UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended March 31, 2000
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-9819
DYNEX CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-1549373
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10900 Nuckols Road, 3rd Floor, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
(804) 217-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
|_| Yes |X|No
On April 30, 2000, the registrant had 11,444,188 shares of common stock of
$.01 value outstanding, which is the registrant's only class of common stock.
DYNEX CAPITAL, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2000 and
December 31,1999.........................................3
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999............................4
Consolidated Statement of Shareholders' Equity for
the three months ended March 31, 2000....................5
Consolidated Statements of Cash Flows for
the three months ended March 31, 2000 and 1999...........6
Notes to Unaudited Consolidated Financial
Statements...............................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............18
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................36
Item 2. Changes in Securities and Use of Proceeds...................37
Item 3. Defaults Upon Senior Securities.............................37
Item 4. Submission of Matters to a Vote of Security Holders.........37
Item 5. Other Information...........................................37
Item 6. Exhibits and Reports on Form 8-K............................37
SIGNATURES...........................................................38
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
<S> <C> <C>
March 31, December 31,
ASSETS 2000 1999
------------------ ------------------
Investments:
Collateral for collateralized bonds $ 3,552,431 $ 3,700,714
Securities 110,257 127,711
Other investments 39,599 48,927
Loans held for sale 225,796 232,384
------------------ ------------------
3,928,083 4,109,736
Investment in and net advances to Dynex Holding, Inc. 8,112 4,814
Cash, substantially restricted 53,584 54,433
Accrued interest receivable 1,979 2,208
Other assets 16,899 19,705
================== ==================
$ 4,008,657 $ 4,190,896
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Non-recourse debt $ 3,243,092 $ 3,282,378
Recourse debt:
Secured by collateralized bonds retained 69,734 144,746
Secured by investments 245,963 282,479
Unsecured 105,003 109,873
------------------ ------------------
------------------ ------------------
3,663,792 3,819,476
Accrued interest payable 3,109 6,303
Accrued expenses and other liabilities 34,919 40,045
------------------ ------------------
3,701,820 3,865,824
------------------ ------------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share,
50,000,000 shares authorized:
9.75% Cumulative Convertible Series A,
1,309,061 issued and outstanding 29,900 29,900
9.55% Cumulative Convertible Series B,
1,912,434 issued and outstanding 44,767 44,767
9.73% Cumulative Convertible Series C,
1,840,000 issued and outstanding 52,740 52,740
Common stock, par value $.01 per share,
100,000,000 shares authorized,
11,444,188 and 11,444,099 issued and outstanding, respectively 114 114
Additional paid-in capital 351,995 351,995
Accumulated other comprehensive loss (56,038) (48,507)
Accumulated deficit (116,641) (105,937)
------------------ ------------------
306,837 325,072
--------------- ------------------
====
$ 4,008,657 $ 4,190,896
================== ==================
<FN>
See notes to unaudited consolidated financial statements.
</FN>
</TABLE>
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
--------------- --- ---------------
<S> <C> <C>
2000 1999
--------------- ---------------
--------------- ---------------
Interest income:
Collateral for collateralized bonds $ 70,230 $ 71,238
Securities 1,976 4,590
Other investments 1,512 584
Loans held for sale or securitization 5,374 7,373
Net advances to Dynex Holding, Inc. - 3,333
--------------- ---------------
--------------- ---------------
79,092 87,118
--------------- ---------------
--------------- ---------------
Interest and related expense:
Non-recourse debt 56,827 55,207
Recourse debt 8,886 16,175
Other 1,788 730
Net advances from Dynex Holding, Inc. 291 -
--------------- ---------------
--------------- ---------------
67,792 72,112
--------------- ---------------
--------------- ---------------
Net interest margin before provision for losses 11,300 15,006
Provision for losses (5,321) (3,793)
--------------- ---------------
--------------- ---------------
Net interest margin 5,979 11,213
Net loss on sale or writedown of investments (13,433) (926)
Equity in net loss of Dynex Holding, Inc. (719) (369)
Other income 122 1,359
--------------- ---------------
--------------- ---------------
(8,051) 11,277
General and administrative expenses (2,403) (2,008)
Net administrative fees and expenses to Dynex Holding, Inc. (250) (5,924)
--------------- ---------------
--------------- ---------------
(Loss) income before extraordinary item (10,704) 3,345
Extraordinary item - loss on extinguishment of debt - (1,086)
--------------- ---------------
--------------- ---------------
Net (loss) income after extraordinary item (10,704) 2,259
Dividends on preferred stock (3,228) (3,228)
--------------- ---------------
=============== ===============
Net loss to common shareholders $ (13,932) $ (969)
=============== ===============
=============== ===============
Net (loss) income per common share before extraordinary item:
Basic $ (1.22) $ 0.01
=============== ===============
=============== ===============
Diluted $ (1.22) $ 0.01
=============== ===============
=============== ===============
Net loss per common share after extraordinary item:
Basic $ (1.22) $ (0.08)
=============== ===============
=============== ===============
Diluted $ (1.22) $ (0.08)
=============== ===============
=============== ===============
<FN>
See notes to unaudited consolidated financial statements.
</FN>
</TABLE>
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 2000
(amounts in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other
Preferred Common Paid-in Comprehensive Accumulated
Stock Stock Capital Loss Deficit Total
------------ ------------------------- --------------- --------------- ------------
Balance at December 31, 1999 $ 127,407 $ 114 $ 351,995 $ (48,507) $ (105,937) $ 325,072
------------ ------------------------- --------------- --------------- ------------
Comprehensive loss:
Net loss - three months ended
March 31, 2000 - - - - (10,704)
(10,704)
Change in net unrealized loss on
investments classified as
available-for-sale during the period - - - (7,531) - (7,531)
------------ ------------------------- --------------- --------------- ------------
Total comprehensive loss - - - (7,531) (18,235)
(10,704)
------------ ------------------------- --------------- --------------- ------------
Balance at March 31, 2000 $ 127,407 $ 114 $ 351,995 $ (56,038) $ (116,641) $ 306,837
============ ========================= =============== =============== ============
<FN>
See notes to unaudited consolidated financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended
<S> <C> <C>
----------------------------------------
(amounts in thousands) March 31,
2000 1999
------------------ ------------------
Operating activities:
Net (loss) income $ (10,704) $ 2,259
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Provision for losses 5,321 3,793
Net loss on sale or writedown of investments 13,433 926
Equity in net loss of Dynex Holding, Inc. 719 369
Extraordinary item - loss on extinguishment of debt - 1,086
Amortization and depreciation 4,334 9,868
Net change in accrued interest, other assets and other (6,634) (10,004)
liabilities
------------------ ------------------
Net cash provided by operating activities 6,469 8,297
------------------ ------------------
Investing activities:
Collateral for collateralized bonds:
Funding of investments subsequently securitized - (280,783)
Principal payments on collateral 120,868 396,198
(Increase) decrease in accrued interest receivable (399) 2,987
Net decrease (increase) in funds held by trustee 201 (744)
Net decrease in loans held for sale or securitization 6,691 149,210
Purchase of other investments (553) (7,237)
Payments received on other investments 1,758 2,997
Purchase of securities - (23,513)
Payments received on securities 13,135 20,045
Proceeds from sales of securities 2,468 16,181
Investment in and net advances to Dynex Holding, Inc. (4,017) (15,103)
Proceeds from sale of loan operations 9,500 -
Capital expenditures - (6)
------------------ ------------------
Net cash provided by investing activities 149,652 260,232
------------------ ------------------
Financing activities:
Collateralized bonds:
Proceeds from issuance of bonds 78,997 372,189
Principal payments on bonds (120,034) (389,849)
Increase in accrued interest payable 963 2,858
Repayment of senior notes (4,980) -
Repayment of recourse debt borrowings, net (111,916) (251,904)
Net proceeds from issuance of common stock - 18
Dividends paid - (3,228)
------------------ ------------------
Net cash used for financing activities (156,970) (269,916)
------------------ ------------------
Net decrease in cash (849) (1,387)
Cash at beginning of period 54,433 30,103
================== ==================
Cash at end of period $ 53,584 $ 28,716
================== ==================
Cash paid for interest $ 66,763 $ 70,691
================== ==================
================== ==================
Supplemental disclosure of non-cash activities:
Collateral for collateralized bonds owned subsequently $ - $ 1,161,475
securitized
================== ==================
================== ==================
<FN>
See notes to unaudited consolidated financial statements.
</FN>
</TABLE>
DYNEX CAPITAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(amounts in thousands except share data)
NOTE 1--BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. The consolidated financial statements include the
accounts of Dynex Capital, Inc. and its qualified REIT subsidiaries (together,
"Dynex REIT"). The loan production operations are primarily conducted through
Dynex Holding, Inc. ("DHI"), a taxable affiliate of Dynex REIT. Dynex REIT owns
all the outstanding non-voting preferred stock of DHI which represents a 99%
economic ownership interest in DHI. The common stock of DHI represents a 1%
economic ownership of DHI and is owned by certain officers of Dynex REIT. In
light of these factors, DHI is accounted for under a method similar to the
equity method. Under the equity method, Dynex REIT's original investment in DHI
is recorded at cost and adjusted by Dynex REIT's share of earnings or losses and
decreased by dividends received. References to the "Company" mean Dynex Capital,
Inc., its consolidated subsidiaries, and DHI and its consolidated subsidiaries.
All significant intercompany balances and transactions with Dynex REIT's
consolidated subsidiaries have been eliminated in consolidation of Dynex REIT.
In the opinion of management, all material adjustments, consisting of
normal recurring adjustments, considered necessary for a fair presentation of
the consolidated financial statements have been included. The Consolidated
Balance Sheet at March 31, 2000, the Consolidated Statements of Operations for
the three months ended March 31, 2000 and 1999, the Consolidated Statement of
Shareholders' Equity for the three months ended March 31, 2000, the Consolidated
Statements of Cash Flows for the three months ended March 31, 2000 and 1999 and
related notes to consolidated financial statements are unaudited. Operating
results for the three months ended March 31, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000. For
further information, refer to the audited consolidated financial statements and
footnotes included in the Company's Form 10-K for the year ended December 31,
1999.
Certain reclassifications have been made to the financial statements for
1999 to conform to presentation for 2000.
NOTE 2 -- SIGNIFICANT RISKS AND UNCERTANTIES
The Company's business strategy has historically relied on access to
financing sources such as warehouse lines of credit and repurchase agreements,
and the asset-backed securities market, to finance its activities. During 1999,
the Company's access to these sources of financing was substantially impaired
due in part to market perception of specialty finance companies that resulted
from the disruption in the fixed income market in late 1998. As a result of this
environment, the Company sold both its manufactured housing lending operations
and model home purchase/leaseback business during 1999, and decided not to
extend the forward commitments on commercial mortgage loans. In addition, in
lieu of securitization, the Company decided to sell as whole loans its
commercial loans held in inventory. The sale of the two production operations
will significantly lower the Company's capital requirements and will reduce the
need for short-term financing. On a long-term basis, competitive pressures,
including competing against larger companies which generally have significantly
lower costs of capital and access to the financing sources, the lack of ability
to obtain critical lending sources to finance its production operations, and the
lack of ability to access the capital markets as a long-term source of financing
in a cost effective manner, are expected to continue to hamper the Company's
ability to compete profitably in the marketplace for the foreseeable future.
The Company has recourse debt of approximately $427 million as of March 31,
2000, of which $324 million comes due in 2000 (see Note 5, Recourse Debt). Given
the Company's operating performance during 1999 and the recent jury verdict in
the litigation with AutoBond Acceptance Corporation as discussed in Note 9,
Litigation, the Company's access to additional credit has been limited, and
there is generally less willingness of the Company's current lenders to grant
extensions. In addition, the Company is in violation of certain covenants in two
of its warehouse lines of credit and the 1994 Senior Notes, principally related
to minimum senior unsecured ratings and minimum net worth requirements, and the
receipt of a going concern opinion from its auditors. The Company has not
received waivers from one of its warehouse lines of credit and the 1994 Senior
Notes for these covenant violations, and, as a result, certain lenders could
accelerate the debt as due and payable upon written notice. As of May 15, 2000,
no lender has accelerated such debt.
As of May 15, 2000, the aggregate amount due under the two warehouse lines
of credit was $237.7 million, collateralized by loans with an unpaid principal
balance of $307.2 million. Substantially all collateral pledged under these
lines is held for sale. No assurance can be given, however, that any sales will
ultimately be consummated.
The senior unsecured notes due July 2002, with an outstanding balance of
$97.3 million at March 31, 2000, contain covenants which provide for the
acceleration of amounts outstanding should Dynex REIT default under other credit
agreements in amounts in excess of $10 million, and such amounts outstanding
under the other credit agreements are accelerated by the respective lender.
As of May 15, 2000, the Company also has $51.7 million outstanding under
repurchase agreements with substantially one counterparty, which amount is
collateralized with collateral having a current estimated market value of $58.4.
As discussed in Note 9, Litigation, on March 9, 2000, a jury in the
litigation with AutoBond Acceptance Corporation ("AutoBond") returned a verdict
in favor of AutoBond, and awarded $18.7 million in direct lost profits and $50.5
million in lost future profits to AutoBond. On April 17, 2000, based on motions
filed by the Company, the judge presiding over the matter in Travis County
proposed a judgment of approximately $27 million (which includes estimated
prejudgment interest) in lieu of the approximate $69 million jury verdict. At a
subsequent hearing on April 17, 2000, the Court further reduced the award to
$23.6 million including prejudgment interest. AutoBond has accepted this
judgment, as reduced by the trial court, of $23.6 million. On May 15, 2000, the
Court denied the Company's motion to post alternative security in lieu of an
appeal bond in order to appeal the Court's earlier judgment in favor of
AutoBond. To date the Company has been unable to obtain an appeal bond. The
Court stayed enforcement of the judgment for ten days to allow the Company to
appeal the Court's action to the Austin Court of Appeals. The Company intends to
appeal the Court's action. In addition, the Court ordered the parties to resume
mediation in an effort to either settle the case or agree on alternative
security. The Court also reduced the amount of the judgment by $270,000 to
approximately $23.3 million. As of March 31, 2000, the Company has a litigation
reserve of $26.8 million.
NOTE 3--NET INCOME PER COMMON SHARE
Net income per common share is presented on both a basic net income per
common share and diluted net income per common share basis. Diluted net income
per common share assumes the conversion of the convertible preferred stock into
common stock, using the if-converted method, and stock appreciation rights,
using the treasury stock method, but only if these items are dilutive. As a
result of the two-for-one split in May 1997 and the one-for-four reverse split
in July 1999 of Dynex REIT's common stock, the preferred stock is convertible
into one share of common stock for two shares of preferred stock
The following table reconciles the numerator and denominator for both the
basic and diluted net income per common share for the three months ended March
31, 2000 and 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------ ------------------------------------------------------------------
Three Months Ended March 31,
------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------ ------------------------------ --- -------------------------------
<S> <C> <C> <C> <C>
Weighted-Average Weighted-Average
Number of Number of
Shares Shares
Income Income
------------- ------------- ------------- -------------
(Loss) income before extraordinary item $ (10,704) $ 3,345
Extraordinary item - loss on extinguishment of debt - (1,086)
------------- -------------
------------- -------------
Net (loss) income after extraordinary item (10,704) 2,259
Less: Dividends on preferred stock (3,228) (3,228)
------------- ------------- ------------- -------------
Basic and diluted net loss to common shareholders $ 11,444,158 $ 11,507,431
(13,932) (969)
============= =============
============= ============= ============= =============
Net (loss) income per common share before extraordinary
item:
Basic $ (1.22) $
0.01
============= =============
Diluted $ (1.22) $
0.01
============= =============
Net loss per common share after extraordinary item:
Basic $ (1.22) $
(0.08)
============= =============
Diluted $ (1.22) $
(0.08)
============= =============
Reconciliation of anti-dilutive shares:
Dividends and additional shares of preferred stock:
Series A $ 654,531 $ 766 654,531
766
Series B 1,119 956,217 1,119 956,217
Series C 1,343 920,000 1,343 920,000
Expense and incremental shares of stock appreciation
rights - 24,539 2 28,764
------------- ------------- -------------
=============
$ 3,228 2,555,287 $ 3,230 2,559,512
============= ============= ============= =============
------------- -------------
- ------------------------------------------------------------ ------------- -- ------------- --- ------------- -- ------------- ---
</TABLE>
NOTE 4 -- COLLATERAL FOR COLLATERALIZED BONDS AND SECURITIES
The following table summarizes Dynex REIT's amortized cost basis and fair
value of investments classified as available-for-sale, as of March 31, 2000 and
December 31, 1999, and the related average effective interest rates:
<TABLE>
<CAPTION>
- ------------------------------------------ --------------------------------- ------ ------------------------------------
March 31, 2000 December 31, 1999
- ------------------------------------------ --------------------------------- ------ ------------------------------------
<S> <C> <C> <C> <C>
Effective Effective
Interest Interest
Fair Value Rate Fair Value Rate
- ------------------------------------------ ---------------- -- ------------- ------ ----------------- ---- -------------
Collateral for collateralized bonds:
Amortized cost $ 3,624,465 7.5% $ 3,752,702 7.8%
Allowance for losses (16,352) (15,299)
- ------------------------------------------ ---------------- -- ------------- ------ ----------------- --- --------------
Amortized cost, net 3,608,113 3,737,403
Gross unrealized gains 26,061 34,198
Gross unrealized losses (81,743) (70,887)
- ------------------------------------------ ---------------- -- ------------- ------ ----------------- --- --------------
$ 3,552,431 $ 3,700,714
- ------------------------------------------ ---------------- -- ------------- ------ ----------------- --- --------------
Securities:
Funding Notes and Securities $ 82,779 6.7% $ 94,890 6.8%
Adjustable-rate mortgage securities 12,742 5.8% 18,047 7.0%
Fixed-rate mortgage securities 9,173 8.8% 9,861 13.5%
Derivative and residual securities 7,576 0.9% 18,421 1.5%
- ------------------------------------------ ---------------- -- ------------- ------ ----------------- --- --------------
112,270 141,219
Allowance for losses (1,657) (1,690)
--------------------------------------- ---------------- -- ------------- ------ ----------------- --- --------------
Amortized cost, net 110,613 139,529
Gross unrealized gains 4,265 1,353
Gross unrealized losses (4,621) (13,171)
- ------------------------------------------ ---------------- -- ------------- ------ ----------------- --- --------------
$ 110,257 $ 127,711
- ------------------------------------------ ---------------- -- ------------- ------ ----------------- --- --------------
</TABLE>
Collateral for collateralized bonds. Collateral for collateralized bonds
consists primarily of securities backed by adjustable-rate and fixed-rate
mortgage loans secured by first liens on single family housing, fixed-rate loans
on multifamily and commercial properties and manufactured housing installment
loans secured by either a UCC filing or a motor vehicle title. All collateral
for collateralized bonds is pledged to secure repayment of the related
collateralized bonds. All principal and interest (less servicing-related fees)
on the collateral is remitted to a trustee and is available for payment on the
collateralized bonds. Dynex REIT's exposure to loss on collateral for
collateralized bonds is generally limited to the amount of collateral pledged to
the collateralized bonds in excess of the amount of the collateralized bonds
issued, as the collateralized bonds issued by the limited-purpose finance
subsidiaries are non-recourse to Dynex REIT.
Dynex REIT did not securitize any collateral through the issuance of
collateralized bonds during the first quarter of
2000.
Securities. Funding Notes and Securities consist of fixed-rate funding
notes and securities secured by fixed-rate automobile installment contracts
originated by AutoBond. Adjustable-rate mortgage securities ("ARM") consist of
mortgage certificates secured by ARM loans. Fixed-rate mortgage securities
consist of mortgage certificates secured by mortgage loans that have a fixed
rate of interest for at least one year from the balance sheet date. Derivative
securities are classes of collateralized bonds, mortgage pass-through
certificates or mortgage certificates that pay to the holder substantially all
interest (i.e., an interest-only security), or substantially all principal
(i.e., a principal-only security). Residual interests represent the right to
receive the excess of (i) the cash flow from the collateral pledged to secure
related mortgage-backed securities, together with any reinvestment income
thereon, over (ii) the amount required for principal and interest payments on
the mortgage-backed securities or repurchase arrangements, together with any
related administrative expenses.
Sale of Investments. Securities with an aggregate principal balance of
$2,771 were sold during the three months ended March 31, 2000 for an aggregate
loss of $303. The specific identification method is used to calculate the basis
of securities sold. Net loss on sale or writedown of investments at March 31,
2000 also includes (i) realized losses of $12,160 related to the writedown of
$23,656 of securities which were sold during April 2000 (ii) realized losses of
$1,282 primarily related to fees paid during the three months ended March 31,
2000 to cancel commercial loan commitments and (iii) realized gains of $342
related to the sale of $21,521 of commercial loans during the first quarter of
2000 (which Dynex REIT had recognized a loss of $6,480 during the fourth quarter
of 1999 to adjust the carrying value of these loans to the lower of cost or
market). Net loss on sale or writedown of investments at March 31, 1999 includes
(i) realized gains of $210 related to the sale of $15,971 of securities during
the first quarter of 1999 (ii) realized losses of $2,051 related to the sale or
writedown of $10,764 of commercial loans during the three months ended March 31,
1999 and (iii) realized gains of $431 on various trading positions entered into
during the three months ended March 31, 1999.
Dynex REIT uses estimates in establishing fair value for its financial
instruments. Estimates of fair value for financial instruments may be based on
market prices provided by certain dealers. Estimates of fair value for certain
other financial instruments including collateral for collateralized bonds, are
determined by calculating the present value of the projected cash flows of the
instruments using appropriate discount rates, prepayment rates and credit loss
assumptions. Discount rates used are those which management believes would be
used by willing buyers of these financial instruments at prevailing market
rates. The discount rate used in the determination of fair value of the
collateral for collateralized bonds at both March 31, 2000 and December 31, 1999
was approximately 18%. Variations in market discount rates, prepayments rates
and credit loss assumptions may materially impact the resulting fair values of
the Company's financial instruments. Estimates of fair value for other financial
instruments are based primarily on management's judgment. Since the fair value
of Dynex REIT's financial instruments is based on estimates, actual gains and
losses recognized may differ from those estimates recorded in the consolidated
financial statements.
NOTE 5 -- RECOURSE DEBT
Dynex REIT utilizes repurchase agreements, notes payable and secured credit
facilities (together, "recourse debt") to finance certain of its investments.
The following table summarizes Dynex REIT's recourse debt outstanding at March
31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
- -------------------------------------------------------------- -------------------- -- ---------------------
<S> <C> <C>
March 31, 2000 December 31, 1999
- -------------------------------------------------------------- -------------------- -- ---------------------
Recourse debt secured by:
Collateralized bonds $ 69,734 $ 144,746
Securities 49,058 66,090
Other investments 22,276 31,498
Loans held for sale 173,761 183,901
Other assets 868 990
-------------------- ---------------------
315,697 427,225
Unsecured debt:
7.875% senior notes, net of issuance costs 96,452 96,361
Series B 10.03% senior notes, net of issuance costs 8,551 13,512
- -------------------------------------------------------------- -------------------- -- ---------------------
$ 420,700 $ 537,098
- -------------------------------------------------------------- -------------------- -- ---------------------
</TABLE>
Secured Debt. At March 31, 2000 and December 31, 1999, recourse debt
consisted of $83,713 and $163,045, respectively, of repurchase agreements
secured by investments, $231,116 and $263,190, respectively, outstanding under
secured credit facilities which are secured by loans held for sale, securities
and other investments, and $868 and $990, respectively, of amounts outstanding
under a capital lease. At March 31, 2000, substantially all recourse debt in the
form of repurchase agreements had maturities within sixty days and bear interest
at rates indexed to one-month London InterBank Offered Rate ("LIBOR"). If the
counterparty to the repurchase agreement fails to return the collateral, the
ultimate realization of the security by Dynex REIT may be delayed or limited.
At March 31, 2000, Dynex REIT had four committed secured credit facilities
aggregating $698,700 to finance the funding of loans and securities, which
expire prior to December 31, 2000. The following table summarizes the material
terms of these facilities.
<TABLE>
<CAPTION>
- ---------------------------------------- --------------- ----- ------------------ -------------------- --------------------
<S> <C> <C> <C> <C>
Outstanding Range of Interest
Facility Balance Maturity Date Eligible Collateral Rates
- ---------------------------------------- --------------- ----- ------------------ -------------------- --------------------
$195,000 secured credit facility $ 113,200 (1) May 29, 2000 Loans held for Various, ranging
agented by Chase Bank of Texas sale, property tax from LIBOR plus
receivables 1.375%-2.50%
$400,000 secured credit facility with 71,900 May 19, 2000 Loans held for sale LIBOR plus 1.25%
Morgan Stanley Mortgage Capital, Inc. and 1.50%
$100,000 secured credit facility with 35,100 May 10, 2000 Funding Notes and LIBOR plus 3.75%
Daiwa Finance Corp. Securities
$3,700 secured credit facility with 2,800 December 15, 2000 Other investments LIBOR plus 2.50%
Residential Funding Corporation
- ---------------------------------------- --------------- ----- ------------------ -------------------- --------------------
$ 223,000
- ---------------------------------------- --------------- ----- ------------------ -------------------- --------------------
<FN>
(1) The $195,000 secured credit facility agented by Chase Bank of Texas includes a subline in the amount of $79,052 for
the issuance of letters of credit to facilitate the issuance of tax-exempt multifamily housing bonds as discussed in
Note 8. As of March 31, 2000, $79,052 of letters of credit had been issued under the subline. Such amount is not
included in the $113,200 balance outstanding included in the table above.
</FN>
</TABLE>
For the Chase Bank of Texas syndicated line ("Chase Bank Syndicate")
expiring on May 29, 2000 and the Morgan Stanley Mortgage Capital, Inc. ("Morgan
Stanley") line expiring on May 19, 2000, Dynex REIT is seeking to sell a
substantial portion of the associated collateral by the respective maturity
dates. However, it is unlikely that Dynex REIT will be able to payoff such
credit lines by the respective maturity dates, and there can be no assurances
that the lenders will agree to any extensions. In the event that the lenders
declare an Event of Default, the underlying credit line agreements provide for
the liquidation of the pledged collateral. In such a scenario it is likely that
the Company will suffer substantial losses on the sale of the collateral. The
credit facility with Diawa Finance Corp. was fully prepaid on May 12, 2000 with
the proceeds obtained from the securitization of the funding note collateral.
The above lines of credit include various representations and covenants.
Dynex REIT has violated certain covenants on credit lines expiring on May 19,
2000 and May 29, 2000 relating primarily to minimum net worth, minimum senior
unsecured ratings requirements and the receipt of a going concern opinion from
its auditors. Dynex REIT has received waivers from Morgan Stanley for the
uncured covenant violations. Dynex REIT has not received waivers for any uncured
covenant violations from the Chase Bank Syndicate on the credit line expiring on
May 29, 2000. The Chase Bank Syndicate has not formally notified Dynex REIT in
writing as required by the loan documentation, that it has (i) terminated its
commitment to lend or (ii) declared all or a portion of the loan due and
payable. The Company's recourse credit facilities generally contain
cross-default provisions whereby a default under any one credit facility is a
default under each of the other credit facilities.
Unsecured Debt. Since 1994, Dynex REIT has issued three series of unsecured
notes payable totaling $150 million. These notes payable had an outstanding
balance at March 31, 2000 of $105,840. The Company has $97,250 outstanding of
its July 2002 senior notes (the "2002 Notes") and $8,590 million outstanding on
notes issued in September 1994 (the "1994 Notes"). Effective May 15, 1999, the
Company amended the 1994 Notes. In return for certain covenant relief related to
the fixed-charge coverage requirements of the 1994 Notes, the Company agreed to
(i) convert the principal amortization of the 1994 Notes from annual to monthly
and (ii) shorten the remaining principal amortization period from 30 months to
16 months. Monthly amortization for the 1994 Notes through August 2000
approximates $1.7 million per month. The Company is in violation of certain
covenants in the 1994 Notes including the minimum net worth requirement and the
covenant requiring an unqualified audit opinion. The Company has not received
waivers for these defaults; however, the holders of the 1994 Notes have not
accelerated the remaining amounts due.
The 2002 Notes contain covenants which provide for the acceleration of
amounts outstanding under the 2002 Notes should Dynex REIT default under other
credit agreements in amounts in excess of $10 million, and such amounts
outstanding under the other credit agreements are accelerated by the respective
lender.
NOTE 6-- ADOPTION OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. In June 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" ("FAS No. 137"). FAS
No. 137 amends FAS No. 133 to defer its effective date to all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company is in the process of
determining the impact of adopting FAS No. 133.
NOTE 7--DERIVATIVE FINANCIAL INSTRUMENTS
Dynex REIT may enter into interest rate swap agreements, interest rate cap
agreements, interest rate floor agreements, financial forwards, financial
futures and options on financial futures ("Interest Rate Agreements") to manage
its sensitivity to changes in interest rates. These Interest Rate Agreements are
intended to provide income and cash flow to offset potential reduced net
interest income and cash flow under certain interest rate environments. At trade
date, these instruments are designated as either hedge positions or trade
positions.
For Interest Rate Agreements designated as hedge instruments, Dynex REIT
evaluates the effectiveness of these hedges periodically against the financial
instrument being hedged under various interest rate scenarios. The revenues and
costs associated with interest rate swap agreements are recorded as adjustments
to interest income or expense on the asset or liability being hedged. For
interest rate cap agreements, the amortization of the cost of the agreements is
recorded as a reduction in the net interest income on the related investment.
The unamortized cost is included in the carrying amount of the related
investment. Revenues or cost associated with futures and option contracts are
recognized in income or expense in a manner consistent with the accounting for
the asset or liability being hedged. Amounts payable to or receivable from
counterparties are included in the financial statement line of the item being
hedged. Interest Rate Agreements that are hedge instruments and hedge an
available for sale investment which is carried at its fair value are also
carried at fair value, with unrealized gains and losses reported as accumulated
other comprehensive income.
As a part of Dynex REIT's interest rate risk management process, Dynex REIT
may be required periodically to terminate hedge instruments. Any realized gain
or loss resulting from the termination of a hedge is amortized into income or
expense of the corresponding hedged instrument over the remaining period of the
original hedge or hedged instrument as a yield adjustment.
If the underlying asset, liability or commitment is sold or matures, or the
criteria that was executed at the time the hedge instrument was entered into no
longer exists, the Interest Rate Agreement is no longer accounted for as a
hedge. Under these circumstances, the accumulated change in the market value of
the hedge is recognized in current income to the extent that the effects of
interest rate or price changes of the hedged item have not offset the hedge
results. As a result of the sale in April 2000 of the ARM securities which were
being hedged with the $1.0 million of interest rate caps, the Company wrote off
the remaining value of these interest rate caps of $3,878 against the loss on
sale or writedown of investments during the first quarter of 2000.
For Interest Rate Agreements entered into for trading purposes, realized
and unrealized changes in fair value of these instruments are recognized in the
consolidated statements of operations as trading activities in the period in
which the changes occur or when such trade instruments are settled. Amounts
payable to or receivable from counterparties, if any, are included on the
consolidated balance sheets in accrued expenses and other liabilities.
NOTE 8 -- COMMITMENTS
The Company makes various representations and warranties relating to the
sale or securitization of loans. To the extent the Company were to breach any of
these representations or warranties, and such breach could not be cured within
the allowable time period, the Company would be required to repurchase such
loans, and could incur losses. In the opinion of management, no material losses
are expected to result from any such representations and warranties.
The Company has made various representations and warranties relating to the
sale of various production operations. To the extent the Company were to breach
any of these representations or warranties, and such breach could not be cured
within the allowable time period, the Company would be required to cover any
losses and expenses up to certain limits. In the opinion of management, no
material losses are expected to result from any such representations and
warranties.
Dynex REIT facilitates the issuance of tax-exempt multifamily housing
bonds, the proceeds of which are used to fund construction or moderate
rehabilitation mortgage loans on multifamily properties. These tax-exempt bonds
are sold to third party investors. Regarding tax-exempt bonds associated with
construction properties, Dynex REIT enters into various standby commitments and
similar agreements whereby Dynex REIT is required to pay principal and interest
to the bondholders in the event there is a payment shortfall from the
construction proceeds, and is required to repurchase bonds if the bonds cannot
be successfully marketed. Dynex REIT has facilitated the issuance of
approximately $76.8 million of tax-exempt bonds related to construction
mortgage loans on multifamily properties, and has provided letters of credit to
support its obligation of $79.1 million at March 31, 2000 and December 31, 2000.
Dynex has a further obligation to repurchase the tax-exempt bonds once the
letters of credit expire. Approximately $20.9 million of letters of credit
expire in 2000, approximately $44.0 million expire in 2001 and approximately
$14.2 expire in 2002. Specifically as support for its obligation to repurchase,
Dynex REIT has posted fully cash-collateralized letters of credit totaling
$16,678, and escrowed cash of an additional $15,832 and posted a $5,000 sight
draft surety bond. Such amounts are at risk should the Company fail on its
repurchase obligation. Regarding tax-exempt bonds associated with moderate
rehabilitation properties, Dynex REIT is party to various conditional bond
repurchase obligations which require Dynex REIT to repurchase bonds in the
aggregate notional amount of $167.7 million by June 15, 2000.
NOTE 9 -- LITIGATION
On February 8, 1999, AutoBond Acceptance Corporation ("AutoBond"), AutoBond
Master Funding Corporation V ("Funding"), and its three principal common
shareholders (collectively, the "Plaintiffs") commenced an action in the
District Court of Travis County, Texas (250th Judicial District) against the
Company and James Dolph (collectively, the "Defendants") alleging that the
Company breached the terms of the Credit Agreement, dated June 9, 1998, by and
among AutoBond, Funding and the Company. The terms of the Credit Agreement
provided for the purchase by the Company of funding notes issued by Funding, and
collateralized by automobile installment contracts ("Auto Contracts") acquired
by AutoBond. The Company suspended purchasing the funding notes in February 1999
on grounds that AutoBond and Funding had violated certain provisions of the
Credit Agreement. The Plaintiffs also alleged that the Defendants conspired to
misrepresent and mischaracterize AutoBond's credit underwriting criteria and its
compliance with such criteria with the intention of interfering and causing
actual damage to AutoBond's business, prospective business and contracts.
On August 26, 1999, the District Court of Travis County ordered AutoBond
and Funding, through a temporary injunction action, to cooperate with the
Company and permit the transfer of the servicing of the Auto Contracts from
AutoBond to a third party servicer selected by the Company. The servicing was
transferred on September 3, 1999.
On March 9, 2000, a jury in the AutoBond action returned a verdict in favor
of the Plaintiffs, and awarded AutoBond and Funding $18.7 million in direct lost
profits and $50.5 million in lost future profits, for a total of $69.2 million.
The Company filed on March 24, 2000 with the Court motions to set aside the
verdict and to reduce the amount of the verdict, and on the same date, AutoBond
filed a motion to the court to enter judgment. On April 17, 2000, in response to
the various motions filed, the judge presiding over the matter in Travis County
reduced the $69.2 million verdict awarded by the jury to approximately $27
million (which includes estimated prejudgment interest). As a result, the
Company recorded a litigation provision of $27.0 million for the amount of the
reduced judgment during the fourth quarter of 1999. At a subsequent hearing on
April 17, 2000, the Court further reduced the award to $23.6 million including
prejudgment interest. AutoBond has accepted this judgment, as reduced by the
trial court, of $23.6 million. On May 15, 2000, the Court denied the Company's
motion to post alternative security in lieu of an appeal bond in order to appeal
the Court's earlier judgment in favor of AutoBond. To date the Company has been
unable to obtain an appeal bond The Court stayed enforcement of the judgment for
ten days to allow the Company to appeal the Court's action to the Austin Court
of Appeals. The Company intends to appeal the Court's action. In addition, the
Court ordered the parties to resume mediation in an effort to either settle the
case or agree on alternative security. The Court also reduced the amount of the
judgment by $270,000 to approximately $23.3 million.
The Company is also subject to other lawsuits or claims which arise in the
ordinary course of its business, some of which seek damages in amounts which
could be material to the financial statements. Although no assurance can be
given with respect to the ultimate outcome of any such litigation or claim, the
Company believes the resolution of such lawsuits or claims will not have a
material effect on the Company's consolidated balance sheet, but could
materially affect consolidated results of operations in a given year.
NOTE 10 -- RELATED PARTY TRANSACTIONS
Dynex REIT has a credit arrangement with DHI whereby DHI and any of DHI's
subsidiaries can borrow funds from Dynex REIT to finance its operations. Under
this arrangement, Dynex REIT can also borrow funds from DHI. The terms of the
agreement allow DHI and its subsidiaries to borrow up to $50 million from Dynex
REIT at a rate of Prime plus 1.0%. Dynex REIT can borrow up to $50 million from
DHI at a rate of one-month LIBOR plus 1.0%. This agreement has a one-year
maturity which is extended automatically unless notice is received from one of
the parties to the agreement within 30 days of the anticipated termination of
the agreement. As of March 31, 2000 and December 31, 1999, net borrowings due to
DHI under this agreement totaled $21,953 and $26,720, respectively. Net interest
expense under this agreement was $379 and $26 for the three months ended March
31, 2000 and 1999, respectively.
Dynex REIT also had a loan origination agreement with Dynex Financial, Inc.
("DFI"), an operating subsidiary of DHI, whereby Dynex REIT paid DFI on a fee
plus cost basis for the origination of manufactured housing loans on behalf of
Dynex REIT. During the three months ended March 31, 1999, Dynex REIT paid DFI
$4,439 under such agreement. This agreement was terminated as a result of the
sale of manufactured housing operations during 1999.
Dynex REIT has a funding agreement with Dynex Commercial, Inc. ("DCI"), an
operating subsidiary of DHI, whereby Dynex REIT pays DCI a fee per loan
originated on behalf of Dynex REIT. Dynex REIT paid DCI $118 and $844,
respectively under this agreement for the three months ended March 31, 2000 and
1999.
Dynex REIT had note agreements with Dynex Residential, Inc. ("DRI"), an
operating subsidiary of DHI, whereby DRI and its subsidiaries could borrow up to
$287,000 from Dynex REIT on a secured basis to finance the acquisition of model
homes from single family home builders. The interest rate on the notes was
adjustable and was based on 30-day LIBOR plus 2.875%. During 1999, $4,577 of the
notes was assumed by SMFC funding corporation ("SMFC"), a subsidiary of DHI. The
remainder of the notes were paid off at the time of the sale of DRI on November
10, 1999. The outstanding balance of the notes as of March 31, 2000 and December
31, 1999 was $3,552 and $4,274, respectively. Interest income recorded by Dynex
REIT on the notes for the three months ended March 31, 2000 and 1999 was $89 and
$3,360, respectively.
Dynex REIT has entered into subservicing agreements with DCI, Dynex
Commercial Services, Inc. ("DCSI"), DFI and GLS Capital Services, Inc ("GLS") to
service commercial, single family, consumer, manufactured housing loans and
property tax receivables. All four entities are subsidiaries of DHI. For
servicing the commercial loans, DCI or DSCI, as applicable, receives an annual
servicing fee of 0.02% of the aggregate unpaid principal balance of the loans.
For servicing the single family mortgage, consumer and manufactured housing
loans, DFI received annual fees ranging from sixty dollars ($60) to one hundred
forty-four dollars ($144) per loan and certain incentive fees. The subservicing
agreement with DFI was terminated due to the sale of DFI on December 20, 1999.
For servicing the property tax receivables, GLS receives an annual servicing fee
of 0.72% of the aggregate unpaid principal balance of the property tax
receivables. Servicing fees paid by Dynex REIT under such agreements were $82
and $558 during the three months ended March 31, 2000 and 1999, respectively.
NOTE 11 -- INVESTMENT IN AND NET ADVANCES TO DYNEX HOLDING, INC.
Investment in and net advances to DHI accounted for under a method similar
to the equity method amounted to $8,112 and $4,814 at March 31, 2000 and
December 31, 1999, respectively. The results of operations and financial
position of DHI are summarized below:
<TABLE>
<CAPTION>
-------------------------------------------------------- -------------------------------------- ---
Three Months ended March 31,
<S> <C> <C>
Condensed Income Statement Information 2000 1999
--------------------------------------------------------- ---------------- --- ---------------- ---
Total revenues $ 666 $ 11,049
Total expenses 1,392 11,421
Net income (726) (372)
--------------------------------------------------------- ---------------- --- ---------------- ---
--------------------------------------------------------- ---------------- --- ---------------- ---
March 31, December 31,
Condensed Balance Sheet Information 2000 1999
--------------------------------------------------------- ---------------- --- ---------------- ---
Total assets $ 32,164 $ 36,822
Total liabilities 5,143 9,075
Total equity 27,021 27,747
--------------------------------------------------------- ---------------- --- ---------------- ---
</TABLE>
NOTE 12--SUBSEQUENT EVENTS
On May 12, 2000 the Company closed a transaction securitizing its
investment in the Funding Notes related to AutoBond Acceptance Corporation. This
securitization was structured as financing. As a part of this transaction the
Company exchanged the non-recourse senior class of securities from the
transaction with Diawa (or an affiliate) in exchange for the release of Diawa's
recourse note secured by the Funding Notes. This had the effect of lowering the
Company's recourse debt outstanding by approximately $31 million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Dynex Capital, Inc. (the "Company") is a financial services company which
invests in a portfolio of securities and investments backed principally by
single family mortgage loans, commercial mortgage loans and manufactured housing
installment loans. Such loans have been funded generally by the Company's loan
production operations or purchased in bulk in the market. Loans funded through
the Company's production operations have generally been pooled and pledged as
collateral using a collateralized bond security structure, which provides
long-term financing for the loans while limiting credit, interest rate and
liquidity risk.
FINANCIAL CONDITION
<TABLE>
<CAPTION>
- -------------------------------------------------- ------------------ --- --------------------
<S> <C> <C>
March 31, December 31,
(amounts in thousands except per share data) 2000 1999
- -------------------------------------------------- ------------------ --- --------------------
Investments:
Collateral for collateralized bonds $ 3,552,431 $ 3,700,714
Securities 110,257 127,711
Other investments 39,599 48,927
Loans held for sale 225,796 232,384
Non-recourse debt - collateralized bonds 3,243,092 3,282,378
Recourse debt 420,700 537,098
Shareholders' equity 306,837 325,072
Book value per common share 15.15 16.74
- -------------------------------------------------- ------------------ --- -------------------
</TABLE>
Collateral for collateralized bonds Collateral for collateralized bonds
consists primarily of securities backed by adjustable-rate and fixed-rate
mortgage loans secured by first liens on single family properties, fixed-rate
loans secured by first liens on multifamily and commercial properties,
manufactured housing installment loans secured by either a UCC filing or a motor
vehicle title and property tax receivables. As of March 31, 2000, the Company
had 27 series of collateralized bonds outstanding. The collateral for
collateralized bonds decreased slightly to $3.6 billion at March 31, 2000
compared to $3.7 billion at December 31, 1999. This decrease of $0.1 billion is
primarily the result of $120.9 million in paydowns on collateral.
Securities Securities consist primarily of fixed-rate "funding notes and
securities" secured by automobile installment contracts and adjustable-rate and
fixed-rate mortgage-backed securities. Securities also include derivative and
residual securities. Derivative securities are classes of collateralized bonds,
mortgage pass-through certificates or mortgage certificates that pay to the
holder substantially all interest (i.e., an interest-only security), or
substantially all principal (i.e., a principal-only security). Residual
interests represent the right to receive the excess of (i) the cash flow from
the collateral pledged to secure related mortgage-backed securities, together
with any reinvestment income thereon, over (ii) the amount required for
principal and interest payments on the mortgage-backed securities or repurchase
arrangements, together with any related administrative expenses. Securities
decreased to $110.3 million at March 31, 2000 compared to $127.7 million at
December 31, 1999. This decrease was primarily the result of $13.1 million of
paydowns and the sale of $2.8 million of securities during the three months
ended March 31, 2000.
Other investments Other investments consists primarily of property tax
receivables and a note receivable received in connection with the sale of the
Company's single family mortgage operations in May 1996. Other investments
decreased from $48.9 million at December 31, 1999 to $39.6 million at March 31,
2000. This decrease is primarily the result of the receipt of the $9.5 million
annual principal payment on the note receivable from the 1996 sale of the single
family mortgage operations.
Loans held for sale Loans held for sale decreased from $232.4 million at
December 31, 1999 to $225.8 million at March 31, 2000. This decrease was
primarily due to the sale of several commercial loans held for sale. In
addition, the Company sold the remaining $3.5 million of manufactured housing
loans to Bingham Financial Services Corporation during the three months ended
March 31, 2000. These decreases were partially offset by $12.5 million of new
loan fundings during the first quarter of 2000 which were primarily draws on
existing multifamily construction loans.
Non-recourse debt Collateralized bonds issued by Dynex REIT are recourse
only to the assets pledged as collateral, and are otherwise non-recourse to
Dynex REIT. Collateralized bonds decreased slightly from $3.3 billion at
December 31, 1999 to $3.2 billion at March 31, 2000. This decrease was primarily
a result of paydowns on all collateralized bonds of $120.0 million during the
three months ended March 31, 2000.
Recourse debt Recourse debt decreased to $420.7 million at March 31, 2000
from $537.1 million at December 31, 1999. This decrease was primarily due to the
sale of $96.6 million of retained collateralized bonds and $25.0 million of
loans, during the first quarter of 2000, which had been financed with $79.8
million of repurchase agreements and $14.1 million of notes payable,
respectively. Also during the first quarter of 2000, Dynex REIT paid off
approximately $22.4 million of notes payable as a result of $23.9 million of
paydowns on investments.
Shareholders' equity Shareholders' equity decreased to $306.8 million at
March 31, 2000 from $325.1 million at December 31, 1999. This decrease was a
combined result of a $7.5 million increase in the net unrealized loss on
investments available-for-sale from $48.5 million at December 31, 1999 to $56.0
million at March 31, 2000 and a net loss of $10.7 million during the three
months ended March 31, 2000.
Loan Production Activity
($ in thousands)
- -------------------------------------------------------------------------------
Three Months Ended March 31, ------------------------------ 2000 1999
- -------------------------------------------------------------------------------
Commercial (1) $ - $ 48,658 Manufactured housing - 108,972 Specialty finance -
48,363 ----------------- ----------- Total fundings through direct production -
205,993 Secured funding notes (2) - 13,654
- -------------------------------------------------------------------------------
Total fundings $ - $ 219,647
- -------------------------------------------------------------------------------
(1) Included in commercial fundings were $25.2 million of multifamily
construction loans which closed during the three months ended March 31, 1999. As
of March 31, 2000, $414.5 million of multifamily construction loans have closed,
of which only the amount drawn for these loans of $126.3 million is included in
the balance of the loans held for sale at March 31, 2000.
(2) Secured by automobile installment contracts.
Direct loan production for the three months ending March 31, 1999 totaled
$206.0 million compared to none for the same period in 2000. The Company is no
longer actively originating loans.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------------
<S> <C> <C>
(amounts in thousands except per share information) 2000 1999
- --------------------------------------------------------------------------------------------------
Net interest margin $ 5,979 $ 11,213
Loss on sale of investments (13,433) (926)
Equity in net loss of Dynex Holding, Inc. (719) (369)
General and administrative expenses 2,403 2,008
Net administrative fees and expenses to Dynex Holding, Inc. 250 5,924
Net (loss) income before preferred stock dividends (10,704) 2,259
Basic net income (loss) per common share (1) $ (1.22) $ (0.08)
Diluted net income (loss) per common share (1) $ (1.22) $ (0.08)
Dividends declared per share:
Common $ - $ -
Series A and B Preferred - 0.585
Series C Preferred - 0.730
- --------------------------------------------------------------------------------------------------
<FN>
(1)Adjusted for the one-for-four reverse common stock split effective August 2, 1999.
</FN>
</TABLE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999. The decrease in net income and net income per common share during the
three months ended March 31, 2000 as compared to the same period in 1999 is
primarily the result of a decrease in net interest margin and an increase in the
loss on sale of investments. These decreases were partially offset by the
reduction in net administrative fees and expenses to Dynex Holding, Inc.
Net interest margin for the three months ended March 31, 2000 decreased to
$6.0 million, or 47% below the $11.2 million for the same period for 1999. This
decrease was primarily the result of the decline in average interest-earning
assets from $4.8 billion for the three months ended March 31, 1999 to $4.1
billion for the three months ended March 31, 2000. In addition, provision for
losses increased to $5.3 million or 0.52% on an annualized basis of average
interest-earning assets during the three months ended March 31, 2000 compared to
$3.8 million and 0.31% during the three months ended March 31, 1999. This
increase in provision for losses was a result of increasing the reserve for
probable losses on various loan pools pledged as collateral for collateralized
bonds where the Company has retained credit risk.
The net loss on sale of investments for the three months ended March 31,
2000 increased to $13.4 million as compared to $0.9 million for the same period
in 1999. This increase is primarily the result of realized losses of $12.2
million related to the writedown of $23.7 million of securities which were sold
during April 2000. In addition, the Company had realized losses of $1.3 million
primarily related to fees paid during the three months ended March 31, 2000 to
cancel commercial loan commitments and a $0.3 million loss on the sale of $2.8
million of securities during the three months ended March 31, 2000. These
decreases were partially offset by realized gains of $0.3 million related to the
sale of $21.5 million of commercial loans during the first quarter of 2000
(which Dynex REIT had recognized a loss of $6.5 million during the fourth
quarter of 1999 to adjust the carrying value of these loans to the lower of cost
or market). The loss on sale of investments for the first quarter of 1999 was
primarily the result of a $2.1 million loss related to the sale or writedown of
$10.8 million of commercial loans during the three months ended March 31, 1999.
This decrease was partially offset by a $0.2 million gain related to the sale of
$16.0 million of securities and a $0.4 million gain on various trading positions
closed during the three months ended March 31, 1999.
Net administrative fees and expenses to DHI decreased $5.6 million, or 96%,
to $0.3 million in the three months ended March 31, 2000 as compared to the same
period in 1999. This decrease is principally a combined result of the sale of
the Company's model home purchase/leaseback and manufactured housing loan
production operations during the fourth quarter of 1999. All general and
administrative expenses of these businesses were incurred by DHI.
The following table summarizes the average balances of interest-earning
assets and their average effective yields, along with the average
interest-bearing liabilities and the related average effective interest rates,
for each of the periods presented.
<TABLE>
<CAPTION>
Average Balances and Effective Interest Rates
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
-----------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Effective Average Effective
Balance Rate Balance Rate
----------------- ----------- ----------------- -----------
Interest-earning assets: (1)
Collateral for collateralized bonds (2) (3) $ 3,637,089 7.72% $ 3,974,145 7.17%
Securities 135,391 5.84 265,579 6.91
Other investments 50,143 12.77 205,001 7.69
Loans held for sale or securitization 262,109 8.20 372,759 7.91
----------------- ----------- ----------------- -----------
Total interest-earning assets $ 4,084,732 7.75% $ 4,817,484 7.24%
================= =========== ================= ===========
Interest-bearing liabilities:
Non-recourse debt (3) $ 3,255,742 6.91% $ 3,512,582 6.20%
Recourse debt - collateralized bonds retained 131,525 6.48 285,406 5.49
----------------- ----------- ----------------- -----------
3,387,267 6.89 3,797,988 6.15
Recourse debt secured by investments:
Securities 59,535 8.48 179,341 5.93
Other investments 11,613 5.38 152,081 5.98
Loans held for sale or securitization 193,508 5.97 319,421 5.59
Recourse debt - unsecured 106,636 8.84 127,883 8.81
================= =========== ================= ===========
Total interest-bearing liabilities $ 3,758,559 6.93% $ 4,576,714 6.17%
================= =========== ================= ===========
Net interest spread on all investments (3) 0.82% 1.07%
=========== ===========
Net yield on average interest-earning assets (3) 1.38% 1.38%
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
<FN>
(1) Average balances exclude adjustments made in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" to record available-for-sale securities at fair
value.
(2) Average balances exclude funds held by trustees of $1,143 and $1,898 for the three months ended March 31, 2000 and
1999, respectively.
(3) Effective rates are calculated excluding non-interest related collateralized bond expenses and provision for credit
losses. If included, the effective rate on interest bearing liabilities for the first quarter of 2000 and 1999
would be 7.79% and 6.64%, respectively, and the net yield on average interest-earnings assets for the same periods
would be 0.59% and 0.93%, respectively.
</FN>
</TABLE>
The net interest spread decreased to 0.82% for the three months ended March
31, 2000 from 1.07% for the same period in 1999. This decrease was primarily due
to approximately a 1% increase in the average one-month LIBOR for the first
quarter of 2000 when compared to the first quarter of 1999. This decrease in net
interest spread was partially offset by a reduction in premium amortization
expense, which decreased from $5.9 million for the three months ended March 31,
1999, respectively to $2.0 million for the same period in 2000. The overall
yield on interest-earning assets increased to 7.75% for the three months ended
March 31, 2000 from 7.24% for the three months ended March 31, 1999. The cost of
interest-bearing liabilities increased to 6.93% for the three months ended March
31, 2000, respectively, from 6.17% for the three months ended March 31, 1999,
respectively.
Individually, the net interest spread on collateral for collateralized
bonds decreased 19 basis points, from 102 basis points for the three months
ended March 31, 1999 to 83 basis points for the same period in 2000. This
decrease was primarily due to the increased borrowing cost during the first
quarter of 2000 which was partially offset by lower premium amortization caused
by decreased prepayments during the three months ended March 31, 2000 compared
to the same period in 1999. The net interest spread on securities decreased 362
basis points, from 98 basis points for the three months ended March 31, 1999 to
a negative 264 basis points for the three months ended March 31, 2000. This
decrease was primarily the result of increased borrowing costs on securities due
to both the increase in the average one-month LIBOR during the first quarter of
2000 as well as an increase in the interest spread on certain credit facilities
during the latter half of 1999 and the first quarter of 2000. The net interest
spread on other investments increased 568 basis points, from 171 basis points
for the three months ended March 31, 1999, to 739 basis points for the same
period in 2000, primarily due to the purchase of higher yielding property tax
receivables during 1999. The net interest spread on loans held for sale or
securitization remained fairly constant, decreasing only 9 basis points, from
232 basis points for the three months ended March 31, 1999, to 223 basis points
for the same period in 2000.
Interest Income and Interest-Earning Assets
Approximately $1.5 billion of the investment portfolio as of March 31, 2000
is comprised of loans or securities that have coupon rates which adjust over
time (subject to certain periodic and lifetime limitations) in conjunction with
changes in short-term interest rates. Approximately 66% of the ARM loans
underlying the ARM securities and collateral for collateralized bonds are
indexed to and reset based upon the level of six-month LIBOR; approximately 25%
are indexed to and reset based upon the level of the one-year Constant Maturity
Treasury (CMT) index. The following table presents a breakdown, by principal
balance, of the Company's collateral for collateralized bonds and ARM and fixed
mortgage securities by type of underlying loan. This table excludes other
derivative and residual securities, other securities, other investments and
loans held for sale or securitization.
<TABLE>
<CAPTION>
Investment Portfolio Composition (1)
($ in millions)
- --------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Other Indices
<S> <C> <C> <C> <C> <C>
LIBOR Based ARM CMT Based ARM Based ARM Loans Fixed-Rate Loans
Loans Loans Total
- --------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
1998, Quarter 2 $ 2,153.5 $ 1,159.8 $ 240.2 $ 1,467.0 $ 5,020.5
1998, Quarter 3 1,873.7 978.3 208.0 1,351.0 4,411.0
1998, Quarter 4 1,644.0 720.4 195.4 1,704.0 4,263.8
1999, Quarter 1 1,411.6 629.8 159.4 1,927.6 4,128.4
1999, Quarter 2 1,239.2 525.4 146.9 1,872.9 3,784.4
1999, Quarter 3 1,112.7 461.4 135.9 2,095.4 3,805.4
1999, Quarter 4 1,048.5 430.8 121.1 2,061.5 3,661.9
2000, Quarter 1 976.7 362.6 117.4 2,029.4 3,486.1
- --------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
<FN>
(1) Includes only the principal amount of collateral for collateralized bonds, ARM securities and fixed-rate mortgage
securities.
</FN>
</TABLE>
The average asset yield is reduced for the amortization of premiums, net of
discounts on the investment portfolio. As indicated in the table below, premiums
on the collateral for collateralized bonds, ARM securities, fixed-rate mortgage
securities at March 31, 2000 were $36.2 million, or approximately 1.01% of the
aggregate balance of collateral for collateralized bonds, ARM securities and
fixed-rate securities. Of this $36.2 million, $33.5 million relates to the
premium on multifamily and commercial mortgage loans that have prepayment
lockouts or yield maintenance for at least seven years. Amortization expense as
a percentage of principal paydowns has increased from 1.46% for the three months
ended March 31, 1999 to 1.64% for the same period in 2000. The principal
prepayment rate for the Company (indicated in the table below as "CPR Annualized
Rate") was approximately 18% for the three months ended March 31, 2000. CPR or
"constant prepayment rate" is a measure of the annual prepayment rate on a pool
of loans. Excluded from this table are the Company's loans held for sale, which
were generally written-down to market during the fourth quarter of 1999.
<TABLE>
<CAPTION>
Premium Basis and Amortization
($ in millions)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amortization
CPR Expense as a % of
Amortization Annualized Principal Principal Paydowns
Net Premium Expense Rate Paydowns
- -------------------------------------------------------------------------------------------------------------------------
1998, Quarter 2 $ 45.7 $ 7.0 36% $ 563.0 1.24%
1998, Quarter 3 39.0 6.3 40% 603.0 1.05%
1998, Quarter 4 77.8 5.7 41% 502.5 1.12%
1999, Quarter 1 65.4 5.9 38% 402.8 1.46%
1999, Quarter 2 60.7 4.8 30% 338.4 1.42%
1999, Quarter 3 45.4 3.4 28% 239.6 1.40%
1999, Quarter 4 38.3 2.2 20% 165.0 1.41%
2000, Quarter 1 36.2 2.0 18% 122.6 1.64%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Credit Exposures
The Company securitizes its loan production into collateralized bonds or
pass-through securitization structures. With either structure, the Company may
use overcollateralization, subordination, third-party guarantees, reserve funds,
bond insurance, mortgage pool insurance or any combination of the foregoing as a
form of credit enhancement. With all forms of credit enhancement, the Company
may retain a limited portion of the direct credit risk after securitization.
The following table summarizes the aggregate principal amount of collateral
for collateralized bonds and ARM and fixed-rate mortgage pass-through securities
outstanding; the direct credit exposure retained by the Company (represented by
the amount of overcollateralization pledged and subordinated securities owned by
the Company and rated below BBB by one of the nationally recognized rating
agencies), net of the credit reserves maintained by the Company for such
exposure; and the actual credit losses incurred for each quarter. Credit
reserves maintained by the Company and included in the table below included
third-party reimbursement guarantees which totaled $29.7 million at March 31,
2000. The table excludes any risks related to representations and warranties
made on loans funded by the Company and securitized in mortgage pass-through
securities generally funded prior to 1995. This table also excludes any credit
exposure on loans held for sale, funding notes and securities, and other
investments. The increase in net credit exposure as a percentage of the
outstanding loan principal balance from 3.72% at March 31, 1999 to 4.25% at
March 31, 2000 is related primarily to the credit exposure retained by the
Company on its manufactured housing securitization during September 1999 offset
partially by the sale of previously retained classes from two of the Company's
commercial loan securitization.
Credit Reserves and Actual Credit Losses
($ in millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding Loan Credit Exposure, Net Actual Credit Credit Exposure, Net of Credit
Principal Balance of Credit Reserves Losses Reserves to Outstanding Loan
Balance
- -----------------------------------------------------------------------------------------------------------------
1998, Quarter 2 $ 5,098.8 $ 120.1 $ 3.8 2.36%
1998, Quarter 3 4,440.2 132.4 6.4 2.98%
1998, Quarter 4 4,389.7 159.7 3.8 3.64%
1999, Quarter 1 4,340.8 161.6 4.3 3.72%
1999, Quarter 2 3,965.6 155.5 4.6 3.92%
1999, Quarter 3 3,949.2 194.5 5.3 4.93%
1999, Quarter 4 3,770.3 183.2 5.5 4.86%
2000, Quarter 1 3,731.9 158.7 4.8 4.25%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes single family mortgage loan, manufactured
housing loan and commercial mortgage loan delinquencies as a percentage of the
outstanding collateral balance for those securities in which Dynex REIT has
retained a portion of the direct credit risk. The delinquencies as a percentage
of the outstanding collateral balance has decreased to 1.72% at March 31, 2000
from 2.69% at March 31, 1999. The Company monitors and evaluates its exposure to
credit losses and has established reserves based upon anticipated losses,
general economic conditions and trends in the investment portfolio. As of March
31, 2000, management believes the credit reserves are sufficient to cover
anticipated losses which may occur as a result of current delinquencies
presented in the table below.
Delinquency Statistics (1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
<C>
90 days and over delinquent
60 to 90 days delinquent (2) Total
- -------------------------------------------------------------------------------------------------------------------------
1998, Quarter 2 0.24% 1.82% 2.06%
1998, Quarter 3 0.39% 1.73% 2.12%
1998, Quarter 4 0.25% 2.11% 2.36%
1999, Quarter 1 0.45% 2.24% 2.69%
1999, Quarter 2 0.30% 1.82% 2.12%
1999, Quarter 3 0.23% 1.72% 1.95%
1999, Quarter 4 0.27% 1.37% 1.64%
2000, Quarter 1 0.26% 1.46% 1.72%
- -------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes funding notes, other investments and loans held for sale or securitization.
(2) Includes foreclosures, repossessions and REO.
</FN>
</TABLE>
The following table summarizes the credit ratings for collateral for
collateralized bonds and securities held in the investment portfolio, presented
on a gross basis (i.e., the collateralized bonds are not netted against the
associated pledged collateral). This table excludes $7.3 million of other
derivative and residual securities (as the risk on such securities is primarily
prepayment-related, not credit-related), other investments and loans held for
sale or securitization. This table also excludes the funding notes, aggregating
$78.9 million which are not rated. The balance of the investments rated below A
are net of credit reserves and discounts. All balances exclude the related
mark-to-market adjustment on such assets. At March 31, 2000, securities with a
credit rating of AA or better were $3.0 billion, or 90.4% of the total.
<TABLE>
<CAPTION>
Investments by Credit Rating (1)
($ in millions)
- ------------------ ---------- ----------- ---------- ---------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Below Below
AAA/AA A BBB BBB AAA /AA A BBB BBB
Carrying Carrying Carrying Carrying Percent of Percent Percent Percent
Value Value Value Value Total of Total of Total of Total
- ------------------ ---------- ----------- ---------- ---------- ------------ ---------- ----------- ----------
1998, Quarter 2 $4,729.1 $ 138.5 $ 72.7 $ 7.7 95.6% 2.8% 1.5% 0.1%
1998, Quarter 3 4,126.6 139.3 73.3 5.4 95.0% 3.2% 1.7% 0.1%
1998, Quarter 4 3,815.6 206.2 97.6 14.4 92.3% 5.0% 2.4% 0.3%
1999, Quarter 1 3,614.8 219.2 118.8 24.0 90.9% 5.5% 3.0% 0.6%
1999, Quarter 2 3,282.2 219.4 118.8 21.7 90.1% 6.0% 3.3% 0.6%
1999, Quarter 3 3,278.1 242.6 133.0 20.7 89.2% 6.6% 3.6% 0.6%
1999, Quarter 4 3,154.4 191.4 123.3 19.8 90.4% 5.5% 3.5% 0.6%
2000, Quarter 1 3,024.1 191.6 111.9 19.5 90.4% 5.7% 3.3% 0.6%
- ------------------ ---------- ----------- ---------- ---------- ------------ ---------- ----------- ----------
<FN>
(1) Carrying value does not include funding notes, derivative and residual securities, other investments and loans
held for sale or securitization. Balances also exclude the mark-to-market adjustment. Carrying value also
excludes $224.9 million of overcollateralization at March 31, 2000.
</FN>
</TABLE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. In June 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No, 133" ("FAS No. 137"). FAS
No. 137 amends FAS No. 133 to defer its effective date to all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company is in the process of
determining the impact of adopting FAS No. 133.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations from a variety of sources. These
sources include cash flow generated from the investment portfolio, including net
interest income and principal payments and prepayments, common stock offerings
through the dividend reinvestment plan, short-term warehouse lines of credit
with commercial and investment banks, repurchase agreements and the capital
markets via the asset-backed securities market (which provides long-term
non-recourse funding of the investment portfolio via the issuance of
collateralized bonds). Historically, cash flow generated from the investment
portfolio has satisfied its working capital needs, and the Company has had
sufficient access to capital to fund its loan production operations, on both a
short-term (prior to securitization) and long-term (after securitization) basis.
However, market conditions since October 1998 have substantially reduced the
Company's access to capital. The Company is currently unable to access
additional short-term warehouse lines of credit to replace maturing lines, and
is unable to efficiently access the asset-backed securities market to meet its
long-term funding needs. Largely as a result of its inability to access
additional capital, the Company sold its manufactured housing and model home
purchase/leaseback operations in 1999, and ceased issuing new commitments in its
commercial lending operations. The Company is attempting to substantially reduce
both its short-term debt and capital requirements. The Company's current focus
is the repayment of its recourse debt, which includes substantially all of the
short-term warehouse lines of credit and repurchase agreements.
A substantial portion of the assets are pledged to secure indebtedness
incurred by Dynex REIT. Accordingly, those assets would not be available for
distribution to any general creditors or the stockholders of Dynex REIT in the
event of the liquidation, except to the extent that the liquidation proceeds of
such assets exceeds the amount of the indebtedness they secure.
As more fully described below, the Company was in default of certain
covenants in its secured credit facilities and its unsecured senior notes issued
in September 1994. The Company has not secured waivers for all of the defaults;
however, none of the respective lenders have accelerated amounts outstanding as
of that date as a result of the defaults. See further discussion below and Note
5 in the accompanying consolidated financial statements.
Non-recourse Debt
Dynex REIT, through limited-purpose finance subsidiaries, has issued
non-recourse debt in the form of collateralized bonds to fund the majority of
its investment portfolio. The obligations under the collateralized bonds are
payable solely from the collateral for collateralized bonds and are otherwise
non-recourse to Dynex REIT. Collateral for collateralized bonds are not subject
to margin calls. The maturity of each class of collateralized bonds is directly
affected by the rate of principal prepayments on the related collateral. Each
series is also subject to redemption according to specific terms of the
respective indentures, generally when the remaining balance of the bonds equals
35% or less of the original principal balance of the bonds. At March 31, 2000,
Dynex REIT had $3.2 billion of collateralized bonds outstanding as compared to
$3.3 billion at December 31, 1999.
Recourse Debt
Secured. At March 31, 2000, Dynex REIT had four committed credit facilities
aggregating $699 million, comprised of (i) a $195 million credit line agented by
Chase Bank of Texas, expiring on May 29, 2000, from a consortium of commercial
banks primarily for the warehousing of multifamily construction and permanent
loans (including providing the letters of credit for tax-exempt bonds), (ii) a
$400 million credit line, expiring on May 19, 2000 from Morgan Stanley Capital,
Inc. primarily for the warehousing of permanent loans on multifamily and
commercial properties, (iii) a $100 million credit line, expiring on May 10,
2000 from Diawa Finance Corp. for the warehousing of the funding notes and
securities, and (iv) a $4 million credit line, expiring on December 15, 2000,
from Residential Funding Corporation for the warehousing of model homes not
included in the sale of the related business. While Dynex REIT has received bids
for the sale of a substantial portion of the assets that secure the credit lines
expiring on May 19, 2000 and May 29, 2000, it is unlikely that Dynex REIT will
be able to payoff such credit lines by the respective maturity dates. Although,
the Company will seek extensions to the maturity dates, there can be no
assurances that the lenders will agree to such extensions. In the event that the
lenders declare an event of default, the underlying credit line agreements
provide for the liquidation of the pledged collateral. In such a scenario it is
likely that the Company will suffer losses on the sale of the collateral. The
credit facility with Diawa Finance Corp. was fully prepaid on May 12, 2000 with
the proceeds obtained from the securitization of the funding note collateral.
The above lines of credit include various representations and covenants.
Dynex REIT was in violation of certain covenants on the credit lines expiring on
May 19, 2000 and May 29, 2000 relating primarily to minimum net worth and
minimum senior unsecured ratings requirements, and the receipt of a going
concern opinion from its auditors. Dynex REIT has received waivers from Morgan
Stanley for the uncured covenant violations. Dynex REIT has also not received
waivers for any uncured covenant violations from the Chase Bank of Texas
syndicated line ("Chase Bank Syndicate") on the credit line expiring on May 29,
2000. The Chase Bank Syndicate has not formally notified Dynex REIT in writing
as required by the loan documentation, that it has (i) terminated its commitment
to lend or (ii) declared all or a portion of the loan due and payable. The
Company's recourse credit facilities generally contain cross-default provisions
whereby a default under any one credit facility is a default on each of the
other credit facilities.
The following table summarizes the committed credit facilities at March 31,
2000 expiring in 2000. At March 31, 2000, Dynex REIT had $222.8 million
outstanding under its committed credit facilities expiring in 2000.
Committed Credit Facilities
At March 31, 2000
($ in millions)
<TABLE>
<CAPTION>
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------------
<S> <C> <C> <C> <C>
Current Balance of Contracted Expiration
Outstanding Pledged of Facility
Collateral Type Credit Limit Borrowings Collateral
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------------
Various (primarily commercial loans) $ 195.0 $113.2 $128.1 May 29, 2000
Commercial loans 400.0 71.9 122.6 May 19, 2000
Funding Notes and Securities 100.0 35.1 104.2 May 10, 2000
Model homes 3.7 2.8 4.0 December 15, 2000
----------------- ---------------- ----------------- -----------------------
698.7 223.0 358.9
Less: deferred facility expenses - (0.2) -
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------------
Total $ 698.7 $ 222.8 $358.9
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------------
</TABLE>
Dynex REIT also uses repurchase agreements to finance a portion of its
investments, which generally have maturities of thirty-days or less. Repurchase
agreements allow Dynex REIT to sell investments for cash together with a
simultaneous agreement to repurchase the same investments on a specified date
for a price which is equal to the original sales price plus an interest
component. At March 31, 2000, outstanding obligations under all repurchase
agreements totaled $83.7 million compared to $163.0 million at December 31,
1999. As of May 15, 2000, Dynex REIT had repurchase agreements outstanding of
$51.7 million, all with one counterparty. Dynex REIT has provided collateral
worth an estimated fair market value of $58.4 million to support the amount of
the repurchase agreement outstanding. All repurchase agreements with such
counterparty are on an "overnight" or one-day basis. The following table
summarizes the outstanding balances of repurchase agreements by credit rating of
the related assets pledged as collateral to support such repurchase agreements
as of each respective quarter end. The table excludes repurchase agreements used
to finance loans held for sale or securitization.
<TABLE>
<CAPTION>
Repurchase Agreements by Rating of Investments Financed
($ in millions)
- --------------------------- -------------- --------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
AAA AA A BBB Below BBB Total
- --------------------------- -------------- --------------- --------------- --------------- --------------- --------------
1998, Quarter 3 $ 560.8 $ 91.2 $ 58.7 $ 51.9 $ - $ 762.6
1998, Quarter 4 124.5 109.5 91.4 65.6 - 391.0
1999, Quarter 1 86.3 63.2 64.2 57.9 - 271.6
1999, Quarter 2 79.8 31.7 49.5 55.2 - 216.2
1999, Quarter 3 375.0 71.6 76.1 75.6 - 598.3
1999, Quarter 4 77.9 14.9 4.4 65.3 0.5 163.0
2000, Quarter 1 34.9 13.8 4.4 30.2 0.4 83.7
- --------------------------- -------------- --------------- --------------- --------------- --------------- --------------
</TABLE>
Increases in short-term interest rates, long-term interest rates or market
risk could negatively impact the valuation of securities and may limit Dynex
REIT's borrowing ability or cause various lenders to initiate margin calls for
securities financed using repurchase agreements. Additionally, certain
investments are classes of securities rated AA, A or BBB that are subordinated
to other classes from the same series of securities. Such subordinated classes
may have less liquidity than securities that are not subordinated and the value
of such classes is more dependent on the credit rating of the related insurer or
the credit performance of the underlying loans or receivables. In instances of a
downgrade of an insurer or the deterioration of the credit quality of the
underlying collateral, Dynex REIT may be required to sell certain investments in
order to maintain liquidity. If required, these sales could be made at prices
lower than the carrying value of the assets, which could result in losses.
Unsecured. Since 1994, Dynex REIT has issued three series of unsecured
notes payable totaling $150 million. These notes payable had an outstanding
balance at March 31, 2000 of $105.8 million. The Company has $97.3 million
outstanding of its July 2002 senior notes (the "2002 Notes") and $8.5 million
outstanding on notes issued in September 1994 (the "1994 Notes"). Effective May
15, 1999, the Company amended the 1994 Notes. In return for certain covenant
relief related to the fixed-charge coverage requirements of the 1994 Notes, the
Company agreed to (i) convert the principal amortization of the 1994 Notes from
annual to monthly and (ii) shorten the remaining principal amortization period
from 30 months to 16 months. Monthly amortization for the 1994 Notes through
August 2000 approximates $1.7 million per month. As of March 31, 2000, the
Company was in violation of certain covenants in the 1994 Notes including the
minimum net worth requirement and the covenant requiring an unqualified audit
opinion. These violations resulted in an immediate event of default; however,
the holders of the 1994 Notes have not accelerated the remaining amounts due.
The 2002 Notes also contain covenants which provide for the acceleration of
amounts outstanding under the 2002 Notes should Dynex REIT default under other
credit agreements in excess of $10 million, and such amounts outstanding under
the other credit agreements are accelerated by the respective lender.
Total recourse debt decreased to $420.7 million at March 31, 2000 from
$537.1 million at December 31, 1999. This decrease was primarily due to the sale
of $50.1 million of retained collateralized bonds and $25.0 million of loans,
during the first quarter of 2000, which had been financed with $79.8 million of
repurchase agreements and $14.1 million of notes payable, respectively. Also
during the first quarter of 2000, Dynex REIT paid off approximately $22.4
million of notes payable as a result of $23.9 million of paydowns on
investments.
Total Recourse Debt
($ in millions)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Total Recourse Debt to Fixed Charge Coverage
Total Recourse Debt Equity Ratio
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998, Quarter 2 $ 1,390.3 256% 1.48%
1998, Quarter 3 1,614.5 321% 1.28%
1998, Quarter 4 1,032.7 228% 0.27%
1999, Quarter 1 781.4 173% 1.14%
1999, Quarter 2 880.0 201% 1.28%
1999, Quarter 3 1,215.0 285% 1.02%
1999, Quarter 4 537.1 165% (2.61%)
2000, Quarter 1 420.7 137% (0.20%)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Table 1
Net Balance Sheet (1)
($ in thousands)
<S> <C> <C>
March 31, 2000 December 31,
1999
---------------- -----------------
----------------
ASSETS
Investments:
Collateral for collateralized bonds $ 3,552,431 $ 3,700,714
Less: Collateralized bonds issued (3,358,916) (3,498,883)
---------------- -----------------
----------------
Net investment in collateralized bonds 193,515 201,831
Collateralized bonds retained 115,404 215,062
Securities 110,257 127,711
Other investments 39,599 48,927
Loans held for sale 225,796 232,384
---------------- -----------------
684,571 825,915
Investment in and advances to Dynex Holding, Inc. 8,112 4,814
Cash, substantially restricted 53,584 54,433
Accrued interest receivable 2,399 3,651
Other assets 16,899 19,705
----------------
================ =================
$ 765,565 $ 908,518
================ =================
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase agreements $ 83,713 $ 163,046
Notes payable 336,987 374,052
Accrued interest payable 3,109 6,303
Other liabilities 34,919 40,045
---------------- -----------------
458,728 583,446
---------------- -----------------
----------------
Shareholders' Equity:
Preferred stock, par value $.01 per share,
50,000,000 shares authorized:
9.75% Cumulative Convertible Series A
1,309,061 issued and outstanding 29,900 29,900
9.55% Cumulative Convertible Series B
1,912,434 issued and outstanding 44,767 44,767
9.73% Cumulative Convertible Series C
1,840,000 issued and outstanding 52,740 52,740
Common stock, par value $.01 per share,
100,000,000 shares authorized,
11,444,188 and 11,444,099 issued and outstanding, respectively 114 114
Additional paid-in capital 351,995 351,995
Accumulated other comprehensive loss (56,038) (48,507)
Accumulated deficit (116,641) (105,937)
----------------
---------------- -----------------
306,837 325,072
----------------
================ =================
$ 765,565 $ 908,518
================ =================
<FN>
(1) This presents the balance sheet where the collateralized bonds are "netted" against the collateral for
collateralized bonds. This presentation better illustrates the Company's net investment in the collateralized
bonds and the collateralized bonds retained in its investment portfolio.
</FN>
</TABLE>
FORWARD-LOOKING STATEMENTS
Certain written statements in this Form 10-Q made by the Company, that are
not historical fact constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements may
involve factors that could cause the actual results of the Company to differ
materially from historical results or from any results expressed or implied by
such forward-looking statements. The Company cautions the public not to place
undue reliance on forward-looking statements, which may be based on assumptions
and anticipated events that do not materialize. The Company does not undertake,
and the Securities Litigation Reform Act specifically relieves the Company from,
any obligation to update any forward-looking statements.
Factors that may cause actual results to differ from historical results or
from any results expressed or implied by forward-looking statements include the
following:
Economic Conditions. The Company is affected by general economic
conditions. The risk of defaults and credit losses could increase during an
economic slowdown or recession. This could have an adverse effect on the
Company's financial performance and the performance on the Company's securitized
loan pools.
Capital Resources. The Company relies on various credit facilities and
repurchase agreements with certain commercial and investment banking firms to
help meet the Company's short-term funding needs. The Company is in violation of
numerous covenants under its existing credit facilities. The Company's access to
alternative or additional sources of financing has been significantly reduced.
Capital Markets. The Company relies on the capital markets for the sale
upon securitization of its collateralized bonds or other types of securities.
While the Company has historically been able to sell such collateralized bonds
and securities into the capital markets, the Company's access to capital markets
in the future has been substantially reduced.
Interest Rate Fluctuations. The Company's income depends on its ability to
earn greater interest on its investments than the interest cost to finance these
investments. Interest rates in the markets served by the Company generally rise
or fall with interest rates as a whole. A majority of the loans currently
originated by the Company are fixed-rate. The profitability of a particular
securitization may be reduced if interest rates increase substantially before
these loans are securitized. In addition, the majority of the investments held
by the Company are variable rate collateral for collateralized bonds and
adjustable-rate investments. These investments are financed through non-recourse
long-term collateralized bonds and recourse short-term repurchase agreements.
The net interest spread for these investments could decrease during a period of
rapidly rising short-term interest rates, since the investments generally have
periodic interest rate caps and the related borrowing have no such interest rate
caps.
Defaults. Defaults by borrowers on loans retained by the Company may have
an adverse impact on the Company's financial performance, if actual credit
losses differ materially from estimates made by the Company at the time of
securitization. The allowance for losses is calculated on the basis of
historical experience and management's best estimates. Actual defaults may
differ from the Company's estimate as a result of economic conditions. Actual
defaults on ARM loans may increase during a rising interest rate environment.
The Company believes that its reserves are adequate for such risks.
Prepayments. Prepayments by borrowers on loans securitized by the Company
may have an adverse impact on the Company's financial performance. Prepayments
are expected to increase during a declining interest rate or flat yield curve
environment. The Company's exposure to rapid prepayments is primarily (i) the
faster amortization of premium on the investments and, to the extent applicable,
amortization of bond discount, and (ii) the replacement of investments in its
portfolio with lower yield securities.
Competition. The financial services industry is a highly competitive
market. Increased competition in the market could adversely affect the Company.
Regulatory Changes. The Company's business is subject to federal and state
regulation which, among other things require the Company to maintain various
licenses and qualifications and require specific disclosures to borrowers.
Changes in existing laws and regulations or in the interpretation thereof, or
the introduction of new laws and regulations, could adversely affect the
performance of the Company's securitized loan pools.
Significant Risks and Uncertainties. See Note 2 to the Company's financial
statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument due to fluctuations in
interest and foreign exchange rates and in equity and commodity prices. Market
risk is inherent to both derivative and non-derivative financial instruments,
and accordingly, the scope of the Company's market risk management extends
beyond derivatives to include all market risk sensitive financial instruments.
As a financial services company, net interest income comprises the primary
component of the Company's earnings. As a result, the Company is subject to risk
resulting from interest rate fluctuations to the extent that there is a gap
between the amount of the Company's interest-earning assets and the amount of
interest-bearing liabilities that are prepaid, mature or reprice within
specified periods. The Company's strategy is to mitigate interest rate risk
through the creation of a diversified investment portfolio of high quality
assets that, in the aggregate, preserves the Company's capital base while
generating stable income in a variety of interest rate and prepayment
environments. 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 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 assumptions. While certain investments may perform poorly in an
increasing or decreasing interest rate environment, other 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.
The Company's Portfolio Executive Committee ("PEC"), which includes
executive management representatives, monitors and manages the interest rate
sensitivity and repricing characteristics of the balance sheet components
consistent with maintaining acceptable levels of change in both the net
portfolio value and net interest income. The Company's exposure to interest rate
risk is reviewed on a monthly basis by the PEC and quarterly by the Board of
Directors.
The Company utilizes a monthly static cash flow and yield projection under
interest rate scenarios detailed below. While the Company may use such tools,
there can be no assurance the Company will accomplish the goal of adequately
managing the risk profile of the investment portfolio.
The Company measures the sensitivity of its net interest income to changes
in interest rates. Changes in interest rates are defined as instantaneous,
parallel, and sustained interest rate movements in 100 basis point increments.
The Company estimates its interest income for the next twelve months assuming no
changes in interest rates from those at period end. Once the base case has been
estimated, cash flows are projected for each of the defined interest rate
scenarios. Those scenario results are then compared against the base case to
determine the estimated change to net interest income.
The following table summarizes the Company's net interest margin
sensitivity analysis as of March 31, 2000. This analysis represents management's
estimate of the percentage change in net interest margin given a parallel shift
in interest rates. The "Base" case represents the interest rate environment as
it existed as of March 31, 2000. The analysis is heavily dependent upon the
assumptions used in the model. The effect of changes in future interest rates,
the shape of the yield curve or the mix of assets and liabilities may cause
actual results to differ from the modeled results. In addition, certain
financial instruments provide a degree of "optionality." The model considers the
effects of these embedded options when projecting cash flows and earnings. The
most significant option affecting the Company's portfolio is the borrowers'
option to prepay the loans. The model uses a dynamic prepayment model that
applies a Constant Prepayment Rate ranging from 5.5% to 70.1% based on the
projected incentive to refinance for each loan type in any given period. While
the Company's model considers these factors, the extent to which borrowers
utilize the ability to exercise their option may cause actual results to
significantly differ from the analysis. Furthermore, its projected results
assume no additions or subtractions to the Company's portfolio, and no change to
the Company's liability structure. Historically, the Company has made
significant changes to its assets and liabilities, and is likely to do so in the
future.
Basis Point % Change in Net
Increase (Decrease) Interest Margin from
in Interest Rates Base Case
----------------------- -----------------------
+200 (33.56)%
+100 (17.12)%
Base -
-100 13.50%
-200 15.53%
The Company's investment policy sets forth guidelines for assuming interest
rate risk. The investment policy stipulates that given a 200 basis point
increase or decrease in interest rates over a twelve month period, the estimated
net interest margin may not change by more than 25% of current net interest
margin during the subsequent one year period. Based on the projections above,
the Company is not in compliance with its stated policy regarding the interest
rate sensitivity of net interest margin if interest rates increase 200 basis
points over a twelve month period.
Approximately $1.5 billion of the Company's investment portfolio as of
March 31, 2000 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. Approximately 66% and 25%
of the ARM loans underlying the Company's ARM securities and collateral for
collateralized bonds are indexed to and reset based upon the level of six-month
LIBOR and one-year CMT, respectively.
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 or 2%
every twelve 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
that 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 proceeds or costs of interest rate swap, cap or
floor agreements.
Because of the 1% or 2% 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. Liquidity risk also exists with all other investments
pledged as collateral for repurchase agreements, but to a lesser extent.
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 interest rate agreements are used by the
Company to help mitigate the risk to the investment portfolio of fluctuations in
interest rates that would ultimately impact net interest income. To help protect
the Company's net interest income in a rising interest rate environment, the
Company has purchased interest rate caps with a notional amount of $351 million,
which help reduce the Company's exposure to interest rate risk rising above the
lifetime interest rate caps on ARM securities and loans. These interest rate
caps provide the Company with additional cash flow should the related index
increase above the contracted rates. The contracted rates on these interest rate
caps are based on one-year CMT. These interest rate cap agreements expire 2001
to 2003. The Company will also utilize interest rate swaps to manage its
exposure to changes in financing rates of assets and to convert floating rate
borrowings to fixed rate where the associated asset financed is fixed rate.
These interest rate swap agreements expire in 2001. Interest rate caps and
interest rate swaps that the Company uses to manage certain interest rate risks
represent protection for the earnings and cash flow of the investment portfolio
in adverse markets. To date, short term interest rates have not risen at the
speed or to the extent such that the protective cashflows provided by the caps
and swaps have been realized.
The Company may also utilize futures and options on futures to moderate the
risks inherent in the financing of a portion of its investment portfolio with
floating-rate repurchase agreements. The Company uses these instruments to
synthetically lengthen the terms of repurchase agreement financing, generally
from one to three or six months. Interest rate futures and option agreements
have historically provided the Company a means of essentially locking-in
borrowing costs at specified rates for a specified period of time. Under these
contracts, the Company will receive additional cash flow if the underlying index
increases above contracted rates, mitigating the net interest income loss that
results from the higher repurchase agreement rates The Company will pay
additional cash flow if the underlying index decreases below contracted rates.
The Company has not utilized futures or options on futures since 1997, as they
primarily benefit the Company when expected rates as measured by the forward
yield-curve are less than current cash market rates.
Interest rate caps and interest rate swaps that the Company utilizes to
manage certain interest rate risks represent protection for the earnings and
cashflow of the investment portfolio in adverse markets. To date, market
conditions have not been adverse such that the caps and swaps have been
utilized.
The remaining portion of the Company's investments portfolio as of March
31, 2000, approximately $2.4 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,
and (ii) equity, which in the aggregate totals approximately $1.8 billion as of
the same date. Overall, the Company's interest rate risk is related both to the
rate of change in short term interest rates, and to the level of short term
interest rates.
ART II. OTHER INFORMATION
Item 1. Legal Proceedings
On February 8, 1999, AutoBond Acceptance Corporation ("AutoBond"), AutoBond
Master Funding Corporation V ("Funding"), and its three principal common
shareholders (collectively, the "Plaintiffs"") commenced an action in the
District Court of Travis County, Texas (250th Judicial District) against the
Company and James Dolph (collectively, the "Defendants") alleging that the
Company breached the terms of the Credit Agreement, dated June 9, 1998, by and
among AutoBond, Funding and the Company. The terms of the Credit Agreement
provided for the purchase by the Company of funding notes issued by Funding, and
collateralized by automobile installment contracts ("Auto Contracts") acquired
by AutoBond. The Company suspended purchasing the funding notes in February 1999
on grounds that AutoBond and Funding had violated certain provisions of the
Credit Agreement. The Plaintiffs also alleged that the Defendants conspired to
misrepresent and mischaracterize AutoBond's credit underwriting criteria and its
compliance with such criteria with the intention of interfering and causing
actual damage to AutoBond's business, prospective business and contracts.
On August 26, 1999, the District Court of Travis County ordered AutoBond
and Funding, through a temporary injunction action, to cooperate with the
Company and permit the transfer of the servicing of the Auto Contracts from
AutoBond to a third party servicer selected by the Company. The servicing was
transferred on September 3, 1999.
On March 9, 2000, a jury in the AutoBond action returned a verdict in favor
of the Plaintiffs, and awarded AutoBond and Funding $18.7 million in direct lost
profits and $50.5 million in lost future profits, for a total of $69.2 million.
The Company filed on March 24, 2000 with the Court motions to set aside the
verdict and to reduce the amount of the verdict, and on the same date, AutoBond
filed a motion to the court to enter judgment. On April 17, 2000, in response to
the various motions filed, the judge presiding over the matter in Travis County
reduced the $69.2 million verdict awarded by the jury to approximately $27
million (which includes estimated prejudgment interest). As a result, the
Company recorded a litigation provision of $27.0 million for the amount of the
reduced judgment. At a subsequent hearing on April 17, 2000, the Court further
reduced the award to $23.6 million including prejudgment interest. AutoBond has
accepted this judgment, as reduced by the trial court, of $23.6 million. On May
15, 2000, the Court denied the Company's motion to post alternative security in
lieu of an appeal bond in order to appeal the Court's earlier judgment in favor
of AutoBond. To date the Company has been unable to obtain an appeal bond The
Court stayed enforcement of the judgment for ten days to allow the Company to
appeal the Court's action to the Austin Court of Appeals. The Company intends to
appeal the Court's action. In addition, the Court ordered the parties to resume
mediation in an effort to either settle the case or agree on alternative
security. The Court also reduced the amount of the judgment by $270,000 to
approximately $23.3 million.
The Company is also subject to other lawsuits or claims which arise in the
ordinary course of its business, some of which seek damages in amounts which
could be material to the financial statements. Although no assurance can be
given with respect to the ultimate outcome of any such litigation or claim, the
Company believes the resolution of such lawsuits or claims will not have a
material effect on the Company's consolidated balance sheet, but could
materially affect consolidated results of operations in a given year.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNEX CAPITAL, INC.
By: /s/ Thomas H. Potts
Thomas H. Potts, President
(authorized officer of registrant)
/s/ Stephen J. Benedetti
Stephen J. Benedetti, Treasurer and Controller
(principal accounting officer)
Dated: May 19, 2000
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<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
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127,407
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