<PAGE>
Dynex Capital, Inc.
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Notice of Annual Meeting of Stockholders
and
Proxy Statement
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Annual Meeting of Stockholders
May 19, 1998
<PAGE>
DYNEX CAPITAL, INC.
March 26, 1998
To Our Stockholders:
You are cordially invited to attend the 1998 Annual Meeting of
Stockholders of Dynex Capital, Inc. to be held at the AmeriSuites Hotel
located at Innsbrook Corporate Center, 4100 Cox Road, Glen Allen, Virginia on
Tuesday, May 19, 1998, at 2:00 p.m. Eastern time.
The business of the meeting is to (i) elect the Directors and (ii)
approved an amendment to the Company's Articles of Incorporation. Information
relating to these proposals is set forth in the Proxy Statement attached.
While stockholders may exercise their right to vote their shares
in person, we recognize that many stockholders may not be able to attend the
Annual Meeting. Accordingly, we have enclosed a proxy which will enable you
to vote your shares on the issues to be considered at the Annual Meeting even
if you are unable to attend. All you need to do is mark the proxy to indicate
your vote, date and sign the proxy, and return it in the enclosed postage-paid
envelope as soon as conveniently possible. If you desire to vote in
accordance with management's recommendations, you need not mark your votes on
the proxy but need only sign, date and return the proxy in the enclosed
postage-paid envelope in order to record your vote.
Sincerely,
Thomas H. Potts
President
<PAGE>
1
DYNEX CAPITAL, INC.
10900 Nuckols Road
Glen Allen, Virginia 23060
(804) 217-5800
----------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Our Stockholders:
The Annual Meeting of Dynex Capital, Inc. will be held at the
AmeriSuites Hotel located at Innsbrook Corporate Center, 4100 Cox Road, Glen
Allen, Virginia on Tuesday, May 19, 1998, at 2:00 p.m. Eastern time, to
consider and act upon the following matters:
1. The election of five Directors, each for a one-year term;
2. Approval of an amendment to the Company's Articles of Incorporation
to comply with certain requirements of the New York Stock
Exchange ("NYSE") regarding transactions entered into or through
facilities of the NYSE which involve excess shares of the Company's
common stock; and
3. Such other business as may properly come before the Annual Meeting.
Only stockholders of record at the close of business on March 25, 1998,
the record date, will be entitled to vote at the Annual Meeting.
Management desires to have maximum representation at the Annual
Meeting and respectfully requests that you date, execute and promptly mail the
enclosed proxy in the accompanying postage-paid envelope. A proxy may be
revoked by a stockholder by notice in writing to the Secretary of the
Company at any time prior to its use, by presentation of a later-dated
proxy, or by attending the Annual Meeting and voting in person.
By order of the Board of Directors
Lynn K. Geurin
Secretary
Dated: March 26, 1998
<PAGE>
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1
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[GRAPHIC OMITTED]
Directions from the North on Interstate 95:
Take the Interstate 295 West-Charlottesville exit. Travel approximately
8.5 miles on Interstate 295 West towards Charlottesville. Take the
Nuckols Road-South Exit. Travel approximately 1.0 mile to the first stop light,
which is located at the corner of Cox and Nuckols Road. Turn right on Cox
Road. Travel approximately 1.5 miles and turn right at the AmeriSuites Hotel
entrance.
Directions from the airport:
(In regards to the map above - Interstate 64 should be used as a reference
point only)As you leave the airport on 156 North-Airport Drive follow the "to
295-North"signs. You will pass the Interstate 64 East and West exists and the
Interstate295 South exit. After these exits, continue on 156
North-Airport Drive approximately 2.5 miles. Take the "295 North to 95-North
and 64-West" exit Northtowards Washington. Stay on Interstate 295 North for
approximately 19.5 miles.Take the Nuckols Road-South Exit. Travel
approximately 1.0 mile to the firststop light, which is located at the corner
of Cox and Nuckols Road. Turn righton Cox Road. Travel approximately 1.5
miles and turn right at the AmeriSuites Hotel entrance.
Directions from the South or Downtown:
Take Interstate 64 West to Interstate 295 towards Washington. Take the
first exit - Nuckols Road South. Travel approximately 1.0 mile to the
first stop light, which is located at the corner of Cox and Nuckols Road. Turn
right on Cox Road. Travel approximately 1.5 miles and turn right at the
AmeriSuites Hotel entrance.
<PAGE>
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7
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1
DYNEX CAPITAL, INC.
10900 Nuckols Road
Glen Allen, Virginia 23060
(804) 217-5800
----------------------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
May 19, 1998
To Our Stockholders:
This Proxy Statement is furnished with the solicitation by the Board
of Directors of Dynex Capital, Inc. (the "Company") of proxies to be used at
the Annual Meeting of Stockholders of the Company to be held at the
AmeriSuites Hotel located at Innsbrook Corporate Center, 4100 Cox Road, Glen
Allen, Virginia on Tuesday, May 19, 1998, at 2:00 p.m. Eastern time. The Annual
Meeting is being held for the purposes set forth in the accompanying notice of
Annual Meeting of Stockholders. This Proxy Statement, the accompanying proxy
card and the notice of Annual Meeting are being provided to stockholders
beginning on or about March 26, 1998.
GENERAL INFORMATION
Solicitation
The enclosed proxy is solicited by the Board of Directors of the Company.
The costs of this solicitation will be borne by the Company. Proxy
solicitations will be made by mail, and also may be made by personal interview,
telephone and telegram by Directors and officers of the Company. Brokerage
houses and nominees will be requested to forward the proxy soliciting
material to the beneficial owners of the Company's common stock and to
obtain authorization for the execution of proxies. The Company will, upon
request, reimburse such parties for their reasonable expenses in forwarding
proxy materials to such beneficial owners. Additionally, the Company has
engaged the firm of MacKenzie Partners, Inc., New York, New York, to conduct
proxy solicitations on its behalf at a cost estimated to be $5,000, plus
reasonable out-of-pocket expenses.
Voting Rights
Holders of shares of the Company's common stock at the close of
business on March 25, 1998, the record date, are entitled to notice of, and
to vote at,the Annual Meeting. On that date 45,548,182 shares of common
stock were outstanding. Each share of common stock outstanding on the
record date is entitled to one vote on each matter presented at the
Annual Meeting. The presence, in person or by proxy, of stockholders
entitled to cast a majority of all the votes entitled to be cast constitutes
a quorum for the transaction of business at the Annual Meeting.
Voting of Proxies
Shares of common stock represented by all properly executed
proxies received in time for the Annual Meeting will be voted in accordance
with the choices specified in the proxy. Unless contrary instructions are
indicated on the proxy, the shares will be voted FOR the election of the
nominees named in this Proxy Statement as Directors, and FOR the amendment
to the Company's Articles of Incorporation to comply with certain
requirements of the New York Stock Exchange relating to transactions involving
excess shares, as set forth herein.
The management and the Board of Directors of the Company know of
no matters to be brought before the Annual Meeting other than as set forth
herein; no stockholder proposals were received by the Company on or before
November 1,1997, the deadline for inclusion of such proposals in this Proxy
Statement.
Revocability of Proxy
The giving of the enclosed proxy does not preclude the right to vote
in person should the stockholder giving the proxy so desire. A proxy may be
revoked at any time prior to its exercise by delivering a written
statement to the Secretary of the Company that the proxy is revoked, by
presenting to the Company a later-dated proxy executed by the person
executing the prior proxy, or by attending the Annual Meeting and voting in
person.
Annual Report on Form 10-K
The Annual Report on Form 10-K, including financial statements for
the year ended December 31, 1997, which are being mailed to stockholders
together with this Proxy Statement, contains financial and other information
about the activities of the Company, but is not incorporated into this Proxy
Statement and is not to be considered a part of these proxy soliciting
materials.
ELECTION OF DIRECTORS
Five Directors of the Company, constituting the entire Board of
Directors, are to be elected at the 1998 AnnualMeeting to serve until the next
annual meeting and until their successors are elected and duly qualified.
Mr. J. SidneyDavenport, Mr. Richard C. Leone, Mr. Thomas H. Potts, Mr. Paul
S. Reid and Mr. Donald B. Vaden have been nominated bythe Board of Directors
for re-election to the Board of Directors at the Annual Meeting. Unless
authorization iswithheld, the persons named as proxies will vote FOR the
election of the nominees of the Board of Directors named above.
Each nominee has agreed to serve if elected. In the event any nominee
shall unexpectedly be unable to serve, the proxies will be voted for such
other person as the Board of Directors may designate. Selected
biographical information regarding each nominee is set forth below:
J. Sidney Davenport, 56, has been a Director of the Company since its
organization in December 1987. He was a Vice President of The Ryland Group,
Inc., a publicly-owned corporation engaged in residential housing
construction and mortgage-related financial services, from March 1981 to
January 1998. Mr. Davenport was Executive Vice President of Ryland
Mortgage Company from April 1992 to January 1998. Mr. Davenport served as
a Director of Mentor Income Fund, Inc., a publicly-traded closed-end mutual
fund, from June 1992 to August 1993.
Richard C. Leone, 57, has been a Director of the Company since
January 1988. He currently is the President of The Twentieth Century Fund,
a tax-exempt research foundation engaged in economic, political and social
policy studies. Mr. Leone is also a Director of seven Dreyfus mutual funds.
Thomas H. Potts, 48, has been President and a Director of the Company
since its organization in December 1987. Prior to that, Mr. Potts served in
various positions on behalf of The Ryland Group, Inc. Mr. Potts served as
Treasurer of The Ryland Group, Inc. from May 1987 until April 1992,
Executive Vice President of Ryland Acceptance Corporation ("Ryland
Acceptance")from November 1987 until April 1992, and Executive Vice President,
and previously Senior Vice President of Ryland Mortgage Company from April
1991 until April 1992. Mr. Potts also served as President and Director
of Mentor Income Fund, Inc. from its inception in December 1988 until June 1992.
Paul S. Reid, 49, has been a Director of the Company since January 1988.
Mr. Reid is currently the Executive Vice President of the Mortgage Bankers
Association of America. From 1989 until 1997, Mr. Reid served as the President
and Chief Executive Officer of American Home Funding, Inc., a wholly-owned
subsidiary of Rochester Community Savings Bank, an FDIC insured institution.
Mr. Reid has advised the Board that he may have to resign from the Board
due to a possible conflict of interest. In such event, the Board would nominate
a new director to fill the vacancy created by Mr. Reid's resignation.
Donald B. Vaden, 63, has been a Director of the Company since January
1988. In March 1995, Mr. Vaden resumed practicing law specializing in mediation
and arbitration, and is certified for general and family mediation by the
Supreme Court of Virginia. He serves as a director of the Virginia Mediation
Network, Inc. He is the retired past Chairman of Residential Home Funding
Corporation where he served from December 1992 until February 1995.
Information Concerning the Board of Directors
The members of the Audit Committee during 1997 were Mr. Davenport, Mr.
Reid and Mr. Vaden. The Audit Committee reviews and approves the scope of the
annual audit undertaken by the Company's independent certified public
accountantsand meets with them on a regular basis to review the progress and
results of their work as well as any recommendations they may make. The Audit
Committee held three regular meetings and one special meeting in 1997. The
Board of Directors also had a Compensation Committee during 1997 with the
members being Mr. Davenport, Mr. Leone, Mr. Reid and Mr. Vaden. The
Compensation Committee met two times in 1997. The Company has no other
standing committees of the Board of Directors.
The Board of Directors held four regular meetings and one special meeting
in 1997. During this period, each of the Directors attended at least 75% of
these meetings of the Board of Directors and the committees on which he served.
The Directors who are not employed by the Company (the "Outside
Directors") receive an annual fee of $25,000 per year, plus $500 for each
meeting of the Board of Directors, or a committee thereof, they attend.
In addition, these Directors are reimbursed for expenses related to their
attendance at Board of Directors and committee meetings.
In 1995, the Company adopted the 1995 Directors Stock Incentive Plan (the
"Directors Plan") pursuant to which Directors of the Company as of May 1, 1995,
who were not employees of the Company or its affiliates, each received an
initial grant of 7,000 Stock Appreciation Rights ("SARs"). Under the Directors
Plan, new Directors receive an initial grant of 5,000 SARs. Subsequent to these
initial grants, eligible Directors are granted 1,000 SARs annually through May
1, 1998. The exercise price of the SARs is equal to the market value of the
Company's common stock on the date of each grant. The SARs may be settled only
in cash. As authorized by the Directors Plan, on May 1, 1997, each eligible
Director received a grant of 1,000 SARs.
OWNERSHIP OF COMMON STOCK
The table below sets forth, as of December 31, 1997, the number of shares
of common stock beneficially owned by owners of more than five percent of the
Company's common stock outstanding, each Director of the Company, the
President, each of the other four executive officers named in the Summary
Compensation Table under "Management of the Company", and the number of
shares beneficially owned by all of the Company's Directors and officers
as a group. To the Company's knowledge, no other person beneficially
owns more than 5% of the outstanding shares of common stock. Unless
otherwise indicated, all persons named as beneficial owners of common
stock have sole voting power and sole investment power with respect to the
shares beneficially owned.
<TABLE>
<CAPTION>
<S> <C> <C>
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Common Stock
----------------- -------------------- ------------
J. Sidney Davenport 106,894 *
Richard C. Leone 3,200 (1) *
Thomas H. Potts 1,503,009 (2) 3.33%
Paul S. Reid 5,682 *
Donald B. Vaden 28,853 (3) *
Lynn K. Geurin 35,845 *
William J. Moore 2,000 *
William Robertson 4,460 (4) *
William H. West, Jr. 4,250 *
Legg Mason (5) 2,514,817 5.65%
All Directors and executive
officers as a group 1,694,193 3.75%
</TABLE>
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* Less than 1% of the outstanding shares of common stock.
(1) Includes 600 shares of common stock owned of record by such person's
children.
(2) Includes 25,314 shares of common stock owned of record by such person's
children and spouse.
(3) Includes 2,330 shares of common stock of record by such person's spouse.
(4) Includes 3,460 shares of common stock of record by such person's children
and spouse.
(5) Address: 100 Light Street, Baltimore, Maryland 21202. Shares are held
by Legg Mason Special Investment Trust,Inc. and Legg Mason Total Return
Trust, Inc., with Legg Mason Fund Adviser, Inc. having power to dispose
thereof; and by various clients of Legg Mason Capital Management, Inc.,
Legg Mason Trust Company and Legg Mason Wood Walker, Inc., each having
power to dispose thereof.
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<PAGE>
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MANAGEMENT OF THE COMPANY
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The executive officers of the Company and their positions are as follows:
Name Age Position(s) Held
Thomas H. Potts 48 Director and President
Lynn K. Geurin 41 Executive Vice President,
Chief Financial Officer, Secretary
William J. Moore 61 Executive Vice President
William Robertson 53 Executive Vice President
William H. West, Jr. 34 Executive Vice President
The executive officers serve at the discretion of the Company's Board of
Directors. Biographical information regarding Mr. Potts is provided above.
Information regarding the other executive officers of the Company is set forth
below:
Lynn K. Geurin has served as Executive Vice President and Chief
Financial Officer of the Company since April 1992 and Secretary since Februay
1995. From December 1987 until April 1992, Ms. Geurin served as Secretary and
Treasurer of the Company. From September 1987 until June 1992, she also
served as Controller of Ryland Acceptance and its subsidiaries.
Ms. Geurin served as Secretary and Treasurer of Mentor Income Fund, Inc.
from December 1988 until June 1992.
A Form 4 involving one transaction for the purchase of 3,600 shares of the
Company's common stock by Ms. Geurin was inadvertently not filed.
William J. Moore has served as Executive Vice President, Commercial Real
Estate Lending, since September 1996. From January 1992 until August 1996, Mr.
Moore served as Chief Executive Officer for Multi-Family Capital Markets, Inc.
In connection with the acquisition by the Company of Multi-Family Capital
Markets, Inc., in August 1996, Mr. Moore was elected an officer of the Company.
William Robertson has served as Executive Vice President, Manufactured
Housing Lending, since November 1995. From 1993 until joining the Company in
1995, Mr. Robertson served as Senior Vice President for Household Financial
Services. From 1992 until 1993, Mr. Robertson served as Vice President of ITT
Consumer Financial Corporation. From 1989 until 1992, he served as Vice
President of Residential Mortgage Operations for Chemical Bank.
William H. West, Jr. has served as Executive Vice President, Portfolio
Management, since July 1996. From October 1995 until June 1996, Mr. West served
as Managing Director and Co-Head of the Fixed Asset Income Investment
department at Mentor Investment Group, a unit of Wheat First Union. From
August 1993 until October 1995, he served as Vice President/Portfolio Manager
at Mentor Investment Group. From December 1990 until August 1993,
he served as Vice President/Portfolio Manager for Ryland Capital Management.
In July 1995, the Securities and Exchange Commission ("SEC")approved the
settlement of its investigation with respect to a 1992 purchase of the
Company's common stock by the Company's President, Thomas H. Potts.
In connection with such settlement, the SEC filed a complaint in the United
States District Court for the District of Maryland, and Mr. Potts agreed to
(i) entry of an injunction permanently enjoining him from violating Section
10(b) of the Act, (ii) pay a civil penalty, and (iii) disgorge the implied
profit on the purchase plus interest. The Company concurs with Mr. Potts'
decision to settle this matter and has full confidence in Mr. Potts. Mr. Potts
has been a consistent purchaser of the Company's stock throughout his
tenure with the Company, has never sold shares of the Company's stock and
made the April 1992 purchases as a long-term investor. The Company does not
expect this settlement to have any impact on the Company or the fulfillment
of Mr. Potts' responsibilities as President.
Executive Compensation
The Summary Compensation Table on the following page includes individual
compensation information on the President and the four other most highly
compensated executive officers ("Named Officers") during 1997, 1996 and 1995.
<PAGE>
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Summary Compensation Table
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Long-Term
Compensation Awards All Other
----------------------------------
Annual Compensation (1) Restricted Stock SARs Compensation
-------------------------------
Name and -------------------------------
Principal Position Year Salary ($) Bonus ($) Award (#) (2) (#) (3) ($) (4)
- -------------------------- -------- -------------- --------------- ------------------- -------------- ------------------
Thomas H. Potts 1997 $299,000 $228,000 - 58,040 $46,447
President and 1996 293,333 220,000 - 58,036 257,648
Director 1995 270,003 182,700 - 100,000 33,894
Lynn K. Geurin 1997 156,667 104,810 - 19,340 30,500
Executive Vice 1996 143,333 104,275 10,400 18,136 54,271
President
1995 126,667 85,118 - 20,020 20,521
William J. Moore (5) 1997 154,667 100,000 - 11,390 19,838
Executive Vice 1996 50,000 33,333 - - 5,320
President
William Robertson (5) 1997 156,667 79,900 - 11,610 15,611
Executive Vice 1996 145,000 71,688 - 10,882 -
President
1995 21,029 10,913 - - -
William H. West, Jr. (5) 1997 141,667 58,269 - 10,520 7,340
Executive Vice 1996 67,500 31,725 - 5,600 -
President
</TABLE>
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1) Does not include perquisites and other personal benefits, securities or
property where the aggregate amount of such compensation to an executive
officer is the lesser of either $50,000 or 10% of annual salary and bonus.
2) As of December 31, 1996, Ms. Geurin holds 5,220 shares of restricted
stock valued at $153,338. Dividends are paid on restricted stock.
3) Stock Appreciation Rights ("SARs") .
4) Amounts for 1997 for Mr. Potts and Ms. Geurin consist of matching and
profit sharing contributions to the Company's Executive Deferred
Compensation Plan ("EDC Plan") and the Company's 401(k) Plan in the
amount of $45,548 and $30,229, respectively. Amounts for 1997 for
Mr. Potts and Ms. Geurin also consist of Group Term Life Insurance in the
amount of $899 and $271, respectively. Amounts for 1997 for Mr. Moore,
Mr. Robertson and Mr. West consist of matching and profit sharing
contributions to the 401(k) Plan in the amount of $18,368, $14,996 and
$7,237, respectively. Amounts for 1997 for Mr. Moore, Mr. Robertson and
Mr.West also consist of Group Term Life Insurance in the amount of $1,470,
$615 and $103, respectively.
5) Compensation for Mr. Moore, Mr. Robertson and Mr. West reflects salary
from their dates of hire, which were August 31, 1996, November 6, 1995 and
July 1, 1996, respectively.
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Aggregated SAR Exercises In Last Fiscal Year
And Year-End SAR Value Table
The table below presents the total number of SARs (and related
Dividend Equivalent Rights ("DERs")) exercised by the Named Officers in 1997
and held by the Named Officers at December 31, 1997 (distinguishing between
SARs that are exercisable as of December 31, 1997 and those that had not become
exercisable as of that date) and includes the aggregate amount by which the
market value of the SARs (including related DERs) exceeds the exercise price at
December 31, 1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Value of Unexercised
SARs Exercised Number of Unexercised in-the-money
in 1997 (1) SARs at 12-31-97 SARs at 12-31-97 (1) (2)
------------------------------ -------------------------------- ----------------------------------
Number Value
of SARs Realized Exercisable Unexercisable Exercisable Unexercisable
-------------- -------------- -------------- ---------------- ------------- -----------------
Thomas H. Potts 90,000 $1,569,372 93,279 183,427 $554,959 $849,562
Lynn K. Geurin 15,000 479,221 48,185 57,061 421,512 253,828
William J. Moore - - - 11,390 - 6,232
William Robertson - - 2,176 20,316 10,221 47,239
William H. West, - - 1,120 15,000 3,234 18,692
Jr.
</TABLE>
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1) Includes related DERs.
2) Based on the closing price ($13.25) on the New York Stock Exchange ("NYSE")
of the Company's common stock on that date.
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<PAGE>
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SAR Grants In Last Fiscal Year
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The following table provides information related to SARs granted to the
Named Officers during fiscal 1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Individual Grants
----------------------------------------------------------
Percentage of Potential Realizable Value
Total SARs at Assumed Annual Rates
Number of Granted to Exercise of Stock Appreciation
SARs Employees in Price Expiration for SAR Term (1)
------------------------------
Name Granted (2) Fiscal 1997 ($ per share) Date 5% ($) 10% ($)
- ------------------ ------------- ---------------- --------------- ------------ ------------- ---------------
Thomas H. Potts 58,040 29.71% $13.750 2/2003 $315,803 $733,109
Lynn K. Geurin 19,340 9.90% 13.750 2/2003 105,232 244,285
William J. Moore 11,390 5.83% 13.750 2/2003 61,975 143,868
William Robertson 11,610 5.94% 13.750 2/2003 63,172 146,647
William H. West, 10,520 5.39% 13.750 2/2003 57,241 132,879
Jr.
</TABLE>
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1) Excludes any value relative to the DERs associated with the SARs,
except for DERs accrued as of December 31, 1997. However, the SARs will
continue to accrue DERs over the period until exercise or expiration. The
number of DERs that accrue on an SAR is based on the amount by which the
dividends paid on common stock during the accrual period exceed a benchmark
established by the Compensation Committee for such period. Each DER is
equivalent to an additional SAR with the same exercise price as the SAR to
which it is related. As of December 31, 1997, there were 41.30 DERs accrued
per 1,000 SARs. Each such DER is convertible into one additional SAR and had
a value of $0.55 at December 31, 1997, and assuming 5% and 10% annual rates of
stock appreciation for the SAR term from the SAR grant date, each such DER
would have a value of $5.44 and $12.63, respectively.
2) The SARs, which were granted under the Company's Incentive Plan and
have an exercise price equal to the closing price of the Company's common
stock on the NYSE on the date of grant, become exercisable in annual 20%
increments from the date of grant.
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Employment Agreements
Mr. Potts has entered into an employment agreement with the
Company, effective September 30, 1994. The employment agreement has a term
of seven years. Pursuant to his employment agreement, Mr. Potts agreed to
devote his full business time and efforts to the business of the Company.
Mr. Potts currently receives a base salary of $300,000 per annum; such base
salary is subject to normal periodic review at least annually by the
Compensation Committee based on the salary policies of the Company and
Mr. Potts' contributions to the Company. Mr. Potts is also entitled to
receive incentive compensation as approved by the Compensation Committee.
The employment agreement will terminate in the event of Mr. Potts'
death or total disability, may be terminated by the Company with "cause" (as
defined therein) or for any reason other than cause, and may be terminated by
the resignation of Mr. Potts. If the employment agreement is terminated by the
Company for any reason other than cause, total disability or death, then the
Company shall pay to Mr. Potts his salary and benefits through the expiration
date. The employment agreement contains certain covenants, among other things,
by Mr. Potts requiring him to maintain the confidentiality of information
relating to the Company and restricting his ability to compete with the Company.
Mr. Moore entered into an employment agreement with the Company,
effective as of August 31, 1996. The employment agreement has a term of
five years. Pursuant to his employment agreement, Mr. Moore agreed to
devote his full business time and efforts to the business of the Company.
Mr. Moore currently receives a base salary of $157,000 per annum; such base
salary is subject to normal periodic review at least annually by the
Compensation Committee based on the salary policies of the Company and Mr.
Moore's contributions to the Company. Mr. Moore is also entitled to
receive incentive compensation as approved by the Compensation Committee.
The employment agreement will terminate in the event of Mr. Moore's
death or total disability, may be terminated by the Company with "cause" (as
defined therein) or for any reason other than cause, and may be terminated by
the resignation of Mr. Moore. If the employment agreement is terminated by the
Company for any reason other than cause, total disability or death, then the
Company shall pay to Mr. Moore his salary through the expiration date. The
employment agreement contains certain covenants, among other things, by Mr.
Moore requiring him to maintain the confidentiality of information relating to
the Company and restricting his ability to compete with the Company.
The Company has no other employment agreements with its executive
officers.
Compensation Committee Report
The Compensation Committee of the Company's Board of Directors, which
is comprised exclusively of directors who are not employees of the Company,
administers the Company's executive compensation program. All issues pertaining
to executive compensation are reviewed and approved by the Compensation
Committee.
The Compensation ommittee believes that executive compensation should
reward long-term value created for shareholders and reflect the business
strategies and long-range plans of the Company. The guiding principles in
regards to compensation are (i) to attract and retain key high caliber
executives, (ii) to provide levels of compensation competitive with those
offered by the Company's competitors, (iii) to motivate executives to enhance
long-term stockholder value by linking stock performance (on a total return
basis) with long-term incentive compensation, and (iv) to design a long-term
compensation program that leads to management retention.
Executive officer compensation is based on three principal components:
base salary, annual bonus, and SARs (and related DERs) granted under the
Company's Incentive Plan. The base salaries of executive officers, including Mr.
Potts, are determined annually by the Compensation Committee. Base salary is
intended to be set at a level competitive with the amounts paid to the
management of companies with similar business structure, size and marketplace
orientation, with additional emphasis on professional experience.
In accordance with the Company's philosophy that the compensation
package of the executive officers be directly and materially linked to
operating performance and the total return of the Company's common stock,
the bonus component of annual compensation is directly tied to the
achievement ofpre-established target earnings per share goals established by
the Compensation Committee. In addition, the payment of a portion of the
annual bonus for each executive officer, except Mr. Potts, depends upon the
attainment of planned objectives established at the beginning of the year
specifically for that executive. Whether or not an executive officer earns
a bonus in any year is determined based upon the achievement of these
earnings goals and specific objectives. Partial bonuses may be awarded for
partial completion of planned objectives and the achievement of earnings
percentage of base salary payable as bonus ranges from 50% to 75%. Mr. Potts'
maximum potential bonus, which is based solely on earnings per share
targets pre-established by the Compensation Committee, is 75% of base
salary. Mr. Potts' compensation is heavily weighted toward attainment of
long-term value through the Incentive Plan awards. Each year the President
establishes bonus programs for all executive officers (other than himself) in
the first quarter. The Compensation Committee reviews and approves the plans
at their annual Compensation Committee meeting. In 1997, partial bonuses
were paid in respect of achievement of earnings per share goals above the
minimum level but below the target and for full or partial attainment of
planned objectives.
The Company also uses SARs and related DERs to align the long-range
interest of its executive officers with the interests of shareholders. The
amount of SARs that are granted to executive officers is determined by the
Compensation Committee, taking into consideration the officer's position with
the Company, overall individual performance, and an estimate of the long-term
value of the SARs and related DERs in light of the officer's current base
salary. The Compensation Committee applies its collective judgment to determine
the grants appropriate under the Incentive Plan, with emphasis placed on the
anticipated long-term value of the award considering current base salary. As
noted above, a larger percentage of Mr. Potts' overall compensation package is
comprised of grants of SARs and related DERs reflecting the Compensation
Committee's view that compensation for the President should depend heavily on
the long-term total return performance of the Company's common stock.
Section 162(m) of the Internal Revenue Code ("Code") limits
deductibility of compensation for the Chief Executive Officer and the
additional four executive officers who are the most highly paid and employed
at year end to $1 million per year per individual, effective for tax years
beginning on or after January 1, 1994. If certain conditions are met, some
compensation may be excluded from consideration in computing the $1 million
limit. One of such conditions is that a committee composed solely of "outside"
directors as defined in the Code be appointed to consider and approve
compensation intended to qualify for exclusion from the $1 million limit.
Therefore, the Compensation Committee has established a subcommittee
satisfying these requirements. The Compensation Committee will review and
may ratify the recommendations of such subcommittee. Mr. Potts received
compensation in excess of $1 million in 1997, which was fully deductible by the
Company. To date, no other executive officer has received compensation in
excess of $1 million per year. The policy of the Compensation Committee
relative to this provision of the Code is to establish and maintain a
compensation program which maximizes the creation of long-term shareholder
value.
The Company's Incentive Plan and the Company's Bonus Plan provide for
certain executive officers and key employees to meet the conditions necessary
for compensation paid pursuant to those plans to be excluded from consideration
in computing the $1 million limit. It must be noted, however, that the
Compensation Committee is obligated to the Board of Directors and the
stockholders of the Company to recognize and reward performance which
increases the value of the Company. Accordingly, the Compensation Committee
will continue to exercise discretion in those instances where the
mechanistic approaches necessary under tax law considerations would
compromise the interests of stockholders.
Richard C. Leone, Chairman
J. Sidney Davenport
Paul S. Reid
Donald B. Vaden
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during 1997 were Mr.
Davenport, Mr. Leone, Mr. Reid, and Mr. Vaden.
Mr. Davenport served as an executive officer of Ryland Mortgage
Company ("Ryland") until January 1998. During 1997, the Company acquired
model homes from Ryland for an aggregate purchase price of $11,350,125.
Mr. Reid served as an executive officer of American Home Funding,
Inc.("AHF") until October 1997. During 1997, the Company acquired
mortgage-backed pass through securities from AHF for an aggregate
purchase price of approximately $12,982,177, the estimated fair value of
such securities at the date of purchase. The Company may continue to
purchase similar securities from AHF in the future.
<PAGE>
- --------------------------------------------------------------------------------
Total Return Comparison
- --------------------------------------------------------------------------------
The following graph demonstrates a five year comparison of cumulative
total returns for Dynex Capital, Inc. ("DX"), the Standard & Poor's 500 ("S&P
500"), and the Value Line, Inc. Real Estate Investment Trust Industry Index
(the "Peer Group"). The table below assumes $100 was invested at the close of
trading on the last trading day preceding the first day of the fifth preceding
fiscal year in DX common stock, S&P 500, and Peer Group.
Comparative Five-Year Total Returns *
DX, S&P 500, Peer Group
(Performance Results through 12/31/97)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
[ GRAPH TO BE PROVIDED BY VALUE LINE ON 3/13/98 ]
------------- -------------- ------------- -------------- -------------- --------------
1992 1993 1994 1995 1996 1997
----------------- ------------- -------------- ------------- -------------- -------------- --------------
------------- -------------- ------------- -------------- -------------- --------------
DX $ 100.00 157.05 66.60 137.07 221.10 224.66
----------------- ------------- -------------- ------------- -------------- -------------- --------------
----------------- ------------- -------------- ------------- -------------- -------------- --------------
S&P 500 $ 100.00 110.09 111.85 153.80 189.56 252.82
----------------- ------------- -------------- ------------- -------------- -------------- --------------
----------------- ------------- -------------- ------------- -------------- -------------- --------------
Peer Group $ 100.00 108.55 117.95 136.48 186.65 219.11
----------------- ------------- -------------- ------------- -------------- -------------- --------------
</TABLE>
* Cumulative total return assumes reinvestment of dividends. The source of this
information is Value Line, Inc. The factual material is obtained from sources
believed to be reliable, but Value Line, Inc. is not responsible for any errors
or omissions contained herein.
AMENDMENT TO ARTICLES OF INCORPORATION
The Board of Directors, by unanimous written consent, has advised and
approved an amendment to the Company's Articles of Incorporation in
substantially the form set forth below.
"Resolved, that the Company's Articles of Incorporation be amended by
deleting paragraph (7) of Article VI in its entirety and substituting therefor:
"(7) Application of Article. Nothing contained in this Article or in any other
provision hereof shall limit the authority of the Board of Directors to take
any and all other action as it in its sole discretion deems necessary or
advisable to protect the Corporation and the interests of its shareholders by
maintaining the Corporation's eligibility to be, and preserving the
Corporation's status as, a qualified real estate investment trust under the
Code; provided, however, that nothing in this Article VI or elsewhere in
these Articles shall preclude settlement of any transaction entered into or
through the facilities of the New York Stock Exchange or any other exchange
on which the Corporation's common shares may be listed from time to time."
The Board unanimously recommends to the stockholders that the Articles of
Incorporation be amended, as set forth above. The New York Stock Exchange has
requested that the Company amend its Articles of Incorporation as provided
herein.
If the amendment to the Company's Articles of Incorporation is approved by
the stockholders, the cost to the Company to effect this amendment is not
expected to be significant.
The Board recommends a vote FOR the proposal to amend the Company's
Articles of Incorporation.
APPOINTMENT OF AUDITORS
For the year ending December 31, 1997, KPMG Peat Marwick LLP ("Peat
Marwick"), independent certified public accountants, examined the financial
statements of the Company. The Company's Audit Committee and Board of Directors
have determined that sound business practice suggests that it would be
appropriate to consider periodically whether the Company would be able to
reduce its overall accounting costs, while maintaining or enhancing the
efficiency of the audit process, by seeking competitive proposals on its
accounting work. After reviewing any proposals received, including a fee quote
from Peat Marwick, the Audit Committee will make a recommendation to the Board
of Directors, on the appointment of an independent public accountant for the
year ending December 31, 1998.
During 1997, there were no disagreements between the Company and
Peat Marwick on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures. A representative of Peat
Marwick is expected to be present at the Annual Meeting and will be
provided with an opportunity to make a statement and to respond to
appropriate questions from stockholders.
VOTES REQUIRED TO ADOPT RESOLUTIONS
The election of Directors requires a plurality of votes cast at the
meeting. The approval of the proposal to amend the Company's Articles of
Incorporation requires the affirmative vote of the holders of a majority of the
outstanding shares of common stock of the Company.
The following principles of Virginia law apply to the voting of
shares of common stock at the meeting. The presence in person or by
proxy of stockholders entitled to vote a majority of the outstanding
shares of common stock will constitute a quorum. Shares represented by proxy
or in person at the meeting, including shares represented by proxies that
reflect abstentions, will be counted as present in the determination of a
quorum. An abstention as to any particular matter, however, does not
constitute a vote "for" or "against" such matter except that an abstention
will have the same effect as a vote "against" the proposal to amend the
Company's Articles of Incorporation. "Broker non-votes" (i.e., where a
broker or nominee submits a proxy specifically indicating the lack of
discretionary authority to vote on a matter) will be treated in the same
manner as abstentions.
OTHER MATTERS
The management and the Board of Directors of the Company know of no
other matters to come before the Annual Meeting other than those stated in the
notice of the meeting. However, f any other matters are properly presented to
the stockholders for action, it is the intention of the proxy holders named in
the enclosed proxy to vote in their discretion on all matters on which the
shares represented by such proxy are entitled to vote.
STOCKHOLDER PROPOSALS
Any proposal which a stockholder may esire to present to the 1999
Annual Meeting of Stockholders must be received in writing by the Secretary of
the Company prior to November 15, 1998.
By the order of the Board of Directors
Thomas H. Potts
President
March 26, 1998
<PAGE>
