10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 14, 2000
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 September 30, 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.)
4551 Cox Road, Suite 300, 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.
|X| Yes |_| No
On October 31, 2000, the registrant had 11,446,206 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 September 30, 2000 and
December 31,
1999..............................................................3
Consolidated Statements of Operations for the three and nine months
ended September 30, 2000 and
1999..............................................................4
Consolidated Statement of Shareholders' Equity for
the nine months ended September 30,
2000..............................................................5
Consolidated Statements of Cash Flows for
the nine months ended September 30, 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..........32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................35
Item 2. Changes in Securities and Use of Proceeds...........................35
Item 3. Defaults Upon Senior Securities.....................................35
Item 4. Submission of Matters to a Vote of Security Holders.................35
Item 5. Other Information...................................................35
Item 6. Exhibits and Reports on Form 8-K....................................36
SIGNATURES...................................................................37
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2000
(amounts in thousands)
DYNEX CAPITAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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"). While the Company was actively originating loans, the operations
for the loan production was primarily conducted through Dynex Holding, Inc.
("DHI"), a taxable affiliate of Dynex REIT. Currently the Company's property tax
receivable operations are conducted through DHI. 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 this 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 September 30, 2000, the Consolidated Statements of Operations
for the three and nine months ended September 30, 2000 and 1999, the
Consolidated Statement of Shareholders' Equity for the nine months ended
September 30, 2000, the Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 and related notes to consolidated
financial statements are unaudited. Operating results for the nine months ended
September 30, 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 - SUBSEQUENT EVENT
On November 7, 2000, the Company and California Investment Fund, LLC
("CIF") entered into an Agreement and Plan of Merger, dated as of November 7,
2000 (the "Merger Agreement"), by and among, the Company, CIF and DCI
Acquisition Corporation, a newly created subsidiary of CIF. The Merger Agreement
provides for CIF to acquire 100% of the equity of the Company for a purchase
price of $90,000 in cash. CIF will acquire the common stock of the Company for a
price of $2.00 per share, the Series A Preferred Stock of the Company for a
price of $12.07 per share, the Series B Preferred Stock of the Company for a
price of $12.32 per share and the Series C Preferred Stock of the Company for a
price of $15.08 per share, less any dividends paid or declared on any such
shares.
The transaction is expected to close in the first quarter of 2001, subject
to the approval of the Company's shareholders and customary closing conditions.
The transaction is also conditioned upon CIF securing necessary financing and
the consent of the holders of the Company's senior notes. Regarding the senior
notes, CIF has thirty days from the date of the Merger Agreement to obtain any
necessary consents. In addition, CIF must confirm its financing commitments
prior to the Company filing with the Securities and Exchange Commission the
preliminary proxy statement relating to the transaction and prior to the mailing
of the merger proxy to the Company's shareholders.
NOTE 3 -- 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
and continuing into 2000, the Company's access to these sources of financing was
substantially impaired. As a result of this environment, in order to lower the
Company's capital requirements and reduce the need for short-term financing, the
Company sold both its manufactured housing lending operations and model home
purchase/leaseback business during 1999, and decided not to extend existing
forward commitments on commercial mortgage loans. In addition, in order to repay
outstanding recourse borrowing obligations, and in some cases in lieu of
securitization, the Company decided to sell as whole loans its commercial loans
held in inventory and certain other securities. The sale of the two production
operations has significantly lowered the Company's capital requirements and
reduced 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, and
the lack of access to capital in a cost effective manner, are expected to
continue to hamper the Company's ability to compete profitably in the
marketplace for at least the balance of the year.
The Company has recourse debt of approximately $143,403 as of September 30,
2000, of which $40,111 comes due in 2000 (see Note 7, Recourse Debt). Given the
Company's operating performance and prospects, 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. This lack of willingness to
extend credit has forced the Company to liquidate a number of its investments,
in some cases at terms less favorable than had the Company been able to find
alternative funding sources for these investments. In addition, as discussed in
Note 7, the Company's facility with Chase Bank of Texas expired on October 31,
2000. The Company and the bank group are in discussion on an extension of the
facility to January 31, 2001; however, there can be no assurance that the
Company will receive such an extension. Approximately $75,764 of letters of
credit have been issued under the facility, and these letters of credit are
secured by tax-exempt bonds which are secured by first mortgage loans on
multifamily property, as well as additional collateral pledged by the Company.
The senior unsecured notes due July 2002 (the "2002 Notes"), with an
outstanding balance of $97,250 at September 30, 2000, contain covenants which
provide for the acceleration of amounts outstanding should Dynex REIT default
under other credit agreements in amounts in excess of $10,000, and such amounts
outstanding under the other credit agreements are accelerated by the respective
lender. No such defaults or accelerations exist as of September 30, 2000.
The 2002 Notes also include covenants restricting dividend payments by
Dynex REIT. Generally, Dynex REIT may make dividend payments to the extent such
payments are necessary for the Company to maintain REIT status. The Company may
also declare and pay dividends on the Preferred Stock provided that for the four
previous fiscal quarters, Dynex REIT meets certain coverage requirements. The
Company has failed to meet these coverage requirements for the third quarter
2000, and expects to continue to fail these coverage requirements for the
balance of the year.
As of September 30, 2000, the Company also has $39,672 outstanding under
repurchase agreements substantially all with one counterparty, which amount is
collateralized with securities having an estimated market value in excess of
$60,000.
NOTE 4--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
("SARs"), 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 and nine months
ended September 30, 2000 and 1999.
NOTE 5 -- 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 September 30, 2000
and December 31, 1999, and the related average effective interest rates:
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, manufactured housing installment loans
secured by either a UCC filing or a motor vehicle title and fixed-rate
automobile installment contracts. 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.
During the nine months ended September 30, 2000, Dynex REIT securitized
$71,209 of collateral, through the issuance of one series of collateralized
bonds. The collateral consisted of fixed-rate funding notes and securities
secured by fixed-rate automobile installment contracts acquired by AutoBond
Acceptance Corporation ("AutoBond"). The securitization was accounted for as a
financing of the underlying collateral pursuant to Statement of Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("FAS No. 125") as Dynex REIT retained call
rights which were substantially in excess of a clean-up call as defined by this
accounting standard. The funding notes were previously classified as Securities
in the Company's financial statements. As a result of the settlement of the
AutoBond litigation in June 2000 (see Note 10), the Company received 100% of the
outstanding stock of the entities which issued the funding notes and securities,
and which owns all of the underlying automobile installment contracts (the
"AutoBond Entities"). These entities are included in the consolidated financial
statements of the Company. On November 7, 2000, the Company completed the sale
of all of the underlying automobile installment contracts to a third party. In
order to effect the sale of the contracts, the Company collapsed the
collateralized bond and funding note structures. The Company recorded a loss
during the third quarter of 2000 relating to the automobile contracts, based on
the agreed-upon sales price for the contracts.
Securities. Funding Notes and Securities consisted of fixed-rate funding
notes and securities secured by fixed-rate automobile installment contracts
acquired 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
$34,448 were sold during the nine months ended September 30, 2000 for an
aggregate loss of $13,892. The specific identification method is used to
calculate the basis of securities sold. Loss on sale of investments at September
30, 2000 also includes realized losses of $16,296 related to the sale of
$268,732 of commercial loans during the nine months ended September 30, 2000. In
addition, as discussed in Note 10, the Company was party to various conditional
bond repurchase agreements whereby the Company had the option to purchase
$167,800 of such tax-exempt bonds secured by multifamily mortgage loans expiring
in June. The Company did not exercise this option and the counterparty to the
agreement retained $30,284 in cash collateral as settlement as provided for in
the related agreements. The Company recorded a charge against earnings of
$30,284 as a result during the nine months ended September 30, 2000. In
addition, Dynex REIT recorded a loss during the third quarter of 2000 relating
to the automobile contracts of $746 as a result of entering into a sale
agreement during the third quarter of 2000 to sell these automobile contracts.
The sale was completed during the fourth quarter of 2000.Gain on sale of
investments for the nine months ended September 30, 1999 includes (i) realized
losses of $3,413 related to the sale of $22,062 of commercial loans (ii)
realized gains of $4,176 on various derivative trading positions entered into
during the nine months ended September 30, 1999 and (iii) realized losses of
$1,108 related to the sale of $18,540 of securities during the nine months ended
September 30, 1999.
During the nine months ended September 30, 2000, Dynex REIT also recognized
losses of $18,447 primarily related to the permanent impairment in the carrying
value of certain securities and the accrual of losses related to contingent
obligations on its off-balance sheet tax-exempt bond positions. As a result of
the receipt of 100% of the outstanding stock of the AutoBond Entities in
connection with the settlement of the AutoBond litigation, Dynex REIT recorded
permanent impairment charges of $15,036 to record the underlying automobile
installment contracts at their current fair market value. The market value for
these automobile contracts was based on management's estimate. Losses on
contingent obligations were accrued related to Dynex REIT's performance
obligations as "funding facility issuer" on approximately $73,609 of tax-exempt
bonds which Dynex REIT expects to settle during the fourth quarter of 2000 or
the first quarter of 2001.
NOTE 6 -- USE OF ESTIMATES
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 discount rates, prepayment rates and credit loss assumptions
established by management.
Collateral for collateralized bonds make up a significant portion of Dynex
REIT's investments. The estimate of fair value for collateral for collateralized
bonds is determined by calculating the present value of the projected cash flows
of the instruments, using discount rates, prepayment rate assumptions and credit
loss assumptions established by management. The discount rate used in the
determination of fair value of the collateral for collateralized bonds was 16%
at September 30, 2000. Prepayment rate assumptions at September 30, 2000 were
generally at a "constant prepayment rate" or CPR of 28% for securities secured
by single family mortgage loan collateral, and a CPR equivalent of 7% for
securities secured by manufactured housing loan collateral. Commercial mortgage
loan collateral was generally assumed to prepay at the average expiration date
of prepayment lock-out periods. The loss assumptions utilized vary for each
series of collateral of collateralized bonds, depending on the collateral
pledged. The cash flows for the collateral for collateralized bonds were
projected to the estimated date that the security can be called and retired by
the Company, which is typically triggered when the remaining security balance
equals 35% of the original balance. In most cases, the Company assumes that at
the time of the call, the underlying collateral is sold at anticipated market
prices.
Variations in market discount rates, prepayment rates and credit loss
assumptions may materially impact the resulting fair values of the Company's
financial instruments. 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 7-- 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
September 30, 2000 and December 31, 1999:
Secured Debt. At September 30, 2000 and December 31, 1999, recourse debt
consisted of $39,672 and $163,046, respectively, of recourse repurchase
agreements secured by investments, $6,439 and $263,190, respectively,
outstanding under secured credit facilities which are secured by loans held for
sale, securities and other investments, and $659 and $990, respectively, of
amounts outstanding under a capital lease. At September 30, 2000, substantially
all recourse debt in the form of repurchase agreements had maturities of thirty
days or less 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 September 30, 2000, Dynex REIT had two committed secured credit
facilities aggregating $198,700 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.
The $195,000 secured credit facility agented by Chase Bank of Texas (the
"Chase Facility") has been converted to a non-revolving facility which currently
only includes $75,764 of letters of credit issued to support Dynex REIT's
obligations as funding facility issuer on its remaining $73,609 tax-exempt bond
position. The Chase Facility expired on October 31, 2000. The Company and the
bank group are in discussion on an extension of the facility to January 31,
2001; however, there can be no assurance that the Company will receive such an
extension. The $75,764 of letters of credit are secured by tax-exempt bonds
which are secured by first mortgage loans on multifamily properties, as well as
additional collateral pledged by the Company including $22,474 of cash, and
other loans and investments and the stock of a subsidiary.
Unsecured Debt. Since 1994, Dynex REIT has issued three series of unsecured
notes payable totaling $150,000. These notes payable had an outstanding balance
at September 30, 2000 of $97,250 which consisted only of its July 2002 senior
notes (the "2002 Notes"). The 2002 Notes mature July 15, 2002. The 2002 Notes
include covenants restricting dividend payments by Dynex REIT. Generally, Dynex
REIT may make dividend payments to the extent such payments are necessary for
the Company to maintain REIT status. The Company may also declare and pay
dividends on the Preferred Stock provided that for the four previous fiscal
quarters, Dynex REIT meets certain coverage requirements. The Company has failed
to meet these coverage requirements for the third quarter 2000, and expects to
continue to fail these coverage requirements for the balance of the year.
NOTE 8-- 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. In June 2000, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133" ("FAS No. 138"). FAS No.
138 amends FAS No. 133's accounting for certain derivative instruments and
certain hedging activities. FAS No. 138 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company does not believe the
adoption of FAS No. 133 will have a material impact on its financial statements.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("FAS No.
140"). FAS No. 140 replaces the Statement of Financial Accounting Standards No.
125 "Accounting for the Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("FAS No. 125"). FAS No. 140 revises the
standards for accounting for securitization and other transfers of financial
assets and collateral and requires certain disclosure, but it carries over most
of FAS No. 125 provisions without reconsideration. FAS No. 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001. FAS No. 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transaction and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported
for period ending on or before December 15, 2000, for which financial statements
are presented for comparative purposes. FAS No. 140 is to be applied
prospectively with certain exceptions. Other than those exceptions, earlier or
retroactive application of its accounting provision is not permitted. The
Company does not believe the adoption of FAS No. 140 will have a material impact
on its financial statements.
NOTE 9--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.
During the second quarter, Dynex REIT liquidated its interest rate caps and
interest rate swap agreements at losses in order to enhance its liquidity
position. As a result, Dynex REIT recognized losses of approximately $3,394,
while generating cash proceeds of $793 from the sales. The notional balance of
these positions was $2.3 billion. As a result of the sales, Dynex REIT now no
longer has any hedges related to the reset lag inherent in its ARM assets (which
generally reset every six months to one year) relative to its financing for such
assets (which generally resets monthly), and for the lifetime interest rate caps
embedded in such ARM assets.
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 10 -- 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 has facilitated the issuance of tax-exempt multifamily housing
bonds ("TEBs"), the proceeds of which are used to fund construction or moderate
rehabilitation loans on multifamily properties. These TEBs are sold to third
party investors. Dynex REIT has entered into various standby commitments and
similar agreements whereby Dynex REIT is required to pay principal and interest
to the TEB bondholders in the event there is a payment shortfall on the mortgage
loan underlying each such TEB, and in certain cases is required to purchase the
TEB if such TEB cannot be successfully re-marketed to third party investors.
Dynex REIT has facilitated the issuance of approximately $73,609 of TEBs by
providing pursuant to the Chase Facility letters of credit of $75,764 at
September 30, 2000. Dynex REIT has an obligation to purchase the TEBs once the
letters of credit expire. Approximately $72,540 expire in 2001 and approximately
$3,224 expire in 2002. As of September 30, 2000, Dynex REIT has provided $22,474
in cash, loans and other investments, and the stock of one of the Company's
subsidiaries as collateral for such letters of credit. Dynex REIT's interest in
the above TEBs is currently held for sale. The facility under which such letters
of credit were issued matured on October 31, 2000. As of November 14, 2000, the
Company has not reached agreement with its lenders under the Chase Facility for
the terms of an extension. Therefore, the lenders have the right to demand
additional cash collateral to fully collateralize the $75,764 in letters of
credit outstanding. To date the lenders have not exercised this right, but there
can be no assurance that the lenders will not make such demand.
The Company was party to various conditional bond repurchase agreements
whereby the Company had the option to purchase $167,800 of such tax-exempt bonds
secured by multifamily mortgage loans. On June 15, 2000, the Company did not
exercise this option and the counterparty to the agreement retained $30,284 in
cash collateral as settlement as provided for in the related agreements. Such
amount was charged to earnings during the second quarter. The Company has no
further obligation relative to these TEBs.
NOTE 11 -- 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.
On June 9, 2000, the Company settled the matter with AutoBond for a cash
payment of $20,000. In return for the payment, the Company received a complete
release of all claims against it by AutoBond, and ownership of the AutoBond
subsidiaries which own the underlying automobile installment contracts, and that
issued the securities that were purchased from AutoBond.
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 12 -- 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 September 30, 2000 and December 31, 1999, net borrowings
due to DHI under this agreement totaled $18,382 and $26,720, respectively. Net
interest expense under this agreement was $1,087 and $395 for the nine months
ended September 30, 2000 and 1999, respectively.
Dynex REIT has a funding agreement with Dynex Commercial, Inc. ("DCI"), an
operating subsidiary of DHI, whereby Dynex REIT paid DCI a fee. Dynex REIT paid
DCI $234 and $1,871, respectively under this agreement for the nine months ended
September 30, 2000 and 1999.
Dynex REIT has entered into a note agreement with SMFC Funding Corporation
("SMFC"), a subsidiary of DHI to finance single-family model homes purchased by
SMFC. The outstanding balance of the note as of September 30, 2000 and December
31, 1999 was $548 and $4,274, respectively. Interest income recorded by Dynex
REIT on the notes for the nine months ended September 30, 2000 and 1999 was $157
and none, respectively. SMFC is currently not actively purchasing model homes,
and it is anticipated that Dynex REIT will be fully repaid on the remaining
outstanding balance by the end of the year.
Dynex REIT has entered into subservicing agreements with DCI, Dynex
Commercial Services, Inc. ("DCSI"), Dynex Financial, Inc. ("DFI" - previously a
subsidiary of DHI) and GLS Capital Services, Inc ("GLS") to service commercial,
single family, and consumer loans and property tax receivables. All of these
entities, with the exception of DFI, 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. A new
subservicing agreement was entered into with Bingham Financial Services
Corporation, the new parent of DFI. 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 $211 and $2,108 during the nine months ended September 30,
2000 and 1999, respectively.
During 1999, the Company made a loan to Thomas H. Potts, president of the
Company, as evidenced by a promissory note in the aggregate principal amount of
$934,500 with interest accruing on the outstanding balance at the rate of Prime
plus one-half percent per annum (the "Note"). Mr. Potts directly owns 399,502
shares of common stock of the Company, all of which has been pledged as
collateral to secure the Note. As of September 30, 2000, interest on the Note
was current and the outstanding balance of the Note was $925,000.
NOTE 13 -- 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 $1,178 and $4,814 at September 30, 2000 and
December 31, 1999, respectively. The results of operations and financial
position of DHI are summarized below:
NOTE 14 - OTHER MATTERS
On November 21, 2000, the Company will hold a special meeting of the
preferred stockholders to elect two additional members to its Board of
Directors. The record date for voting by the preferred stockholders on the
election of the two directors has been set as of October 13, 2000.
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.
On November 7, 2000, the Company and California Investment Fund, LLC
("CIF") CIF entered into an Agreement and Plan of Merger, dated as of November
7, 2000 (the "Merger Agreement"), by and among, the Company, CIF and DCI
Acquisition Corporation, a newly created subsidiary of CIF. The Merger Agreement
provides for CIF to acquire 100% of the equity of the Company for a purchase
price of $90 million in cash. CIF will acquire the common stock of the Company
for a price of $2.00 per share, the Series A Preferred Stock of the Company for
a price of $12.07 per share, the Series B Preferred Stock of the Company for a
price of $12.32 per share and the Series C Preferred Stock of the Company for a
price of $15.08 per share, less any dividends paid or declared on any such
shares.
The transaction is expected to close in the first quarter of 2001, subject
to the approval of the Company's shareholders and customary closing conditions.
The transaction is also conditioned upon CIF securing necessary financing and
the consent of the holders of the Company's senior notes. Regarding the senior
notes, CIF has thirty days from the date of the Merger Agreement to obtain any
necessary consents. In addition, CIF must confirm its financing commitments
prior to the Company filing with the Securities and Exchange Commission the
preliminary proxy statement relating to the transaction and prior to the mailing
of the proxy to the Company's shareholders.
FINANCIAL CONDITION
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September 30, December 31,
(amounts in thousands except per share data) 2000 1999
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Investments:
Collateral for collateralized bonds $ 3,252,173 $ 3,700,714
Securities 10,542 129,331
Other investments 36,643 48,927
Loans held for sale 12,575 232,384
Non-recourse debt - collateralized bonds 3,030,461 3,282,378
Recourse debt 143,403 537,098
Shareholders' equity 172,017 325,072
Book value per common share 3.37 16.74
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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, fixed-rate automobile installment contracts and property tax
receivables. As of September 30, 2000, the Company had 28 series of
collateralized bonds outstanding. The collateral for collateralized bonds
decreased to $3.3 billion at September 30, 2000 compared to $3.7 billion at
December 31, 1999. This decrease of $0.4 billion is primarily the combined
result of $396.7 million in paydowns on collateral and a $82.6 million increase
in the unrealized loss on collateral for collateralized bonds during the nine
months ended September 30, 2000. These decreases were partially offset by the
securitization of $71.2 million of fixed-rate funding notes secured by
fixed-rate automobile installment contracts during the second quarter of 2000.
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. Securities decreased to $10.5 million at September 30, 2000
compared to $129.3 million at December 31, 1999. This decrease was primarily the
result of the securitization of $71.2 million of fixed-rate funding notes during
the second quarter of 2000. Securities also decreased due to $20.1 million of
paydowns and $34.4 million of sales during the nine months ended September 30,
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 $36.6 million at September
30, 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 $12.6 million at September 30, 2000. This decrease was
primarily due to the sale of $268.7 million of commercial loans held for sale.
In addition, the Company sold the remaining $3.5 million of manufactured housing
loans during the first quarter of 2000. These decreases were partially offset by
$24.1 million of new loan fundings during the nine months ended September 30,
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 from $3.3 billion at December 31,
1999 to $3.0 billion at September 30, 2000. This decrease was primarily a result
of paydowns on all collateralized bonds of $399.0 million during the nine months
ended September 30, 2000. This decrease was partially offset by Dynex REIT
adding $41.7 million of collateralized bonds during the second quarter of 2000.
In addition, Dynex REIT sold $112.4 million of previously retained
collateralized bonds during the nine months ended September 30, 2000.
Recourse debt Recourse debt decreased to $143.4 million at September 30,
2000 from $537.1 million at December 31, 1999. This decrease was primarily due
to the sale of $112.4 million of retained collateralized bonds and $268.7
million of loans, during the nine months ended September 30, 2000, which had
been financed with $91.3 million of repurchase agreements and $187.4 million of
notes payable, respectively. In addition, $71.2 million of fixed-rate funding
notes were securitized as collateral for collateralized bonds during the second
quarter of 2000. These funding notes were previously financed by $27.3 million
of notes payable. Also during the nine months ended September 30, 2000, Dynex
REIT paid off approximately $32.8 million of notes payable as a result of $34.0
million of paydowns on investments.
Shareholders' equity Shareholders' equity decreased to $172.0 million at
September 30, 2000 from $325.1 million at December 31, 1999. This decrease was a
combined result of a $72.8 million increase in the net unrealized loss on
investments available-for-sale from $48.5 million at December 31, 1999 to $121.3
million at September 30, 2000 and a net loss of $80.2 million during the nine
months ended September 30, 2000.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2000 Compared to Three and Nine
Months Ended September 30, 1999. The decrease in net income and net income per
common share during the three months ended September 30, 2000 as compared to the
same period in 1999 is primarily the result of a decrease in net interest margin
and a decrease in the gain on sale of investments. These decreases were
partially offset by a reduction in impairment charge / writedowns and net
administrative fees and expenses to Dynex Holding, Inc. The decrease in net
income and net income per common share during the nine months ended September
30, 2000 as compared to the same period in 1999 is primarily the result of a
decrease in net interest margin, a decrease in the gain on sale of investments
and an increase in impairment charge / writedowns. These decreases were
partially offset by a reduction in net administrative fees and expenses to Dynex
Holding, Inc.
Net interest margin for the nine months ended September 30, 2000 decreased
to $9.1 million, or 76% below the $38.1 million for the same period for 1999.
Net interest margin for the three months ended September 30, 2000 decreased to
$1.3 million, or 90%, below the $12.3 million for the same period in 1999. These
decreases were primarily the result of the decline in average interest-earning
assets from $4.6 billion and $4.7 billion for the three and nine months ended
September 30, 1999, respectively, to $3.5 billion and $3.8 billion for the three
and nine months ended September 30, 2000, respectively. In addition, the average
cost of funds increased to 7.65% and 7.29% for the three and nine months ended
September 30, 2000, respectively, from 6.28% and 6.10% for the same periods in
1999 due to an increase in short-term interest rates. In addition, provision for
losses increased to $16.1 million or 0.56% on an annualized basis of average
interest-earning assets during the nine months ended September 30, 2000 compared
to $10.9 million and 0.31% during the nine months ended September 30, 1999.
Provision for losses increased to $5.3 million or 0.60% on an annualized basis
of average interest-earnings assets during the three months ended September 30,
2000 compared to $3.3 million or 0.29% during the same period in 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 gain (loss) on sale of investments for the nine months ended
September 30, 2000 decreased to a $63.3 million loss, as compared to a $0.1
million gain for the same period in 1999. This decrease is primarily the result
of both realized losses of $13.9 million related to the sale of $34.4 million of
securities and realized losses of $16.4 million related to the sale of $268.7
million of loans during the nine months ended September 30, 2000. In addition,
as discussed in Note 10, the Company was party to various conditional bond
repurchase agreements whereby the Company had the option to purchase $167,800 of
such tax-exempt bonds secured by multifamily mortgage loans expiring in June.
The Company did not exercise this option and the counterparty to the agreement
retained $30,284 in cash collateral as settlement as provided for in the related
agreements. The Company recorded a charge against earnings of $30,284 as a
result. Also, Dynex REIT recorded a loss during the third quarter of 2000
relating to the automobile contracts of $0.7 million as a result of entering
into a sale agreement during the third quarter of 2000 to sell these automobile
contracts. The sale was completed during the fourth quarter of 2000. During the
nine months ended September 30, 1999 Dynex REIT recognized losses of $3.4
million and $1.1 million related to the sale of $22.1 million of loans and $18.5
million of securities, respectively. These were partially offset by realized
gains of $4.2 million in various derivative trading positions closed during the
nine months ended September 30, 1999. The net (loss) gain of investments for the
three months ended September 30, 2000 decreased to a $0.6 million loss, as
compared to a $1.6 million gain for the same period in 1999. During the three
months ended September 30, 2000, Dynex REIT recorded a loss during the third
quarter of 2000 relating to the automobile contracts of $0.7 million as a result
of entering into a sale agreement during the third quarter of 2000 to sell these
automobile contracts. This was partially offset by gains of $0.1 million
relating to the sale of real estate owned properties acquired through property
tax receivables. While during the same period in 1999, Dynex REIT recognized
gains of $2.7 million in various derivative trading positions closed during the
third quarter of 1999 offset partially by $1.3 million of losses relating to the
loans sold during the third quarter of 1999.
Impairment charges / writedowns increased to a $22.1 million loss for the
nine months ended September 30, 2000 from a $13.9 million loss for the nine
months ended September 30, 1999. During the nine months ended September 30,
2000, Dynex REIT recognized losses of $18.4 million related to the permanent
impairment in the carrying value of certain securities and the accrual of losses
related to contingent obligations on its off-balance sheet tax-exempt bond
positions. As a result of the receipt of 100% of the outstanding stock of the
AutoBond Entities in connection with the settlement of the AutoBond litigation,
Dynex REIT recorded permanent impairment charges of $15.0 million to record the
underlying automobile installment contracts at their current fair market value.
The market value for these automobile contracts was based on management's
estimate. Losses on contingent obligations were accrued related to Dynex REIT's
performance obligations as "funding facility issuer" on approximately $73.6
million of tax-exempt bonds which Dynex REIT expects to settle this position
during the fourth quarter of 2000 or the first quarter of 2001. Impairment
charges / writedowns for the nine months ended September 30, 1999 is comprised
of (i) realized losses of $2.3 million related to the writedown of $30.6 million
of commercial loans, (ii) writedowns of $8.2 million related to certain
securities which were sold during the fourth quarter of 1999 and (iii) realized
losses of $2.7 million primarily related to the write-off of hedging positions
on $64.4 million of commercial loan commitments. Impairment charges / writedowns
for the three months ended September 30, 1999 is comprised of writedowns of $8.2
million related to certain securities which were sold during the fourth quarter
of 1999.
Net administrative fees and expenses to DHI decreased $4.1 million, or 95%,
and $15.0 million, or 96% to $0.2 million and $0.6 million in the three and nine
months ended September 30, 2000, respectively, as compared to the same periods
in 1999. These decreases are 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.
Average Balances and Effective Interest Rates
The net interest spread decreased to 0.40% and 0.57% for the three and nine
months ended September 30, 2000 from 1.32% and 1.26% for the same periods in
1999. This decrease was primarily due to an increase in the average one-month
LIBOR during the nine months ended September 30, 2000. This decrease in net
interest spread was partially offset by a reduction in premium amortization
expense, which decreased from $3.4 million and $14.0 million for the three and
nine months ended September 30, 1999, respectively to $2.1 million and $6.2
million for the same periods in 2000. The overall yield on interest-earning
assets increased to 8.05% and 7.86% for the three and nine months ended
September 30, 2000, respectively from 7.60% and 7.36% for the three and nine
months ended September 30, 1999, respectively. The cost of interest-bearing
liabilities increased to 7.65% and 7.29% for the three and nine months ended
September 30, 2000, respectively, from 6.28% and 6.10% for the three and nine
months ended September 30, 1999, respectively.
Individually, the net interest spread on collateral for collateralized
bonds decreased 77 basis points, from 131 basis points for the nine months ended
September 30, 1999 to 54 basis points for the same period in 2000. This decrease
was primarily due to the increased borrowing cost during the nine months ended
September 30, 2000 which was partially offset by lower premium amortization
caused by decreased prepayments during the nine months ended September 30, 2000
compared to the same period in 1999. The net interest spread on securities
decreased 216 basis points, from a negative 13 basis points for the nine months
ended September 30, 1999 to a negative 229 basis points for the nine months
ended September 30, 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 nine months ended September 30, 2000 as well as an increase in
the interest spread on certain credit facilities during the past twelve months.
The net interest spread on other investments increased 505 basis points, from
162 basis points for the nine months ended September 30, 1999, to 667 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 decreased 90 basis points for the nine months ended September 30,
1999 from 261 basis points to 171 basis points for the nine months ended
September 30, 2000, primarily as a result of the increased borrowing costs on
loans due to the increase in the average one-month LIBOR during the nine months
ended September 30, 2000.
Interest Income and Interest-Earning Assets
Approximately $1.3 billion of the investment portfolio as of September 30,
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 64% 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 27%
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.
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 September 30, 2000 were $32.0 million, or approximately 0.97% of
the aggregate balance of collateral for collateralized bonds, ARM securities and
fixed-rate securities. Of this $32.0 million, $31.5 million relates to the
premium on multifamily and commercial mortgage loans that have prepayment
lockouts or yield maintenance for at least seven years. Amortization expense as
a percentage of principal paydowns has increased from 1.40% for the three months
ended September 30, 1999 to 1.59% for the same period in 2000. The principal
prepayment rate for the Company (indicated in the table below as "CPR Annualized
Rate") was approximately 22% for the three months ended September 30, 2000. CPR
or "constant prepayment rate" is a measure of the annual prepayment rate on a
pool of loans. Excluded from this table are the Company's loans held for sale.
Premium Basis and Amortization
($ in millions)
Credit Exposures
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 on these
securities (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 $29.6 million
at September 30, 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 and other investments. The aggregate
outstanding principal balance of these excluded investments at September 30,
2000 was $57.0 million. Net credit exposure as a percentage of the outstanding
loan principal balance increased slightly from 4.32% at June 30, 2000 to 4.42%
at September 30, 2000. Credit losses have increased to $6.8 million for the
three months ended September 30, 2000 as compared to $5.4 million for the three
months ended June 30, 2000. This increase is primarily a result of higher loss
severity on manufactured housing loans due to a market saturation of
manufactured housing repossessions.
Credit Reserves and Actual Credit Losses
($ in millions)
The following table summarizes single family mortgage loan, manufactured
housing loan, funding notes 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 increased slightly to
1.96% at September 30, 2000 from 1.95% at September 30, 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 September 30, 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.
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. In June 2000, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133" ("FAS No. 138"). FAS No.
138 amends FAS No. 133's accounting for certain derivative instruments and
certain hedging activities. FAS No. 138 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company believes that the
adoption of FAS No. 133 will not have a material impact on its financial
statements.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("FAS No.
140"). FAS No. 140 replaces the Statement of Financial Accounting Standards No.
125 "Accounting for the Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("FAS No. 125"). FAS No. 140 revises the
standards for accounting for securitization and other transfers of financial
assets and collateral and requires certain disclosure, but it carries over most
of FAS No. 125 provisions without reconsideration. FAS No. 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001. FAS No. 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transaction and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported
for period ending on or before December 15, 2000, for which financial statements
are presented for comparative purposes. FAS No. 140 is to be applied
prospectively with certain exceptions. Other than those exceptions, earlier or
retroactive application of its accounting provision is not permitted. The
Company does not believe the adoption of FAS No. 140 will have a material impact
on its financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations from a variety of
sources. These sources have included 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. Over the first nine months of 2000, the Company
has been focused on substantially reducing both its short-term debt and capital
requirements. The Company's current focus is the release of its obligations
under letters of credit and the repayment of its recourse debt.
A majority of the Company's 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.
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 September 30,
2000, Dynex REIT had $3.0 billion of collateralized bonds outstanding as
compared to $3.3 billion at December 31, 1999.
Recourse Debt
Secured. At September 30, 2000, Dynex REIT had two non-revolving credit
facilities aggregating $199 million, comprised of (i) a $195 million
non-revolving credit line agented by Chase Bank of Texas ("the Chase Facility"),
expiring on October 31, 2000) from a consortium of commercial banks currently
restricted to existing letters of credit for tax-exempt bonds, and (ii) a $4
million non-revolving 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. During the third quarter of 2000, Dynex
REIT sold certain commercial and multifamily loans which repaid all borrowings
under the Chase Facility, and provided $22.4 million of cash collateral (in
addition to the $73.6 million in TEBs and other collateral) for the $75.8
million of letters of credit issued pursuant to this facility that support Dynex
REIT's remaining $73.6 million TEB position. Dynex REIT is working with several
prospective buyers for its remaining tax-exempt bond position in order to
release the Chase letters. No agreement for the sale of such TEB position has
been reached as of the date hereof primarily as a result of the fact that most
of the underlying multifamily properties are still under construction or in the
lease-up phase. As of October 31, 2000, the Chase Facility has expired, and the
Company and the bank group have not yet reached agreement on terms of an
extension to January 31, 2000. There can be no assurance that the Company will
receive such extension.
The following table summarizes the committed credit facilities at September
30, 2000 expiring in 2000. At September 30, 2000, Dynex REIT had $0.4 million
outstanding under its committed credit facilities expiring in 2000.
Committed Credit Facilities
At September 30, 2000
($ in millions)
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 September 30, 2000, outstanding obligations under all recourse
repurchase agreements totaled $39.7 million compared to $163.0 million at
December 31, 1999. Dynex REIT has provided collateral with a current principal
balance of $110.9 million to support the amount of the repurchase agreement
outstanding. All of the recourse repurchase agreements are on an "overnight" or
one-day basis. The following table summarizes the outstanding balances of
recourse repurchase agreements by credit rating of the related assets pledged as
collateral to support such repurchase agreements as of each respective quarter
end. The table excludes repurchase agreements used to finance loans held for
sale.
Recourse Repurchase Agreements by Rating of Investments Financed
($ in millions)
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 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 September 30, 2000 of $97.3 million, all relating to senior notes due
July 15, 2002 (the "2002 Notes"). 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 excess of $10 million, and such
amounts outstanding under the other credit agreements are accelerated by the
respective lender. Dynex is not in breach of any covenants under the 2002 Notes.
Total recourse debt decreased to $143.4 million at September 30, 2000 from
$537.1 million at December 31, 1999. This decrease was primarily due to the sale
of $112.4 million of retained collateralized bonds and $268.7 million of loans,
during the nine months ended September 30, 2000, which had been financed with
$91.3 million of repurchase agreements and $187.4 million of notes payable,
respectively. In addition, $71.2 million of fixed-rate funding notes were
securitized as collateral for collateralized bonds during the second quarter of
2000. These funding notes were previously financed by $27.3 million of notes
payable. Also during the nine months ended September 30, 2000, Dynex REIT paid
off approximately $32.8 million of notes payable as a result of $34.0 million of
paydowns on investments.
Total Recourse Debt
($ in millions)
- ------------------------------------------------------------------------
Total Recourse Debt to
Total Recourse Debt Equity
- ------------------------------------------------------------------------
1998, Quarter 4 $ 1,032.7 228%
1999, Quarter 1 781.4 173%
1999, Quarter 2 880.0 201%
1999, Quarter 3 1,215.0 285%
1999, Quarter 4 537.1 165%
2000, Quarter 1 420.7 137%
2000, Quarter 2 244.6 138%
2000, Quarter 3 143.4 83%
- ------------------------------------------------------------------------
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'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, to
the extent that it has loan production activity. 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
pledged as collateral for collateralized bonds by the Company are fixed-rate.
The Company currently finances these fixed-rate assets through non-recourse
debt, approximately $211 million of which is variable rate. In addition,
significant amount 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 default rates or
loss severities 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 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 September 30, 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 September 30, 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) in Interest Margin from
Interest Rates Base Case
------------------------- -----------------------
+200 (6.02)%
+100 (3.02)%
Base -
-100 3.02%
-200 6.03%
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 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 $1.3 billion of the Company's investment portfolio as of
September 30, 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 64% and 27%
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. The Company had no interest rate swap, cap or floor agreements
as of September 30, 2000.
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 may enter
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. The Company may
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. 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. The Company had no hedges in place as of September 30, 2000.
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
September 30, 2000, approximately $2.0 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 $1.7
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.
PART 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.
On June 9, 2000, the Company settled the matter with AutoBond for a cash
payment of $20 million. In return for the payment, the Company received a
complete release of all claims against it by AutoBond, and ownership of the
AutoBond subsidiaries which own the underlying automobile installment contracts,
and that issued the securities that were purchased from AutoBond.
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
Current Report on Form 8-K as filed with the Commission on October 18,
2000, relating to the possible acquisition of the Company by California
Investment Fund LLC.
Current Report on Form 8-K as filed with the Commission on November 8,
2000, relating to the agreement and plan of merger between the Company and
California Investment Fund LLC.
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: November 14, 2000