SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(AMENDMENT NO. 15)
Dynex Capital, Inc.
--------------------------------------------------------------------------------
(Name of Issuer)
Common Stock, par value $0.01 per share
(Title of Class of Securities)
268170506
---------
(CUSIP Number)
Michael R. Kelly
550 West C Street
San Diego, CA 92101
--------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
March 1, 2001
-------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G
to report the acquisition which is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the
following box |_|.
Note: Schedules filed in paper format shall include a signed original
and five copies of the schedule, including all exhibits. See Rule 13d-7 for
other parties to whom copies are to be sent.
*The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities and for any subsequent amendment containing information which would
alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not
be deemed to be "filed" for the purpose of section 18 of the Securities Exchange
Act of 1934 ("Act") or otherwise subject to the liabilities of that section of
the Act but shall be subject to all other provisions of the Act (however, see
the Notes).
- Page 1 of 7 Pages -
---------------------------- -------------------------------
CUSIP No. 26817Q506 Page 2 of 7 Pages
---------------------------- -------------------------------
1 NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY)
California Investment Fund, LLC (33-0688954)
--------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) |X|
(b) /_/
--------------------------------------------------------------------------------
3 SEC USE ONLY
--------------------------------------------------------------------------------
4 SOURCE OF FUNDS
WC
--------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e) /_/
--------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
California
--------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES -0-
BENEFICIALLY ------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH 572,178
REPORTING ------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH -0-
------------------------------------------------
10 SHARED DISPOSITIVE POWER
572,178
--------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
572,178
--------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
/_/
--------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.00%
--------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
OO
--------------------------------------------------------------------------------
------------------------------- ---------------------------
CUSIP No. 26817Q506 Page 3 of 7 Pages
------------------------------- ---------------------------
1 NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY)
Michael R. Kelly
--------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) |X|
(b) |_|
--------------------------------------------------------------------------------
3 SEC USE ONLY
--------------------------------------------------------------------------------
4 SOURCE OF FUNDS
WC
--------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e) |_|
--------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
USA
--------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES -0-
BENEFICIALLY ------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH 572,178
REPORTING ------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH -0-
------------------------------------------------
10 SHARED DISPOSITIVE POWER
572,178
--------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
572,178
--------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
--------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.00%
--------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
IN
--------------------------------------------------------------------------------
---------------------------------- --------------------------------
CUSIP No. 294408-10-9 Page 4 of 7 Pages
---------------------------------- --------------------------------
1 NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY)
Richard Kelly
--------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) |X|
(b) /_/
--------------------------------------------------------------------------------
3 SEC USE ONLY
--------------------------------------------------------------------------------
4 SOURCE OF FUNDS
WC
--------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e) |_|
--------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States of America
--------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES -0-
BENEFICIALLY ------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH 572,178
REPORTING ------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH -0-
------------------------------------------------
10 SHARED DISPOSITIVE POWER
572,178
--------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
572,178
--------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
/_/
--------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.00%
--------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
IN
--------------------------------------------------------------------------------
SCHEDULE 13D
ITEM 1: SECURITY AND ISSUER
This Amendment No. 15 on Schedule 13D relates to the common stock, par
value $0.01 per share, of Dynex Capital, Inc. ("Dynex"). This amendment amends
and supplements Schedule 13D of California Investment Fund, LLC, dated April 3,
2000 and filed on April 4, 2000 with the Securities and Exchange Commission
("SEC"), Amendment No. 1 to Schedule 13D, dated September 12, 2000 and filed on
September 13, 2000 with the SEC, Amendment No. 2 to Schedule 13D, dated October
3, 2000 and filed on October 3, 2000 with the SEC, Amendment No. 3 to Schedule
13D, dated October 17, 2000 and filed on October 17, 2000 with the SEC,
Amendment No. 4 to Schedule 13D, dated October 24, 2000 and filed on October 24,
2000 with the SEC, Amendment No. 5 to Schedule 13D, dated October 30, 2000 and
filed on October 30, 2000 with the SEC, Amendment No. 6 to Schedule 13D, dated
November 8, 2000 and filed on November 8, 2000 with the SEC, Amendment No. 7 to
Schedule 13D, dated December 12, 2000 and filed on December 12, 2000 with the
SEC, Amendment No. 8 to Schedule 13D, dated December 21, 2000 and filed on
December 21, 2000 with the SEC, Amendment No. 9 to Schedule 13D, dated December
27, 2000 and filed on December 27, 2000 with the SEC, Amendment No. 10 to
Schedule 13D, dated January 5, 2001 and filed on January 5, 2001 with the SEC,
Amendment No. 11 to Schedule 13D, dated January 30, 2001 and filed on January
30, 2001 with the SEC, Amendment No. 12 to Schedule 13D, dated February 8, 2001
and filed on February 8, 2001 with the SEC, Amendment No. 13 to Schedule 13D
dated February 9, 2001 and filed on February 9, 2001, and Amendment No. 14 on
Schedule 13D dated February 22, 2001 and filed on February 23, 2001 (together,
the "Schedule 13D"). Except as amended by this amendment, there has been no
change in the information previously reported on the Schedule 13D.
ITEM 4: PURPOSE OF TRANSACTION
On March 1, 2001, California Investment Fund, LLC ("CIF") filed a
Motion to Compel Arbitration and Stay Pending Litigation, and related Brief in
Support of Defendant's Motion to Compel Arbitration and Stay Litigation,
together with CIF's Answer and Counterclaims, each in the United States District
Court for the Eastern District of Virginia, Alexandria Division (Civil Action
No. 01-0145-A).
These court filings relate to the Agreement and Plan of Merger dated as
of November 7, 2000 ("Merger Agreement") by and among CIF, DCI Acquisition
Corporation and Dynex Capital Inc. ("Dynex") and Dynex's purported termination
of the Merger Agreement.
Copies of the Motion to Compel Arbitration and Stay Pending Litigation
and the Answer and Counterclaims of Defendant California Investment Fund, LLC
and Demand for Jury Trial (without Exhibits thereto) are attached to this
Amendment No. 15 to Schedule 13D as Exhibits A and B, respectively.
- Page 5 of 7 Pages -
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit A - Motion to Compel Arbitration and Stay Pending Litigation filed
by California Investment Fund, LLC dated March 1, 2001
Exhibit B - Answer and Counterclaims of Defendant California
Investment Fund, LLC and Demand for Jury Trial dated March 1,
2001 (without exhibits)
Exhibit C - Press Release dated March 2, 2001
[SIGNATURE PAGE TO FOLLOW]
- Page 6 of 7 Pages -
SIGNATURES
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, correct and
complete.
CALIFORNIA INVESTMENT FUND, LLC,
a California limited liability company
Date: March 2, 2001 By: /s/ Michael R. Kelly
---------------------------------------------------
Michael R. Kelly
Its: Managing Member
MICHAEL R. KELLY
Date: March 2, 2001 By: /s/ Michael R. Kelly
--------------------------------------------------
Michael R. Kelly, as an individual
RICHARD KELLY
Date: March 2, 2001 By: /s/ Richard Kelly
--------------------------------------------------
Richard Kelly, as an individual
[SIGNATURE PAGE TO SCHEDULE 13D]
- Page 7 of 7 Pages -
EXHIBIT A -
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
ALEXANDRIA DIVISION
------------------------------------------
)
DYNEX CAPITAL, INC. )
)
Plaintiff, )
)
v. ) Civil Action No. 01-0145-A
)
CALIFORNIA INVESTMENT FUND, LLC, )
)
Defendant. )
------------------------------------------)
DEFENDANT'S MOTION TO COMPEL
ARBITRATION AND STAY PENDING LITIGATION
Pursuant to 9 U.S.C. ss.ss. 1, et seq., Defendant California Investment
Fund, LLC ("CIF") hereby moves the Court to compel arbitration of the issues
raised in Count I of Plaintiff Dynex Capital, Inc.'s ("Dynex") Complaint and to
stay further proceedings in the above-captioned action. In support of this
motion, CIF files the accompanying Brief in Support of Defendant's Motion to
Compel Arbitration and Stay Pending Litigation, and states as follows:
1. CIF and Dynex are parties to an Escrow Agreement, dated November 7,
2000, and a contemporaneously executed Agreement and Plan of Merger ("Merger
Agreement"), which provide for mandatory arbitration of any dispute related to a
disbursement of the Escrow Shares and Escrow Fund placed in escrow by CIF in
accordance with the Escrow Agreement.
2. On January 29, 2001, Dynex filed a Complaint instituting this
action, seeking a declaratory judgment that Dynex properly terminated the Merger
Agreement and is entitled to all rights and remedies provided in the Agreement,
which includes disbursement of the Escrow Shares and Escrow Fund.
A-1
3. CIF has contested and objected to the disbursement of any such funds
or shares held in escrow, triggering the mandatory arbitration provision in the
Escrow Agreement and requiring the parties to promptly commence binding
arbitration in accordance with the terms of the parties' agreements.
4. Dynex's request for a declaratory judgment by this Court of rights
and remedies under the aforementioned agreements is in direct contravention of
the parties' express agreement to arbitrate, and the issues raised in Dynex's
Complaint are subject to arbitration under the parties' mandatory arbitration
agreement.
5. CIF has been aggrieved by Dynex's failure, neglect or refusal to
arbitrate pursuant to the parties' written arbitration agreement.
6. CIF is entitled to seek relief pursuant to 9 U.S.C. ss.ss. 3, 4,
asking the Court to direct the parties to proceed to arbitration in accordance
with the terms of their agreements, and to stay the action before it, which
involves issues arbitrable pursuant to such agreements.
WHEREFORE, CIF respectfully requests the Court to grant CIF's motion to
compel arbitration and stay this action.
Respectfully submitted,
---------------------
Craig B. Young (VSB#22633)
ANDREWS & KURTH L.L.P.
1701 Pennsylvania Ave., N.W.,
Suite 300
Washington, D.C. 20006
Phone: (202) 662-2700
Facsimile: (202) 662-2739
Attorneys for California
Investment Fund, LLC
Date: March 1, 2001
A-2
EXHIBIT B -
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
ALEXANDRIA DIVISION
------------------------------------------
)
DYNEX CAPITAL, INC., )
)
Plaintiff, )
)
v. ) Civil Action No. 01-0145-A
)
CALIFORNIA INVESTMENT FUND, LLC, )
)
Defendant. )
------------------------------------------)
ANSWER AND COUNTERCLAIMS
OF DEFENDANT CALIFORNIA INVESTMENT FUND, LLC
AND DEMAND FOR JURY TRIAL
Defendant California Investment Fund, LLC ("CIF" or "Defendant") hereby
waives service of Plaintiff Dynex Capital, Inc.'s ("Dynex" or "Plaintiff")
Summons and Complaint and for its Answer and Counterclaims states as follows:1
ANSWER
FIRST DEFENSE
In answer to the numbered paragraphs of the Complaint, CIF pleads
as follows:2
--------
1 Dynex's Return of Service and Affidavit of Service states that Dynex
served the Complaint on the Secretary of the Commonwealth of Virginia
("Secretary") in Richmond, Virginia, but CIF has not been notified by the
Secretary of this action.
2 For ease in comparing this document to the Complaint, Plaintiff's
headings are inserted as they appear in the Complaint, without any admission of
their accuracy.
B-1
Parties and Jurisdiction
------------------------
1. CIF admits the allegations of Paragraph 1 of the Complaint. Dynex is a
corporation incorporated in Virginia with it principal place of business in
Virginia, and is, therefore, a citizen of Virginia.
2. CIF admits the allegations of Paragraph 2 of the Complaint. CIF is a limited
liability company formed under the laws of California with its principal place
of business in California, and is, therefore, a citizen of California.
3. CIF admits the allegations of Paragraph 3 of the Complaint.
4. CIF admits that venue is proper in this district pursuant 28 U.S.C.ss.1391.
CIF denies the remaining allegations of Paragraph 4 of the Complaint.
Facts
-----
5. CIF admits that it entered into a contract with Dynex entitled "Agreement and
Plan of Merger" on November 7, 2000 ("Merger Agreement") which is Exhibit 1 to
the Complaint, to which the Court is respectfully referred for a full and
complete statement of the contents thereof. CIF denies the remaining allegations
of Paragraph 5 of the Complaint.
6. CIF admits that the parties entered into the Merger Agreement. CIF
respectfully refers the Court to the Merger Agreement for a full and complete
statement of the contents thereof.
7. Paragraph 7 of the Complaint consists of selective quotations from the Merger
Agreement and an Acknowledgment and Agreement dated December 8, 2000
("Acknowledgment and Agreement"), and legal conclusions to which no response is
required. Without admitting that the Acknowledgment and Agreement is an
enforceable contract, to the extent Paragraph 7 quotes from the Merger Agreement
and an Acknowledgment and Agreement, CIF respectfully refers the
B-2
Court to those documents for a full and complete statement of the contents
thereof. To the extent an answer is deemed to be required to the legal
conclusions in Paragraph 7, CIF denies those allegations.
8. CIF denies the allegations in the first sentence of Paragraph 8. The
remainder of Paragraph 8 consists of legal conclusions to which no response is
required. To the extent a response is deemed to be required, CIF admits that it
provided Dynex a letter from Fremont Investment & Loan dated December 19, 2000,
which is attached as Exhibit 2 to the Complaint, to which the Court is
respectfully referred for a full and complete statement of the contents thereof.
CIF is without sufficient knowledge or information to form a belief as to the
truth of Dynex's allegations concerning discussions between Dynex and Fremont,
and therefore denies the allegations in the last sentence of Paragraph 8 of the
Complaint.
9. Paragraph 9 of the Complaint consists of legal conclusions to which no
response is required. To the extent a response is deemed to be required, CIF
denies the allegations of Paragraph 9 of the Complaint.
10. CIF admits that it entered into a letter agreement with Dynex dated December
22, 2000 ("December 22nd Letter") (which is attached as Exhibit 3 to the
Complaint) to which the Court is respectfully referred for a full and complete
statement of the contents thereof. CIF denies the remaining allegations of
Paragraph 10.
11. Paragraph 11 of the Complaint consists of selective quotations from the
December 22nd Letter and legal conclusions to which no response is required. To
the extent Paragraph 11 quotes from the December 22nd Letter, CIF respectfully
refers the Court to that Letter for a full and complete statement of the
contents thereof. To the extent a response is deemed to be required to the legal
conclusions in Paragraph 11, CIF denies those allegations.
B-3
12. CIF admits that Dynex purports to quote a portion of the December 22nd
Letter in Paragraph 12 of the Complaint and respectfully refers the Court to
that Letter for a full and complete statement of the contents thereof.
13. CIF admits that Dynex purports to quote a portion of the December 22nd
Letter in Paragraph 13 of the Complaint and respectfully refers the Court to
that Letter for a full and complete statement of the contents thereof.
14. Paragraph 14 of the Complaint consists of legal conclusions to which no
response is required. To the extent a response is deemed to be required, CIF
denies the allegations of Paragraph 14 of the Complaint.
15. Paragraph 15 of the Complaint consists of legal conclusions to which no
response is required. To the extent a response is deemed to be required, CIF
denies the allegations of Paragraph 15 of the Complaint.
16. Paragraph 16 of the Complaint consists of legal conclusions to which no
response is required. To the extent a response is deemed to be required, CIF
admits that Dynex sent CIF a letter dated January 26, 2000 (the "January 26th
Letter") (which is attached as Exhibit 4 to the Complaint), in which it
purported to terminate the Merger Agreement. The Court is respectfully referred
to the January 26th Letter for a full and complete statement of the contents
thereof. CIF denies the remaining allegations of Paragraph 16.
17. Admitted that CIF contends and has contended that Dynex's purported
termination was improper and unauthorized under the Merger Agreement, that Dynex
has breached the Merger Agreement and that Dynex has not acted in good faith.
Admitted that CIF reserved its rights to seek enforcement of the Merger
Agreement. CIF denies the remaining allegations of Paragraph 17 of the
Complaint.
B-4
COUNT I
18. CIF repeats and incorporates by reference its answers to Paragraphs 1-17 of
the Complaint.
19. Denied.
20. Admitted that CIF contends that Dynex had no right to terminate the Merger
Agreement, that Dynex has not acted in good faith, and that Dynex has breached
the Merger Agreement. CIF denies the remaining allegations of Paragraph 20 of
the Complaint.
21. Admitted. CIF denies each and every allegation not previously admitted. CIF
denies that Dynex is entitled to the relief prayed for, or to any relief
whatsoever.
SECOND DEFENSE
Any alleged lack of performance by CIF is excused under the doctrine of
substantial performance because CIF substantially performed its obligations
under the Merger Agreement and the December 22nd Letter.
THIRD DEFENSE
Any alleged lack of performance by CIF is excused under the prevention
doctrine as a result of Dynex's hindrance of CIF in fulfillment of a
condition(s) of the Merger Agreement and/or the December 22nd Letter.
FOURTH DEFENSE
Any alleged lack of performance by CIF is excused by Dynex's prior
failure to act in good faith in carrying out its obligations under the contract.
FIFTH DEFENSE
B-5
To the extent Dynex seeks equitable relief, it is barred from doing so
by its unclean hands.
COUNTERCLAIMS
Pursuant to Rule 13, Federal Rules of Civil Procedure, California
Investment Fund, LLC ("CIF) hereby states its counterclaims against Dynex
Capital, Inc. ("Dynex") and alleges as follows:
NATURE OF THE ACTION
1. This is an action for declaratory judgment and, in the alternative, for
breach of contract and breach of the duty of good faith and fair dealing based
on Dynex's interference with CIF's performance of its obligations under the
Merger Agreement, Dynex's failure to carry out its obligations under the Merger
Agreement, its failure to act in good faith in carrying out its obligations
under the Merger Agreement and its improper termination of the Merger Agreement.
CIF also brings alternative counterclaims to redress Dynex's breach of the
independent duty of good faith and fair dealing in terminating the agreement.
Because the Merger Agreement and the Escrow Agreement require arbitration of
certain issues raised by this case, CIF files herewith Defendant's Motion to
Compel Arbitration and to Stay Pending Litigation.
PARTIES
2. CIF is a limited liability company formed under the laws of California with
its principal place of business in San Diego, California, and is, therefore, a
citizen of California.
3. Dynex is a corporation incorporated in Virginia with it principal place of
business in Glen Allen, Virginia, and is, therefore, a citizen of Virginia.
JURISDICTION AND VENUE
B-6
4. This Court has subject matter jurisdiction over this action pursuant to 28
U.S.C. ss. 1332(a)(1), in that the matter in controversy exceeds the sum or
value of $75,000, exclusive of interest and costs and is between citizens of
different States.
5. Venue in this District is proper pursuant to 28 U.S.C.ss.1391 because (i)
Dynex resides in this district and (ii) a substantial part of the events giving
rise to the claim occurred in this District.
6. Pursuant to the Merger Agreement, Dynex consented to the jurisdiction of any
federal or state court of Virginia for the resolution of any legal action or
proceeding arising out of or relating to the Merger Agreement.
THE FACTS
7. Early in 2000, CIF began to consider the possible acquisition of Dynex.
8. In late 1998 and throughout 1999, Dynex had experienced difficulties in the
financial markets which had a negative impact on Dynex's investment portfolio,
its origination operations and its ability to securitize economically the loans
it originated.
9. Dynex had also been named as a defendant in a lawsuit brought by AutoBond
Acceptance Corporation ("AutoBond"), a company with which Dynex had entered into
a funding relationship in June 1998.
10. As a result of the difficulties identified in Paragraphs 8 and 9, Dynex had
found it necessary to sell assets in order to maintain liquidity. Dynex also
retained PaineWebber Incorporated ("PaineWebber") as a financial adviser for the
purpose of exploring financial and strategic alternatives, including a possible
sale or liquidation of the company.
11. By December 1999, Dynex's management directed PaineWebber, among other
things, to begin exploring a sale of the company by contacting potential merger
partners.
B-7
12. On or about March 10, 2000, Dynex announced that the jury in the AutoBond
litigation returned a verdict in favor of AutoBond and awarded AutoBond
approximately $69 million in damages. Dynex further reported that the award
presented going concern issues for the company. The AutoBond award also
complicated Dynex's efforts to locate a potential merger partner.
13. In March 2000, because of its interest in possibly acquiring the company,
CIF purchased 572,178 shares of common stock of Dynex. On March 29, 2000, CIF
publicly disclosed that it had acquired a five percent interest in Dynex.
14. To further explore its interest in possibly acquiring Dynex, CIF entered a
confidentiality agreement dated April 6, 2000 with PaineWebber (the
"Confidentiality Agreement"), under which CIF would receive confidential
information about Dynex for use "in connection with the consideration of a
possible acquisition of some or all of the equity securities or assets of"
Dynex. In the Confidentiality Agreement, CIF also agreed that, it would not
purchase any Dynex securities for a period of 24 months following a termination
of discussions between the companies. The Confidentiality Agreement is attached
hereto as Exhibit 1.
15. In or about April 2000, CIF began pursuing a transaction with Dynex and made
two preliminary proposals for a cash purchase of the company.
16. In May 2000, CIF and Dynex entered an agreement under which CIF would
receive an option to purchase certain assets in return for making a $15.5
million repurchase agreement to Dynex to assist Dynex in generating funds for a
proposed settlement of the AutoBond litigation. In or about June 2000, Dynex
announced settlement of the AutoBond litigation.
17. On or about September 29, 2000, CIF and Dynex entered into a letter of
intent concerning a proposed transaction. The September 29, 2000 letter is
attached hereto as Exhibit 2.
B-8
18. By letter dated November 1, 2000, PaineWebber provided its opinion that the
proposed transaction for CIF to acquire all of the capital stock of Dynex was
fair to Dynex's shareholders, subject to certain reservations and
qualifications. The November 1, 2000 letter is attached hereto as Exhibit 3.
19. On or about November 7, 2000, CIF and Dynex entered the Merger Agreement,
which is filed with the Court as Exhibit 1 to the Complaint.
20. Based on its own investigation, as well as the PaineWebber fairness opinion,
the Dynex Board of Directors approved the merger transaction with CIF and was
prepared to recommend that Dynex's shareholders also approve the deal because
the transaction would have given the shareholders significant premiums to the
trading prices of Dynex's shares and was superior to any other alternatives then
available.
21. On or about November 7, 2000, the parties also entered an Escrow Agreement
(the "Escrow Agreement"), attached hereto as Exhibit 4. The Escrow Agreement
provides, among other things, for CIF to deposit shares of stock and also one
million dollars into escrow with an escrow agent, U.S. Trust Company, National
Association ("U.S. Trust"). The Escrow Agreement also provides for arbitration
of disputes over the disbursement of the shares and funds held in escrow.
22. Pursuant to the Escrow Agreement, CIF deposited 572,178 shares of Dynex
common stock ("Escrow Shares") that it owns and $1,000,000 ("Escrow Funds") into
escrow.
23. CIF also undertook the steps required to complete the transaction agreed
upon in the Merger Agreement. These steps included: (1) exercising due diligence
on the structure, personnel, operations and financial strength of Dynex, (2)
seeking financing for the transaction,
B-9
and (3) attempting to structure the transaction such that there would be no
breach of the 7 7/8% Senior Notes of Dynex due July 2002 ("Target Senior Notes")
or related indenture.
24. Dynex, however, delayed responding to CIF's requests for due diligence
information needed to convince a potential financier to agree to provide
financing for the transaction. These delays included the failure to respond in a
timely fashion to requests for information by Andrew Davidson & Company ("Andrew
Davidson"), CIF's appraiser of Dynex's assets, made in the final week of
November 2000. Despite the fact that CIF informed Dynex that the timely receipt
of information was imperative, Dynex failed to provide the current or historical
performance data on the assets that Andrew Davidson was appraising on behalf of
CIF. Several requests by Andrew Davidson remained unsatisfied in December 2000.
Even in January 2001, Dynex continued in its failure to provide loan-specific
current information about the performance of $3.2 billion in individual loans.
25. In spite of Dynex's delays in providing information, CIF obtained a letter
from Fremont Investment & Loan ("Fremont") dated December 19, 2000, which is
filed with the Court as Exhibit 2 to the Complaint.
26. Dynex claimed, at this time, that CIF was in breach of its obligations and
informed CIF that the parties needed to address what would be a reasonable time
in which to address the purported deficiencies of the Fremont letter dated
December 19, 2000. CIF denied that it was in breach. To resolve this
disagreement, Dynex and CIF agreed to the December 22nd Letter, which is filed
with the Court as Exhibit 3 to the Complaint.
27. Even after the December 22nd Letter, Dynex still did not respond fully and
in timely fashion to CIF's requests for information. For example, Dynex failed
to provide information relating to current period credit losses for all of
Dynex's deals during the first week of January
B-10
2001. CIF also required, and requested, detailed information concerning the
current market value of approximately $100 million in collateralized bonds that
had been retained and were being held by Dynex; these bonds can fluctuate in
value, and their true value was an important part of CIF's valuation of Dynex.
Nonetheless, Dynex never provided this information.
28. Dynex never provided CIF with the detailed information supporting the Dynex
balance sheet for year end 2000 and only on or about January 23, 2001 did Dynex
provided detailed support for its November 2000 balance sheet.
29. Not until on or about January 25, 2001, did Dynex provide CIF with the
detailed report provided by PaineWebber to support its fairness opinion.
30. In the course of their negotiations, Dynex had separated from the merger
transaction a letter of credit it was trying to pay off that had been issued by
Chase Bank of Bank of Texas. Dynex's ability to resolve this potential liability
was a matter of great concern to CIF in its valuation of Dynex. Nonetheless,
Dynex delayed providing CIF with updated information on this transaction, which
Dynex did not resolve until January 25, 2001.
31. Dynex also delayed providing CIF with information identifying the holders of
Dynex's Target Senior Notes (the "Bondholders"). Nonetheless, on or about
January 26, 2001, CIF reached an agreement-in-principal with certain
Bondholders. It was agreed that this agreement-in- principal was to be
memorialized in writing directly thereafter. Dynex knew that this agreement had
been reached because a member of its senior management participated in the
teleconference during which the agreement-in-principal was reached.
32. On or about January 26, 2001, CIF received a letter from a guarantor of
approximately twenty-five percent of the Target Senior Notes, ACA Financial
Guaranty Corporation ("ACA"),
B-11
indicating its support for the transaction. The January 26, 2001 letter from ACA
is attached hereto as Exhibit 5.
33. Nonetheless, on or about January 26, 2001, before CIF's agreement with the
Bondholders could be memorialized in writing, Dynex purported to terminate the
Merger Agreement and the December 22nd Letter. Dynex's termination letter is
filed with the Court as Exhibit 4 to the Complaint.
34. At the same time, Dynex requested that U.S. Trust release the Escrow Shares
and Escrow Funds held in escrow. A copy of this request is attached as Exhibit
6.
35. At the same time, Dynex made a Section 13(D) filing with the Securities and
Exchange Commission publicizing its purported termination and escrow demand.
36. In spite of Dynex's purported termination of the Merger Agreement and
December 22nd Letter, CIF continued to try to complete the transaction. By
letter dated January 29, 2001, CIF urged the Dynex Board of Directors to honor
the Merger Agreement and requested that Dynex "take no action inconsistent with
the consummation of the transactions contemplated by the Merger Agreement . . .
." CIF's January 29, 2001 letter is attached hereto as Exhibit 7.
37. In furtherance of the transaction, CIF continued working in good faith with
the Bondholders to memorialize the earlier agreement-in-principal.
38. On information and belief, on or about February 1, 2001, Dynex informed
counsel for certain of the Bondholders that CIF was required to refrain from
purchasing any securities for a period of 24 months following Dynex's purported
termination.
39. On or about February 5, 2001, Fremont provided CIF with financing for the
transaction. Fremont's February 5, 2001, letter is attached hereto as Exhibit 8.
B-12
40. In spite of its belief that it had obtained the financing and Bondholder
support needed for the transaction and that Dynex's termination was unjustified
and ineffective to cancel the Merger Agreement and the December 22nd Letter, on
or about February 8, 2001, CIF made another proposal to Dynex for completing the
transaction. CIF's February 8, 2001 letter to the Dynex Board of Directors (the
"February 8th Letter") is attached hereto as Exhibit 9.
41. Dynex has failed to respond substantively to the February 8th Letter. In
addition, on information and belief Dynex is seeking to sell its assets, make
transactions with its available cash and/or take other steps that would be
inconsistent with the consummation of the transaction called for in the Merger
Agreement and the December 22nd Letter.
42. By letter dated February 22, 2001, to U.S. Trust, CIF objected to Dynex's
claim to the Escrow Shares and the Escrow Funds. A copy of CIF's February 22,
2001 letter to U.S. Trust is attached hereto as Exhibit 10.
43. In light of CIF's objection to Dynex's request for release of the Escrow
Shares and the Escrow Fund, there is currently a dispute regarding between the
two companies regarding the disbursement of those funds by U.S. Trust. Section
6(e) of the Escrow Agreement, requires that Dynex and CIF "promptly commence
binding arbitration in New York, New York, in accordance with the commercial
arbitration rules of the American Arbitration Association."
44. CIF intends to move promptly to stay this action pending the outcome of the
binding arbitration provided for in the Escrow Agreement. CIF brings these
counterclaims to preserve them in case, after the completion of the arbitration,
further proceedings in this Court may be necessary on any unresolved issues
and/or claims.
COUNT I
DECLARATORY JUDGMENT
B-13
45. CIF repeats and realleges the averments of Paragraphs 1 through 44 as if
fully set forth herein.
46. There is an actual controversy between CIF and Dynex concerning whether the
Merger Agreement and the December 22nd Letter are still in force and bind CIF
and Dynex.
47. Pursuant to the Merger Agreement and the December 22nd Letter, Dynex had a
duty not to hinder, delay or prevent CIF's performance of the transaction
contemplated by the Merger Agreement or the December 22nd Letter.
48. Dynex's actions and omissions directly and indirectly hindered CIF's
performance under the Merger Agreement and the December 22nd Letter and
contributed materially to any alleged failure by CIF to perform the conditions
under the Merger Agreement and the December 22nd Letter, including any delays it
may have experienced in obtaining financing and Bondholder support.
49. CIF was entitled to cure any alleged failure to perform the conditions under
the Merger Agreement or the December 22nd Letter, including any delays it may
have experienced in obtaining financing and Bondholder support. Accordingly,
Dynex's purported termination was unjustified.
50. As a result of Dynex's actions and omissions, any alleged failure by CIF to
perform the conditions of the Merger Agreement and the December 22nd Letter is
deemed to be waived or excused and, therefore, CIF did not breach the Merger
Agreement or the December 22nd Letter.
51. Because any alleged failure by CIF to perform the conditions of the Merger
Agreement or the December 22nd Letter is deemed to be waived or excused, Dynex's
purported termination is null, void and of no effect.
B-14
52. CIF is entitled to a declaration that (i) CIF did not breach the Merger
Agreement or the December 22nd Letter; (ii) Dynex's purported termination of the
Merger Agreement is null, void and of no effect; and (iii) the Merger Agreement
remains in full force and effect.
COUNT II
Alternative Cause of Action - Breach of Contract by Dynex
---------------------------------------------------------
53. CIF repeats and realleges the averments of Paragraphs 1 through 52 as if
fully set forth herein.
54. Pursuant to Section 5(a) of the Merger Agreement, Dynex agreed to "use
commercially reasonable efforts to take all action and to do all things
necessary, proper, or advisable in order to consummate and make effective the
transactions contemplated by the Agreement . . . as soon as practicable after
the date hereof."
55. Pursuant to Section 5(b) of the Merger Agreement, Dynex agreed to "use
commercially reasonable efforts to obtain . . . any third party consents,
waivers or licenses that [CIF] reasonably may request in connection with the
matters referred to herein."
56. Pursuant to Section 5(g) of the Merger Agreement, Dynex agreed not to
"engage in any practice, take any action, or enter into any transaction outside
the Ordinary Course of Business."
57. Pursuant to Section 5(h) of the Merger Agreement entitled "Full Access,"
Dynex agreed that it "will (and cause each of its Subsidiaries to) permit
representatives of [CIF] to have full access at all reasonable times, upon
reasonable prior notice, and in a manner so as not to interfere with the normal
business operations [of Dynex] and its Subsidiaries, to all premises,
properties, personnel, books, records (including tax records), contracts, and
documents of or pertaining to each of [Dynex] and its Subsidiaries."
B-15
58. Pursuant to Section 6(a)(iv) of the Merger Agreement, Dynex agreed that it
"shall have performed and complied with all of its covenants hereunder in all
material respects through the Closing."
59. By failing to provide information to CIF in timely fashion, by precipitously
attempting to terminate the Merger Agreement and the December 22nd Letter, and
by aggressively publicizing its purported termination of the Merger Agreement
and the December 22nd Letter, Dynex failed to provide the level of assistance
and support called for in Sections 5(a), 5(b), 5(g), 5(h), and 6(a)(iv) of the
Merger Agreement, thereby breaching the Merger Agreement and the December 22nd
Letter.
60. In the event the Merger Agreement is not in full force and effect, CIF is
entitled to liquidated damages in an amount no less than $2 million, and return
of the Escrow Shares and Escrow Funds for Dynex's breach of Sections 5(a), 5(b),
5(g), 5(h), and 6(a)(iv) of the Merger Agreement to be determined at trial.
COUNT III
Alternative Cause of Action - Breach of Contract by Dynex
---------------------------------------------------------
Prevention Doctrine
61. CIF repeats and realleges the averments of Paragraphs 1 through 60 as if
fully set forth herein.
62. Dynex's actions and omissions directly and indirectly hindered CIF's
performance under the Merger Agreement and the December 22nd Letter and
contributed materially to any alleged failure by CIF to perform the conditions
under the Merger Agreement and the December 22nd Letter, including any delays it
may have experienced in obtaining financing and Bondholder support.
B-16
63. CIF was entitled to cure any alleged failure to perform the conditions under
the Merger Agreement or the December 22nd Letter. Accordingly, Dynex's purported
termination was unjustified.
64. CIF is entitled to treat Dynex's actions and omissions as a breach of the
Merger Agreement and the December 22nd Letter.
65. In the event the Merger Agreement is not in full force and effect, CIF is
entitled to liquidated damages in an amount no less than $2 million, and return
of the Escrow Shares and Escrow Funds for Dynex's breach of the Merger Agreement
and the December 22nd Letter to be determined at trial.
COUNT IV
Alternative Cause of Action - Breach of Independent Duty of Good Faith
and Fair Dealing Under Virginia Law
-----------------------------------
66. CIF repeats and realleges the averments of Paragraphs 1 through 65 as if
fully set forth herein.
67. Under Virginia law, a party may not exercise contractual rights in bad
faith.
68. In the event the Merger Agreement and December 22nd Letter are not in full
force and effect and if Dynex had a right to terminate the Merger Agreement, it
did so in bad faith because it knew: (1) that it had caused or contributed to
any delays encountered by CIF in performing its obligations under the Merger
Agreement and/or the December 22nd Letter; (2) CIF would be able to cure any
deficiency in its performance in a short period of time; and (3) any such brief
delay would not injure Dynex.
69. In the event the Merger Agreement is terminated because of Dynex's breach of
its independent duty of good faith and fair dealing, CIF is entitled to return
of the Escrow Shares and
B-17
Escrow Funds and damages in an amount no less than $45 million as a result of
Dynex's breach to be determined at trial.
70. In the event the Merger Agreement is not terminated because of Dynex's
breach of its independent duty of good faith and fair dealing, CIF is also
entitled to a declaration that the Confidentiality Agreement is null and void to
the extent that it restrains CIF from purchasing Dynex securities for a 24 month
period following the termination of discussions.
WHEREFORE, counter-claimant CIF demands judgment:
1. Declaring that it has not breached the Merger Agreement and
the December 22nd Letter, and that Dynex's purported
termination is of no force or effect;
2. Declaring that the Merger Agreement and the December 22nd
Letter are still in force and enjoining Dynex from taking
actions inconsistent with those agreements;
3. Or, in the Alternative, declaring Dynex to be in breach of the
Merger Agreement and awarding CIF the Escrow Shares and Escrow
Funds and liquidated damages.
4. Also, in the alternative, declaring Dynex to be in breach of
the independent duty of good faith and fair dealing and
awarding CIF the Escrow Shares and Escrow Funds and its
damages from the failed transaction in the amount of $45
million.
5. Also, in the alternative, declaring Dynex to be in breach of
the independent duty of good faith and fair dealing and
declaring that the Confidentiality Agreement is null and void
to the extent that it restrains CIF from purchasing Dynex
securities for a 24 month period following the termination of
discussions.
6. Awarding CIF its costs and attorneys' fees; and
7. Awarding CIF such other and further relief as the Court deems
appropriate.
DEMAND FOR JURY TRIAL
B-18
Pursuant to Rule 38, Fed. R. Civ. P., and Local Rule 38,California
Investment Fund, LLC, hereby demands trial by jury for all the issues so
triable.
Respectfully submitted,
---------------------
Craig B. Young (VSB#22633)
ANDREWS & KURTH L.L.P.
1701 Pennsylvania Ave., N.W.,
Suite 300
Washington, D.C. 20006
Phone: (202) 662-2700
Facsimile: (202) 662-2739
Attorneys for California
Investment Fund, LLC
Date: March 1, 2001
B-19
CERTIFICATE OF SERVICE
I hereby certified that a true and accurate copy of the foregoing was,
this 1st day of March, 2001, served by first-class mail, postage prepaid, upon
the following counsel of record:
William D. Dolan, III, Esquire
Michael W. Robinson, Esquire
2010 Corporate Ridge, Suite 400
McLean, VA 22102
-------------------------------
Craig B. Young
B-20
EXHIBIT C - PRESS RELEASE
Contacts:
Michael Kelly Jonathan Gasthalter
California Investment Fund Citigate Sard Verbinnen
619) 687-5000 (212) 687-8080
CALIFORNIA INVESTMENT FUND RESPONDS TO LAWSUIT
----------------------------------------------
SAN DIEGO, CA - March 2, 2001 - California Investment Fund, LLC ("CIF"), an
affiliate company of First Commercial Corporation, a private real estate
investment company headquartered in San Diego, announced today that on March 1,
2001, it filed its Answer and Counterclaims in response to a lawsuit commenced
by Dynex Capital, Inc. in the U.S. District Court for the Eastern District of
Virginia. CIF also filed a Motion to Compel Arbitration and Stay Pending
Litigation.
The full text of the Answer and Counterclaims and the Motion are on
file with the Securities and Exchange Commission as an amendment to CIF's
Schedule 13D, and are available on-line at the SEC's website.
California Investment Fund, LLC is an affiliate real estate investment
company of First Commercial Corporation. First Commercial, a private real estate
investment company based in San Diego, California, is focused on the acquisition
of whole loans and whole loan portfolios secured by commercial real estate.
Founded in 1993 by Michael and Richard Kelly, First Commercial Corporation
specializes in the commercial real estate loan secondary market.
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