PROSPECTUS SUPPLEMENT
(To Prospectus dated May 11, 1998)
SUBJECT TO COMPLETION, DATED MAY 11, 1998
$60,000,000
Dynex Capital, Inc.
% Senior Notes due July 1, 2008
The % Senior Notes due July 1, 2008 (the "Notes") offered hereby are being
issued by Dynex Capital, Inc., a Virginia corporation (the "Company"), in an
aggregate principal amount equal to $60 million. Interest on the Notes will be
payable monthly in arrears on the first calendar date of each month commencing
July 1, 1998. The Notes are not redeemable by the Company prior to July 1, 2001.
However, the Notes are redeemable thereafter in whole or in part at the option
of the Company, at a redemption price equal to the principal amount of the Notes
being redeemed plus accrued interest to the redemption date, if any. See
"Description of the Notes - Optional Redemption" herein. The Notes will mature
on July 1, 2008. 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 100% of the
principal amount thereof, plus accrued interest to the date of repurchase. The
Notes will be senior, unsecured obligations of the Company except that the Notes
will be subordinated in right of payment of principal to the Company's Series A,
9.56% Senior Notes due on or before October 15, 1999, and Series B, 10.03%
Senior Notes due on or before October 15, 2001 (the "Series A and B Notes"),
which had an aggregate principal balance outstanding of $41 million as of March
31, 1998. Except for this subordination, the Notes 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. See "Description of the Notes - Ranking; Subordination." The Notes
constitute a separate series of debt securities that 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." There
presently is no secondary trading market for the Notes, nor can there be any
assurance that such a market will develop or be sustained in the future.
However, the Company has been advised that the Underwriters intend to make a
market in the Notes. The Company does not presently intend to list the Notes on
any securities exchange or have them included for quotation on the Nasdaq Stock
Market ("Nasdaq") or any other quotation system.
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 Discount (1) Company (2)
- ----------------------------------------------------------- ------------------------- -------------------------- ------------------
Per Note % % %
..............................................................
- ----------------------------------------------------------- ------------------------- -------------------------- ------------------
Total $ $ $
(3).....................................................................
- ----------------------------------------------------------- ------------------------- -------------------------- =================
<FN>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting expenses of the offering estimated at approximately $
payable by the Company.
(3) The Company has granted the Underwriters an option excercisable
within 30 days from the date of this Prospectus Supplement to purchase up
to $9,000,000 aggregate principal amount of additional Notes on the same
terms and conditions set forth above to cover over-allotments, if any. If
all such additional Notes are purchased, the total Price to Public,
Underwriting Discount and Proceeds to the Company will be $ , $ and $ ,
respectively.
</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 on or about , 1998.
Stifel, Nicolaus & Company
Incorporated
Robert W. Baird & Co.
Incorporated
EVEREN Securities, Inc.
Scott & Stringfellow, Inc.
The date of this Prospectus Supplement is , 1998.
Information contained in this prospectus supplement is subject to
completion. 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. This prospectus supplement and the
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.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein or therein by reference. Unless
otherwise indicated, the information in this Prospectus Supplement assumes that
the Underwriters' over-allotment option will not be exercised.
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 that 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 multifamily and commercial
properties and the origination of loans secured by manufactured homes. The
Company will generally securitize the loans funded as collateral for
collateralized bonds, thereby limiting its credit risk and providing long-term
financing for its investment 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 their taxable income to shareholders and
will generally not be subject to federal income tax. See "Federal Income Tax
Considerations'" in the accompanying Prospectus.
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 that 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 many of
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, mortgage 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 which 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 hedging instruments such
as interest rate swap, cap, or floor agreements, which are used to manage the
Company's exposure to interest rate risk.
Lending Operations
The Company's primary lending activities include commercial mortgage
lending and manufactured housing lending. The Company will provide mortgage
financing for apartment properties, assisted living and retirement housing,
skilled nursing facilities, limited and full service hotels, urban and suburban
office buildings, retail shopping strips and centers, light industrial buildings
and manufactured housing parks, among others. The Company"s manufactured housing
production includes installment loans, land/home loans and inventory financing
to manufactured housing dealers. In addition to these primary sources of loan
production, the Company leases and provides financing to builders of single
family homes that serve as model homes for those builders and purchases and
manages real estate property tax receivables. Additionally, the Company has
purchased and may continue to purchase single family mortgage loans on a "bulk"
basis from time to time.
The main purposes of the Company's production operations are to enhance the
return on shareholders' equity ("ROE") by earning a favorable net interest
spread while loans are being accumulated for securitization and to create
investments for the Company's portfolio at a lower cost than if such investments
were purchased from third parties. The creation of such investments generally
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 securitization of loans as
collateralized bonds and pass-through securities generally limits the Company's
credit and interest rate risk in contrast to retaining loans in the portfolio in
whole-loan form using short term funding sources.
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,
1997, 1996, 1995, 1994 and 1993 and from the unaudited financial information at
and for the three months ended March 31, 1998 and 1997. 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, 1997, which is herein incorporated by reference. The results for the three
months ended March 31, 1998, as reported, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
<TABLE>
<CAPTION>
Three Months Ended March Years Ended December 31,
31,
--------------------------- ------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands, except
per share data)
Operating Data:
Total interest income $ 98,332 $ 77,022 $336,904 $ 312,301 $ 255,254 $ 227,920 $ 172,256
Total interest and related 80,658 56,431 252,167 237,160 211,463 182,942 127,237
expense
--------------------------- ------------------------------------------------------------------
Net interest margin 17,674 20,591 84,737 75,141 43,791 44,978 45,019
Gain on sale of single family - - - 17,285 - - -
mortgage operations
Net gain on sale of assets 4,657 2,487 10,254 503 9,651 27,723 23,585
Other income 628 451 3,604 882 1,591 840 734
General and administrative 8,527 5,219 24,597 20,763 18,123 21,284 15,211
expenses
=========================== ==================================================================
Net income $ 14,432 $ 18,310 $ 73,998 $ 73,048 $ 36,910 $ 52,257 $ 54,127
=========================== ==================================================================
Total revenue $103,617 $ 79,960 $350,762 $ 330,971 $ 266,496 $ 256,483 $ 196,575
Total expenses $ 89,185 $ 61,650 $276,764 $ 257,923 $ 229,586 $ 204,226 $ 142,448
Net income per common share (1)
Basic $ 0.25 $ 0.35 $ 1.38 $ 1.54 $ 0.85 $ 1.32 $ 1.56
Diluted 0.25 0.35 1.37 1.49 0.85 1.32 1.56
Balance Sheet Data (as of period
end):
Investments: (2)
Collateral for collaterized $3,810,259 $2,495,256 $4,375,561 $2,698,342 $1,025,680 $ 441,222 $ 434,698
bonds
Mortgage securities 938,153 910,194 513,750 890,212 2,138,584 2,563,811 2,288,472
Other investments 245,661 121,250 214,120 98,943 42,101 33,473 12,477
Loans held for securitization 1,077,145 388,077 235,023 265,537 220,048 501,272 777,769
--------------------------- ------------------------------------------------------------------
Total investments $6,071,218 $3,914,777 $5,338,454 $3,953,034 $3,426,413 $3,539,778 $3,513,416
Total assets $6,116,407 $3,945,803 $5,378,172 $3,983,122 $3,486,288 $3,590,383 $3,724,554
Non-recourse debt - collateralized $3,090,979 $1,956,194 $3,632,079 $2,147,384 $ 843,856 $ 351,406 $430,470
bonds
Recourse debt 2,438,427 1,450,435 1,145,695 1,299,876 2,238,931 3,010,372 2,990,289
Total liabilities 5,566,960 3,440,854 4,817,263 3,479,505 3,131,465 3,400,350 3,471,522
Shareholders' equity 549,447 504,949 560,909 503,617 354,823 190,033 253,032
Net interest spread 1.24% 1.71% 1.48% 1.52% 1.04% 1.12% 1.55%
Return on average common 12.5% 18.8% 17.9% 21.6% 12.5% 19.2% 25.8%
shareholders' equity (3)
Ratio of available earnings to 1.71x 1.89x 1.81x 1.56x 1.26x 1.35x 1.69x
fixed charges (4)
___________________________
<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) Collateral for
collateralized bonds and mortgage securities are shown at fair value as of March
31, 1998 and 1997, December 31, 1997, 1996, 1995 and 1994 and at amortized cost
as of December 31, 1993.
(3)Excludes unrealized gain/loss on investments available-for-sale
(4)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.
</FN>
</TABLE>
The Offering
Securities Offered............. $60,000,000 principal amount of % Senior
Notes due July 1, 2008.
Form and Denominations......... Notes will be issued in fully-registered
form, pursuant to a book-entry system, in denominations of $1,000 and integral
multiples thereof. See "Description of Notes - Book-Entry System."
Interest Payment Date.......... Monthly commencing on July 1, 1998, and on
the first day of each month thereafter. The first interest payment will
represent interest from the date of delivery of the Notes, anticipated to be ,
1998 through July 1, 1998.
Maturity Date.................. July 1, 2008.
Optional Redemption by the Company............ At the option of the
Company, the Notes may be redeemed, at any time on or after July 1, 2001, in
whole or in part, at par plus accrued interest to the date of redemption.
Optional Redemption by the Holder............. The Notes may be redeemed by the
Holder upon a Change of Control Triggering Event. See "Description of the Notes
- - Repurchase at Option of Holders Upon a Change of Control Triggering Event."
Ranking; Subordination......... 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, with the exception that the Notes will be junior in right of
payment of principal to the Company's existing Series A and B Notes. See
"Description of the Notes - Ranking; Subordination." Any common stock and
preferred stock of the Company are junior in right of payment of the Notes. The
Company may issue additional indebtedness that may be ranked pari passu with the
Notes. See "Description of the Notes - Limitation on Incurrence of Indebtedness
and Issuance of Disqualified Stock." The Notes are not insured by the FDIC or
otherwise and are not secured by any assets of the Company.
Covenants...................... The indenture, dated as of July 14, 1997
(the "Indenture") between the Company and Chase Bank of Texas, N.A., Houston,
Texas (the "Trustee"), contains certain covenants that, among other things,
limit the ability of the Company and its subsidiaries and affiliates to incur
additional indebtedness other than Permitted Indebtedness, make certain
investments other than Permitted Investments, enter into certain consolidations
or mergers and enter into certain transactions with affiliates, in each case
subject to exceptions and qualifications provided therein. See "Description of
the Notes - Certain Covenants."
Use of Proceeds................ The Company intends initially to 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.
Results of Operations
For the three months ended March 31, 1998 compared to the three months
ended December 31, 1997 and March 31, 1997
Net income for the three months ended March 31, 1998 was $14.4 million
compared to $17.8 million for the three months ended December 31, 1997 and $18.3
million for the three months ended March 31, 1997. The decrease in the Company's
earnings during the three months ended March 31, 1998 as compared to the three
months ended December 31, 1997 and the three months ended March 31, 1997 was
primarily the result of a decrease in net interest margin and an increase in
general and administrative expenses that were offset partially by an increase in
the gain on sale of assets.
Net interest margin for the three months ended March 31, 1998 decreased to
$17.7 million compared to the net interest margin of $21.9 million and $20.6
million for the three months ended December 31, 1997 and March 31, 1997,
respectively. The decrease was primarily the result of an increase in
amortization expense as compared to the prior periods, which resulted from a
much higher rate of mortgage prepayments on the adjustable rate mortgage ("ARM")
loans and securities in the Company's investment portfolio during the first
quarter of 1998.
For the three months ended March 31, 1998, the net gain on sale of assets
increased to $4.7 million compared to $2.0 million for the three months ended
December 31, 1997 and $2.5 for the three months ended March 31, 1997. The
increase in the net gain was primarily the result of premiums of $2.6 million
received from call options written that expired during the quarter.
General and administrative expenses increased to $8.5 million for the three
months ended March 31, 1998 compared to $7.2 million for the three months ended
December 31, 1997 and $5.2 million for the three months ended March 31, 1997.
The increase was a result of continued growth in the infrastructure of the
current production operations.
1997 compared to 1996
Net income increased for 1997 compared to 1996 primarily because of an
increase in both net interest margin and gain on sale of assets. These increases
were offset partially by an increase in general and administrative expenses and
no comparable gain to the gain on sale of the single family mortgage operations
in 1996. The decrease in the Company's net income per common share during 1997
as compared to 1996 is primarily the result of an increase in the average number
of common shares outstanding due to the issuance of new common stock and the
partial conversion of outstanding preferred stock.
Net interest margin for the year ended December 31, 1997 increased to $84.7
million, or 12.8%, over net interest margin of $75.1 million for the same period
in 1996. The increase in net interest margin was a result of an overall growth
in average interest-earning assets, which increased to $4.5 billion during 1997
as compared to $4.1 billion for 1996. Additionally, the increase in net interest
margin was due to the additional common stock issued during 1997, the proceeds
from which were initially used to pay short-term borrowings.
The gain on the sale of the single family mortgage operations in 1996 was a
one-time gain related to the sale of the Company's single family correspondent,
wholesale and servicing business on May 13, 1996. The net gain on sale of assets
for 1997 increased to $10.3 million, as compared to a $0.5 million gain for
1996. The gain on sale of assets during 1997 was primarily the result of $9.9
million in premiums received on covered call options and put options written
during 1997 and $0.6 million in gains generated on the sale of certain
investments. During 1996, the Company sold certain investments in its portfolio,
which resulted in a $2.0 million net gain. The Company also wrote down, by $1.5
million, the carrying value of certain mortgage derivative securities because
anticipated future prepayment rates were expected to result in the Company
receiving less cash than its remaining basis in those investments.
General and administrative expenses increased $3.8 million, or 18.5%, to
$24.6 million in 1997. This increase was primarily a result of the growth in the
Company's current production operations offset partially by the expense
reductions resulting from the sale of the single family mortgage operations in
May 1996. In 1997, the Company opened one regional office and three district
offices to support its manufactured housing lending operations.
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 $75.1 million, or 71.5%, over net
interest margin of $43.8 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 1.52% for 1996 versus 1.04% for
1995. The increase in net interest margin also resulted from the increased
contribution from the Company's net investment in collateralized bonds. The
0.48% 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 benefited 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
that 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.
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 continued to expand its manufactured housing
operations, and in August 1996, acquired Multi-Family Capital Markets, Inc. to
expand its multi-family and commercial real estate lending businesses.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1998, 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, 1998
---------------------------------------------
(dollars in thousands except share data) Actual As Adjusted
------------------- -----------------
<S> <C> <C>
Total Debt:
Non-recourse debt -- collateralized bonds........................... $ 3,090,979 $ 3,090,979
Repurchase agreements............................................... 1,861,270 1,861,270
Notes payable....................................................... 436,157 376,157
Senior Notes payable ............................................... 141,000 201,000
------------------- -----------------
------------------- -----------------
Total debt......................................................... $ 5,529,406 $ 5,529,406
------------------- -----------------
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, 1,323,061 shares issued and outstanding..... $ 30,220 $ 30,220
Series B Cumulative Convertible Preferred Stock, $24.50 per share
liquidation value, 1,917,234 shares issued and outstanding..... 44,880 44,880
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;
45,584,622 issued and outstanding ............................... 456 456
Additional paid in capital.......................................... 347,849 347,849
Net unrealized gain on investments available-for-sale............... 67,895 67,895
Retained earnings..................................................... 5,407 5,407
------------------- -----------------
Total shareholders' equity............................................ 549,447 549,447
------------------- -----------------
Total capitalization.................................................. $ 6,078,853 $ 6,078,853
=================== =================
</TABLE>
BUSINESS
Business Focus and Strategy
The Company strives to create a diversified portfolio of investments that
in the aggregate generates stable income for the Company in a variety of
interest rate environments and preserves the capital base of the Company. 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
attractively priced investments for its portfolio, as well as control the
underwriting and servicing of such financial assets, and (iii) increasing the
efficiency with which the Company utilizes its equity capital over time. To
increase potential returns to shareholders, the Company also employs leverage
through the use of secured borrowings and repurchase agreements to fund a
portion of its portfolio investments. The Company's specific strategies for its
lending operations and investment portfolio are discussed below.
Lending Strategies
The Company strives to be a vertically integrated lender by performing the
sourcing, underwriting, funding and servicing of loans to maximize efficiency
and provide superior customer service. The Company adheres to the following
business strategies in its lending operations:
develop loan 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; and
perform the servicing function for loans on which the Company has credit
exposure, emphasizing the use of early intervention, aggressive collection and
loss mitigation techniques in the servicing process with the goal of managing
and reducing delinquencies and minimizing losses in its securitized loan pools.
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 were purchased in the secondary market;
securitize its loan production to provide long-term financing for its
investment portfolio and to reduce the Company's liquidity, interest rate and
credit risk;
utilize leverage to finance purchases of loans and investments in line with
prudent capital allocation guidelines that 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.
Lending Operations
The Company's primary lending activities include commercial mortgage
lending and manufactured housing lending. The Company provides mortgage
financing for apartment properties, assisted living and retirement housing,
skilled nursing facilities, limited and full service hotels, urban and suburban
office buildings, retail shopping strips and centers, light industrial and
warehouse buildings and manufactured housing parks, among others. The Company's
manufactured housing production includes installment loans, land/home loans and
inventory financing to manufactured housing dealers. In addition to these
primary sources of loan production, the Company provides financing for, or
purchases and leases single family homes to builders of single family homes that
serve as model homes for those builders. The Company also purchases and manages
real estate property tax receivables. Additionally, the Company has purchased
and may continue to purchase single family mortgage loans on a "bulk" basis from
time to time.
The main purposes of the Company's production operations are to enhance the
ROE by earning a favorable net interest spread while loans are being accumulated
for securitization and to create investments for the Company's portfolio at a
lower cost than if such investments were purchased from third parties. The
creation of such investments generally 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 securitization
of loans as collateralized bonds and pass-through securities generally limits
the Company's credit and interest rate risk in contrast to retaining loans in
the portfolio in whole-loan form using short term financing.
Commercial Lending Operations
The Company originates commercial mortgage loans which are secured
primarily by multifamily properties, as well as limited service and full service
hotels, office buildings, light industrial and warehouse spaces, assisted living
and retirement homes, skilled nursing facilities, distribution centers and
retail space, among others. The Company originally entered the commercial market
in 1992 as a multifamily lender focused on multifamily mortgage loans secured by
apartment properties that qualified for low-income housing tax credits
("LIHTCs") under Section 42 of the Internal Revenue Code. Since 1992, the
Company has funded or provided loan commitments for approximately $1 billion of
LIHTC communities nationwide. The Company believes that it is one of the
country's leading LIHTC lenders. In 1997, the Company broadened its commercial
mortgage lending beyond LIHTC apartment properties to include apartment
properties that have not received LIHTCs, assisted living and retirement
housing, skilled nursing facilities, limited service and full service hotels,
office buildings, retail shopping strips and centers and light industrial
buildings.
LIHTC Lending For property owners to comply 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."
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 LIHTCs typically provides funds equal to approximately 25% - 50% of the
construction costs of the project depending on the specific LIHTC program. The
multifamily 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 LIHTCs. The multifamily mortgage loans originated by the Company are
currently sourced through direct relationships with the developers and
syndicators of LIHTCs. There are no correspondent or broker relationships.
Multifamily Construction/Permanent Lending As a part of its product
expansion efforts during 1997, the Company began offering a multifamily
construction/permanent loan program for LIHTC properties. The construction loans
generally range in size from $1 million to $10 million with a loan-to-value
ratio of 80% or less of the appraised property value. The Company underwrites
each property to its required debt service coverage and loan-to-value levels,
and serves as the construction loan administrator on each property.
Tax-exempt Multifamily Housing Bonds The Company facilitates the issuance
of tax-exempt multifamily housing bonds by state, local and municipal housing
authorities, the proceeds of which are used to fund mortgage loans on LIHTC
multifamily properties. The Company enters into standby commitment agreements
whereby the Company is required to pay principal and interest to the bondholders
in the event there is a payment shortfall on the underlying mortgage loans. In
addition, the Company is required to purchase the bonds if such bonds are not
able to be remarketed by the remarketing agent. The bonds are remarketed in the
tax-exempt market generally every seven days. The Company provides letters of
credit to support its obligations, and has provided such letters of credit in
the amount of $25.9 million as of March 31, 1998.
Other Commercial Lending The Company's expansion into non-multifamily
commercial lending during 1997 was due to several factors: (i) to increase
volume to expedite securitizations, (ii) to capitalize on the underwriting,
closing and servicing infrastructure that the Company already had in place, and
(iii) to benefit in the securitization rating levels from a more diversified
pool of loans. The commercial loans are combined with the multifamily loans and
securitized through the issuance of collateralized bonds.
The Company sources these commercial loans through direct relationships
with developers, property owners and on a selected basis from commercial
mortgage bankers. The Company's underwriting guidelines for other commercial
mortgage loans are generally consistent with rating agency and investor
requirements.
The other commercial mortgages primarily have fixed interest rates with
loan sizes that generally vary from $1 million to $20 million. The product types
include mainly limited service hotels, industrial warehouse, distribution
centers, retirement homes, retail and office property.
Risk Management Because the Company funds and commits to fund commercial
loans at fixed-interest rates, the Company is exposed to interest rate risk to
the extent that interest rates increase prior to the time such loans are
securitized. The Company strives to mitigate such risk by the use of futures
contracts and forward contracts of US treasury securities with duration
characteristics similar to such loans and loan commitments.
Manufactured Housing Lending Operations
The Company has been funding manufactured housing loans since 1996. The
Company believes the manufactured housing lending market is growing as a result
of strong customer demand. The market for loans on new manufactured homes is
expected to grow as shipments of multi-section homes relative to single-section
homes increase based on information from the Manufactured Housing Institute's
1997-1998 "Quick Facts". The Company believes the manufactured home is gaining
greater market acceptance as the product's quality improves and its
affordability remains attractive versus site built housing.
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 pier or a foundation, whereas a single family home is built on the
site. The majority of the manufactured housing loans are in the form of a
consumer installment loan (i.e., a personal property loan) in which the borrower
rents or owns the land underlying the manufactured home. However, an increasing
percentage of these loans are in the form of a "land/home" loan, a first lien
mortgage loan. The Company offers both fixed and adjustable rate loans with
terms ranging from 7 to 30 years. The Company underwrites all loans which it
originates. As of March 31, 1998, the Company had $137 million in principal
balance of manufactured housing loans held for securitization and had
commitments outstanding of approximately $94 million. As of March 31, 1998, the
average funded amount per loan is approximately $40,000. To date, approximately
96% of the Company's loan fundings have been fixed interest rate loans.
The Company has two primary distribution channels -- its dealer network and
direct lending. Substantially all new manufactured homes are sold through
manufactured housing dealers. According to the May 1996 "Manufactured Housing
and Recreational Vehicle Industries" by Merrill Lynch, approximately 90% of
these homes are financed. The Company plans to expand its distribution channels
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. As of March 31,
1998, the Company had 1,346 approved dealers with 2,600 sales locations.
The Company services its dealer network through its home office in Virginia
and its five regional offices located in North Carolina, Georgia, Texas, Ohio
and Washington. The Company also has three district sales offices. 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.
During the first quarter of 1998, the Company established its "National
Business Center" (NBC) to focus on the refinance and re-sale market for
manufactured housing loans. The Company anticipates that the NBC will be
expanded to other products in the future.
Inventory Financing. The Company offers 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
will lend 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 will perform a financial review of the manufacturer
as well as the dealer. The Company performs monthly inspections of the dealer's
inventory financed by the Company and annual reviews of both the dealer and the
manufacturer. The Company believes that offering this product will increase
market presence and will enable the Company to improve its positioning with the
dealers and manufacturers.
Manufactured housing loans originated by the Company are primarily
fixed-rate loans. To reduce interest rate risk associated with these fixed-rate
loans, the Company utilizes interest rate forwards, futures and swaps until the
pool of loans is securitized. To date, the loans have been securitized through
the issuance of variable rate bonds, with the interest on a portion of such
bonds swapped to a fixed rate through an interest rate swap agreement.
Specialty Finance
Model Home Sale/Leaseback and Lending Program. The Company provides
financing to single family home builders through a sale/leaseback program in
which the Company purchases single family homes from builders and the builders
simultaneously lease the homes back for use as models. The Company also provides
loans to builders secured by the single family homes used as models. The Company
has an appraisal performed on each home and limits the amount of the loan or
purchase price for the homes to a predetermined percentage of each home's
appraised value. Upon expiration of the lease period, the Company sells the home
to a third-party buyer. The lease terms are generally 12-24 months and can be
extended at the option of the builder upon approval of the Company. For the
three months ended March 31, 1998, the Company purchased and subsequently leased
back or provided financing to builders for $30 million of models homes. At March
31, 1998, the Company had $147 million of model homes on lease or had provided
financing to 25 builders throughout the United States and Mexico.
Property Tax Receivables. Since 1993, the Company has been involved in the
purchase and management of property tax receivables from various state and local
jurisdictions. A property tax receivable is a delinquent tax on real property
that has a lien status superior to any mortgage (and most other liens) on the
property. As a result, the property tax receivables generally have a very low
"lien-to-value". Various jurisdictions sell these property tax receivables to
investors, as the private sector is more efficient and better equipped to
collect the taxes and to get the properties back on the tax rolls. The Company
offers payment plans to taxpayers in order to assist them in bringing their
property taxes current. In the event the taxpayer does not pay the property tax
receivable, the Company has the right to foreclose on the property to recover
the amount of the tax, accrued interest, and associated costs.
The Company had $41 million of property tax receivables at March 31, 1998
in five states. Over 80% of the property tax receivables are on single family
residential properties. The Company has established local offices responsible
for collecting the property tax receivables, and if necessary, foreclosing on
the properties in the event that the collection efforts fail.
Single Family Lending
Pursuant to the terms of the sale of the Company's single family mortgage
operations to a subsidiary of Dominion Resources, Inc. 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. Currently, the Company purchases "A" quality adjustable-rate,
single family loans on a bulk basis to the extent that the Company can generate
a favorable return on investment upon securitization. Due to the sale of its
single family mortgage operations, the Company does not currently have the
internal capability to directly underwrite single family mortgage loans. In the
future, the Company may re-establish an internal capability for single family
mortgage loans. In the interim, the Company may utilize independent contractors
to assist in the underwriting and servicing of such loans. For the three months
ended March 31, 1998, the Company purchased $562 million of single family, "A"
quality loans through such bulk loan purchases.
Loan Servicing
During 1996, the Company established the capability to service both
commercial and manufactured housing loans funded through its production
operations. The purpose of servicing the loans funded through the production
operations is to manage the Company's credit exposure more effectively while the
loans are held for securitization, as well as to manage the credit exposure that
is usually retained when the Company securitizes the pool of loans. The
commercial 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, in the event of default, the workout
of such situations through either a modification of the loan or the foreclosure
and sale of the property.
The manufactured housing servicing function is operated in Fort Worth,
Texas. As the servicer of manufactured housing loans, the Company is responsible
for the collection of monthly payments, and if the loan defaults, the resolution
of the defaulted loan through either a modification of the loan or the
repossession and sale of the related property. With manufactured housing loans,
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 such loans.
Loan Securitization Strategy
The Company primarily uses funds provided by its senior notes, bank
borrowings and equity to finance loan production when loans are initially
funded. When a sufficient volume of loans is accumulated, the loans are
securitized through the issuance of collateralized bonds. The Company strives to
securitize its loan production every three to six months. As a result of the
reduction in the availability of mortgage pool insurance, and the Company's
desire to reduce both the variability of its earnings and its recourse
borrowings as a percentage of its overall borrowings, 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 believes that securitization is an efficient and cost effective
way to (i) reduce capital otherwise required to own the loans in whole loan
form, (ii) limit the Company's credit exposure on the loans, (iii) lower the
overall cost of financing the loans and (iv) limit the Company's exposure to
interest rate and/or valuation risk, depending on the securitization structure.
The length of time between when the Company funds the loan and when it
securitizes such loan varies depending on certain factors, including the loan
volume, fluctuations in the prices of securities and variations in the
securitization process.
The securities are structured by the Company so that a substantial portion
of the securities are rated in one of the two highest rating categories (i.e.,
AAA or AA) by at least one of the nationally recognized rating agencies. In
contrast to mortgage-backed securities in which the principal and interest
payments are guaranteed by the U. S. government or an agency thereof, securities
created by the Company do not benefit from any such guarantee. The ratings for
the Company's collateralized bonds are based on the perceived credit risk by the
applicable rating agency of the underlying loans, the structure of the
securities and the associated level of credit enhancement. Credit enhancement is
designed to provide protection to one or more classes of security holders in the
event of a borrower default and to protect against other losses, including those
associated with fraud or reductions in the principal balances or interest rates
on mortgage loans as required by law or a bankruptcy court. 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. Each series of securities is expected to be fully
payable from the collateral pledged to secure the series.
Master Servicing The Company performs the function of master servicer for
certain of the securities it has issued, including all of the securities it has
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 such loan
master serviced or serviced by the Company as of the last day of each month. As
of March 31, 1998, the Company master serviced $3.7 billion in securities.
Investment Portfolio
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 in a variety of interest rate and prepayment environments and
preserves the Company's capital base. In many instances, the investment strategy
involves not only the creation of the asset, but also structuring the related
securitization or borrowing to create a stable yield profile and reduce interest
rate and credit risk.
The Company continuously monitors the aggregate cash flow, projected net
yield and market value of its investment portfolio under various interest rate
and prepayment environments. While certain investments may perform poorly in an
increasing or decreasing interest rate environment, certain investments may
perform well, and others may not be impacted at all. Generally, the Company adds
investments to its portfolio that are designed to increase the diversification
and reduce the variability of the yield produced by the portfolio in different
interest rate environments.
Credit Quality. The investment portfolio is of very high credit quality.
Excluding residual and derivative securities where the risk is primarily the
rate of prepayments and not credit, 98% of the Company's investments relate to
securities rated AA or AAA by at least one rating agency. These ratings are
based on AAA-rated bond insurance, mortgage pool insurance or subordination. On
securities where the Company has retained a portion of the credit risk below the
investment grade level (BBB), the Company's maximum exposure to credit losses
(net of discounts, reserves and third party guarantees) was $94 million as of
March 31, 1998.
Composition. At March 31, 1998, the Company's investments included the
following amounts at their carrying basis:
<TABLE>
<CAPTION>
Balance % of Total
------------------- ------------------
<S> <C> <C>
(dollars in thousands)
Investments:
Collateral for collateralized bonds $ 3,810,259 62.8%
Mortgage securities:
Adjustable-rate mortgage securities 674,540 11.1
Fixed-rate mortgage securities 169,663 2.8
Residual and derivative securities 93,950 1.6
------------------- ------------------
Total mortgage securities 938,153 15.5
Other investments 245,661 4.0
Loans held for securitization 1,077,145 17.7
------------------- ------------------
Total investments $ 6,071,218 100.0%
=================== ==================
</TABLE>
The following amounts represent the distribution of the above investments
by product type at March 31, 1998:
<TABLE>
<CAPTION>
Balance % of Total
------------------ ------------------
<S> <C> <C>
(dollars in thousands)
Investments secured by:
Single family loans $ 4,709,430 77.6%
Multifamily loans 510,307 8.4
Manufactured housing loans 366,182 6.0
Commercial loans 227,114 3.7
Model homes leases and loans 146,478 2.4
Property tax receivables 41,154 0.7
Installment note receivable 28,500 0.5
Corporate bonds 25,732 0.4
Other 16,321 0.3
------------------ ------------------
Total Investments $ 6,071,218 100.0%
================== ==================
</TABLE>
Collateral for 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 earnings generated from the 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. Collateral for collateralized
bonds is composed primarily of ARM securities with indices based on six-month
London InterBank Offered Rate ("LIBOR") and one-year Constant Maturity Treasury
Index ("CMT"). The Company's current lending production is predominantly
fixed-rate loans, and accordingly the mix of adjustable-rate versus fixed-rate
loans may change in future periods.
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 Company finances a
portion of its ARM securities with repurchase agreements, which 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 was to be reduced.
Fixed-rate mortgage securities. Fixed-rate mortgage securities consist of
securities that have a fixed-rate of interest for at least three years. 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.
Residual and derivative securities. Residual and derivative securities
consist primarily of interest-only securities ("I/Os"), principal-only
securities ("P/Os") and residual interests that were either purchased or 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, 1998 was $75 million
of equity ownership in ARM trusts which own collateral financed with repurchase
agreements. The collateral consists primarily of agency ARM securities. The
Company's borrowings against its derivative and residual 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 investments. Other investments consists primarily of single family
homes purchased and simultaneously leased back to home builders. At the end of
each lease, generally after a twelve to eighteen month lease term, the Company
will sell the home. Also included in other investments are property tax
receivables and an installment note received as part of the consideration for
the sale of the single family mortgage operations in 1996.
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. Of the $1.1 billion in loans held for securitization
outstanding at March 31, 1998, the Company expects to securitize approximately
$750 million in May, 1998.
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 that arises from the periodic
and lifetime interest rate caps on the ARM securities, the mismatched repricing
of portfolio investments versus borrowed funds, and asset 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.
Approximately $4.5 billion of the Company's investment portfolio as of
March 31, 1998 is 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 short-term 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 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 and subject to lifetime caps, while
the associated borrowings have no such limitation. As short-term 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 the increase or decrease in the net interest spread due to
changes in the short-term interest rates to 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 $1.0 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 investments portfolio as of March
31, 1998, approximately $1.6 billion, is 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 $1.4 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.
Second Quarter Securitization The Company plans to securitize approximately
$1.7 billion of its assets during the second quarter of 1998 through the
issuance of collateralized bonds. The assets include approximately $750 million
of ARM securities, approximately $590 million of ARM loans, approximately $300
million of manufactured housing loans and approximately $45 million of property
tax receivables. As a result of the issuance of such collateralized bonds, the
Company expects to pay down approximately $1.2 billion of its repurchase
agreements and approximately $120 million of its notes payable.
Risks
The Company is exposed to three types of risks inherent in its investment
portfolio. These risks include credit risk (inherent in the loans before
securitization and the security structure after securitization),
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). In
general, 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 assets within
the portfolio under various extreme scenarios; (iii) a monthly static cash flow
and yield projection under 49 different scenarios, and (iv) a monthly "Portfolio
Committee" meeting to review the status of the portfolio, changes in the
portfolio and any issues and recommendations. Additionally, the portfolio status
is reviewed with the Board of Directors on a quarterly basis. 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.
Credit Risk. When a loan is funded and becomes part of the Company's
investment portfolio, the Company has all of the credit risk on the loan should
it default. Upon securitization of the pool of loans, the credit risk retained
by the Company is generally limited to the net investment in collateralized
bonds and subordinated securities. The Company began to retain a portion of the
credit risk on securitized mortgage loans in 1994 as mortgage pool insurance
became less available in the market and as the Company diversified into other
products. To the extent the Company has credit exposure on a pool of loans after
securitization, the Company will generally utilize its servicing capabilities in
an effort to better manage its credit exposure. The Company evaluates and
monitors its exposure to credit losses and has established reserves and
discounts for anticipated credit losses based upon estimated future losses on
the loans, general economic conditions and trends in the portfolio. As of March
31, 1998, the Company's maximum credit exposure (net of discounts, reserves and
guarantees from a third party) on its investment portfolio (excluding loans held
for securitization) is $94 million, or less than 18% of total equity. The
reserve relating to loans held for securitization was $1.3 million or 0.12% of
total loans held for securitization at March 31, 1998.
Prepayment/Interest Rate Risk. The Company strives to structure its
portfolio of investments to provide stable spread income in a variety of
prepayment and interest rate scenarios. To manage prepayment risk (i.e. from a
decline in long-term rates on fixed rate assets, or a flattening or inverse
yield curve as to ARM assets), the Company minimizes the amount of
"interest-only" investments or premium on assets. The Company has, in aggregate
as of March 31, 1998, less than $61 million of asset premium and "interest-only"
investments.
The Company also views its hedging activities as a tool to manage interest
rate risk. To manage interest rate spread risk as a result of a rapid increase
in short term rates, the Company has entered into a $1.0 billion interest rate
swap agreement, which essentially removes the 1% periodic cap on certain
six-month ARM assets. Additionally, if short term rates were to rise
significantly, the Company has $1.5 billion in interest rate cap agreements
(with strike prices between 9% and 11%) that would limit the Company's borrowing
cost on a comparable amount of short term debt.
Margin Call Risk. The Company uses repurchase agreements to finance a
portion of its investment portfolio. This financing structure exposes the
Company to "margin calls" if the market value of the assets pledged as
collateral for the repurchase agreements declines. The Company has established a
target equity requirement 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 increased up to 300 basis points over a one-year period. As of March 31,
1998, the Company had total repurchase agreements outstanding of $1.9 billion,
secured by collateralized bonds retained, ARM securities, fixed-rate mortgage
securities and derivative and residual securities at their market values of $533
million, $676 million, $167 million and $9 million, respectively. The Company
expects its borrowings pursuant to repurchase agreements to decline to
approximately $700 million as a result of the securitization of $1.7 billion of
assets planned for the second quarter of 1998.
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, may 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' obligations, resulting in a potential loss to
the Company.
Since 1996, the Company has 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 on
such collateral, and consequently eliminates the margin call risk and to a
lesser degree the interest rate risk. During 1997 and 1996, the Company issued
approximately $2.4 billion and $1.8 billion, respectively in collateralized
bonds. The Company plans to continue to use collateralized bonds as its primary
securitization vehicle. The Company is planning a securitization of $1.7 billion
of assets for the second quarter of 1998.
Year 2000
The Year 2000 issue affects virtually all companies and organizations. Many
companies have existing computer applications which use only two digits to
identify a year in the date field. These applications were designed and
developed without considering the impact of the change of the century. If not
corrected these computer applications may fail or create erroneous results by
the year 2000.
The majority of the Company's information critical systems have been
developed internally since 1992. The development of these systems was undertaken
with full awareness of issues involving the Year 2000, and consequently the
Company does not expect to encounter any significant Year 2000 problems with
these systems.
The Company relies upon a small number of third party software vendors for
certain information systems. Testing of these vendors' systems is expected to be
completed by the end of 1998, and the Company does not expect to see any
significant impact to the operations supported by these vendors as a result of
Year 2000 problems. The Company does not expect that any expenses incurred as a
result of any necessary modifications will be material to the results of
operations.
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 will not
be subject to federal income tax on such distributed taxable income to the
extent that certain REIT qualification tests are met. Certain other affiliated
entities that 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.
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 14, 1997 among Chase Bank of Texas
N. A., as trustee (the "Trustee"), and will be limited to an aggregate principal
amount of $60 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.
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 March 31, 1998, the Company, on a consolidated basis, had $436.2
million of senior, secured indebtedness other than collateralized bonds and
repurchase agreements and $141.0 million of senior, unsecured indebtedness.
Assuming the completion of the offering of the Notes, on an adjusted basis and
giving effect to the issuance of the Notes, the Company would have had at March
31, 1998, $376.2 million of senior, secured indebtedness other than
collateralized bonds and repurchase agreements and $201.0 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 1, 2008 (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 "Merger, Consolidation or Sale of Assets",
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 provisions 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 , 1998, or from the
immediately preceding Interest Payment Date (as defined below) to which interest
has been paid, payable monthly in arrears on the first day of each month,
commencing July 1, 1998 and on the applicable Maturity Date (each, an "Interest
Payment 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 600 Travis Street, 8th Floor, Houston, Texas,
or, at the option of the Holder, at the office of the Trustee in The City of New
York, which is located initially at Texas Commerce Trust Company, 55 Water
Street, North Building, Room 234, Window 20, New York, New York, 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, New York or Houston, Texas are
authorized or required by law, regulation or executive order to close.
Ranking; Subordination
The Notes will be senior, unsecured obligations of the Company except the
Notes will be subordinated in right of payment of principal to the Company's
Series A and B Notes in the event of any default, voluntary or involuntary
insolvency or bankruptcy proceedings or any receivership, liquidation,
reorganization, dissolution or other winding-up of the Company, or similar
proceedings related to the Company which event results in the acceleration of
the maturity of the Company's outstanding unsecured indebtedness (any such event
a "Default Event"). The Series A and B Notes had an aggregate principal balance
outstanding of $41 million at March 31, 1998 with principal payments of $11.75
million due on October 15, 1998, $11.75 million due on October 15, 1999, $8.75
million due on October 15, 2000, and $8.75 million due on October 15, 2001.
Except for this subordination, the Notes 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. As of March 31, 1998, the Company also had outstanding $100 million of
7.875% Senior Notes due July 15, 2002 (the "7.875% Senior Notes") which rank
pari passu with the Series A and B Notes and will rank pari passu with the
Notes. With respect to the payment of interest, the Notes will be unaffected by
the subordination to the Series A and B Notes. Accordingly, upon the occurrence
of a Default Event, any accrued interest will be paid to all holders of
unsecured indebtedness prior to determination of distribution amounts to be paid
to such holders with respect to principal payments.
As a result of the subordination of the Notes to the Series A and B Notes,
upon the occurrence and continuation of a Default Event, any principal available
for distribution to the holders of the Company's senior unsecured indebtedness
would be distributed among the holders of each of the Company's outstanding
series of senior notes in accordance with the following formulas based upon the
adjusted principal balances as of March 31, 1998: (i) the holders of the Series
A and B Notes then outstanding would be entitled to receive a pro rata portion
of an amount equal to 41/141 (approximately 29.08%) of the distribution amount;
(ii) holders of the 7.875% Senior Notes then outstanding would be entitled to
receive a pro rata portion of an amount equal to 100/201 (approximately 49.75%)
of the distribution amount; and (iii) holders of the Notes then outstanding
would be entitled to receive a pro rata portion of an amount equal to the
available distribution amount less the amount distributed to the holders of the
Series A and B Notes and the 7.875% Senior Notes (approximately 21.17%).
As principal balances on the Series A and B Notes decrease, the proportion
of a distribution amount available to holders of the Notes upon the occurrence
of a Default Event will increase. After payment in full of the Series A and B
Notes, upon the occurrence and continuation of a Default Event, any principal
available for distribution to the holders of the Company's senior unsecured
indebtedness would be distributed pro rata among all the holders of the
Company's then outstanding senior unsecured indebtedness.
By reason of such subordination, in the event of a Default Event, senior
unsecured creditors whose right to payment is not so subordinated may recover
more than the holders of the Notes on a ratable basis so long as the Series A
and B Notes remain outstanding. Notwithstanding the subordination of the Notes
to the Series A and B Notes, the Notes will be considered "Senior Debt
Securities" for purposes of the Prospectus.
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 100% 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.
If, as a result of a Change of Control Triggering Event, the Company is
required to repurchase any of its outstanding unsecured senior indebtedness and
there is insufficient funds available for the Company to repurchase all of the
indebtedness it is required to purchase at such time, the amount available for
such repurchases will be apportioned among the outstanding holders of senior
unsecured debt in accordance with the appropriate ranking with respect to
payment of principal. See"--Ranking; Subordination."
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 14E 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, 1997 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 of Permitted Indebtedness, those amounts
other than amounts described with respect to clause (i) of the definition of
Permitted Indebtedness.
"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 or its Subsidiaries and Affiliates 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 the Company; or (ii) any other Person in which the Company 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 described by clause (i) or
(iii) of this definition; 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).
"Hedging Obligations" means the obligations of the Company or its
Subsidiaries or Affiliates 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; provided, that, in
the case of items in indebtedness under (i) through (iii) above, such
indebtedness shall be included only 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 shall also include, 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 (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) of the Company on a consolidated basis
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 of Indebtedness,
Equity Interests or other securities issued by any other Person and investments
in another Person 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 before any deduction for dividends on
Preferred Stock.
"Permitted Indebtedness" means (i) all indebtedness of the Company or its
Subsidiaries or Affiliates 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 and other investments or tax-exempt bonds (iv)
collateralized bond obligations that are non-recourse to the Company or its
Subsidiaries or Affiliates and (v) the incurrence by the Company or its
Subsidiaries or Affiliates 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 unsecured, such Refinancing Indebtedness is likewise,
unsecured, 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 investment
assets (such as collateral for collateralized bonds, mortgage securities, other
investments 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 or its Subsidiaries or
Affiliates (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 Services, 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: (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 existing on the date of the Indenture; or (iv)
the making of any Restricted Investment.
"Subordinated Indebtedness" means with respect to the Notes, any
Indebtedness of the Company which is by its terms
subordinated in right of payment to the Notes.
"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 will not be redeemable by the Company until July 1, 2001.
Thereafter, 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 100% of
the principal amount of the Notes plus accrued interest thereon to the
redemption date (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.
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.
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 (i) DTC is at any time unwilling or unable to continue as depositary for
the Notes and the Company fails to appoint a successor depositary registered as
a clearing agency under the Exchange Act within 90 days, (ii) there shall have
occurred and be continuing an Event of Default and the beneficial owners
representing a majority in principal amount of the Notes advise DTC to cease
acting as depositary for the Notes or (iii) the Company, in its sole discretion,
notifies DTC in writing at any time that all Notes (but not less than all) shall
no longer be represented by the Global Note, 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.
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 , 1998 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
Underwriter Amount of Notes
----------------------
<S> <C>
Stifel, Nicolaus & Company, Incorporated
Robert W. Baird & Co. Incorporated
EVEREN Securities, Inc.
Scott & Stringfellow, Inc.
----------------------
Total .................................................................... $ 60,000,000
======================
</TABLE>
The Company has granted the Underwriters an option to purchase up to an
additional $9,000,000 aggregate principal amount of Notes at the Price to Public
set forth on the cover page of this Prospectus Supplement less the Underwriting
Discount set forth on the cover page of this Prospectus Supplement. The
Underwriting Agreement provides that the obligations 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.
Stifel, Nicolaus & Company, Incorporated, Robert W. Baird & Co.
Incorporated, EVEREN Securities and Scott & Stringfellow have from time to time
performed various investment banking services for the Company for which
customary compensation has been received. Stifel, Nicolaus & Company,
Incorporated, Robert W. Baird & Co. Incorporated, EVEREN Securities and Scott &
Stringfellow expect 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.
The settlement date for the purchase of the Notes will be , 1998, as agreed
upon by the Company and the Underwriters pursuant to Rule 15c6-1 of the Exchange
Act.
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 Hunton & Williams, Richmond, Virginia.
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 COMMISION PASSED UPON
THE ACCURACYOR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATIONTO 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 May 11, 1998
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.
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".
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, 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 loan production operations to create investments for its
portfolio. Currently, the Company's primary production operations include the
origination of mortgage loans secured by multifamily and commercial properties
and the origination of loans secured by manufactured homes. 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. 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 their taxable income to shareholders, and will generally not be subject
to federal income tax. See "Federal Income Tax Considerations."
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, mortgage 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
interest 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 by the Company's interest-earning
assets. The cost of the Company's borrowings may be increased or decreased by
interest rate swap, cap, or floor agreements, which are used to manage the
Company's exposure to interest rate risk.
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 has elected to be taxed as a REIT for federal income tax
purposes 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
As a REIT, Dynex REIT must distribute annually substantially all of its
income to shareholders. Dynex REIT will not be subject to federal income tax on
such distributed taxable income to the extent that certain REIT qualification
tests 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 is 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, Years ended December 31,
-------------------- ----------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------------------- ------------ -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed 1.71:1 1.81:1 1.56:1 1.26:1 1.35:1 1.69:1
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.
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
As of March 31, 1998, there were 45,584,622 outstanding shares of Common
Stock held by 4,404 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 March 31, 1998 there were 1,323,061 shares of Series A Cumulative
Convertible Preferred Stock, 1,917,234 shares of Series B Cumulative Convertible
Preferred Stock, and 1,840,000 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.
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, unless otherwise indicated in the Prospectus Supplement related to
such series, 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 right 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,
voting together as a single class. 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 or resolution of the Board
of Directors of the Company setting the terms such series of Debt Securities. 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.
Satisfaction and Discharge. The Indentures provide generally 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) there is delivered to the Trustee for the Securities of
such series all Securities of all such series and the coupons, if any,
appertaining thereto for cancellation 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.
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 as 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
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 directly 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 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.
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 qualified as a REIT under
the Code since its inception and (ii) the organization and current and
contemplated method of operation of Dynex REIT are such as to enable it to
continue so to qualify in 1998 and subsequent taxable 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 subsidiaries' 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 Dynex
REIT 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 alternative 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 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 thereafter as gain from the disposition of the shares. Shareholders
may not include on their own returns any of Dynex REIT's ordinary or capital
losses. Distributions to shareholders that are attributable to "excess inclusion
income" of Dynex REIT will be characterized as excess inclusion income in the
hands of the shareholders. 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 1997 the Company's excess inclusion income was less than 1% of its taxable
income.
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 are allocable
to excess inclusion income received by Dynex REIT or (iii) under certain
circumstances, with respect to pension trusts owning more than 10% of the shares
of Dynex REIT, a portion of such dividend is attributable to income that would
be UBTI if received directly by the pension trust. 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.
The highest marginal individual income tax rate is 39.6%. The maximum tax
rate on long-term capital gains applicable to non-corporate taxpayers is 28% for
sales and exchanges of assets held for more than one year, but not more than 18
months, and 20% for sales and exchanges of assets held for more than 18 months.
The maximum tax rate on gain from the sale or exchange of "section 1250
property" (i.e., depreciable real estate) is 25%, to the extent that such gain
would have been recaptured and treated as ordinary income if the section 1250
property were personal property. If Dynex REIT designates a dividend as a
capital gain dividend or is deemed to distribute the capital gains it elects to
retain, it may designate the dividend or deemed distribution (subject to certain
limitations) as a 20% rate gain distribution, an unrecaptured section 1250 gain
distribution, or a 28% rate gain distribution. If Dynex REIT fails to designate
the rate, the distribution will be a 28% rate gain distribution.
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.
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 and schedule of the Company included
in the Company's Report on Form 10-K for the year ended December 31, 1997 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 and schedule 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.
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TABLE OF CONTENTS
Prospectus Supplement $60,000,000
<S> <C> <C>
Page
Prospectus Summary............................. S-2
Results of Operations.......................... S-5
Capitalization................................. S-7
Business....................................... S-8 Dynex
Description of the Notes....................... S-19 Capital, Inc.
Underwriting................................... S-31
Legal Matters.................................. S-32
Prospectus % Senior Notes
Available Information.......................... 2 Due July 1, 2008
Incorporation of Certain Documents
by Reference.............................. 2
The Company.................................... 3
Use of Proceeds................................ 4
Ratio of Available Earnings to Fixed Charges... 4
Description of Securities...................... 5
Plan of Distribution........................... 12
Federal Income Tax Considerations.............. 13
Legal Matters.................................. 15
Experts........................................ 15
____________________
____________________
No person has been authorized to give any
information or to make any representations in connection PROSPECTUS SUPPLEMENT
with this offering other than those contained in this , 1998
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 Company or the Underwriters. Neither
the delivery of this Prospectus Supplement and the
accompanying Prospectus nor any sale made hereunder Stifel, Nicolaus & Company Incorporated
shall, under any circumstances, create any implication
that there has been no change in the affairs of the Robert W. Baird & Co. Incorporated
Company since the date hereof or that the information
contained herein is correct as of any time subsequent to EVEREN Securities, Inc.
its date. This Prospectus Supplement and the
accompanying Prospectus do not constitute an offer to Scott & Stringfellow, Inc.
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>
