EXHIBIT J
[CALIFORNIA INVESTMENT FUND, LLC LETTERHEAD]
Dynex Capital, Inc.
Attn: Thomas H. Potts
10900 Nuckols Road, 3rd Floor
Glen Allen, Virginia 23060
804-217-5861
Dynex Capital, Inc.
C/O Investment Banking Division
Paine Webber Incorporated
Attn: Mr. Jim Murray
1285 Avenue of the Americas
New York, NY 10019
212-712-4205
VIA FACSIMILE
July 12, 2000
Dear Mr. Potts and Mr. Murray:
California Investment Fund, LLC (CIF) is in receipt of your letter
dated July 6, 2000. Please find the attached response to your counter-offer
to our Revised Letter of Intent. In summary, the following points have been
changed from the terms you presented.
1. The purchase price has been decreased from our original offer, to
$60 million. Our offer includes all accured, unpaid dividends
within the $60 million, with no further accruals to be paid. The
specific allocation per equity class is based on a pro rata
distribution of the purchase price based on the closing prices and
their relative percentages of total market capitalization on July
10, 2000.
The price has been adjusted to reflect the $132 million dollar
decrease in shareholder equity from April 30, 2000 at $310 million
(see exhibit 1) to June 30, 2000, at $178 million (see exhibit 2).
Our updated offer is an increase from 27.39% of balance sheet
equity to 33.75% of balance sheet equity. The Board's counter offer
of roughly $115 million was 37.06% of the April 30, 2000 balance
sheet equity. This same $115 million is 64.68% of the current
equity of $178 million. The $60 million price is an 11.36% premium
to the current market capitalization. It is our opinion that the
release of the second quarter 2000 financial statements will result
in a significant decline in both the common and preferred share
prices, which will result in our offer being at a 75% or greater
premium to the market capitalization following the release of the
financials.
The loss of over one third of the share holder equity within a 60
day period has caused us great concern, given that the majority of
this impact was accounting driven, and not related to specific
transactions. This radical change in 60 days begs the questions,
how long has management known of the impending write down, is this
write down legitimate, and has the write down been understated or
over stated. A change of this magnitude in just two months raises
serious concerns that management has manipulated the financial
statements for the purpose of propping up the share prices, or to
prevent the proposed sale through accounting gimmickry.
Also keep in mind that the residuals currently valued at $124
million, or roughly 50% of the face amount, are illiquid, and would
trade at a severe discount if sold. A swing from 50% to 20% would
wipe out an additional $70 million in share holder equity.
2. The stock of Dynex Holdings, Inc., will be under option to purchase
at $200,000, pending due diligence review of its assets.
3. An acceptable discount of the Senior Notes must be verified by CIF
prior to entering the definitive agreement. Verification by direct
contact with note holders will be required. Any discount negotiated
by CIF will inure to the benefit of the successor entity.
4. The deposit shall serve as liquidated damages, with no further
remedies in order to be reciprocal to the Break-up Fee as
liquidated damages with no further remedies.
5. Paragraph 11 has been changed to have the deposit placed in escrow
upon execution of the Letter of Intent.
6. Paragraph 13 has been added to reflect CIF's interest in pursuing
the assumption of the liability for the Chase Bank of Texas letter
of credit, maturing July 31, 2000.
If these changes meet with your approval, please sign the attached Letter
of Intent and return. We are prepare to move forward with final due
diligence immediately upon your acceptance
California Investment Fund, L.L.C.
By: /s/ Michael R. Kelly
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Name: Michael R. Kelly
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Title: Managing Member
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