a person or
group will be treated as owning not only shares of Common Stock actually or
beneficially owned, but also any shares of Common Stock attributed to such
person or group under the constructive ownership provisions contained in Section
544 of the Code.
The Articles of Incorporation provide that in the event any person acquires
Excess Shares, each Excess Share may be redeemed at any time by the Company at
the closing price of a share of Common Stock on the New York Stock Exchange on
the last business day prior to the redemption date. From and after the date
fixed for redemption of Excess Shares, such shares shall cease to be entitled to
any distribution and other benefits, except only the right to payment of the
redemption price for such shares.
Under the Articles of Incorporation any acquisition of shares that would
result in failure to qualify as a REIT under the Code is void to the fullest
extent permitted by law, and the Board of Directors is authorized to refuse to
transfer shares to a person if, as a result of the transfer, that person would
own Excess Shares. Prior to any transfer or transaction which, if consummated,
would cause a shareholder to own Excess Shares, and in any event upon demand by
the Board of Directors, a shareholder is required to file with the Company an
affidavit setting forth, as to that shareholder, the information required to be
reported in returns filed by shareholders under Treasury Regulation Section
1.857-9 under the Code and in reports filed under Section 13(d) of the Exchange
Act. Additionally, each proposed transferee of shares of Common Stock, upon
demand of the Board of Directors, also may be required to file a statement or
affidavit with the Company setting forth the number of shares already owned by
the transferee and any related person.
The Common Stock may not be purchased by nonresident aliens or foreign
entities. In addition, the Common Stock may not be held by "disqualified
organizations" within the meaning of Section 860E(e)(5) of the Code, which
generally includes governmental entities and other tax-exempt persons not
subject to the tax on unrelated business taxable income.
<PAGE>
Transfer Agent and Registrar
The transfer agent and the registrar for the Company's Common Stock is First
Union National Bank of North Carolina, Charlotte, North Carolina.
PLAN OF DISTRIBUTION
The Company may sell Securities (1) through underwriters or dealers, (2)
directly to one or more purchasers, or (3) through agents designated from time
to time.
The distribution of Securities may be effected from time to time in one or
more transactions at a fixed price or prices, which may be changed, or at market
prices prevailing at the time of the sale, or at prices related to such
prevailing market prices or at negotiated prices. The Prospectus Supplement will
describe the method of distribution of the Securities offered.
If underwriters are used in the sale in a firm commitment underwriting, the
Securities will be acquired by the underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The obligations of the underwriters to purchase the
Securities will be subject to certain conditions precedent, and the underwriters
will be obligated to purchase all the Securities of the series offered by the
Company's Prospectus Supplement if any of the Securities are purchased. Any
initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
Only underwriters named in the Prospectus Supplement are deemed to be
underwriting in connection with the Securities in respect of which such
Prospectus Supplement and this Prospectus are delivered and any firms not named
therein are not parties to the underwriting agreement in respect of such
Securities and will have no direct or indirect participation in the underwriting
thereof, although they may participate in the discussion of such Securities
under circumstances where they may be entitled to a dealer's commission.
Securities may also be sold directly by the Company or through agents
designated by the Company from time to time. The Securities offered hereby may
also be sold from time to time through agents for the Company by means of (i)
ordinary broker's transactions, (ii) block transactions (which may involve
crosses) in accordance with the rules of the Exchanges, in which such agents may
attempt to sell Securities as agent but may purchase and resell all or a portion
of the blocks as principal, (iii) "fixed price offerings" in accordance with the
rules of the Exchanges, or (iv) a combination of any such methods of sale. In
connection therewith, distributors' or sellers' commissions may be paid or
allowed which will not exceed those customary in the types of transactions
involved. A Prospectus Supplement will set forth the terms of any such "fixed
price offering," "exchange distributions" and "special offerings." If the agent
purchases Securities as principal, it may sell such Securities by any of the
methods described above. Any such agent involved in the offering and sale of
Securities in respect of which this Prospectus is delivered will be named, and
any commissions payable by the Company to such agent set forth in the Prospectus
Supplement. Unless otherwise indicated herein or in the Prospectus Supplement,
any such agent is acting on a best-efforts basis for the period of its
appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters, or dealers to solicit offers by certain institutional
investors to purchase Securities providing for payment and delivery on a future
date specified in the Prospectus Supplement. There may be limitations on the
minimum amount which may be purchased by any such institutional investor or on
the portion of the aggregate principal amount of the particular Securities which
may be sold pursuant to such arrangements. Institutional investors to which such
offers may be made, when authorized, include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and such other institutions as may be approved by the
Company. The obligations of any such purchasers pursuant to such delayed
delivery and payment arrangements will not be subject to any conditions except
(1) the purchase by an institution of the particular Securities shall not at the
time of delivery be prohibited under the laws of any jurisdiction in the United
States to which such institution is subject, and (2) if the particular
Securities are being sold to underwriters, the Company shall have sold to such
underwriters the total principal amount of such Securities less the principal
amount thereof covered by such arrangements. Underwriters will not have any
responsibility in respect of the validity of such arrangements or the
performance of the Company or such institutional investors thereunder.
Agents, underwriters and dealers may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribution with respect to payments which the agents or underwriters may be
required to make in respect thereof. Agents, underwriters and dealers may engage
in transactions with, or perform services for, the Company in the ordinary
course of business.
If an agent or agents are utilized in the sale, such persons may be deemed to
be "underwriters", and any documents, commissions or concessions received by
them from the Company or any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
Any such person who may be deemed to be an underwriter and any such compensation
received from the Company will be described in the Prospectus Supplement.
FEDERAL INCOME TAX CONSIDERATIONS
Federal Income Taxation of Shareholders
The following section is a general summary of certain federal income tax
aspects of an investment in the Company that should be considered by prospective
shareholders. The discussion in this section is based on existing provisions of
the Code, existing and proposed Treasury regulations, existing court decisions,
and existing rulings and other administrative interpretations. There can be no
assurance that future Code provisions or other legal authorities will not alter
significantly the tax consequences described below. No rulings have been
obtained from the Internal Revenue Service concerning any of the matters
discussed in this section.
The Company and its qualified REIT subsidiaries (collectively "Dynex REIT")
believes it has complied, and intends to comply in the future, with the
requirements for qualification as a REIT under the Code. The federal income tax
provisions governing REITs and their shareholders are extremely complicated, and
what follows is only a very brief and general summary of the most important
considerations for shareholders. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES OF THE
COMPANY.
General Considerations
Dynex REIT believes it has complied, and intends to comply in the future,
with the requirements for qualification as a REIT under the Code. Venable,
Baetjer and Howard, LLP, counsel to the Company, has given the Company its
opinion to the effect that, as of the date hereof and based on the various
representations made to it by the Company with respect to its income, assets,
and activities since its inception, and subject to certain assumptions and
qualifications stated in such opinion, (i) Dynex REIT qualifies for treatment as
a REIT under the Code and (ii) the organization and contemplated method of
operation of Dynex REIT are such as to enable it to continue so to qualify in
subsequent years, provided the various operational requirements of REIT status
are satisfied in those years. However, investors should be aware that opinions
of counsel are not binding on the courts or the Internal Revenue Service. To the
extent that Dynex REIT qualifies as a REIT for federal income tax purposes, it
generally will not be subject to federal income tax on the amount of its income
or gain that is distributed to shareholders. However, certain nonqualified REIT
subsidiaries of the Company, which operate the Company's production operations
and are included in the Company's consolidated GAAP financial statements, are
not qualified REIT subsidiaries. Consequently, all of the nonqualified REIT
subsidiarys' taxable income is subject to federal and state income taxes.
The REIT rules generally require that a REIT invest primarily in real
estate-related assets, its activities be passive rather than active, and it
distribute annually to its shareholders a high percentage of its taxable income.
The Company could be subject to a number of taxes if it failed to satisfy those
rules or if it acquired certain types of income-producing real property through
foreclosure. Although no complete assurances can be given, the Company does not
expect that it will be subject to material amounts of such taxes.
Dynex REIT's failure to satisfy certain Code requirements could cause the
Company to lose its status as a REIT. If Dynex REIT failed to qualify as a REIT
for any taxable year, it would be subject to federal income tax (including any
applicable minimum tax) at regular corporate rates and would not receive
deductions for dividends paid to shareholders. As a result, the amount of
after-tax earnings available for distribution to shareholders would decrease
substantially. While the Board of Directors intends to cause Dynex REIT to
operate in a manner that will enable it to qualify as a REIT in all future
taxable years, there can be no certainty that such intention will be realized
because, among other things, qualification hinges on the conduct of the business
of Dynex REIT.
Taxation of Distributions by the Company
Assuming that Dynex REIT maintains its status as a REIT, any distributions
that are properly designated as "capital gain dividends" generally will be taxed
to shareholders as long-term capital gains, regardless of how long a shareholder
has owned his shares. Any other distributions out of Dynex REIT current or
accumulated earnings and profits will be dividends taxable as ordinary income.
Shareholders will not be entitled to dividends-received deductions with respect
to any dividends paid by Dynex REIT. Distributions in excess of Dynex REIT's
current or accumulated earnings and profits will be treated as tax-free returns
of capital, to the extent of the shareholder's basis in his shares of Common
Stock, and as gain from the disposition of shares, to the extent they exceed
such basis. Shareholders may not include on their own returns any of Dynex REIT
ordinary or capital losses. Distributions to shareholders attributable to
"excess inclusion income" of Dynex REIT will be characterized as excess
inclusion income in the hands of the shareholders. Excess inclusion income can
arise from Dynex REIT's holdings of residual interests in real estate mortgage
investment conduits and in certain other types of mortgage-backed security
structures created after 1991. Excess inclusion income constitutes unrelated
business taxable income ("UBTI") for tax-exempt entities (including employee
benefit plans and individual retirement accounts), and it may not be offset by
current deductions or net operating loss carryovers. In the unlikely event that
the Company's excess inclusion income is greater than its taxable income, the
Company's distribution would be based on the Company's excess inclusion income.
In 1995 the Company's excess inclusion was approximately 31% of its taxable
income. Although Dynex REIT itself would be subject to a tax on any excess
inclusion income that would be allocable to a "disqualified organization"
holding its shares, Dynex REIT's by-laws provide that disqualified organizations
are ineligible to hold Dynex REIT's shares.
Dividends paid by Dynex REIT to organizations that generally are exempt from
federal income tax under Section 501(a) of the Code should not be taxable to
them as UBTI except to the extent that (i) purchase of Shares of Dynex REIT was
financed by "acquisition indebtedness," (ii) such dividends constitute excess
inclusion income or (iii) with respect to the trusts owning more than 10% of the
shares of Dynex REIT, under certain circumstances a portion of such dividend is
attributable to UBTI. Because an investment in Dynex REIT may give rise to UBTI
or trigger the filing of an income tax return that otherwise would not be
required, tax-exempt organizations should give careful consideration to whether
an investment in Dynex REIT is prudent.
Taxation of Dispositions of Shares of the Common Stock
In general, any gain or loss realized upon a taxable disposition of shares
will be treated as long-term capital gain or loss if the shares have been held
for more than twelve months and otherwise as short-term capital gain or loss.
However, any loss realized upon a taxable disposition of shares held for six
months or less will be treated as long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. All or a portion of
any loss realized upon a taxable disposition of Shares of Dynex REIT may be
disallowed if other Shares of Dynex REIT are purchased (under a dividend
reinvestment plan or otherwise) within 30 days before or after the disposition.
Backup Withholding
Dynex REIT generally is required to withhold and remit to the United States
Treasury 31% of the dividends paid to any shareholder who (i) fails to furnish
Dynex REIT with a correct taxpayer identification number, (ii) has notified
Dynex REIT that a shareholder has underreported dividend or interest income to
the Internal Revenue Service, or (iii) under certain circumstances, fails to
certify to Dynex REIT that he is not subject to backup withholding. An
individual's taxpayer identification number is his social security number.
Debt Securities
The Debt Securities will be taxable as indebtedness. Interest and original
issue discount, if any, on a Debt Security will be treated as ordinary income to
a holder. Any special tax considerations applicable to a Debt Security will be
described in the related Prospectus Supplement.
Exercise of Securities Warrants
Upon a holder's exercise of a Securities Warrant, the holder will, in
general, (i) not recognize any income, gain or loss for federal income tax
purposes, (ii) receive an initial tax basis in the Security received equal to
the sum of the holder's tax basis in the exercised Securities Warrant and the
exercise price paid for such Security and (iii) have a holding period for the
Security received beginning on the date of exercise.
Sale or Expiration of Securities Warrants
If a holder of a Securities Warrant sells or otherwise disposes of such
Securities Warrant (other than by its exercise), the holder generally will
recognize capital gain or loss (long term capital gain or loss if the holder's
holding period for the Securities Warrant exceeds twelve months on the date of
disposition; otherwise, short term capital gain or loss) equal to the difference
between (i) the cash and fair market value of other property received and (ii)
the holder's tax basis (on the date of disposition) in the Securities Warrant
sold. Such a holder generally will recognize a capital loss upon the expiration
of an unexercised Securities Warrant equal to the holder's tax basis in the
Securities Warrant on the expiration date.
<PAGE>
State and Local Tax Considerations
State and local tax laws may not correspond to the federal income tax
principles discussed in this section. Accordingly, prospective investors should
consult their tax advisors concerning the state and local tax consequences of an
investment in Dynex REIT.
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by
Venable, Baetjer and Howard, LLP, Baltimore, Maryland.
EXPERTS
The consolidated financial statements of the Company included in the
Company's Report on Form 10-K for the year ended December 31, 1996 have been
audited by KPMG Peat Marwick LLP, independent auditors, as set forth in their
report included therein, and incorporated herein by reference. Such financial
statements have been incorporated by reference herein in reliance upon the
report of that firm and upon the authority of that firm as experts in auditing
and accounting.
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
No person has been authorized to
give any information or to make any
representations in connection with this $100,000,000
offering other than those contained in
this Prospectus Supplement or the
accompanying Prospectus and, if given
or made, such other information and
representation must not be relied upon
as having been authorized by the Dynex
Company or the Underwriters. Neither Capital, Inc.
the delivery of this Prospectus
Supplement and the accompanying
Prospectus nor any sale made hereunder
shall, under any circumstances, create
any implication that there has been no % Senior Notes
change in the affairs of the Company
since the date hereof or that the Due July , 2002
information contained herein is correct
as of any time subsequent to its date.
This Prospectus Supplement and the
accompanying Prospectus do not
constitute an offer to sell or a
solicitation of an offer to buy any
securities other than the registered
securities to which they relate. This
Prospectus Supplement and the
accompanying Prospectus do not
constitute an offer to buy such
securities in any circumstances in
which such offer or solicitation is
unlawful.
</TABLE>
--------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS ____________________
<S> <C> <C>
Prospectus Supplement PROSPECTUS SUPPLEMENT
--------------------
...................................Page
The Company........................S-2
Use of Proceeds....................S-2
Selected Financial Data............S-3
Capitalization.....................S-6
Business...........................S-7
Description of the Notes...........S-17
Underwriting.......................S-27
Legal Matters......................S-27
PaineWebber Incorporated
Prospectus
Smith Barney Inc.
Available Information..............2
Incorporation of Certain Documents
by Reference.................. 2 ____________________
The Company........................3
Use of Proceeds....................4
Ratio of Available Earnings to Fixed July ,1997
Charges............................4
Description of Securities..........4
Plan of Distribution...............11
Federal Income Tax Considerations..12
Legal Matters......................14
Experts............................14
========================================= ========================================
</TABLE>
<PAGE>
Red Herring Language
Information contained in this Prospectus Supplement is subject to completion or
amendment. A registration statement relating to these securities has been
declared effective by the Securities and Exchange Commission pursuant to Rule
415 under the Securities Act of 1933. A final Prospectus Supplement and the
Prospectus to which it relates will be delivered to purchasers of these
securities. This Prospectus Supplement and the accompanying Prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
