sv4
As Filed with
the Securities and Exchange Commission on December 10,
2010
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
NOVASTAR FINANCIAL,
INC.
(Exact name of Company as
specified in its charter)
|
|
|
|
|
Maryland
(State or jurisdiction of
incorporation or organization)
|
|
6531
(Primary Standard
Industrial
Classification Code Number)
|
|
74-2830661
(I.R.S. Employer
Identification)
|
2114 Central Street
Suite 600
Kansas City, Missouri
64108
(816) 237-7000
(Address, including zip code,
and telephone number, including area code, of Companys
principal executive offices)
W. Lance Anderson
Chairman and Chief Executive
Officer
2114 Central Street
Suite 600
Kansas City, Missouri
64108
(816) 237-7000
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies of all communications
to:
Gregory G.
Johnson, Esq.
Bryan Cave LLP
One Kansas City Place
1200 Main Street
Suite 3500
Kansas City, Missouri
64105
(816) 374-3200
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement and satisfaction
or of all other conditions to the transactions described in the
enclosed proxy statement/consent solicitation/prospectus.
If the securities being registered on this form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check
the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462 (d) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer o
(Do not check if a smaller reporting company)
|
|
Smaller Reporting company þ
|
If applicable, place an X in the box to designate the
appropriate rule provision relied upon in conducting this
transaction:
Exchange Act
Rule 13e-4(i)
(Cross-Border Issuer Tender
Offer) o
Exchange Act
Rule 14d-1(d)
(Cross-Border Third Party Tender
Offer) o
CALCULATION
OF REGISTRATION FEE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed Maximum
|
|
|
Proposed Maximum
|
|
|
Amount of
|
Title of Each Class of
|
|
|
Amount to be
|
|
|
Offering
|
|
|
Aggregate
|
|
|
Registration
|
Securities Registered
|
|
|
Registered(1)
|
|
|
Price per Security
|
|
|
Offering Price(2)
|
|
|
Fee(3)
|
Common Stock, par value $0.01
|
|
|
43,823,600
|
|
|
n/a
|
|
|
$3,489,900
|
|
|
$248.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the estimated maximum
number of shares of the Companys common stock issuable in
connection with the exchange offer described in the proxy
statement/consent solicitation/prospectus.
|
|
(2)
|
|
Computed pursuant to
Rule 457(c) and 457(f)(1) and (f)(3) of the Securities Act
of 1933. The proposed maximum aggregate offering price is equal
to (i) the product of (a) $1.71, the average of the
high and low prices per share of the Companys 8.90%
Series C Cumulative Redeemable Preferred Stock as quoted by
Pink OTC Markets inter-dealer quotation service on
December 9, 2010 and (b) 2,990,000, the maximum
possible number of shares of the Companys 8.90%
Series C Cumulative Redeemable Preferred Stock that may be
cancelled and exchanged for Companys common stock pursuant
to the exchange offer, less (ii) $1,623,000, the estimated
amount of cash that would be paid by the Registrant in the
exchange offer.
|
|
(3)
|
|
Calculated in accordance with
Section 6(b) of the Securities Act and SEC Fee Advisory #4
for Fiscal Year 2010 at a rate equal to 0.0000713 multiplied by
the proposed maximum aggregate offering price.
|
The Company hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date
until the Company shall file a further amendment that
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until this Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this proxy statement/consent
solicitation/prospectus is not complete and may be changed.
These securities may not be sold until the Registration
Statement filed with the Securities and Exchange Commission is
effective. This proxy statement/consent solicitation/prospectus
is not an offer to sell securities nor does it seek an offer to
buy those securities in any jurisdiction where the offer or sale
is not permitted.
|
SUBJECT TO COMPLETION, DATED
DECEMBER 10, 2010
Proxy Statement/Consent Solicitation/Prospectus
Offer to Exchange Each
Outstanding Share of
Series C Preferred
Stock
of
NovaStar Financial,
Inc.
For, at the Election of the
Holder,
Common Stock Only
or
Common Stock and Cash
and
Solicitation of Consents
Relating to the Recapitalization
THE SERIES C OFFER, CONSENT
SOLICITATION AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT, CENTRAL TIME, ON [ ], 2011
UNLESS THE OFFER IS EXTENDED.
NovaStar Financial, Inc. (NFI or the
Company) is offering (the Series C
Offer), upon the terms and subject to the conditions set
forth in this document and in the related letter of transmittal,
to exchange each share of its 8.90% Series C Cumulative
Redeemable Preferred Stock of the Company, par value $0.01 per
share (the Series C Preferred Stock), held by
you for, at your election, either:
|
|
|
|
|
3 shares of newly-issued common stock of the Company, par
value $0.01 (the Common Stock), and $2.00 in cash
(the
Cash-and-Stock
Option); or
|
|
|
|
19 shares of newly-issued Common Stock (the
Stock-Only Option).
|
Series C Holders elections will be subject to
allocation and proration procedures intended to ensure that, in
the aggregate, 43,823,600 newly-issued shares of Common Stock
and $1,623,000 in cash (plus such other cash that is needed to
cash out fractional shares) will be issued to Series C
Holders (the Offer Consideration).
As of the date of this proxy statement/consent
solicitation/prospectus, there are 2,990,000 shares of
Series C Preferred Stock outstanding, each of which has a
par value of $0.01 per share. The Series C Offer is part of
a larger recapitalization of the Company, whereby the holders of
the Companys 9.00% Series D1 Mandatory Convertible
Preferred Stock, par value $0.01 (the Series D
Preferred Stock), have agreed to exchange their stock for
an aggregate of 37,161,600 newly-issued shares of Common Stock
and $1,377,000 in cash (the Series D Exchange).
As of September 30, 2010, the Series C Preferred Stock
had an aggregate liquidation preference of $74.8 million
and accrued and unpaid dividends of $20.0 million. As of
September 30, 2010, the Series D Preferred Stock had
an aggregate liquidating preference of $52.5 million and
accrued and unpaid dividends of $26.7 million. Our common
stock and Series C Preferred Stock are currently quoted by
Pink OTC Markets inter-dealer quotation service as an
OTCQB security under the symbol NOVS and
NOVSP, respectively. The Series D Preferred
Stock is privately held.
As part of the Series C Offer, we are soliciting consents
from the holders of the Series C Preferred Stock (the
Series C Holders) to effect the Series C
Offer and the Series D Exchange. We refer to our
solicitation of these consents as the Consent
Solicitation. Series C Holders are required to
deliver consents to effect the Series C Offer and the
Series D Exchange in order to participate in the
Series C Offer, and Series C Holders may not deliver
consents unless they surrender their Series C Preferred
Stock for exchange in the Series C Offer.
Our Series C Offer and Consent Solicitation is subject to
the conditions listed under The Series C Offer and
Consent Solicitation Certain Conditions of the
Series C Offer and Consent Solicitation. One of
the conditions to the Series C Offer and Consent
Solicitation is the final completion of the Series D
Exchange. There are multiple conditions to the closing of the
Series C Offer and the Series D Exchange that are
beyond our control, and we cannot provide you any assurance that
these conditions will be satisfied or that the Series C
Offer and the Series D Exchange will close.
Exchange of the Series C Preferred Stock and an
investment in the common stock involves risks. See Risk
Factors beginning on page 9 of this document for a
discussion of factors that you should consider in connection
with the Series C Offer and Consent Solicitation.
IMPORTANT
If you wish to tender all of your shares of Series C
Preferred Stock, and deliver your consent to the Series C
Offer and Series D Exchange and your proxy, you should
follow the instructions beginning on
page [ ] of this document. If you wish to
withdraw your tender, you may do so by following the
instructions set forth in this proxy statement/consent
solicitation/prospectus. Any holder who withdraws a prior tender
may tender for different Consideration Option by submitting a
new Letter of Transmittal to the Exchange Agent.
Neither the Securities and Exchange Commission nor any state
securities authority has approved or disapproved this
transaction or these securities or determined the fairness of
merits of this transaction or proxy statement/consent
solicitation/prospectus, or determined if this proxy
statement/consent solicitation/prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
ADDITIONAL
INFORMATION
We engaged Georgeson Inc. to act as the information agent
in connection with the Series C Offer. Requests for
assistance or additional copies of this document or the related
letter of transmittal should be delivered to
Georgeson Inc., 199 Water Street,
26th
Floor, New York, NY, 10038-3560. Questions may be directed to
Georgeson Inc. at
(212) 440-9800
for banks and brokers, and at
(866) 695-6074
for all other callers (toll-free).
The date of this Proxy
Statement/Consent Solicitation/Prospectus is
[ ], 2010.
To the Holders of Our Series C Preferred Stock:
You are cordially invited to attend the special meeting of the
stockholders of NovaStar Financial, Inc., a Maryland corporation
(the Company), to be held on
[ ], 2011 at
[ ], a.m., Central Time, at the
Hyatt Regency Crown Center Hotel, 2345 McGee Street, Kansas
City, Missouri 64108, for the following purposes:
1. To approve an amendment to the charter of the Company to
eliminate the Companys 8.90% Series C Cumulative
Redeemable Preferred Stock, par value $0.01 per share (the
Series C Preferred Stock), and the applicable
Articles Supplementary;
2. To approve an amendment to the charter of the Company to
eliminate the Companys 9.00% Series D1 Mandatory
Convertible Preferred Stock, par value $0.01 (the
Series D Preferred Stock), and the applicable
Articles Supplementary;
3. To approve an amendment to the charter of the Company to
increase the number of the authorized shares of capital stock of
the Company from 50,000,000 to 120,000,000;
4. To approve an amendment to the charter of the Company to
preserve the Companys net operating loss carryforwards;
5. To approve certain technical amendments to the charter
of the Company in connection with the foregoing proposals, and
to remove provisions previously required by the Companys
former status as a real estate investment trust; and
6. To transact such other business as may properly come
before the special meeting and any postponement or adjournment
thereof.
As a holder of Series C Preferred Stock, you will be
entitled to vote on proposals 1, 4 and 5 above. Depending
on the subject of any additional proposals properly brought
before the special meeting, you may also be entitled to vote on
other business properly brought before the meeting. At the
meeting, the holders of the Common Stock and the holders of the
Series D Preferred Stock will be entitled to vote on all
business properly brought before the meeting, including
proposals 1, 2, 3, 4 and 5 above. A proxy statement/consent
solicitation/prospectus describing the matters to be considered
at the special meeting to which you will be entitled to vote is
attached to this notice.
The Board of Directors is calling this special meeting in
connection with a recapitalization of the Company involving
(i) an exchange of all outstanding shares of Series D
Preferred Stock, by which the private holders of the
Series D Stock have agreed to exchange their shares subject
to certain conditions beyond their control, and (ii) an
offer to exchange all outstanding shares of Series C
Preferred Stock, together with a consent solicitation seeking
consents to effectuate the Series C Offer and Series D
Exchange. Please see the attached proxy statement/consent
solicitation/prospectus for additional information related to
these transactions.
The Board of Directors has fixed the close of business on
[ ], 2011 as the record date for
determination of stockholders entitled to notice of, and to vote
at, the special meeting and any postponement or adjournment
thereof.
By Order of the Board of Directors
Rodney E. Schwatken
Chief Financial Officer, Chief Accounting Officer and Secretary
Kansas City, Missouri
December [ ], 2010
YOUR VOTE IS IMPORTANT
PLEASE PROMPTLY MARK, DATE, SIGN AND RETURN YOUR PROXY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE OR AUTHORIZE A PROXY TO VOTE YOUR
SHARES BY TELEPHONE OR VIA THE INTERNET AS INSTRUCTED ON
THE PROXY CARD. YOUR VOTE IS REVOCABLE IN ACCORDANCE WITH THE
PROCEDURES SET FORTH IN THIS PROXY STATEMENT/CONSENT
SOLICITATION/PROSPECTUS. IF YOU ATTEND THE SPECIAL MEETING, YOU
MAY VOTE IN PERSON EVEN IF YOU RETURNED A PROXY.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in the proxy statement/consent
solicitation/prospectus summary, including under the sections
titled Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Description of Business and
elsewhere in this proxy statement/consent
solicitation/prospectus constitute forward-looking statements.
These statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially
different from any future results, levels or activity,
performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among other
things, those listed under Risk Factors and
elsewhere in this proxy statement/consent
solicitation/prospectus.
Terminology such as may, will,
expects, plans, anticipates,
believes, estimates,
predicts, potential, or
continue or the negative of such terms or other
comparable terminology, as well as future or conditional verbs
such as would, should,
could, or may are generally intended to
identify
forward-looking
statements. No assurances can be given that any of the events
anticipated by the
forward-looking
statements will transpire or occur, or if any of them do so,
regarding the impact they will have on the results of operations
or financial condition of the Company. Moreover, neither we, nor
any other person assumes responsibility for the accuracy and
completeness of such statements.
This proxy statement/consent solicitation/prospectus has been
generally prepared as of December [ ].
There may be changes in the affairs of the Company
and/or other
matters after that date which are not reflected in this document
and we will not undertake to update all such information unless
required by law.
HOW TO
OBTAIN ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission
(SEC) a Registration Statement on
Form S-4
under the Securities Act with respect to the offered Common
Stock in this proxy statement/consent solicitation/prospectus.
Additional information is contained in the Registration
Statement and you should refer to the Registration Statement and
its exhibits for this information. The Registration Statement
and exhibits and schedules filed as a part thereof, may be
inspected, without charge, at the SEC public reference room
located at 100 F Street, NE, Washington, DC 20549. You
may obtain information on the operation of the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
You may also obtain copies of the materials described above at
prescribed rates by writing to the SEC, Public Reference
Section, 100 F Street, NE, Washington, D.C. 20549.
You may also access information on NFI at the SEC website at:
http://www.sec.gov.
The SEC website contains reports, proxy and information
statements regarding companies that file electronically with the
SEC. Copies of all or any portion of the Registration Statement
may be obtained from the public reference section of the SEC
upon payment of the prescribed fees.
If you would like additional copies of this proxy
statement/consent solicitation/prospectus, or if you have
questions about the Series C Offer or Consent Solicitation,
you should contact:
Georgeson
Inc.
199 Water Street,
26th
Floor
New York, NY 10038-3560
Banks and Brokers Call (212) 440-9800
All Others Call Toll-Free (866) 695-6074
This proxy statement/consent solicitation/prospectus contains
certain business and financial information about the Company
that is not included in or delivered with this document. You may
request a copy of any document that we have filed with the SEC
at no cost, by writing the Company at 2114 Central Street,
Suite 600, Kansas City, Missouri 64108. To receive timely
delivery of the requested documents in advance of the Expiration
Date, your request should be received no later than
[ ], 2011.
We have not authorized anyone to give any information or
make any representation about our Series C Offer or Consent
Solicitation that is different from, or in addition to, that
contained in this proxy statement/
ii
consent solicitation/prospectus or in any of the materials
that we have incorporated into this proxy statement/consent
solicitation/prospectus. Therefore, if anyone gives you
information of this sort, you should not rely on it. If you are
in a jurisdiction where offers to exchange or sell, or
solicitations of offers to exchange or purchase, the securities
offered by this document are unlawful, or if you are a person to
whom it is unlawful to direct these types of activities, then
the Series C Offer and Consent Solicitation presented in
this document do not extend to you. We are not aware, however,
of any jurisdiction in which the transactions of this type would
be unlawful.
iii
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
i
|
|
|
|
|
ii
|
|
|
|
|
ii
|
|
|
|
|
1
|
|
|
|
|
7
|
|
|
|
|
9
|
|
|
|
|
19
|
|
|
|
|
22
|
|
|
|
|
27
|
|
|
|
|
28
|
|
|
|
|
29
|
|
|
|
|
30
|
|
|
|
|
34
|
|
|
|
|
36
|
|
|
|
|
36
|
|
|
|
|
36
|
|
|
|
|
38
|
|
|
|
|
49
|
|
|
|
|
51
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
77
|
|
|
|
|
80
|
|
|
|
|
83
|
|
|
|
|
85
|
|
|
|
|
89
|
|
|
|
|
90
|
|
|
|
|
94
|
|
|
|
|
97
|
|
|
|
|
101
|
|
|
|
|
107
|
|
|
|
|
107
|
|
|
|
|
F-1
|
|
|
|
|
A-1
|
|
EX-21.1 |
EX-23.1 |
iv
THE
SERIES C OFFER AND CONSENT SOLICITATION SUMMARY
This summary highlights the material information contained in
this document, but may not include all of the information that
you, as a holder of Series C Preferred Stock, would like to
know. To fully understand the Series C Offer and Consent
Solicitation, and for a more complete description of the legal
terms of the Series C Offer and Consent Solicitation, you
should carefully read this entire document, including the other
documents we refer to in this document. Our principal executive
offices are located at 2114 Central Street, Suite 600,
Kansas City, Missouri 64108 and our telephone number is
(816) 237-7000.
|
|
|
The Company |
|
NovaStar Financial, Inc. |
|
The Companys Address and Phone Number |
|
2114 Central Street
Suite 600
Kansas City, Missouri 64108
(816) 237-7000 |
|
The Companys Business |
|
The Company operates two majority-owned subsidiaries:
StreetLinks National Appraisal Services LLC, a national
residential appraisal and real estate valuation management
services company and Advent Financial Services LLC, a
start-up
business which provides access to tailored banking accounts,
small dollar banking products and related services to low and
moderate income level individuals. We also own a portfolio of
nonconforming residential mortgage securities. Prior to 2008, we
originated, securitized, sold and serviced residential
nonconforming mortgage loans. |
|
Common Stock |
|
Common Stock, par value $0.01 per share (OTCQB: NOVS) |
|
Series C Preferred Stock |
|
8.90% Series C Cumulative Redeemable Preferred Stock, par
value $0.01 per share (OTCQB: NOVSP) |
|
Series C Offer |
|
An offer to exchange each share of its Series C Preferred
Stock of the Company, par value $0.01 per share, for, at the
election of each holder, either: |
|
|
|
3 shares of newly-issued common stock of the
Company, par value $0.01 (the Common Stock) and
$2.00 in cash (the
Cash-and-Stock
Option); or
|
|
|
|
19 shares of newly-issued Common Stock (the
Stock-Only Option).
|
|
|
|
Series C Holders elections will be subject to
allocation and proration procedures intended to ensure that, in
the aggregate, 43,823,600 newly-issued shares of Common Stock
and $1,623,000 in cash (plus such other cash that is needed to
cash out fractional shares) will be issued to Series C
Holders (the Offer Consideration). See The
Series C Offer and Consent Solicitation
General and Series C Offer
Consideration Explanation and Examples. |
|
Common Stock Outstanding Before the Series C
Offer |
|
As of [ ], 2010, the Company has
9,368,053 shares of Common Stock outstanding. |
|
Common Stock Outstanding After the Series C
Offer |
|
Assuming that 100% of the shares of Series C Preferred
Stock are accepted for exchange in the Series C Offer,
43,823,600 shares of Common Stock would be issued in the
Series C Offer, and 90,353,253 shares of our Common
Stock would be outstanding after completion of the Series C
Offer and the issuance of |
1
|
|
|
|
|
37,161,600 shares of Common Stock in the Series D
Exchange. Consent from our Series C Holders is required to
make the Series C Offer and complete the Series D
Exchange. |
|
Outstanding Shares of Series C Preferred Stock
Prior to the Series C Offer |
|
2,990,000 shares |
|
Consent Solicitation |
|
As part of the Series C Offer, we are soliciting the
consent of Series C Holders to the Series C Offer and
the Series D Exchange. Series C Holders are required
to deliver consents to participate in the Series C Offer,
and Series C Holders are not required to deliver consents
unless they surrender their Series C Preferred Stock for
exchange in the Series C Offer. Series C Holders who
validly surrender their Series C Preferred Stock for
exchange in the Series C Offer will be deemed to have
consented to the Series C Offer and the Series D
Exchange. |
|
Reasons for the Series C Offer |
|
The Series C Offer is being conducted, along with the
Series D Exchange, to eliminate the Companys large
and growing obligation to its preferred stockholders, which the
Company believes impedes its growth and strategic opportunities
available to it and has a negative impact on cash available to
all shareholders in the future. |
|
Offer Consideration |
|
The total aggregate consideration offered is 43,823,600
newly-issued
shares of Common Stock and $1,623,000 in cash. Regardless of the
number of Series C Preferred Stock tendered for each
Consideration Option, the Company will not issue more than
43,823,600 shares of Common Stock or pay out more than
$1,623,000 in cash. |
|
Trading and Related Matters |
|
The Common Stock issuable pursuant to the Series C Offer is
being registered under the Securities Act of 1933, as amended,
and will be freely tradable, except by our affiliates. |
|
Differences in Rights of Our Common Stock and
Series C Preferred Stock |
|
The Series C Preferred Stock and Common Stock have
different rights. For more information about these differences,
see The Series C Offer and Consent
Solicitation Differences in Rights of Our Common
Stock and Series C Preferred Stock. |
|
Market Price Information |
|
The last reported sale price of shares of Common Stock as quoted
by Pink OTC Markets inter-dealer quotation service on
[ ], 2010, was
$[ ]. The last reported sale price of
shares of Series C Preferred Stock as quoted by Pink OTC
Markets inter-dealer quotation service on
[ ], 2010, was
$[ ]. |
|
Series D Exchange |
|
The Series D Exchange is the exchange of all issued and
outstanding shares of the Companys 9.00% Series D1
Mandatory Convertible Preferred Stock, par value $0.01, for an
aggregate of 37,161,600 newly-issued shares of Common Stock and
$1,377,600 in cash. |
|
Recapitalization |
|
The Series C Offer and the Series D Exchange, together
with the Amendments, are part of the Companys plan of
recapitalization to improve the Companys capital structure. |
2
|
|
|
Expiration Date |
|
The Series C Offer and Consent Solicitation will expire at
12:00 midnight, Central time, on [ ],
2011, unless we extend the period of time for which this
exchange offer is open, in which case the term Expiration
Date means the latest time and date on which the
Series C Offer and Consent Solicitation, as so extended,
expires. However, we may extend the Series C Offer and
Consent Solicitation under certain circumstances. |
|
Settlement Date |
|
The settlement date in respect of Series C Preferred Stock
validly surrendered and accepted for exchange in the
Series C Offer will occur promptly following the Expiration
Date. We expect the Settlement Date to be within three business
days after the Expiration Date. |
|
How to Tender Series C Preferred Stock for
Exchange and Deliver Consents to the Series C
Offer |
|
For you to validly tender shares of Series C Preferred
Stock pursuant to our Series C Offer and Consent
Solicitation: |
|
|
|
a properly completed and duly executed letter of
transmittal, along with any required signature guarantees, and
any other required documents, must be received by the Exchange
Agent at the address listed herein, and certificates for
tendered shares of Series C Preferred Stock must be
received by us at the respective address; and
|
|
|
|
you must comply with the guaranteed delivery
procedures set forth in The Series C Offer and
Consent Solicitation Procedure for Tendering
Shares.
|
|
Fractional Shares |
|
Fractional shares of Common Stock will not be tendered in
exchange for Series C Preferred Stock. Instead, each
Series C Holder who otherwise would have been entitled to
receive a fraction of a share of the Companys Common Stock
will receive an amount in cash equal to the product obtained by
multiplying the fractional share interest to which such
Series C Holder would otherwise be entitled by the
Companys average closing price over the
10-day
period preceding the Expiration Date. |
|
Partial Tenders |
|
We will not accept partial tender of your shares. To participate
in the Series C Offer, a Series C Holder must tender
all Series C Preferred Stock held by that Series C
Holder. |
|
Withdrawal Rights |
|
Your tender of shares of Series C Preferred Stock pursuant
to the Series C Offer and Consent Solicitation is
irrevocable, except that shares of Series C Preferred Stock
tendered pursuant to the Series C Offer and Consent
Solicitation may be withdrawn at any time prior to the
expiration of the Series C Offer and Consent Solicitation. |
|
|
|
For a withdrawal to be effective, a written or facsimile
transmission notice of withdrawal must be timely received by the
Exchange Agent at the address set forth on the Letter of
Transmittal and must specify the name, address and social
security number of the person having tendered the shares of
Series C Preferred Stock to be withdrawn, the certificate
number or numbers for such shares and the name of the registered
holder, if different from that of the person who tendered |
3
|
|
|
|
|
such shares of Series C Preferred Stock. See The
Series C Offer and Consent Solicitation
Withdrawal Rights. |
|
Conditions Precedent to the Series C Offer |
|
Our obligation to accept shares for exchange in the
Series C Offer is conditioned upon, among other things: |
|
|
|
the completion of the Series D Exchange;
|
|
|
|
receipt of consent to the Series C Offer and
the Series D Exchange by the holders of two-thirds of the
outstanding Series C Preferred Stock;
|
|
|
|
approval of the Amendments to our charter; and
|
|
|
|
the effectiveness of the registration statement of
which the proxy statement/consent solicitation/prospectus is a
part.
|
|
|
|
For a description of all of the conditions to the Series C
Offer, see The Series C Offer and Consent
Solicitation Conditions to the
Series Offer. |
|
Consequences of Failure to Exchange Outstanding
Series C Preferred Stock |
|
If the Series C Offer closes, all shares of Series C
Preferred Stock that are not tendered in the Series C Offer
and Consent Solicitation will be automatically cancelled and
will then represent the right to receive, prorata per share of
Series C Preferred Stock that remain outstanding, the cash
and Common Stock remaining from the Offer Consideration after
the Series C Offer closes. The remaining Offer
Consideration will be distributed to the non-tendering former
Series C Holders within 30 days of the Expiration
Date, as extended. Any Series C Holder who does not
participate in the Series C Offer will have no control over
the approximate mix of cash and Common Stock he, she or it will
receive, though it is likely that he, she or it will receive the
Stock-Only Option for some of his, her or its shares and the
Cash-and-Stock
Option for the other shares. |
|
|
|
Further, if holders of at least two-thirds of the Series C
Preferred Stock do not participate and the Company is not able
to complete the recapitalization, the Company may not be able to
meet its long-term financial obligations unless the Company
undertake some other remedial measure. This could result in a
material adverse effect to the Company, which could include
bankruptcy. |
|
Interest of Certain Persons in the Series C Offer
and Consent Solicitation |
|
Howard Amster and Barry Igdaloff are directors of the Company
who were elected to serve on the Board by the Series C
Holders. Mr. Amster owns 172,366 shares of
Series C Preferred Stock and is the trustee of two trusts
which own 44,600 shares of Series C Preferred Stock,
collectively. Mr. Igdaloff owns 207,649 shares of
Series C Preferred Stock and as a registered investment
advisor he controls an additional 100,125 shares. |
4
|
|
|
|
|
Messrs. Amster and Igdaloff did not serve on the special
committee of the Board which considered the recapitalization,
including the Series C Offer. |
|
|
|
Messrs. Amster and Igdaloff will be entitled to participate
in the Series C Offer and Consent Solicitation on the same
terms as are being offered to other Series C Holders.
Including the shares in trust for which Mr. Amster is the
trustee, Messrs. Amster and Igdaloff will have the power to
vote 426,415 shares of Preferred C Stock, or 14.26% of the
outstanding Series C Preferred Stock. Further,
Messrs. Amster and Igdaloff are both parties to a Voting
Agreement with the Company, dated December 10, 2010,
pursuant to which the Company agreed to include
Messrs. Amster and Igdaloff on the managements
proposed slate of directors presented to the Company
shareholders at the following Annual Shareholders Meeting. |
|
|
|
Messrs. Amster and Igdaloff have both indicated that they
will elect the Stock-Only Option in exchange for their
Series C Preferred Stock. |
|
|
|
As part of the Series C Offer and Consent Solicitation, and
one of the amendments to the charter contemplated by a proposal
to be considered at the meeting, Messrs. Amster and
Igdaloff will not automatically continue to serve on the Board
beyond the 2011 Annual Shareholder Meeting. For more information
regarding the Board service of Messrs. Amster and Igdaloff,
see Directors, Executive Officers and Control
Persons Series C Directors. |
|
Material U.S. Federal Income Tax Considerations |
|
As discussed below under Material United States Federal
Income Tax Considerations Tax Consequences to
Holders of Series C Preferred Stock any loss on your
Series C Preferred Stock will not be recognized. In
addition, if you have gain on your Series C Preferred
Stock, you may recognize taxable income on the receipt of cash
and shares of Common Stock in exchange for shares of our
Series C Preferred Stock in the Series C Offer. We
urge you to carefully consider the discussion set forth below
under Material United States Federal Income Tax
Considerations Tax Consequences to Holders of
Series C Preferred Stock and to consult your own tax
advisors regarding the Series C Offer in light of your own
particular circumstances. |
|
Plans and Proposals |
|
Other than the Series C Offer and the Series D
Exchange, we do not have any plans, proposals or negotiations
that would result in any material change in our corporate
structure or business, nor do we have any plans, proposals or
negotiations which would relate to or result in our Common Stock
becoming eligible for termination of registration under
Section 12(g)(4) of the Securities Exchange Act of 1934. |
|
Exchange Agent |
|
Computershare Trust Company, N.A. |
|
Transfer Agent |
|
Computershare Trust Company, N.A. |
|
Information Agent |
|
Georgeson Inc. |
|
Regulatory Approvals |
|
We are not aware of any other material regulatory approvals
necessary to complete the Series C Offer, other than the
obligation |
5
|
|
|
|
|
to file a Schedule TO/13E3 with the Securities and Exchange
Commission (the SEC) and to otherwise comply with
applicable securities laws. |
|
Appraisal Rights and Right to Petition for Fair
Value |
|
No stockholder of the Company will have appraisal rights with
respect to any matter to be acted upon at the special meeting. |
|
|
|
However, dissenting Series C Holders will have the right to
petition for the fair value of their Series C Preferred
Stock if the Series C Offer is consummated. For more
information regarding the right to demand Fair Value, see
The Series C Offer and Consent
Solicitation Appraisal Rights and the Right to
Petition for Fair Value. |
|
Further Information |
|
If you have questions regarding the Series C Offer or the
Consent Solicitation or the procedures for exchanging your
Series C Preferred Stock in the Series C Offer, or if
you require additional Series C Offer materials, please
contact: |
|
|
|
Georgeson Inc.
199 Water Street,
26th
Floor
New York, NY 10038-3560
Banks and Brokers Call (212) 440-9800
All Others Call Toll-Free (866) 695-6074 |
6
SUMMARY
HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL
INFORMATION
The following information reflects selected summary historical
and unaudited pro forma financial information of the Company to
give the effect of the Series C Offer and Series D
Exchange. The unaudited pro forma financial information is
presented for illustrative purposes only and does not
necessarily indicate the financial position or results that
would have been realized had the Series C Exchange and the
Series D Exchange been completed as of the dates indicated.
The selected unaudited pro forma financial information has been
derived from, and should be read in conjunction with, our
historical consolidated financial statements included in this
prospectus.
Primary
Assumptions
The primary assumptions made in preparing the unaudited pro
forma information below are that our shareholders will approve:
|
|
|
|
|
an amendment to the charter of the Company to eliminate the
Companys 8.90% Series C Cumulative Redeemable
Preferred Stock, par value $0.01 per share (the
Series C Preferred Stock);
|
|
|
|
an amendment to the charter of the Company to eliminate the
Companys 9.00% Series D1 Mandatory Convertible Preferred
Stock, par value $0.01 (the Series D Preferred
Stock); and
|
|
|
|
an amendment to charter of the Company to increase the number of
the authorized shares of capital stock of the Company from
50,000,000 to 120,000,000.
|
The unaudited pro forma financial information as been adjusted
resulting from the foregoing assumptions to:
|
|
|
|
|
increase common shares outstanding by 43,823,600 for the full
exchange of the Series C Preferred Stock effective as of
the date of its original issuance on January 15, 2004;
|
|
|
|
increase common shares outstanding by 37,161,600 for the full
exchange of the Series D Preferred Stock effective as of
the date of its original issuance on July 16, 2007; and
|
|
|
|
exclude the accrued and unpaid dividends on the Series C
Preferred Stock and Series D Preferred Stock because the effect
of the pro forma adjustments is to reflect that neither the
Series C Preferred Stock or Series D Preferred Stock
were issued.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Summary Historical Financial Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic
|
|
|
9,368,053
|
|
|
|
9,338,131
|
|
|
|
9,332,405
|
|
|
|
8,552,911
|
|
|
|
7,417,267
|
|
Weighted average common shares outstanding-dilutive
|
|
|
9,368,053
|
|
|
|
9,338,131
|
|
|
|
9,332,405
|
|
|
|
8,617,904
|
|
|
|
7,498,232
|
|
Book value per common share-basic
|
|
$
|
(128.47
|
)
|
|
$
|
(107.52
|
)
|
|
$
|
(36.30
|
)
|
|
$
|
51.42
|
|
|
$
|
65.99
|
|
Book value per common share-dilutive
|
|
|
(128.47
|
)
|
|
|
(107.52
|
)
|
|
|
(36.30
|
)
|
|
|
51.04
|
|
|
|
65.28
|
|
Dividends declared per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.40
|
|
|
|
22.40
|
|
Income (loss) from continuing operations available to common
shareholders per share-basic
|
|
|
(20.97
|
)
|
|
|
(74.81
|
)
|
|
|
(51.04
|
)
|
|
|
5.70
|
|
|
|
15.42
|
|
Income (loss) from continuing operations available to common
shareholders per share-dilutive
|
|
|
(20.97
|
)
|
|
|
(74.81
|
)
|
|
|
(51.04
|
)
|
|
|
5.66
|
|
|
|
15.25
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Summary Unaudited Pro Forma Historical Financial
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic
|
|
|
90,353,253
|
|
|
|
90,323,331
|
|
|
|
70,188,405
|
|
|
|
52,376,511
|
|
|
|
51,240,867
|
|
Weighted average common shares outstanding-dilutive
|
|
|
90,353,253
|
|
|
|
90,323,331
|
|
|
|
70,188,405
|
|
|
|
52,441,504
|
|
|
|
51,321,832
|
|
Book value per common share-basic
|
|
$
|
(12.70
|
)
|
|
$
|
(10.67
|
)
|
|
$
|
(4.46
|
)
|
|
$
|
8.74
|
|
|
$
|
9.77
|
|
Book value per common share-dilutive
|
|
|
(12.70
|
)
|
|
|
(10.67
|
)
|
|
|
(4.46
|
)
|
|
|
8.73
|
|
|
|
9.76
|
|
Dividends declared per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.78
|
|
|
|
3.34
|
|
Income (loss) from continuing operations per share-basic
|
|
|
(2.00
|
)
|
|
|
(7.57
|
)
|
|
|
(6.66
|
)
|
|
|
1.06
|
|
|
|
2.36
|
|
Income (loss) from continuing operations per share-dilutive
|
|
|
(2.00
|
)
|
|
|
(7.57
|
)
|
|
|
(6.66
|
)
|
|
|
1.06
|
|
|
|
2.36
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Summary Historical Financial Information:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
Weighted average common shares outstanding-dilutive
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
Book value per common share-basic
|
|
$
|
(24.49
|
)
|
|
$
|
(125.54
|
)
|
Book value per common share-dilutive
|
|
|
(24.49
|
)
|
|
|
(125.54
|
)
|
Dividends declared per common share
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations available to common
shareholders per share-basic
|
|
|
104.30
|
|
|
|
(17.98
|
)
|
Income (loss) from continuing operations available to common
shareholders per share-dilutive
|
|
|
104.30
|
|
|
|
(17.98
|
)
|
Summary Unaudited Pro Forma Historical Financial
Information:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic
|
|
|
90,322,407
|
|
|
|
90,353,253
|
|
Weighted average common shares outstanding-dilutive
|
|
|
90,322,407
|
|
|
|
90,353,253
|
|
Book value per common share-basic
|
|
$
|
(1.78
|
)
|
|
$
|
(12.44
|
)
|
Book value per common share-dilutive
|
|
|
(1.78
|
)
|
|
|
(12.44
|
)
|
Dividends declared per common share
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per share-basic
|
|
|
10.92
|
|
|
|
(1.74
|
)
|
Income (loss) from continuing operations per share-dilutive
|
|
|
10.92
|
|
|
|
(1.74
|
)
|
8
RISK
FACTORS
In deciding whether to tender your shares of Series C
Preferred Stock pursuant to the Series C Offer and Consent
Solicitation, you should read carefully this proxy
statement/consent solicitation/prospectus and the documents to
which we refer you. You should also carefully consider the
following factors.
Risks
Related to Series C Offer
The
Series C Offer and Series D Exchange may not benefit
us or our stockholders.
The Series C Offer and Series D Exchange may not
enhance stockholder value or improve the liquidity and
marketability of our Common Stock. As of
[ ], 2010, there were
[ ] outstanding shares of Common Stock,
2,990,000 shares of Series C Preferred Stock and
2,100,000 shares of Series D Preferred Stock. If all
of the outstanding Common Stock available for issuance under the
Series C Offer and the Series D Exchange is issued,
there will be approximately 90,353,253 shares of Common
Stock outstanding.
This recapitalization will significantly increase the
outstanding shares of Common Stock. It may result in an
immediate decrease in the market value of the Common Stock. In
addition, factors unrelated to our stock or our business, such
as the general perception of the Series C Offer and Consent
Solicitation by the investment community, may cause a decrease
in the value of the Common Stock and impair its liquidity and
marketability. Furthermore, securities markets worldwide have
experienced significant price and volume fluctuations over the
last several years. This market volatility, as well as general
economic, market or political conditions, could cause a
reduction in the market price and liquidity of Common Stock
following the Series C Offer and Consent Solicitation and
Series D Exchange, particularly if the Series C Offer
and Consent Solicitation and Series D Exchange is not
viewed favorably by the investment community.
If
completion of our Series C Offer does not qualify as a
reorganization under the Internal Revenue Code, you may be taxed
on the full amount of the consideration you receive from
us.
We believe that the exchange of Common Stock and cash, if any,
for all of a holders Series C Preferred Stock
pursuant to the Series C Offer should be treated for
federal income tax purposes as a recapitalization within the
meaning of Section 368 of the Internal Revenue Code. In
such case, Series C Holders who participate in the
Series C Offer will not recognize gain or loss other than
to the extent that they receive cash in the Series C Offer
or securities for accrued and unpaid dividends.
The tax treatment described above, however, is not free from
doubt. If we complete our Series C Offer in a manner in
which the Series C Offer does not qualify for the tax
treatment described above, you may be taxed on any gain you
realize up to the full Offer Consideration.
It is
unlikely that we will pay any dividends on any shares of our
Common Stock you receive in the Series C Offer in the
foreseeable future.
Regardless of whether we exchange all of our outstanding
Series C Preferred Stock and Series D Preferred Stock,
it is unlikely that we will pay any cash or stock dividends on
any shares of our Common Stock in the foreseeable future.
If we
do not complete the Series C Offer and Series D
Exchange, we may not be able to meet our
long-term
financial obligations.
Because the Series D Preferred Stock is subject to
mandatory conversion in the future, and because there are
accrued and unpaid dividends on all classes of preferred stock
of $46,700,000 as of September 30, 2010, we must take some
remedial measure or we may not able to meet our long-term
financial obligations. If we are not able to complete the
recapitalization and we do not take some other action in the
future to address these issues, it could result in a material
adverse effect to the Company, which could include bankruptcy.
9
Tendering
stockholders may be required to return their consideration if a
court were to determine that the Series C Offer constituted
a fraudulent transfer under federal or state laws.
A payment or transfer of property can subsequently be voided if
a court finds that the payment or transfer constituted a
fraudulent transfer. There are generally two
standards used by courts to determine whether a transfer was
fraudulent under federal or state law.
|
|
|
|
|
First, a transfer will be deemed fraudulent if it was made with
the actual intent to hinder, delay or defraud current or future
creditors.
|
|
|
|
Second, a transfer will be considered fraudulent if the
transferor received less than reasonably equivalent value in
exchange for the payment or transfer of property and either
(a) was insolvent at the time of the transaction,
(b) was rendered insolvent as a result of the transaction,
(c) was engaged, or about to engage, in a business or
transaction for which its assets were unreasonably small, or
(d) intended to incur, or believed, or should have
believed, it would incur, debts beyond its ability to pay as
such debts mature.
|
Litigation seeking to void the Series C Offer or
Series D Exchange as fraudulent transfers would have to be
commenced by our creditors or someone acting on their behalf,
such as a bankruptcy trustee. If such litigation is instituted,
we cannot assure you as to what standard a court would apply in
order to determine whether we were insolvent as of
the date the Series C Offer and Series D Exchange was
closed, or that a court would not determine that we were
insolvent on the date of closing. We can also not assure you
that a court would not determine that the Series C Offer or
Series D Exchange constituted fraudulent transfers on
another ground.
The definition of insolvent varies under three
potentially applicable statutes. The measure of insolvency for
purposes of the foregoing will vary depending upon the law of
the jurisdiction which is being applied. Under the Bankruptcy
Code, we would be considered insolvent if the sum of all our
liabilities is greater than the value of all our property at a
fair valuation. The foregoing standards are applied on a
case-by-case
basis to determine the insolvency of a particular person.
Because there can be no assurance which jurisdictions
fraudulent transfer law would be applied by a court, there can
be no assurance as to what standard a court would apply in order
to determine insolvency.
If a court determines the Series C Offer or Series D
Exchange constituted fraudulent transfers, the Series C
Offer or Series D Exchange could be voided. If the
Series C Offer is deemed a fraudulent transfer, holders of
the Series C Preferred Stock that successfully tender their
shares may be required to return the consideration received for
their Series C Preferred Stock, and such holders would be
returned to their original position as a holder of Series C
Preferred Stock.
Risks
Related to our Business
Payment
on our mortgage securities will continue to decrease as
underlying mortgage loans are repaid and if the mortgage loans
underlying our residual and subordinated securities continue to
experience significant credit losses, which will reduce our cash
flows, perhaps abruptly, and adversely affect our
liquidity.
Our mortgage securities consist of certain residual securities
retained from our past securitizations of mortgage loans, which
typically consist of interest-only, and over collateralization
bonds, and certain investment grade and non-investment grade
rated subordinated mortgage securities retained from our past
securitizations and purchased from other ABS issuers. These
residual and subordinated securities are generally unrated or
rated below investment grade and, as such, involve significant
investment risk that exceeds the aggregate risk of the full pool
of securitized loans. By holding the residual and subordinated
securities, we generally retain the first loss risk
associated with the underlying pool of mortgage loans. As a
result, losses on the underlying mortgage loans directly affect
our returns on, and cash flows from, these mortgage securities.
In addition, if delinquencies
and/or
losses on the underlying mortgage loans exceed specified levels,
the level of over-collateralization required for higher rated
securities held by third parties may be increased, further
decreasing cash flows presently payable to us.
10
Increased delinquencies and defaults on the mortgage loans
underlying our residual and subordinated mortgage securities
have resulted in a decrease in the cash flow we receive from
these investments. In the event that decreases in cash flows
from our mortgage securities are more severe or abrupt than
currently projected, our results of operations, financial
condition, and liquidity, and our ability to restructure
existing obligations and establish new business operations will
be adversely affected.
Our cash flows from mortgage securities are likely to be
insufficient to cover our existing expenses in the near future.
As
payments on our mortgage securities continue to decrease we will
become more dependent on the operations and cash flows of our
subsidiaries to meet our obligations.
Our principal assets are our equity interests in our operating
subsidiaries, as well as approximately $16.8 million in
cash and cash equivalents as of September 30, 2010. The
cash flows from our mortgage securities have materially
decreased and will continue to decrease as the underlying
mortgage loans are repaid. As this occurs, we will become more
dependent on the results of operations and cash flows generated
by StreetLinks and Advent, and will rely on distributions and
other payments from StreetLinks and Advent and any new
operations we may establish or acquire, to pay our operating
expenses and meet our other obligations. If our subsidiaries are
unable to make distributions or other payments to us, our
ability to meet our obligations will be materially and adversely
affected.
Our
ability to profitably manage, operate and grow operations is
critical to our ability to pay our operating expenses and meet
our other obligations and is subject to significant
uncertainties and limitations. If we attempt to make any
acquisitions to grow operations, we will incur a variety of
costs and may never realize the anticipated
benefits.
In light of the current state of declining cash flows from our
mortgage securities, our ability to pay our operating expenses
and meet our other obligations is dependent upon our ability to
successfully operate and grow operations such that they generate
positive cash flow. Our ability to start or acquire new
businesses is significantly constrained by our limited liquidity
and our likely inability to obtain debt financing or to issue
equity securities as a result of our current financial
condition, including a shareholders deficit, as well as
other uncertainties and risks. There can be no assurances that
we will be able to successfully operate and grow operations or
establish or acquire new business operations.
If we pursue any new business opportunities, the process of
establishing a new business or negotiating the acquisition and
integrating an acquired business may result in operating
difficulties and expenditures and may require significant
management attention. Moreover, we may never realize the
anticipated benefits of any new business or acquisition. We may
not have, and may not be able to acquire or retain, personnel
with experience in any new business we may establish or acquire.
In addition, future acquisitions could result in contingent
liabilities
and/or
impairment/amortization expenses related to goodwill and other
intangible assets, which could harm our results of operations,
financial condition and business prospects.
We are
unlikely to have access to financing on reasonable terms, or at
all, that may be necessary for us to continue to operate or to
acquire new businesses.
We do not currently have in place any agreements or commitments
for short-term financing nor any agreements or commitments for
additional long-term financing. In light of these factors and
current market conditions, our current financial condition, and
our lack of significant unencumbered assets, we are unlikely to
be able to secure additional financing for existing or new
operations or for any acquisition.
Attempts
to renegotiate and/or restructure the components of our equity
in order to realign the capital structure with our current
business model may be unsuccessful.
We expect to attempt to renegotiate
and/or
restructure the components of our equity in order to realign the
capital structure with our current business model. In the event
we are unsuccessful, we may not be able to pay the accumulated
dividends on our preferred stock or redeem such stock.
11
Renegotiating
and/or restructuring our equity may involve the issuance of a
substantial number of shares of our common stock.
To successfully renegotiate
and/or
restructure our equity we may have to issue a substantial number
of shares our common stock. Such an issuance will dilute our
existing common stockholders and may depress the market value
and price of our common stock. We cannot predict the price at
which our common stock would trade following such an issuance.
Various
legal proceedings could adversely affect our financial
condition, our results of operations and
liquidity.
In the course of our business, we are subject to various legal
proceedings and claims. See Description of
Business Legal Proceedings. In addition, we
have become subject to various securities and derivative
lawsuits, and we may continue to be subject to additional
litigation, in some cases on the basis of novel legal theories.
The resolution of these legal matters or other legal matters
could result in a material adverse impact on our results of
operations, liquidity and financial condition.
Risks
Related to Our Operating Subsidiaries
A
prolonged decline in the number of home sales and the
originations and refinancings of home loans would decrease
appraisal order volume and adversely affect the revenues and
profitability of StreetLinks.
StreetLinks, our residential appraisal management company,
retains a portion of the fee for appraisal services collected
from lenders and borrowers for an independent residential
appraisal to cover its costs of managing the process of
fulfilling the appraisal order. A prolonged decline in the
number of home sales and the originations and refinancings of
home loans would cause a decrease in the demand for appraisals.
The decreased demand for appraisals would have an adversely
affect the revenues and profitability of StreetLinks.
StreetLinks
may be unable to maintain its relationships with its existing
lending customers and may be unable to add new lending customers
which would decrease appraisal order volume and adversely affect
the revenues and profitability of StreetLinks.
StreetLinks has increased its appraisal order volume by adding
lending customers and intends to further develop its business
through the addition of new lending customers. There is no
assurance that StreetLinks will be able to maintain the
relationships with its existing lending customers or add new
lending customers which would decrease appraisal order volume
and adversely affect the revenues and profitability of
StreetLinks.
Government
agencies and regulatory authorities may change or eliminate
current restrictions and requirements for
appraisals.
StreetLinks appraisal order volume has increased, in part,
as a result of increased restrictions and requirements for
appraisals established by government agencies and regulatory
authorities such as the Federal Housing Finance Agency and the
United States Department of Housing and Urban Development that,
among other things, require appraiser independence. Changes in
or elimination of these restrictions and requirements could
adversely affect the demand for StreetLinks services and
the viability of its business model.
Advent
may be unable to develop systems and a network of business
partners to successfully distribute its products and
services.
The success of Advent, our start up operation which will provide
access to tailored banking accounts, small dollar banking
products and related services to meet the needs of low and
moderate income level individuals, will in large part depend on
its ability to develop systems and a network of business
partners for the distribution of its products services. To the
extent Advent is unable to develop systems and a network of
business partners to successfully distribute Advents
products and services, it will have an adverse effect on
Advents business, financial condition and results of
operations.
12
Advents
ability to distribute its financial products is, to some extent,
dependent on the success of its business partners.
Advent anticipates distributing its financial products through
business partners such as tax preparation offices and is to some
extent dependent on the success of these business partners. To
the extent there is a decrease in the demand for the products or
services of Advents business partners, there may be a
decrease in demand for Advents products and services,
which would have an adverse effect on Advents business,
financial condition and results of operations.
Federal
and state legislators and regulators have increasingly taken an
active role in regulating financial products of the type Advent
anticipates offering, and the continuation of this trend could
impede or prevent Advents ability to facilitate these
financial products and harm its business.
From time to time, government officials at the federal and state
levels introduce and enact legislation and regulations proposing
to regulate or prevent the facilitation of financial products.
Certain of the proposed legislation and regulations could, if
adopted, increase costs to Advent and its business partners that
provide its financial products, or could negatively impact or
eliminate the ability of Advent to provide financial products
through Advents business partners such as tax return
preparation offices, which could have an adverse effect on
Advents business, financial condition and results of
operations.
Many states have statutes regulating, through licensing and
other requirements, the activities of brokering loans and
providing credit repair services to consumers as well as payday
loan laws and local usury laws. Certain state regulators are
interpreting these laws in a manner that could adversely affect
the manner in which financial products are facilitated or
permitted. If Advent is required to change business practices or
otherwise comply with these statutes it could have a material
adverse effect on its business, financial condition and results
of operations.
Legal
proceedings against our operating subsidiaries could adversely
affect their business, financial condition and results of
operations.
In the course of their business, our operating subsidiaries may
become subject to legal proceedings and claims and could
experience significant losses as a result of litigation defense
and resolution costs which would have an adverse effect on their
business, financial condition and results of operations.
Differences
in our actual experience compared to the assumptions that we use
to determine the value of our residual mortgage securities and
to estimate reserves could further adversely affect our
financial position.
Our securitizations of mortgage loans that were structured as
sales for financial reporting purposes resulted in gain
recognition at closing as well as the recording of the residual
mortgage securities we retained at fair value. The value of
residual securities represents the present value of future cash
flows expected to be received by us from the excess cash flows
created in the securitization transaction. In general, future
cash flows are estimated by taking the coupon rate of the loans
underlying the transaction less the interest rate paid to the
investors, less contractually specified servicing and trustee
fees, and after giving effect to estimated prepayments and
credit losses. We estimate future cash flows from these
securities and value them utilizing assumptions based in part on
projected discount rates, delinquency, mortgage loan prepayment
speeds and credit losses. It is extremely difficult to validate
the assumptions we use in valuing our residual interests. Even
if the general accuracy of the valuation model is validated,
valuations are highly dependent upon the reasonableness of our
assumptions and the predictability of the relationships which
drive the results of the model. Due to deteriorating market
conditions, our actual experience has differed significantly
from our assumptions, resulting in a reduction in the fair value
of these securities and impairments on these securities. If our
actual experience continues to differ materially from the
assumptions that we used to determine the fair value of these
securities, our financial condition, results of operations and
liquidity will continue to be negatively affected.
13
The
value of, and cash flows from, our mortgage securities may
further decline due to factors beyond our control.
There are many factors that affect the value of, and cash flows
from, our mortgage securities, many of which are beyond our
control. For example, the value of the homes collateralizing
residential loans may decline due to a variety of reasons beyond
our control, such as weak economic conditions or natural
disasters. Over the past year, residential property values in
most states have declined, in some areas severely, which has
increased delinquencies and losses on residential mortgage loans
generally, especially where the aggregate loan amounts
(including any subordinate loans) are close to or greater than
the related property value. A borrowers ability to repay a
loan also may be adversely affected by factors beyond our
control, such as subsequent over-leveraging of the borrower,
reductions in personal incomes, and increases in unemployment.
In addition, interest-only loans, negative amortization loans,
adjustable-rate loans, reduced documentation loans, home equity
lines of credit and second lien loans may involve higher than
expected delinquencies and defaults. For instance, any increase
in prevailing market interest rates may result in increased
payments for borrowers who have adjustable rate mortgage loans.
Moreover, borrowers with option ARM mortgage loans with a
negative amortization feature may experience a substantial
increase in their monthly payment, even without an increase in
prevailing market interest rates, when the loan reaches its
negative amortization cap. The current lack of appreciation in
residential property values and the adoption of tighter
underwriting standards throughout the mortgage loan industry may
adversely affect the ability of borrowers to refinance these
loans and avoid default.
Each of these factors may be exacerbated by general economic
slowdowns and by changes in consumer behavior, bankruptcy laws,
and other laws.
To the extent that delinquencies or losses continue to increase
for these or other reasons, the value of our mortgage securities
and the mortgage loans held in our portfolio will be further
reduced, which will adversely affect our operating results,
liquidity, cash flows and financial condition.
Risks
Related to Our Discontinued Operations
We may
be required to repurchase mortgage loans or indemnify mortgage
loan purchasers as a result of breaches of representations and
warranties, borrower fraud, or certain borrower defaults, which
could further harm our liquidity.
When we sold mortgage loans, whether as whole loans or pursuant
to a securitization, we made customary representations and
warranties to the purchaser about the mortgage loans and the
manner in which they were originated. Our whole loan sale
agreements require us to repurchase or substitute mortgage loans
in the event we breach any of these representations or
warranties. In addition, we may be required to repurchase
mortgage loans as a result of borrower, broker, or employee
fraud. Likewise, we are required to repurchase or substitute
mortgage loans if we breach a representation or warranty in
connection with our securitizations. We have received various
repurchase demands as performance of subprime mortgage loans has
deteriorated. A majority of repurchase requests have been
denied, otherwise a negotiated purchase price adjustment was
agreed upon with the purchaser. Enforcement of repurchase
obligations against us would further harm our liquidity.
Risks
Related to Interest Rates
Changes
in interest rates may harm our results of operations and equity
value.
Our results of operations are likely to be harmed during any
period of unexpected or rapid changes in interest rates. Our
primary interest rate exposures relate to our mortgage
securities and floating rate debt obligations that arise if the
applicable trigger is met. Interest rate changes could adversely
affect our cash flow, results of operations, financial
condition, liquidity and business prospects in the following
ways:
|
|
|
|
|
interest rate fluctuations may harm our cash flow as the spread
between the interest rates we pay on our borrowings and the
interest rates we receive on our mortgage assets narrows;
|
14
|
|
|
|
|
the value of our residual and subordinated securities and the
income we receive from them are based primarily on LIBOR, and an
increase in LIBOR increases funding costs which reduces the cash
flow we receive from, and the value of, these securities;
|
|
|
|
existing borrowers with adjustable-rate mortgages or higher risk
loan products may incur higher monthly payments as the interest
rate increases, and consequently may experience higher
delinquency and default rates; and
|
|
|
|
changes in prepayment rates may harm our earnings and the value
of our mortgage securities.
|
In addition, interest rate changes may also further impact our
net book value as our mortgage securities are marked to market
each quarter. Generally, as interest rates increase, the value
of our mortgage securities decreases which decreases the book
value of our equity.
Furthermore, shifts in the yield curve, which represents the
markets expectations of future interest rates, also
affects the yield required for the purchase of our mortgage
securities and therefore their value. To the extent that there
is an unexpected change in the yield curve it could have an
adverse effect on our mortgage securities portfolio and our
financial position.
Risks
Related to our Capital Stock
There
can be no assurance that our common stock or Series C
Preferred Stock will continue to be traded in an active
market.
Our common stock and our Series C Preferred Stock were
delisted by the New York Stock Exchange (NYSE) in
January 2008, as a result of failure to meet applicable
standards for continued listing on the NYSE. Our common stock
and Series C Preferred Stock are currently quoted by Pink
OTC Markets
inter-dealer
quotation service as an OTCQB security. However, there can be no
assurance that an active trading market will be maintained.
Trading of securities on the Pink OTC Market is generally
limited and is effected on a less regular basis than on
exchanges, such as the NYSE, and accordingly investors who own
or purchase our stock will find that the liquidity or
transferability of the stock may be limited.
Additionally, a shareholder may find it more difficult to
dispose of, or obtain accurate quotations as to the market value
of, our stock. If an active public trading market cannot be
sustained, the trading price of our common and preferred stock
could be adversely affected and your ability to transfer your
shares of our common and preferred stock may be limited.
We are
not likely to pay dividends to our common or preferred
stockholders in the foreseeable future.
To preserve liquidity, our board of directors has suspended
dividend payments on our Series C Preferred Stock and
Series D1 Preferred Stock. Dividends on our Series C
Preferred Stock and D1 Preferred Stock continue to accrue and
the dividend rate on our Series D1 Preferred Stock
increased from 9.0% to 13.0%, compounded quarterly, effective
January 16, 2008 with respect to all unpaid dividends and
subsequently accruing dividends. No dividends can be paid on any
of our common stock until all accrued and unpaid dividends on
our Series C Preferred Stock and Series D1 Preferred
Stock are paid in full. Accumulating dividends with respect to
our preferred stock will negatively affect the ability of our
common stockholders to receive any distribution or other value
upon liquidation.
The
market price and trading volume of our common and preferred
stock may be volatile, which could result in substantial losses
for our shareholders.
The market price of our capital stock can be highly volatile and
subject to wide fluctuations. In addition, the trading volume in
our capital stock may fluctuate and cause significant price
variations to occur. Investors may experience volatile returns
and material losses. Some of the factors that could negatively
affect our share price or result in fluctuations in the price or
trading volume of our capital stock include:
|
|
|
|
|
actual or perceived changes in our ability to continue as a
going concern;
|
15
|
|
|
|
|
actual or anticipated changes in the delinquency and default
rates on mortgage loans, in general, and specifically on the
loans we invest in through our mortgage securities;
|
|
|
|
actual or anticipated changes in residential real estate values;
|
|
|
|
actual or anticipated changes in market interest rates;
|
|
|
|
actual or anticipated changes in our earnings and cash flow;
|
|
|
|
general market and economic conditions, including the operations
and stock performance of other industry participants;
|
|
|
|
developments in the subprime mortgage lending industry or the
financial services sector generally;
|
|
|
|
the impact of new state or federal legislation or adverse court
decisions;
|
|
|
|
the activities of investors who engage in short sales of our
common stock;
|
|
|
|
actual or anticipated changes in financial estimates by
securities analysts;
|
|
|
|
sales, or the perception that sales could occur, of a
substantial number of shares of our common stock by insiders;
|
|
|
|
additions or departures of senior management and key
personnel; and
|
|
|
|
actions by institutional shareholders.
|
Our charter permits us to issue additional equity without
shareholder approval, which could materially adversely affect
our current shareholders.
Our charter permits our board of directors, without shareholder
approval, to:
|
|
|
|
|
authorize the issuance of additional shares of common stock or
preferred stock without shareholder approval, including the
issuance of shares of preferred stock that have preference
rights over the common stock with respect to dividends,
liquidation, voting and other matters or shares of common stock
that have preference rights over our outstanding common stock
with respect to voting;
|
|
|
|
classify or reclassify any unissued shares of common stock or
preferred stock and to set the preferences, rights and other
terms of the classified or reclassified shares; and
|
|
|
|
issue additional shares of common stock or preferred stock in
exchange for outstanding securities, with the consent of the
holders of those securities.
|
In connection with any capital restructuring or in order to
raise additional capital, we may issue, reclassify or exchange
securities, including debt instruments, preferred stock or
common stock. Any of these or similar actions by us may dilute
your interest in us or reduce the market price of our capital
stock, or both. Our outstanding shares of preferred stock have,
and any additional series of preferred stock may also have, a
preference on distribution payments that limit our ability to
make a distribution to common shareholders. Because our decision
to issue, reclassify or exchange securities will depend on
negotiations with third parties, market conditions and other
factors beyond our control, we cannot predict or estimate the
amount, timing or nature of our future issuances, if any.
Further, market conditions could require us to accept less
favorable terms for the issuance of our securities in the
future. Thus, our shareholders will bear the risk that our
future issuances, reclassifications and exchanges will reduce
the market price of our stock
and/or
dilute their interest in us.
Other
Risks Related to our Business
Our
ability to use our net operating loss carryforwards and net
unrealized built-in losses could be severely limited in the
event of certain transfers of our voting
securities.
We currently have recorded a significant net deferred tax asset,
before valuation allowance, almost all of which relates to
certain loss carryforwards and net unrealized
built-in-losses.
While we believe that it is more
16
likely than not that we will not be able to utilize such losses
in the future, the net operating loss carryforwards
(NOLs) and net unrealized built-in losses could
provide significant future tax savings to us if we are able to
use such losses. However, our ability to use these tax benefits
may be impacted, restricted or eliminated due to a future
ownership change within the meaning of
Section 382 of the Code. We do not have the ability to
prevent such an ownership change from occurring. Consequently,
an ownership change could occur that would severely limit our
ability to use the tax benefits associated with the NOLs and net
unrealized built-in losses, which may result in higher taxable
income for us (and a significantly higher tax cost as compared
to the situation where these tax benefits are preserved).
Some
provisions of our charter, bylaws and Maryland law may deter
takeover attempts, which may limit the opportunity of our
shareholders to sell their common stock at favorable
prices.
Certain provisions of our charter, bylaws and Maryland law could
discourage, delay or prevent transactions that involve an actual
or threatened change in control, and may make it more difficult
for a third party to acquire us, even if doing so may be
beneficial to our shareholders. For example, our board of
directors is divided into three classes with three year
staggered terms of office. This makes it more difficult for a
third party to gain control of our board because a majority of
directors cannot be elected at a single meeting. Further, under
our charter, generally a director may only be removed for cause
and only by the affirmative vote of the holders of at least a
majority of all classes of shares entitled to vote in the
election for directors together as a single class. Our bylaws
make it difficult for any person other than management to
introduce business at a duly called meeting requiring such other
person to follow certain advance notice procedures. Finally,
Maryland law provides protection for Maryland corporations
against unsolicited takeover situations.
The
accounting for our mortgage assets may result in volatility of
our results of operations and our financial
statements.
The accounting treatment applicable to our mortgage assets is
dependent on various factors outside of our control and may
significantly affect our results of operations and financial
statements. As current turmoil in the subprime industry
continues to affect the characteristics of our mortgage assets
we may be required to adjust the accounting treatment of our
assets. As a result of this, stockholders must undertake a
complex analysis to understand our earnings (losses), cash flows
and financial condition.
Changes
in accounting standards, subjective assumptions and estimates
used by management related to complex accounting matters could
have an adverse effect on results of operations.
Generally accepted accounting principles in the United States
and related accounting pronouncements, implementation guidance
and interpretations with regard to a wide range of matters, such
as stock-based compensation, asset impairment, valuation
reserves, income taxes and fair value accounting, are highly
complex and involve many subjective assumptions, estimates and
judgments by management. Changes in these rules or their
interpretations or changes in underlying assumptions, estimates
or judgments by management could significantly change our
reported results.
The
recently-enacted Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 and other rules and regulations
promulgated thereunder could cause additional operating and
compliance costs in addition to other
uncertainties.
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Act) was signed into
federal law. The Act will have a broad impact on the financial
services industry, including significant regulatory and
compliance changes. Regulatory agencies will implement new
regulations in the future that will establish the parameters of
the new regulatory framework and provide a clearer understanding
of the legislations effect on our business. Given the
uncertainty associated with the manner in which the provisions
of the Act will be implemented by the various regulatory
agencies, the full extent of the impact the Act will have on our
operations is unclear. Nonetheless, while it is difficult to
predict at this time what
17
specific impact the Act and certain
yet-to-be
implemented rules and regulations will have on us, we expect
that at a minimum our operating and compliance costs will
increase.
The
recently-enacted Health Care and Education Reconciliation Act of
2010 and proposed amendments thereto could cause our
compensation costs to increase, adversely affecting our results
and cash flows.
The recently-enacted Health Care and Education Reconciliation
Act of 2010 and proposed amendments thereto contain provisions
that could materially impact the future healthcare costs of the
Company. While the legislations ultimate impact remains
uncertain, it is possible that these changes could significantly
increase our compensation costs which would adversely affect our
results and cash flows.
Our
business relies on key personnel.
We are heavily dependent upon certain key personnel and the loss
of service of any of these senior executives could adversely
affect our business. Our success depends on the Companys
ability to retain these key executives. The loss of any of these
senior executives could have a material adverse effect on our
business financial condition and results of operation.
System
interruptions or other technology failures could impair the
Companys operations.
We rely on our computer systems and service providers to
consistently provide efficient and reliable service. System
interruptions or other system intrusions, which may not be
within the Companys control, may impair the Companys
delivery of its products and services, resulting in a loss of
customers and a corresponding loss in revenue.
18
QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETING, SERIES C OFFER AND
CONSENT SOLICITATION
|
|
|
Q: |
|
WHY IS THE COMPANY OFFERING TO EXCHANGE THE SERIES C
PREFERRED STOCK? |
|
A: |
|
The Series C Offer, along with the Series D Exchange,
are part of our recapitalization to improve our capital
structure. The Series C Preferred Stock was issued with an
annual dividend equivalent to 8.9% and the Series D
Preferred Stock was issued with an annual dividend equivalent to
9.0%. We have failed to make all dividend payments on the
Series C Preferred Stock and Series D Preferred Stock
since October 2007. Because we have not made all required
dividend payments on the Series D Preferred Stock, the
dividend rate increased to 13.0%, retroactive and compounded to
the beginning of the first quarter in which the dividends were
not paid. The unpaid dividends continue to accrue and have
resulted in the large increase in unpaid dividends recorded in
our consolidated balance sheets of $46.7 million as of
September 30, 2010. Further, the aggregate liquidating
preference of the Series C Preferred Stock and the
Series D Preferred Stock, which does not include the
accrued and unpaid dividends, is $74.8 million and
$52.5 million, respectively as of September 30, 2010.
Therefore, the aggregate obligation relating to the preferred
stock as of September 30, 2010 is $174.0 million. All
accrued and unpaid dividends on our preferred stock must be paid
prior to any payments of dividends or other distributions on our
common stock, and this recapitalization would have the result of
removing this dividend priority favoring the preferred stock. If
the Series C Offer and Series D Exchange are
consummated, approximately $20.0 million in accrued and
unpaid dividends on the Series C Preferred Stock and
$26.7 million of accrued and unpaid dividends on the
Series D Preferred Stock (through September 30,
2010) will be eliminated, and no further dividends on such
preferred stock will accrue. Further, our obligation to pay the
aggregate liquidating preference of the Series C Preferred
Stock and the Series D Preferred Stock would be eliminated
as well. |
|
Q: |
|
WHY IS THE COMPANY SOLICITING CONSENTS OF THE SERIES C
HOLDERS? |
|
A: |
|
We are soliciting consent to the Series C Offer and the
Series D Exchange from all Series C Holders. The
Articles Supplementary governing the Series C
Preferred Stock contains certain conversion and exchange
restrictions. Thus, we are soliciting your consent to complete
the Series C Offer regardless of any applicable conversion
or exchange restrictions. Further, such consent is required to
pay cash in the Series D Exchange. |
|
Q: |
|
WHY IS THE COMPANY CALLING A SPECIAL MEETING? |
|
A: |
|
The Board of Directors is calling this special meeting in
connection with our recapitalization involving the Series C
Offer and Series D Exchange, together with a consent
solicitation seeking consents to effectuate the Series C
Offer and the Series D Exchange. One condition to both the
Series C Offer and the Series D Exchange is that the
five Proposals to be considered at the special meeting be
approved by the requisite vote of our stockholders entitled to
vote on each Proposal. |
|
Q: |
|
WHAT WILL I RECEIVE IN EXCHANGE FOR MY SHARES OF
SERIES C PREFERRED STOCK? |
|
A: |
|
For each share of Series C Preferred Stock validly tendered
and not properly withdrawn by you, you will receive, at your
election, either (a) 3 shares of newly-issued common
stock of the Company, par value $0.01 (the Common
Stock) and $2.00 in cash or (b) 19 shares of
newly-issued Common Stock. The actual mix of each Consideration
Option a Series C Holder will receive upon tender will be
subject to allocation and proration procedures intended to
ensure that, in the aggregate, 43,823,600 newly-issued shares of
Common Stock and $1,623,000 in cash (plus any cash needed to
cash out the fractional shares of Common Stock) will be issued
to Series C Holders. In the aggregate, 811,650 (27.15%) of
the Series C Shares will receive the Cash and Stock
Consideration Option and 2,178,350 (72.85%) of the Series C
Shares will receive the Stock Consideration Option. |
19
|
|
|
|
|
For example, if you owned 100 shares of Series C
Preferred Stock, the aggregate consideration you receive for
each Consideration Option elected based on a range of election
mixes for the Series C Holders in the aggregate would be as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%of Series C Preferred Stock
|
|
What You Would Receive If You Own
|
% Series C Holders Electing
|
|
Shares Electing
|
|
Receiving Elected Option
|
|
100 Series C Shares
|
Cash and
|
|
|
|
Cash and
|
|
|
|
Cash and
|
|
|
|
If You Elected Cash
|
|
If You Elected
|
Stock
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Stock
|
|
and Stock
|
|
Stock
|
Consideration
|
|
Consideration
|
|
Consideration
|
|
Consideration
|
|
Consideration
|
|
Consideration
|
|
|
|
Common
|
|
|
|
Common
|
Option
|
|
Option
|
|
Option
|
|
Option
|
|
Option
|
|
Option
|
|
Cash
|
|
Shares
|
|
Cash
|
|
Shares
|
|
|
0
|
%
|
|
|
100
|
%
|
|
|
0
|
|
|
|
2,990,000
|
|
|
|
N/A
|
|
|
|
73
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
54.29
|
|
|
|
1,466
|
|
|
25
|
%
|
|
|
75
|
%
|
|
|
747,500
|
|
|
|
2,242,500
|
|
|
|
100
|
%
|
|
|
97
|
%
|
|
$
|
200.00
|
|
|
|
300
|
|
|
$
|
5.72
|
|
|
|
1,854
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
1,495,000
|
|
|
|
1,495,000
|
|
|
|
54
|
%
|
|
|
100
|
%
|
|
$
|
108.58
|
|
|
|
1,031
|
|
|
$
|
|
|
|
|
1,900
|
|
|
75
|
%
|
|
|
25
|
%
|
|
|
2,242,500
|
|
|
|
747,500
|
|
|
|
36
|
%
|
|
|
100
|
%
|
|
$
|
72.39
|
|
|
|
1,321
|
|
|
$
|
|
|
|
|
1,900
|
|
|
100
|
%
|
|
|
0
|
%
|
|
|
2,990,000
|
|
|
|
0
|
|
|
|
27
|
%
|
|
|
N/A
|
|
|
$
|
54.29
|
|
|
|
1,466
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Assumes all Series C Shares are tendered.
|
|
|
Q: |
|
WHY SHOULD I PARTICIPATE IN THE SERIES C OFFER AND
CONSENT SOLICITATION? |
|
A. |
|
If you participate in the Series C Offer and Consent
Solicitation, you can choose the Stock-Only Option or
Cash-and-Stock
Option for your Series C Preferred Stock. While the Company
may adjust the exact amount of your shares of Series C
Preferred Stock that would receive each Consideration Option,
depending on the Consideration Option elected by each of the
other participants in Series C Offer and Consent
Solicitation, you will have more control over the consideration
you will receive for your Series C Preferred Stock if you
participate in the Series C Offer and Consent Solicitation.
If you do not participate in the Series C Offer and Consent
Solicitation and the Series C Offer is consummated, you
will receive the Offer Consideration remaining after the
Series C Offer closes pro rata for each of your shares of
Series C Preferred Stock. You will have no control over the
approximate amount and mix of cash and Common Stock you will
receive if you do not participate. |
|
|
|
Further, if the Series C Holders do not participate and we
are not able to complete the recapitalization, we may not be
able to meet our financial obligations. This could result in a
material adverse effect to the Company, which could include
bankruptcy with respect to the preferred stock. |
|
Q: |
|
HOW DO I PARTICIPATE IN THE SERIES C OFFER AND CONSENT
SOLICITATION? |
|
A: |
|
To tender your shares of Series C Preferred Stock, you
should complete and sign the enclosed letter of transmittal (the
Letter of Transmittal), and return it with your
share certificate to the Exchange Agent by mail at: |
Computershare
Trust Company, N.A.
c/o Voluntary
Corporate Actions
P.O. Box 43011
Providence, RI
02940-3011
Or, you may return it to the Exchange Agent via courier at:
Computershare
Trust Company, N.A.
c/o Voluntary
Corporate Actions
Suite V
250 Royall Street
Canton, MA 02021
|
|
|
|
|
If you desire to tender your shares of Series C Preferred Stock
and your certificates are not immediately available or time will
not permit your Letter of Transmittal, stock certificates or any
other required documents to reach the Exchange Agent prior to
the Expiration Date, your tender may nevertheless be effected if
all the conditions are met, including the submission of a
properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by us herewith. See
The Series C Offer and Consent Solicitation
Procedure for Tendering Shares and Notice of Guaranteed
Delivery. |
20
|
|
|
Q: |
|
MAY I MAKE ONE ELECTION TO RECEIVE ONE CONSIDERATION OPTION
FOR SOME OF MY SHARES OF SERIES C PREFERRED STOCK AND
ANOTHER ELECTION TO RECEIVE THE OTHER CONSIDERATION OPTION FOR
OTHER SHARES? |
|
A: |
|
No. You may choose to receive either the Stock-Only Option
for your shares of Series C Preferred Stock or the
Cash-and-Stock
Option for your shares of Series C Preferred Stock. |
|
Q: |
|
CAN I TENDER ONLY SOME OF MY SERIES C PREFERRED
STOCK? |
|
A: |
|
If you want to participate in the Series C Offer, you must
tender 100% of your Series C Preferred Stock. Partial
tenders will not be accepted. |
|
Q: |
|
WHEN AND HOW CAN I WITHDRAW TENDERED SHARES? |
|
A: |
|
Shares of Series C Preferred Stock tendered in the
Series C Offer and Consent Solicitation may be withdrawn by
you at any time prior to the Expiration Date. Your withdrawal
will only be effective if Computershare Trust Company, N.A.
receives a written notice of withdrawal at Computershare
Trust Company, N.A.,
c/o Voluntary
Corporate Actions, P.O. Box 43011, Providence, RI
02940-3011,
if by mail, or alternatively if by courier, at Computershare
Trust Company, N.A.,
c/o Voluntary
Corporate Actions, Suite V, 250 Royall Street, Canton, MA
02021. The written notice must contain your name, address,
social security number, the certificate number or numbers for
such shares and the name of the registered holder of the shares,
if different from the person who tendered the shares. |
|
Q: |
|
WHAT ARE THE CONDITIONS TO THE SERIES C OFFER? |
|
A: |
|
Our Series C Offer is subject to several conditions. The
most significant conditions include: |
|
|
|
the completion of the Series D Exchange;
|
|
|
|
receipt of consent to the Series C Offer and
the Series D Exchange by the holders of two-thirds of the
outstanding Series C Preferred Stock;
|
|
|
|
approval of the Proposals to amend our charter; and
|
|
|
|
the effectiveness of the registration statement of
which this proxy statement/consent solicitation/prospectus is a
part.
|
|
Q: |
|
DO I HAVE ANY APPRAISAL RIGHTS IN CONNECTION WITH THE
SERIES C OFFER AND CONSENT SOLICITATION? |
|
A: |
|
Our stockholders will not have appraisal rights with respect to
any matter to be acted upon at the special meeting. However,
dissenting Series C Holders will have the right to petition
us for the fair value of their Series C Preferred Stock if
the Series C Offer is consummated. Fair value will be
determined as of the close of business on the day of the
upcoming special meeting. To be eligible to receive the fair
value for the Series C Preferred Stock, you must file a
written objection with us at or before the special meeting. To
receive fair value through this process, you may not vote in
favor of the Amendments or consent to the Series C Offer or
the Series D Exchange, and you must make a written demand
to the Company for payment of your Series C Preferred Stock
within 20 days after the charter containing the Amendments
are accepted by the State of Maryland. |
|
Q: |
|
WHICH PROPOSALS WILL I BE ENTITLED TO VOTE ON AS A
SERIES C HOLDER? |
|
A: |
|
As a Series C Holder, you will be entitled to vote on
Proposal 1 (to amend the charter of the Company to
eliminate the Series C Preferred Stock), Proposal 4
(to amend the charter of the Company to preserve the
Companys net operating loss carryforwards) and
Proposal 5 (to amend the charter of the Company to
incorporate certain technical amendments and to remove
provisions previously required by our former status as a real
estate investment trust). |
|
Q: |
|
HOW DO I GIVE THE COMPANY MY PROXY? |
|
A: |
|
You can give the Company your proxy by completing the proxy card
that accompanies this proxy statement/consent
solicitation/prospectus and returning it to the Company in the
enclosed return envelope. |
21
|
|
|
Q: |
|
WHO CAN I CONTACT WITH QUESTIONS ABOUT THE SERIES C
OFFER OR THE CONSENT SOLICITATION OR TO REQUEST ANOTHER COPY OF
THE PROXY STATEMENT/CONSENT SOLICITATION/PROSPECTUS? |
|
A: |
|
You can contact the information agent engaged for Series C
Offer and Consent Solicitation at: |
Georgeson
Inc.
199 Water Street,
26th
Floor
New York, NY 10038-3560
Banks and Brokers Call (212) 440-9800
All Others Call Toll-Free (866) 695-6074
|
|
|
Q: |
|
WHO CAN I CONTACT WITH QUESTIONS ABOUT THE SPECIAL
MEETING? |
|
A: |
|
You can contact the proxy solicitor engaged for this proxy
solicitation at: |
Georgeson
Inc.
199 Water Street,
26th
Floor
New York, NY 10038-3560
Banks and Brokers Call (212) 440-9800
All Others Call Toll-Free (866) 695-6074
THE
SPECIAL MEETING
Proposals
to Be Considered at the Special Meeting
The following proposals will be presented to the stockholders
entitled to vote thereon for consideration at the special
meeting:
|
|
|
|
|
to approve an amendment to the charter of the Company to
eliminate the Series C Preferred Stock
(Proposal 1);
|
|
|
|
to approve an amendment to the charter of the Company to
eliminate the Series D Preferred Stock
(Proposal 2);
|
|
|
|
to approve an amendment to the charter of the Company to
increase the number of authorized shares of capital stock of the
Company from 50,000,000 to 120,000,000
(Proposal 3);
|
|
|
|
to approve an amendment to the charter of the Company to
preserve the Companys net operating loss carryforwards
(Proposal 4);
|
|
|
|
to approve certain technical amendments to the charter of the
Company in connection with the other Proposals, and to remove
provisions previously-required by the Companys former
status as a real estate investment trust
(Proposal 5); and
|
|
|
|
to transact such other business as may properly come before the
special meeting and any postponement or adjournment thereof.
|
Collectively, these proposals will be referred to herein as the
Proposals. The amendments to be approved in the
Proposals are referred to herein as the Amendments.
As described in the subsections titled Record Date and
Voting Rights, Voting of Proxies and
Quorum and Votes Required for Approval of Proposals
below, as a Series C Holder you will be entitled to vote on
Proposal 1, Proposal 4 and Proposal 5, and
possibly other business properly brought before the special
meeting and you will not be entitled to vote on Proposal 2
or Proposal 3.
Reasons
for the Special Meeting and Consideration of the
Proposals
As described below in the Background of the Series C
Offer and Consent Solicitation subsection of this proxy
statement/consent solicitation/prospectus, the Series C
Offer, along with the Series D Exchange, are part
22
of the Companys recapitalization to improve the
Companys capital structure. If the Series C Offer and
Series D Exchange are consummated, approximately
$20.0 million in accrued and unpaid dividends on the
Series C Preferred Stock and $26.7 million of accrued
and unpaid dividends on the Series D Preferred Stock
(through September 30, 2010) will be eliminated, and
no further dividends on such preferred stock will accrue.
Further, the obligation to pay the aggregate liquidating
preference would be eliminated as well.
In order to properly effectuate the Series C Offer and the
Series D Exchange, the five Proposals to be considered at
the special meeting must be approved by the Companys
stockholders entitled to vote on each Proposal. See
Proposal 1 Charter Amendment to Eliminate
the Series C Preferred Stock,
Proposal 2 Charter Amendment to Eliminate
the Series D Preferred Stock,
Proposal 3 Charter Amendment to Increase
the Number of Authorized Shares of Capital Stock of the
Company, Proposal 4 Charter
Amendment to Preserve the Companys Net Operating Loss
Carryforwards and Proposal 5
Technical Charter Amendments in Connection with the Other
Proposals and to remove Provisions Previously-Required by the
Companys Former Status as a Real Estate Investment
Trust for the full description of the reasons for and
effects of each Proposal.
Record
Date and Voting Rights
Our Series C Preferred Stock is generally deemed a
non-voting security. However, as provided in the
Articles Supplementary to the charter governing the
Series C Preferred Stock, the Series C Holders are
entitled to vote their shares of Series C Preferred Stock
on limited items that may affect their rights. On
Proposal 1, Proposal 4, and Proposal 5 the
Series C Holders at the close of business on
[ ], 2011, the record date, are entitled
to vote at the special meeting, and are thus, entitled to notice
thereof. As of the record date, there were 2,990,000 shares
of Series C Preferred Stock outstanding.
Holders of shares of NFIs Common Stock and holders of
NovaStar Financials 9.00% Series D1 Mandatory
Convertible Preferred Stock, par value $0.01 per share (the
Series D Preferred Stock), in each case at the
close of business on [ ], 2011, the
record date, are entitled to notice of, and to vote on
Proposal 1, Proposal 2, Proposal 3,
Proposal 4 and Proposal 5 at the special meeting. On
the record date, 9,368,053 shares of Common Stock and
2,100,000 shares of Series D Preferred Stock were
outstanding. This proxy statement/consent
solicitation/prospectus only solicits proxies from the
Series C Holders.
Each holder of Series C Preferred Stock (a
Series C Holder) is entitled to one vote for
each share of Series C Preferred Stock held as of the
record date. Each holder of Common Stock is entitled to one vote
for each share of Common Stock held as of the record date. Each
holder of Series D Preferred Stock (a Series D
Holder) is entitled to one vote for each share of Common
Stock into which the Series D Preferred Stock held as of
the record date is convertible, in the aggregate. The
outstanding Series D Preferred Stock is convertible into
1,875,000 shares of Common Stock, in the aggregate.
Further, on each of the Proposals (defined below), a separate
approval by at least two-thirds of the Companys
outstanding Series C Preferred Stock or Series D
Preferred Stock, or both classes, is required. Consequently, the
aggregate number of votes entitled to be cast at the special
meeting and any additional separate approvals of the
Series C Holders or Series D Holders is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Holder
|
|
Series D Holder
|
|
|
|
|
Separate Approval (2/3
|
|
Separate Approval(2/3
|
|
|
Aggregate Votes Entitled
|
|
Affirmative Vote of all
|
|
Affirmative Vote of all
|
|
|
to be Cast (Majority
|
|
Outstanding Series C
|
|
Outstanding Series D
|
|
|
Holder Threshold)
|
|
Preferred Stock)
|
|
Preferred Stock)
|
|
Proposal 1
|
|
|
14,233,053
|
|
|
|
Yes
|
|
|
|
No
|
|
Proposal 2
|
|
|
11,243,053
|
|
|
|
No
|
|
|
|
Yes
|
|
Proposal 3
|
|
|
11,243,053
|
|
|
|
No
|
|
|
|
Yes
|
|
Proposal 4
|
|
|
14,233,053
|
|
|
|
Yes
|
|
|
|
Yes
|
|
Proposal 5
|
|
|
14,233,053
|
|
|
|
Yes
|
|
|
|
Yes
|
|
23
Voting of
Proxies
If you are not planning on attending the special meeting to vote
your shares in person, your shares of Series C Preferred
Stock cannot be voted until either a signed proxy card is
returned to the Company or voting instructions are submitted by
using the Internet or by calling a specifically designated
telephone number. To give the Company the power to vote your
shares of Series C Preferred Stock at the special meeting,
the proxy card that accompanies this proxy statement/consent
solicitation/prospectus should be returned to the Company in the
enclosed return envelope. Specific instructions for
Series C Holders of record who wish to use the Internet or
telephone voting procedures are set forth on the proxy card.
Shares of stock represented by properly executed proxies
received in time for the special meeting will be voted in
accordance with the choices specified in the proxies. Unless
contrary instructions are indicated on the proxy:
|
|
|
|
|
Shares of Series C Preferred Stock will be voted FOR
the approval of the amendment to the charter to modify the
terms of the Series C Preferred Stock;
|
|
|
|
Shares of Series C Preferred Stock will be voted FOR
the approval of the amendment to the charter to preserve the
Companys net operating loss carryforwards; and
|
|
|
|
Shares of Series C Preferred Stock will be voted FOR
the approval of certain technical amendments to the charter
in connection with the other Proposals and to remove provisions
previously-required by the Companys former status as a
real estate investment trust.
|
The management and the Board of Directors know of no matters to
be brought before the special meeting other than as set forth
herein. To date, the Company has not received any stockholder
proposals. If any other matter of which the management and Board
of Directors are not now aware is properly presented to the
stockholders for action, it is the intention of the proxy
holders to vote in their discretion on all matters on which the
shares represented by such proxy are entitled to vote.
Revocability
of Proxy
The giving of your proxy does not preclude your right to vote in
person should you so desire. A proxy may be revoked at any time
prior to its exercise by delivering a written statement to the
Corporate Secretary that the proxy is revoked, by presenting a
later-dated proxy, or by attending the special meeting and
voting in person.
Solicitation
of Proxies
The costs of this solicitation of the Series C Holders and
of proxies of the Series C Holders by the Board of
Directors will be borne by the Company. Proxy solicitations will
be made by mail and also may be made by personal interview,
telephone, facsimile transmission and telegram. Banks, brokerage
house nominees and other fiduciaries are requested to forward
the proxy soliciting material to the beneficial owners and to
obtain authorization for the execution of proxies. NFI will,
upon request, reimburse those parties for their reasonable
expenses in forwarding proxy materials to the beneficial owners.
NFI may engage an outside firm to solicit votes. If such a firm
is engaged subsequent to the date of this proxy statement, the
cost is estimated to be less than $10,000, plus reasonable
out-of-pocket
expenses.
Broker
Non-Votes
If the shares you own are held in street name by a
bank, brokerage firm or other nominee, your nominee, as the
record holder of your shares, is required to vote your shares
according to your instructions. In order to vote your shares,
you will need to follow the directions your nominee provides to
you. If you do not give instructions to your nominee, your
nominee will not have discretionary authority to vote your
shares on any of the Proposals and a broker non-vote will result.
Because the required vote for approval on each Proposal is based
on all shares entitled to vote at the special meeting, and all
shares of the Series C Preferred Stock or Series D
Preferred Stock entitled to vote on
24
certain proposals, a broker non-vote will act as a vote
against the Proposal(s) for which you do not give
instructions.
Quorum
and Votes Required for Approval of Proposals
The presence, in person or by proxy, of stockholders entitled to
cast a majority of all of the votes entitled to be cast
(including the Series D Preferred Stock on an as-converted
into Common Stock basis) constitutes a quorum for the
transaction of business at the special meeting. Both abstentions
and broker non-votes will be considered present and entitled to
vote for the purpose of determining the presence of a quorum.
Because there were 14,233,053 eligible votes as of the record
date, we will need at least 7,116,527 votes present in person or
by proxy at the special meeting for a quorum to exist.
Proposal 1: The affirmative vote of a
majority of all shares entitled to vote at the special meeting
(at which a quorum is present), which vote will include the
votes of the holders of our Common Stock, the Series C
Holders and the Series D Holders, and the affirmative vote
of at least two-thirds of all Series C Holders entitled to
vote is required to approve the amendment to the charter to
eliminate the Series C Preferred Stock.
Proposal 2: The affirmative vote of a
majority of all shares entitled to vote at the special meeting
(at which a quorum is present), which vote will include the
votes of the holders of our Common Stock and the Series D
Holders, and the affirmative vote of at least two-thirds of all
Series D Holders entitled to vote is required to approve
the amendment to the charter to eliminate the Series D
Preferred Stock.
Proposal 3: The affirmative vote of a
majority of all shares entitled to vote at the special meeting
(at which a quorum is present), which vote will include the
votes of the holders of our Common Stock and the Series D
Holders, and the affirmative vote of at least two-thirds of all
Series D Holders entitled to vote is required to approve
the amendment to the charter to increase the number of
authorized shares of capital stock of the Company.
Proposal 4: The affirmative vote of a
majority of all shares entitled to vote at the special meeting
(at which a quorum is present), which vote will include the
votes of the holders of our Common Stock, the Series C
Holders and the Series D Holders, the affirmative vote of
at least two-thirds of all Series C Holders entitled to
vote, and the affirmative vote of at least two-thirds of all
Series D Holders entitled to vote is required to approve
the amendment to the charter to preserve the Companys net
operating loss carryforwards.
Proposal 5: The affirmative vote of a
majority of all shares entitled to vote at the special meeting
(at which a quorum is present), which vote will include the
votes of the holders of our Common Stock, the Series C
Holders and the Series D Holders, and the affirmative vote
of at least two-thirds of all Series C Holders entitled to
vote, and the affirmative vote of at least two-thirds of all
Series D Holders entitled to vote is required to approve
certain technical amendments in connection with the other
Proposals and to remove provisions previously-required by the
Companys for status as a real estate investment trust.
For purposes of all five Proposals, abstentions will have the
same effect as a vote against the Proposals.
Appraisal
Rights and the Right to Petition for Fair Value
No stockholder of the Company will have appraisal rights with
respect to any matter to be acted upon at the special meeting.
However, dissenting Series C Holders will have the right to
petition for the fair value of their Series C Preferred
Stock if the Series C Offer is consummated. Fair value will
be determined as of the close of business on the day of the
upcoming special meeting. To be eligible to receive the fair
value for the Series C Preferred Stock, the dissenting
Series C Holder must file a written objection with the
Company at or before the special meeting. To receive fair value
through this process, the Series C Holder may not vote in
favor of the Proposals or consent to the Series C Offer or
the Series D Exchange, and the Series C Holder must
make a written demand to the Company for payment of his, her or
its Series C Preferred Stock within 20 days after the
charter containing the Amendments are accepted by state of
Maryland.
25
The Series D Holders will have this same right to petition
for fair value of their Series D Preferred Stock, though
the Series D Holders have executed the Exchange Agreement
(described below) under which the Series D Holders will
exchange all of their Series D Preferred Stock for Common
Stock and cash. Thus, we do not anticipate that there will be
any dissenting Series D Holders.
Interest
of Certain Persons in Matters to be Acted Upon at the Special
Meeting
Pursuant to the Articles Supplementary to the
Companys charter, whenever dividends on the Series C
Preferred Stock are in arrears for six or more quarters (whether
or not consecutive) the Series C Holders have the right to
elect two additional directors to the Board. Because dividends
on the Series C Preferred Stock were in arrears for six or
more quarters as of the 2009 Annual Shareholders Meeting,
two directors, Howard Amster and Barry Igdaloff, were elected at
that meeting to serve on the Board by the Series C Holders.
Mr. Amster owns 172,366 shares of Series C
Preferred Stock and is the trustee of two trusts which own
44,600 shares of Series C Preferred Stock,
collectively. Mr. Igdaloff owns 207,649 shares of
Series C Preferred Stock and as a registered investment
advisor he controls an additional 100,125 shares.
Messrs. Amster and Igdaloff will be entitled to participate
in the Series C Offer and Consent Solicitation on the same
terms as are being offered to other Series C Holders and
will vote their Series C Preferred Stock at the special
meeting. In accordance with a Voting Agreement with the Company,
Messrs. Amster and Igdaloff will vote for the
Proposals described in this proxy statement/consent
solicitation/prospectus.
Householding
of Proxy Materials
In December of 2000, the Securities and Exchange Commission
adopted rules that permit companies and intermediaries
(e.g., brokers) to satisfy the delivery requirements for
proxy statements with respect to two or more security holders
sharing the same address by delivering a single proxy statement
addressed to those security holders. This process is commonly
referred to as householding.
A single proxy statement will be delivered to multiple
stockholders sharing an address unless contrary instructions
have been received from an affected stockholder. Once you have
received notice from your broker that it will be
householding communications to your address,
householding will continue until you are notified
otherwise or until you revoke your consent. If you or another
stockholder of record with whom you share an address wish to
receive a separate Annual Report or Proxy Statement, we will
promptly deliver it to you if you request it by writing to:
NovaStar Financial, Inc., Investor Relations, 2114 Central
Street, Suite 600, Kansas City, MO 64108. If you or another
stockholder of record with whom you share an address wish to
receive a separate Annual Report or Proxy Statement in the
future, you may telephone toll-free
1-800-884-4225
or write to Computershare, P.O. Box 43078, Providence, Rhode
Island
02940-3078.
Stockholders who currently receive multiple copies of the proxy
statement at their address and would like to request
householding of their communications should contact
their broker.
Proxy
Solicitor
We have engage Georgeson Inc. to act as the proxy solicitor for
this proxy solicitation. If you have questions regarding the
proxy solicitation, please contact Georgeson Inc. at:
199 Water Street,
26th Floor
New York, NY
10038-3560
Banks and Brokers Call (212)
440-9800
All Others Call Toll-Free (866)
695-6074
26
PROPOSAL 1
CHARTER AMENDMENT TO ELIMINATE THE SERIES C PREFERRED
STOCK
General
In connection with the Series C Offer, the Company has
determined to amend its charter to eliminate the Series C
Preferred Stock and the applicable Series C Preferred Stock
Articles Supplementary. The proposed Articles of Amendment
and Restatement attached to this proxy statement as
Appendix A implement such an amendment by deleting
from the Companys existing charter all references and the
terms applicable to the Series C Preferred Stock but for
conversion mechanics applicable to any shares Series C
Preferred Stock that are not tendered in the Series C
Offer. Such residual shares of Series C Preferred Stock
will be converted into the residual pro rata share of cash and
Common Stock remaining after completion of the Series C
Offer. The following description, which summarizes the amendment
to the Companys charter to eliminate the Series C
Preferred Stock and applicable Series C Preferred Stock
Articles Supplementary, is qualified in its entirety by
reference to the proposed Articles of Amendment and Restatement
attached to this proxy statement as Appendix A.
The Series C Offer and the other transactions contemplated
herein, including the Amendment and Restatement of the
Companys charter, will not occur if the charter amendment
to eliminate the Series C Preferred Stock is not approved
at the special meeting.
Elimination
of Series C Preferred Stock
If the Series C Offer and transactions contemplated thereby
are approved and effected, the holders of Series C
Preferred Stock electing to tender in the Series C Offer
will exchange their shares of Series C Preferred Stock for
3 shares of newly-issued Common Stock and $2.00 in cash
(the
Cash-and-Stock
Option) or 19 shares of newly-issued Common Stock
(the
Stock-Only
Option). The actual mix of cash and Common Stock a
Series C Holder will receive upon tender may be adjusted
according to the number of other Series C Holders who elect
the
Cash-and-Stock
Option and the number of other Series C Holders who elect
the Stock-Only Option. For more information regarding the
adjustment and the mix of Common Stock each Series C Holder
who tenders can anticipate receiving, see The
Series C Offer and Consent Solicitation
General and Series C Offer
Consideration Explanation and Examples.
Immediately following the completion of the Series C Offer
transactions, upon the effectiveness of the Articles of
Amendment and Restatement, and without further action on the
part of the Company or its shareholders, all shares of
Series C Preferred Stock not tendered for exchange will be
automatically cancelled and changed into the sum of
A dollars plus B shares of Common Stock
(the Remainder Consideration), according to the
following calculation:
A = $1,623,000 − ($2.00 * X)
B = 43,823,600 − (19 * Y)
Where X equals the number of shares of Series C
Preferred Stock electing the
Cash-and-Stock
Option that are tendered for exchange in the Series C
Offer, but in any event no more than 811,650.
Where Y equals the number of shares of Series C
Preferred Stock electing the Stock-Only Option that are tendered
for exchange in the Series C Offer, but in any event no
more than 2,178,350.
Each share of Series C Preferred Stock not tendered for exchange
will be automatically cancelled and will then represent the
right to receive its pro rata share of the Remainder
Consideration.
The terms of the Series C Preferred Stock are described
under Description of Securities Series C
Preferred Stock. The terms of the Common Stock are
described under Description of Securities
Common Stock. The Series C Preferred Stock and Common
Stock have different rights. For more information about these
differences, see The Series C Offer and Consent
Solicitation Differences in Rights of Our Common
Stock and Series C Preferred Stock.
27
No
Appraisal Rights
No stockholder of the Company will have appraisal rights with
respect to any matter to be acted upon at the special meeting.
However, dissenting Series C Holders will have the right to
petition for the fair value of their Series C Preferred
Stock if the Series C Offer is consummated. For more
information regarding the right to demand Fair Value, see
The Series C Offer and Consent
Solicitation Appraisal Rights and the Right to
Petition for Fair Value.
Vote
Required
The affirmative vote of a majority of the votes cast at the
special meeting (at which a quorum is present), which vote will
include the votes of the holders of our Common Stock, the
Series C Holders and the Series D Holders, and the
affirmative vote of at least two-thirds of all Series C
Holders is required to approve the amendment to the charter to
modify the terms of the Series C Preferred Stock.
Board
Recommendation
After careful consideration, the Companys board of
directors determined that the charter amendment to the
Companys charter to eliminate the Series C Preferred
Stock is advisable and directed that it be submitted to the
Companys stockholders for their approval. The
Companys board of directors recommends that stockholders
vote in favor of the articles amendment to the Companys
charter to eliminate the Series C Preferred Stock.
YOUR
BOARD RECOMMENDS THAT YOU VOTE
FOR
THE CHARTER AMENDMENT TO ELIMINATE THE SERIES C PREFERRED
STOCK
PROPOSAL 2
CHARTER AMENDMENT TO ELIMINATE THE SERIES D PREFERRED
STOCK
General
In connection with the Series D Exchange, the Company has
determined to amend its charter to eliminate the Series D
Preferred Stock and the applicable Series D Preferred Stock
Articles Supplementary. The proposed Articles of Amendment
and Restatement attached to this proxy statement as
Appendix A implement such an amendment by deleting
from the Companys existing charter all references and the
terms applicable to the Series D Preferred Stock. The
following description, which summarizes the amendment to the
Companys charter to eliminate the Series D Preferred
Stock and applicable Series D Preferred Stock
Articles Supplementary, is qualified in its entirety by
reference to the proposed Articles of Amendment and Restatement
attached to this proxy statement as Appendix A.
The Series D Offer and the other transactions contemplated
herein, including the Amendment and Restatement of the
Companys charter, will not occur if the charter amendment
to eliminate the Series D Preferred Stock is not approved
at the special meeting.
Elimination
of Series D Preferred Stock
If the Series D Exchange and transactions contemplated
thereby are approved and effected, the holders of Series D
Preferred Stock will exchange all issued and outstanding shares
of the Series D Preferred Stock for an aggregate of
37,161,600 newly-issued shares of Common Stock and $1,377,000 in
cash. Under the Exchange Agreement, at the completion of the
Series C Offer, the Series D Holders collectively
shall tender to the Company all 2,100,000 shares of issued
and outstanding Series D Preferred Stock and receive an
aggregate of 37,161,600 newly-issued shares of Common Stock and
$1,377,000 in cash. After the Series D Exchange there will
be no more issued or outstanding shares of Series D
Preferred Stock. If each of the proposals is approved by
Companys shareholders, the Company will file the
Companys Articles of Amendment and Restatement with the
State Department of Assessments and Taxation of Maryland to
eliminate both the Series C Preferred Stock and the
Series D Preferred Stock from the Companys charter.
28
The terms of the Series D Preferred Stock are described
under Description of Securities Series D
Preferred Stock. The terms of the Common Stock are
described under Description of Securities
Common Stock.
No
Appraisal Rights
No stockholder of the Company will have appraisal rights with
respect to any matter to be acted upon at the special meeting.
However, the Series D Holders will have the right to
petition for fair value of their Series D Preferred Stock,
though the Series D Holders have executed the Exchange
Agreement (see Review and Approval of Transaction with
Related Parties; Related Party Transactions
Agreements and Transactions with the Series D
Holders), under which the Series D Holders will
exchange all of their Series D Preferred Stock for Common
Stock and cash. For more information regarding the right to
demand Fair Value, see The Series C Offer and Consent
Solicitation Appraisal Rights and the Right to
Petition for Fair Value.
Vote
Required
The affirmative vote of a majority of the votes cast at the
special meeting (at which a quorum is present), which vote will
include the votes of the holders of our Common Stock and the
Series D Holders, and the affirmative vote of at least
two-thirds of all Series D Holders is required to approve
the amendment to the charter to eliminate the terms of the
Series D Preferred Stock.
Board
Recommendation
As a Series C Holder, you will not be entitled to vote
on Proposal 2. The Board will recommend to the holders of
the Common Stock and the Series D Preferred Stock that they
vote for the charter Amendment to eliminate the
Series D Preferred Stock.
PROPOSAL 3
CHARTER AMENDMENT TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF CAPITAL STOCK OF THE COMPANY
General
In order to issue the number of shares of Common Stock called
for under the Series C Offer and the Series D
Exchange, the Companys charter must be amended to increase
the authorized capital stock. The proposed Articles of Amendment
and Restatement include such an amendment. The following
description, which summarizes the amendment to the
Companys charter to change the authorized capital stock,
is qualified in its entirety by reference to the proposed
Articles of Amendment and Restatement attached to this proxy
statement as Appendix C. Your attention is directed
to the Articles of Amendment and Restatement, generally, and
Article V thereof, specifically.
The Series C Offer and the other transactions contemplated
herein, including the Amendment and Restatement of the
Companys charter, will not occur if the charter amendment
to increase the number of authorized shares of capital stock of
the Company is not approved at the special meeting.
Changes
to Authorized Capital Stock
If approved, the amendment to the Companys charter to
change its authorized capital will provide that following the
filing of the Companys Articles of Amendment and
Restatement with the State Department of Assessments and
Taxation of Maryland, the Company will be authorized to issue an
aggregate of 120,000,000 shares of capital stock, par value
$0.01 per share, all of which initially will be classified as
Common Stock. The board of directors will, however, continue to
have the right to classify or reclassify any authorized but
unissued shares of capital stock.
29
Vote
Required
The affirmative vote of a majority of the votes cast at the
special meeting (at which a quorum is present), which vote will
include the votes of the holders of our Common Stock and the
Series D Holders, and the affirmative vote of at least
two-thirds of all Series D Holders is required to approve
the amendment to the charter to increase the number of
authorized shares of capital stock of the Company.
Board
Recommendation
As a Series C Holder, you will not be entitled to vote
on Proposal 3. The Board will recommend to the holders of
the Common Stock and the Series D Preferred Stock that they
vote for the charter Amendment to increase the
number of authorized shares of Common Stock of the Company.
PROPOSAL 4
CHARTER AMENDMENT TO PRESERVE THE COMPANYS NET OPERATING
LOSS CARRYFORWARDS
Description
of the Acquisition Restrictions
The following is a brief summary of the acquisition
restrictions, which are contained in Article Ten of the
Companys proposed Articles of Amendment and Restatement, a
copy of which is attached as Appendix A to this
document and is incorporated herein by reference. You are urged
to read the full text of the acquisition restrictions.
The proposed acquisition restrictions would generally apply
until the date that is 36 months and one day after
completion of the Series C Offer (or earlier, if the
Companys board of directors in good faith determines that
the acquisition restrictions are no longer in the best interests
of the Company and its shareholders, which date is referred to
as the restriction release date). Any attempted
direct or indirect sale, transfer, assignment, exchange,
issuance, grant, redemption, repurchase, conveyance, pledge or
other disposition, whether voluntary or involuntary, and whether
by operation of law or otherwise, by any person other than the
Company of the Companys Common Stock or any other
securities that would be treated as the Companys
stock under Section 382 of the Code and the
applicable regulations to a person or group of persons who own,
or who would own as a result of such transfer, 5% or more (by
value) of the Companys stock would be restricted. Thus,
the restrictions also restrict any attempted transfer of stock
that would result in the identification of a new 5-percent
shareholder of NFI, as determined under the Code and
applicable regulations; this would include, among other things,
an attempted acquisition of NFI stock by an existing 5-percent
shareholder. For these purposes, numerous rules of attribution,
aggregation and calculation prescribed under the Code (and
applicable treasury regulations) will be applied in determining
whether the 5% threshold has been met and whether a group
exists. The acquisition restrictions may also apply in certain
cases to proscribe the creation or transfer of various
options, which are broadly defined, in respect of
the NFI stock to the extent, generally, that exercise of the
option would result in a proscribed level of NFI stock
ownership. As previously stated, the Company board of directors
may waive the acquisition restrictions, and acquisitions of NFI
stock directly from the Company, whether by way of option
exercise or otherwise, are not subject to the acquisition
restrictions.
Generally, the restrictions are imposed only with respect to the
number of shares of NFI stock, or options with respect to NFI
stock, purportedly transferred in excess of the threshold
established in the acquisition restrictions, which is referred
to in this document as the excess stock. In any
event, the restrictions would not prevent a valid transfer if
either the transferor or the purported transferee obtains the
approval of the Companys board of directors. In deciding
whether to approve any proposed transfer, the NFI board of
directors would consider whether the transfer would result in
the application of any limitations under Section 382 of the
Code by the Company of its NOLs and other tax attributes.
If the proposal is approved, the acquisition restrictions would
remain in effect until the restriction release date, unless
Article Ten of the Companys charter is otherwise
amended to remove the restrictions in accordance with the
provisions of Maryland law and the Companys charter.
30
The acquisition restrictions will not apply to the following:
|
|
|
|
|
any transaction directly with the Company, including pursuant to
the exercise of outstanding options or warrants;
|
|
|
|
any tender or exchange offers for all of the Companys
stock meeting certain fairness criteria; or
|
|
|
|
any transaction approved in advance by the Companys board
of directors.
|
Any person permitted to acquire or own 5% or more (by value) of
Company stock pursuant to any of the foregoing bullet points
will not be permitted to acquire any additional Company stock at
any time until after the restriction release date, without the
approval of the Companys board of directors, unless and
until such person owns less than 5% (by value) of NFI stock, at
which point such person may acquire NFI stock only to the extent
that, after such acquisition, such person owns less than 5% (by
value) of the NFI stock.
The Company believes the acquisition restrictions are narrowly
tailored to minimize their anti-takeover effects, that they are
limited to the extent believed to be appropriate for protecting
the ability of the Company to use its NOLs and other tax
attributes and that they are in the best interest of all
shareholders of the Company. For example, they have only a
limited duration, which is determined by the application of the
Code. Similarly, there are numerous exceptions which would not
have been included if not narrowly tailored to protect such NOLs
and other tax attributes. In addition, the Companys board
of directors does not intend to discourage offers to acquire
substantial blocks of NFI stock that would clearly improve
shareholder value, taking into account, as appropriate, any loss
of the NOLs and other tax attributes. In the case of any such
proposed acquisition that the Companys board determines to
be in the best interest of NFI and its shareholders, in light of
all factors deemed relevant, the Companys board would
grant approval for such acquisition to proceed.
Article Ten would provide that all certificates
representing the Companys stock bear the following legend:
THE TRANSFER OF SECURITIES REPRESENTED BY THIS CERTIFICATE
IS (AND OTHER SECURITIES OF THE CORPORATION MAY BE) SUBJECT TO
RESTRICTION PURSUANT TO ARTICLE TEN OF THE
CORPORATIONS ARTICLES OF AMENDMENT AND RESTATEMENT.
THE CORPORATION WILL FURNISH A COPY OF ITS ARTICLES OF
AMENDMENT AND RESTATEMENT SETTING FORTH THE POWERS,
DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS TO THE HOLDER OF
RECORD OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN
REQUEST ADDRESSED TO THE CORPORATION AT ITS PRINCIPAL PLACE OF
BUSINESS.
In accordance with the acquisition restrictions, the Company
will not permit any of its employees or agents, including the
transfer agent, to record any transfer of NFI stock purportedly
transferred in contravention of the acquisition restrictions. As
a result, requested transfers of NFI stock may be delayed or
refused.
The proposed Articles of Amendment and Restatement provide that
any transfer attempted in contravention of the acquisition
restrictions would be null and void from the start, even if the
transfer has been recorded by the transfer agent and new
certificates issued. The purported transferee of the NFI stock
would not be entitled to any rights of shareholders with respect
to the excess stock, including the right to vote the excess
stock, or to receive dividends or distributions in liquidation
in respect thereof, if any. If the Company determines that a
purported transfer has violated the acquisition restrictions,
the Company will require the purported transferee to surrender
the shares of excess stock and any dividends and other
distributions the purported transferee has received on them to
an agent designated by the Companys board of directors.
The agent will then sell the shares of excess stock in one or
more arms-length transactions provided that nothing will
require the agent to sell the shares of excess stock within any
specific time frame if, in the agents discretion, the sale
would disrupt the market for the NFI stock or adversely affect
the value of the NFI stock.
31
Purpose
and Effects of the Acquisition Restrictions
Without the acquisition restrictions, it is possible that
certain transfers of NFI stock could, under Section 382 of
the Code and applicable treasury regulations, result in
limitations on the ability of the Company to utilize fully the
substantial NOLs and other tax attributes currently available to
them for U.S. federal income tax purposes. The
Companys board of directors believes it is in the
Companys best interests to attempt to prevent the
imposition of such limitations by adopting the proposed
acquisition restrictions.
The Company believes that, absent a court determination:
|
|
|
|
|
There can be no assurance that the acquisition restrictions will
be enforceable against all of the Companys
shareholders; and
|
|
|
|
The acquisition restrictions may be subject to challenge on
equitable grounds.
|
It is possible that the acquisition restrictions may not be
enforceable against NFIs shareholders who vote against or
abstain from voting on the amendment. However, the Company
believes that the acquisition restrictions are in the best
interests of the Company and the Companys shareholders and
are reasonable, and the Company will act vigorously to enforce
them against all current and future holders of NFI stock
regardless of how they vote on the amendment.
The Company believes that each of its shareholders who votes in
favor of the amendment will in effect have consented to the
acquisition restrictions and therefore will be bound by them. In
those circumstances, the Company intends to assert that any such
shareholder would be estopped from challenging the legality,
validity or enforceability of the acquisition restrictions.
Consequently, all Company shareholders should carefully consider
this in determining whether to vote in favor of the proposal.
Reasons
for the Acquisition Restrictions
At December 31, 2009, the Company had associated NOLs of
approximately $300 million. NOLs may be carried forward to
offset taxable income in future years and eliminate income taxes
otherwise payable on such future taxable income, subject to
certain adjustments. The Company believes its NOLs could provide
significant future tax savings, depending upon the amount of
taxable income in future taxable years. If the Company does not
have sufficient taxable income in future years to use the tax
benefits before they expire, the Company will lose the benefit
of these NOLs permanently.
The benefit of the Companys NOLs, can be reduced
substantially as a result of Section 382 of the Code.
Section 382 of the Code limits the use of NOLs by a company
that has undergone an ownership change, as defined
in Section 382 of the Code. Generally, an ownership
change occurs if one or more shareholders, each of whom
owns 5% or more (by value) of a companys stock, increase
their aggregate percentage ownership by more than
50 percentage points over the lowest percentage of stock
owned by such shareholders over the preceding three-year period.
For this purpose, all holders who each own less than 5% of a
companys stock (by value) are generally treated together
as one 5-percent shareholder, subject to certain
exceptions. In addition, certain attribution and constructive
ownership rules, which generally attribute ownership of stock to
the ultimate beneficial owner thereof without regard to
ownership by nominees, trusts, corporations, partnerships or
other entities, are applied in determining the level of stock
ownership of a particular shareholder. Options (including
warrants) to acquire capital stock may be treated as if they had
been exercised, on an
option-by-option
basis, if the issuance, transfer or structuring of the option
meets certain tests. All percentage determinations are based on
the fair market value of a companys capital stock,
including any preferred stock that is voting or convertible (or
otherwise participates in corporate growth to any significant
extent). If a company experiences an ownership change, the
amount of taxable income in any taxable year (or portion
thereof) subsequent to the ownership change that can be offset
by NOLs existing prior to such ownership change generally cannot
exceed the product of (x) the aggregate value of the
companys stock and (y) the federal long-term
tax-exempt rate. Certain complex subgroup rules may apply to
such determinations.
32
The acquisition restrictions are designed to restrict transfers
of NFI stock that could cause an ownership change
under Section 382 of the Code and, therefore, could limit
the ability of the Company to utilize its substantial NOLs
currently available for U.S. federal income tax purposes.
The Series C Offer and Series D Exchange will increase
the likelihood that the Company will experience such an
ownership change and, therefore, that the NOLs could be subject
to such limitations.
Anti-Takeover
Effect
The Companys special committee and the Companys
board of directors recommend that the acquisition restrictions
in Article X of the proposed Articles of Amendment and
Restatement be approved for the reasons set forth in this
document. However, you should be aware that the acquisition
restrictions may have an
anti-takeover
effect because they restrict the ability of a person or entity,
or group of persons or entities, from accumulating in the
aggregate 5% or more (by value) of the NFI stock and the ability
of persons, entities or groups now owning 5% or more (by value)
of the NFI stock from acquiring additional NFI stock. The
acquisition restrictions discourage or prohibit a merger, some
tender or exchange offers, proxy contests or accumulations of
substantial blocks of shares for which some shareholders might
receive a premium above market value. In addition, the
acquisition restrictions may delay the assumption of control by
a holder of a large block of capital stock and the removal of
incumbent directors and management, even if such removal may be
beneficial to some or all of the Companys shareholders.
The indirect anti-takeover effect of the acquisition
restrictions is not the reason for the acquisition restrictions.
The special committee and the board of directors have considered
the acquisition restrictions to be reasonable and in the best
interests of the Company and its shareholders because, among
other things the acquisition restrictions reduce some of the
risks that the Company will be unable to utilize its substantial
NOLs described above. In the opinion of the special committee
and the board of directors, the fundamental importance to the
Companys shareholders of maintaining the availability of
such tax assets outweigh the indirect anti-takeover effect the
acquisition restrictions may have. In addition, the special
committee and the board of directors do not intend to discourage
offers to acquire substantial blocks of Common Stock that would
clearly improve shareholder value, taking into account, as
appropriate, any loss of the NOLs. In the case of any such
proposed acquisition that the board of directors determines to
be in the best interest of the Company and its shareholders, in
light of all factors deemed relevant, the board would grant
approval for such acquisition to proceed.
Vote
Required
The affirmative vote of a majority of the votes cast at the
special meeting (at which a quorum is present), which vote will
include the votes of the holders of our Common Stock, the
Series C Holders and the Series D Holders, the
affirmative vote of at least two-thirds of all Series C
Holders, and the affirmative vote of at least two-thirds of all
Series D Holders is required to approve the amendment to
the charter to preserve the Companys net operating loss
carryforwards.
Board
Recommendation
The Companys special committee, and the Companys
board of directors, upon the unanimous recommendation of the
Companys special committee, have approved Proposal 4
and have determined that Proposal 4 is advisable and
favorable to and, therefore, fair to and in the best interests
of the Company and the Companys shareholders. The
Companys special committee and the Companys board of
directors recommend that Companys shareholders vote
FOR approval of the acquisition restrictions
proposal.
YOUR BOARD RECOMMENDS THAT YOU VOTE
FOR
THE CHARTER AMENDMENT TO PRESERVE
THE COMPANYS NET OPERATING LOSS CARRYFORWARDS
33
PROPOSAL 5
CERTAIN TECHNICAL CHARTER AMENDMENTS IN CONNECTION WITH THE
OTHER PROPOSALS AND TO REMOVE PROVISIONS
PREVIOUSLY-REQUIRED BY THE COMPANYS FORMER STATUS AS A
REAL ESTATE INVESTMENT TRUST
General
In connection with the Series C Offer and the Series D
Exchange, the Company has determined to amend and restate its
charter in substantially the form of Articles of Amendment and
Restatement attached as Appendix A. The
Series C Offer, the Series D Exchange and the
amendments to the Companys charter will not occur if the
Articles of Amendment and Restatement is not approved.
The
Amendment and Restatement
The Articles of Amendment and Restatement is attached to this
proxy statement in its entirety as Appendix A, and
you are encouraged to read it carefully when determining how to
vote on this proposal. The Articles of Amendment and Restatement
effect the amendments described in Proposals 1 through 4
above, including to (A) eliminate the Companys
Series C Preferred Stock and associated
Articles Supplementary following the exchange for, or
conversion of, Series C Preferred Stock into a cash and
Common Stock, (B) eliminate the Companys
Series D Preferred Stock and associated
Articles Supplementary following its exchange for Common
Stock, (C) increase the Companys authorized capital
stock and (D) implement certain acquisition restrictions to
preserve the Companys net operating loss carryforwards.
In addition to the changes described above to the Companys
charter, the Articles of Amendment and Restatement effect
amendments to the charter to eliminate charter provisions that
were previously relevant when the Company was taxed as a Real
Estate Investment Trust (a REIT). Due to a decline
in the Companys business prospects, market capitalization
and liquidity, on September 17, 2007, the Company announced
that it would not proceed with declaring a dividend on its
Common Stock that was required in order to satisfy the
requirements to distribute $157 million in 2006 taxable
income to preserve its status as a REIT under the Internal
Revenue Code of 1986, as amended (the Code). The
change in tax status was retroactive to January 1, 2006.
The provisions related to preserving the Companys former
tax status as a REIT that will be eliminated in the Articles of
Amendment and Restatement are the Companys current charter
as Article XI and include generally the following
restrictions:
|
|
|
|
|
no person may beneficially own or constructive own (a) more
than 9.8% of the Companys capital stock or (b) more
than 9.8% of the Companys issued Common Stock, subject to
certain exceptions;
|
|
|
|
no person may beneficially own or constructively own shares of
capital stock to the extent that such ownership would result in
the Companys being closely held within the
meaning of Section 856(h) of the Code or otherwise failing
to qualify as a REIT; and
|
|
|
|
any transfer of shares of capital stock that, if effective,
would result in any person violating the ownership restrictions
described above, or that would cause the Company to be owned by
less than 100 persons, will be null and void ab initio.
|
In addition, the Articles of Amendment and Restatement in the
form as attached as Appendix A will include other
less significant amendments or adjustments to the charter,
including the following:
|
|
|
|
|
the reference to the original incorporator of the Company,
previously in found in Article I has been deleted;
|
|
|
|
updating Article VI to reflect the four directors on the
board of directors immediately prior to giving effect to the
appointment of Howard Amster, Barry Igdaloff or any
Series D Holder representative;
|
|
|
|
removing references to directors appointed by outstanding
preferred stock as no preferred stock will be outstanding.
|
|
|
|
deleting the Articles Supplementary for the unissued
Series D2 Preferred Stock.
|
34
|
|
|
|
|
updating the language in Articles VIII, IX and XII related
to director indemnification, director and officer personal
liability, and majority voting to more closely track the current
Maryland General Corporate Law statues.
|
|
|
|
internal cross-reference within the charter have been updated to
reflect the proposed changes; and
|
|
|
|
the exact amount of Common Stock and cash from the remaining
Offer Consideration that all
non-tendered
Series C Preferred Stock will be converted into, using the
calculation described in Proposal 1
Charter Amendment to Eliminate the Series C Preferred
Stock Elimination of Series C Preferred
Stock.
|
Vote
Required
The affirmative vote of a majority of the votes cast at the
special meeting (at which a quorum is present), which vote will
include the votes of the holders of our Common Stock and the
Series D Holders, and the affirmative vote of at least
two-thirds of all Series D Holders is required to approve
certain technical amendments in connection with the other
Proposals and to remove provisions previously-required by the
Companys for status as a Real Estate Investment Trust.
Board
Recommendation
After careful consideration, the Companys board of
directors determined that certain charter amendments in
connection with the other proposals and to remove provisions
previously-required by the Companys former status as a
real estate investment trust is advisable and directed that
consideration of these amendments be submitted to the
Companys stockholders for their approval. The
Companys board of directors recommends that stockholders
vote in favor of the charter amendments in connection with the
other proposals and to remove provisions previously-required by
the Companys former status as a real estate investment
trust.
YOUR
BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR
CERTAIN TECHNICAL CHARTER AMENDMENTS IN CONNECTION WITH
THE OTHER PROPOSALS AND TO REMOVE PROVISIONS
PREVIOUSLY-REQUIRED
BY THE COMPANYS FORMER STATUS AS A REAL ESTATE INVESTMENT
TRUST
35
OTHER
BUSINESS
The Board of Directors knows of no other matters which may be
presented for stockholder action at the meeting. However, if
other matters do properly come before the meeting, it is
intended that the persons named in the proxies will vote upon
them in accordance with their discretion.
STOCKHOLDER
PROPOSALS OR NOMINATIONS 2011 ANNUAL
MEETING
Any stockholder proposal, including the nomination of a
director, intended to be presented at the 2011 annual meeting of
stockholders and included in the proxy statement and form proxy
relating to such meeting, must be received at NovaStar
Financials offices on or before December 31, 2010.
In addition, the NovaStar Financial bylaws provide that any
stockholder wishing to bring any matter, including the
nomination of a director, before an annual meeting must deliver
notice to the Corporate Secretary of NovaStar Financial, Inc. at
the Companys principal executive offices on or before
January 30, 2011.
The stockholders notice must set forth (a) as to each
person whom the stockholder proposes to nominate for election or
reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for
election of directors pursuant to Regulation 14A under the
Securities Act of 1934, as amended (including such persons
written consent to being named in the proxy statement as a
nominee and to servicing as a director if elected); (b) as
to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired
to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such
business of such stockholder and of the beneficial owner, if
any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if
any, on whose behalf the nomination or proposal is made,
(i) the name and address of such stockholder, as they
appear on the Companys corporate books, and of such
beneficial owner and (ii) the class and number of shares of
the Companys stock which are owned beneficially and of
record by such stockholder and such beneficial owner.
You may contact the Secretary of NovaStar Financial, Inc. at the
Companys principal executive offices regarding the
requirements for making stockholder proposals and nominating
director candidates.
BACKGROUND
OF THE SERIES C OFFER AND CONSENT SOLICITATION
Background
of the Series C Offer and Consent Solicitation
In 2007, to preserve liquidity, the Companys Board of
Directors suspended the payment of dividends on the
Companys Series C Preferred Stock and Series D
Preferred Stock. Since then, preferred dividends have accrued
and will continue to accrue at a rate of 8.90% per annum for the
Series C Preferred Stock and a default rate of 13.0%,
compounded quarterly, for the Series D Preferred Stock.
Dividends on the Series D Preferred Stock compound
quarterly, both with respect to the unpaid dividend and all
subsequently accumulating dividends, and will continue to accrue
at the default rate until the board of directors authorizes and
the Company pays to the Series D Holders all accumulated
and unpaid dividends on the Series D Preferred Stock
(otherwise the dividend rate is 9.0% per annum). As of
September 30, 2010, the Company had $46.7 million in
accrued preferred dividends, $20.0 million of which related
to the Series C Preferred Stock and $26.7 million of
which related to the Series D Preferred Stock. As of
September 30, 2010 the aggregate liquidating preference of
the Series C Preferred Stock and the Series D
Preferred Stock, which does not include accrued and unpaid
dividends, was $74.8 million and $52.5 million,
respectively. Therefore, the aggregate obligation as of
September 30, 2010 is $174.0 million.
The Company believes that, based on its projected financial
results, the cumulative nature of the preferred dividends on the
Series C Preferred Stock and the Series D Preferred
Stock and the compounding nature of the Series D Preferred
Stock dividends, the Company is unlikely to produce cash flow
before preferred dividends that exceeds the Companys
growing preferred dividend requirement, which will grow to
approximately $17.8 million, $19.4 million and
$21.1 million, in 2011, 2012 and 2013, respectively, if the
Company does not pay any cash preferred dividends. Even then,
the Company must pay all accumulated and unpaid dividends on the
Series C Preferred Stock and Series D Preferred Stock
before making any
36
distributions to the Companys common shareholders. If the
Company does not pay any cash preferred dividends, accumulated
and unpaid dividends on the Series C Preferred Stock and
Series D Preferred Stock will grow to approximately
$68.7 million, $88.1 million and $109.2 million,
in 2011, 2012 and 2013, respectively. The Company believes that
this growing obligation to its preferred shareholders will
impede the growth of, and strategic options available to, the
Company and may lead to other material adverse effects to the
Company, including bankruptey or liquidation. The Company also
believes that the value received from a liquidation of its
assets today would not exceed the value of its liabilities and
liquidating preference of its preferred stock.
Conclusions
of the Board of Directors of the Company
Based on a consideration of the above described factors and the
options available to the Company, the Company determined that it
was in its best interest and the best interest of its
shareholders to pursue a recapitalization of the Company.
On May 11, 2010, the Companys board of directors (the
Board) appointed a special committee of
disinterested directors (the Special Committee) to
explore a potential recapitalization of the Company, and in
September 2010, the Board engaged Stifel, Nicolaus &
Company, Incorporated (Stifel) to assist it in
evaluating a potential recapitalization and act as the
Boards independent financial advisor. The Special
Committee is comprised entirely of directors who own neither
Series C Preferred Stock or Series D Preferred Stock,
and who were not elected by holders of Series C Preferred
Stock or Series D Preferred Stock as a class. The
consideration being offered to the Series D Holders and
Series C Holders under the Series D Exchange and the
Series C Offer, respectively, was determined based on
discussions and negotiations with the Series D Holders and
Board members elected by the Series C Holders, as well as
managements, the Special Committees and the
Boards consideration of the impact of the transaction on
the potential value of the Companys NOLs, liquidity, book
value and earnings per share, as well as dilution to the
Companys existing holders of its Common Share.
On December 10, 2010, the Special Committee met
telephonically to review the terms of the proposed transaction.
The Special Committee reviewed and discussed the terms of the
Exchange Agreement, Voting Agreement, Registration Rights
Agreement, Articles of Amendment and Restatement, and the joint
Schedule 13e-3/TO,
as well as the draft registration statement on
Form S-4.
The Special Committee received a report from management as to
the negotiations for the contemplated transactions. The Special
Committee also reviewed an opinion conveyed and delivered by
Stifel to the Board. Stifel discussed the terms of the proposed
transaction and the fairness of the transaction from the
financial standpoint to the holders of the Companys Common
Stock.
The Special Committee considered and discussed certain factors
that affect the fairness of the transaction, including:
|
|
|
|
|
whether projected growth by the Company and its subsidiaries
would enable the Company to eventually pay the accumulated but
unpaid dividends;
|
|
|
|
whether the contemplated transaction threatened the
Companys ability to utilize its NOLs;
|
|
|
|
the short-term and long-term effects on the Companys
ability to access capital markets as a result of the transaction;
|
|
|
|
whether the consideration offered as part of the Stock-Only
Option or the
Cash-and-Stock
Option reflect any premium over current market values for the
Series C Preferred Stock;
|
The Special Committee considered as factors that positively
affected the fairness of the transaction to the holders of the
Companys Common Stock the following:
|
|
|
|
|
the elimination of the accumulated but unpaid dividends, now and
in the future, by eliminating the preferred stock;
|
|
|
|
the elimination of the liquidation preference associated with
the preferred stock; and
|
|
|
|
the improvement to the Companys adjusted book value per
share of common stock on an adjusted pro forma basis.
|
37
The Special Committee considered as factors that negatively
affected the fairness of the transaction to the holders of the
Companys Common Stock the following:
|
|
|
|
|
the risk that if the Internal Revenue Service determines the
Company, by issuing additional Common Stock, underwent an
ownership change as defined in Section 382 of
the Code, the Companys ability to utilize its NOLs to
offset future income may be limited;
|
|
|
|
the dilution of the Common Stock as the number of outstanding
shares of Common Stock would increase from 9,368,053 to
90,353,253 if the Series C Offer and the Series D
Exchange are completed successfully; and
|
|
|
|
the liquidity impacts on the Company resulting from a cash
expenditure of up to $3,000,000 to complete both the
Series C Offer and the Series D Exchange.
|
Immediately following the Special Meeting, the Board met
telephonically to review the terms of the proposed transaction.
Stifel also discussed the terms of the proposed transaction and
the fairness of the transaction from the financial standpoint to
the holders of the Companys Common Stock with the Board.
The Board reviewed and conducted the same analysis as to
fairness issues and as to positive and negative factor as the
Special Committee.
After a thorough review of the above circumstances and factors
with management, and with advice from its financial advisor and
legal counsel, the Board concluded that the potential advantages
and gains of conducting the Series D Exchange and
Series C Offer outweigh the possible disadvantages and
costs. The Board also concluded that the terms of the
Series C Offer are advisable, fair to the Companys
unaffiliated shareholders from financial and procedural points
of view, and in the best interest of the Company and its
shareholders. This conclusion was based on the experience and
knowledge of the Board members as business people. The
Boards opinion was further bolstered by the recommendation
of the Special Committee and the analysis and opinion that the
Board received from Stifel.
The foregoing review by the Board is not intended to be
exhaustive but, rather, includes material factors considered by
the Board. In reaching its decision to approve the Series C
Offer, the Board did not attempt to quantify or assign any
relative weights to the factors considered, and individual
directors may have given different weights to different factors.
The Board considered all factors as a whole, and, overall,
considered them to be favorable to, and to support, the
determination to approve the proposed Series C Offer and
Series D Exchange. The Board does not make any
recommendation to the Series C Holders as to whether or not
they should, individually or in the aggregate, participate in
the Series C Offer.
THE
SERIES C OFFER AND CONSENT SOLICITATION
The following description contains, among other information, a
summary of the Series C Offer and Consent Solicitation and
the related letter of transmittal (the Letter of
Transmittal) and is qualified in its entirety by
references to the full text of the Letter of Transmittal which
is incorporated herein by reference to this proxy
statement/consent solicitation/prospectus. Stockholders are
urged to read carefully the Letter of Transmittal.
General
We hereby offer, upon the terms and subject to the conditions of
the exchange offer described in this proxy statement/consent
solicitation/prospectus and the related Letter of Transmittal,
to exchange each share of our Series C Preferred Stock
validly tendered on or prior to the Expiration Date and not
withdrawn, for, at your election, either: (a) 3 shares
of newly-issued common stock and $2.00 in cash (the
Cash-and-Stock
Option), or (b) 19 shares of newly-issued Common
Stock (the
Stock-Only
Option). The
Cash-and-Stock
Only Option and the Stock-Only Option are the
Consideration Options.
The total aggregate consideration offered under this
Series C Offer is 43,823,600 newly-issued shares of Common
Stock and $1,623,000 in cash (plus any additional cash needed to
cash out the fractional shares of Common Stock) (the Offer
Consideration). Regardless of the number of Series C
Preferred Stock tendered for each Consideration Option, the
Company will not issue more than 43,823,600 shares of
Common Stock or pay out more than $1,623,000 in cash, other than
any cash needed to cash out fractional shares which total
38
includes the remaining Offer Consideration distributed to
non-tendering Series C Holders, if any. If you participate
in the Series C Offer, you must elect to receive either the
Cash-and-Stock
Option or the
Stock-Only
Option. You may not elect to tender some of your Series C
Preferred Stock for one option and some of your Series C
Preferred Stock for the other.
The actual mix of cash and Common Stock a Series C Holder
will receive upon tender may be adjusted according to the number
of other Series C Holders who elect the
Cash-and-Stock
Option and the number of other Series C Holders who elect
the Stock-Only Option, as there is not a sufficient amount of
Common Stock or cash in the Series C Offer to fully provide
the
Cash-and-Stock
Option to more than 27.15% of the Series C Holders or to
fully provide the Stock-Only Option to more than 72.85% of the
Series C Holders, before pro rata adjustments would apply.
As of [ ], 2010, the Company had
2,990,000 shares of Series C Preferred Stock
outstanding. If exactly 811,650 shares of Series C
Preferred Stock are exchanged for the
Cash-and-Stock
Option and exactly 2,178,350 shares of Series C
Preferred Stock are exchange for the Stock-Only Option, every
Series C Holder will receive the Consideration Option for
each share of his, her or its Series C Preferred Stock that
the Series C Holder selected.
Assuming 100% of the Series C Holders participate in the
Series C Offer, and less than 811,650 shares are
tendered for the
Cash-and-Stock
Option, all the Series C Holders who elect the
Cash-and-Stock
Option will receive $2.00 and 3 shares of Common Stock per
tendered share of Series C Preferred Stock, as elected.
However, in that case, any Series C Holder who tenders his,
her or its shares and elected the Stock-Only Option will receive
fewer than 19 shares of Common Stock, but, he, she or it
will receive some cash. Assuming 100% of the Series C
Holders participate in the Series C Offer, and less than
2,178,350 shares are tendered for the Stock-Only Option,
all the Series C Holders who elect the Stock-Only Option
will receive 19 shares of Common Stock per tendered share
of Series C Preferred Stock, as elected. However, in that
case, any Series C Holder who tenders his, her or its
shares and elects the
Cash-and-Stock
Option may receive less than $2.00 in cash, but, in that case,
he, she or it will receive more than 3 shares of Common
Stock. For examples of Offer Consideration to be paid to each
tendering Series C Holder, see
Series C Offer Consideration Explanation
and Examples.
As part of the Series C Offer, the Company is soliciting
consent to the Series C Offer the Series D Exchange
from all Series C Holders. The Articles Supplementary
governing the Series C Preferred Stock contains certain
conversion and exchange restrictions. Thus, we are soliciting
your consent to complete the Series C Offer regardless of
any applicable conversion or exchange restrictions. Further,
such consent is required to pay cash in the Series D
Exchange. Consent can be given to the Series C Offer and
the Series D Exchange by completing the proxy card
accompanying this proxy statement/consent
solicitation/prospectus and mailing it to the Company in the
enclosed return envelope.
We reserve the right to amend the Series C Offer or
Consent Solicitation, including the composition or amount of the
Offer Consideration, for any reason. If we so amend the
Series C Offer or Consent Solicitation, we will extend the
Series C Offer and Consent Solicitation for a period of ten
business days if the Series C Offer or Consent Solicitation
is scheduled to expire prior thereto.
The term Expiration Date means 12:00 midnight,
Central Time, on [ ], 2011 unless and
until we extend the period of time for which the exchange offer
is open, in which event the term Expiration Date
means the latest time and date at which the Series C Offer
and Consent Solicitation, as so extended, expires. See
Series C Offer and Consent Solicitation
Extension, Termination and Amendment and
Conditions of the Series C Offer and
Consent Solicitation.
Tendering Series C Holders will not be obligated to pay any
brokerage commissions. Except as set forth in Instruction 6
of the Letter of Transmittal, transfer taxes on the exchange of
Series C Preferred Stock pursuant to the Series C
Offer and Consent Solicitation will be paid by or on behalf of
NFI.
Our obligation to exchange the Offer Consideration for
Series C Preferred Stock pursuant to the Series C
Offer and Consent Solicitation is subject to a number of
conditions referred to below under The Series C Offer
and Consent Solicitation Conditions of the
Series C Offer and Consent Solicitation.
39
If by 12:00 midnight, Central Time, on
[ ], 2011, or any later time to which
the Expiration Date and this Series C Offer and Consent
Solicitation have been extended, all of the conditions to the
Series C Offer and Consent Solicitation have not been
satisfied or waived, we may elect either to: (a) extend the
Expiration Date and this Series C Offer and Consent
Solicitation and retain all shares of Series C Preferred
Stock theretofore tendered until the expiration of the
Expiration Date and this Series C Offer and Consent
Solicitation, as extended, subject to the right of a tendering
stockholder to withdraw his, her or its Series C Preferred
Stock; (b) waive the remaining conditions (other than the
effectiveness of the registration statement of which this proxy
statement/consent solicitation/prospectus is a part), extend the
Series C Offer and Consent Solicitation for a period of ten
business days if the Series C Offer and Consent
Solicitation are scheduled to expire prior thereto and
thereafter exchange all tendered shares of Series C
Preferred Stock; or (c) terminate the Series C Offer
and Consent Solicitation and exchange none of the Series C
Preferred Stock and return all tendered shares of Series C
Preferred Stock. We will not accept for exchange any shares of
Series C Preferred Stock pursuant to the Series C
Offer and Consent Solicitation until such time as the
registration statement has become effective. See The
Series C Offer and Consent Solicitation
Exchange of Shares; Offer Consideration and
Conditions of the Series C Offer and
Consent Solicitation Effective Registration
Statement. We expect that the Series C Offer and
Consent Solicitation will close promptly after all of these
conditions have been satisfied.
Any shares of Series C Preferred Stock tendered and
accepted for exchange will be cancelled.
Eligible
for Termination of Registration under the Exchange Act
After the Series C Offer and Consent Solicitation, we
anticipate that we will have fewer than three hundred
Series C Holders, and thus, our Series C Preferred
Stock will be eligible for termination of registration under
Section 12(g)(4) of the Securities Exchange Act of 1934
(the Exchange Act) Because we anticipate the tender
offer of the Series C Preferred Stock will make the
Series C Preferred Stock eligible for termination of
registration under the Exchange Act, we will file a Joint
Schedule 13E-3/TO.
Differences
in Rights of Our Common Stock and Series C Preferred
Stock
Differences in the rights represented by our Common Stock and
Series C Preferred Stock are summarized below.
|
|
|
Voting Rights: |
|
Common Stock: One vote per share on all
matters submitted to stockholders. |
|
|
|
Series C: No voting rights other than: |
|
|
|
When dividends on the Series C Preferred Stock
are in arrears for six or more quarterly periods (whether or not
consecutive) the holders of Series C Preferred Stock
(voting together as a single class with all other equity
securities of the Corporation upon which like voting rights have
been conferred and are exercisable), shall be entitled to elect
a total of two additional directors to the Corporations
Board of Directors until all dividends accumulated on the
Series C Preferred Stock for the past dividend periods and
the then current dividend period shall have been fully paid or
authorized and a sum sufficient for the payment thereof set
aside for payment;
|
|
|
|
When any action is to be taken to authorize, create
or increase the authorized or issued amount of any class or
series of equity securities ranking senior to the outstanding
Series C Preferred Stock with respect to the payment of
dividends or the distribution of assets upon voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation or to reclassify any authorized equity securities of
the Corporation into any such senior equity securities, or
create, authorize or issue any
|
40
|
|
|
|
|
obligation or security convertible into or evidencing the right
to purchase any such senior equity securities; and |
|
|
|
When any action is to be taken to amend, alter or
repeal the provisions of the charter so as to materially and
adversely affect any right, preference or voting power of the
Series C Preferred Stock.
|
|
|
|
Dividend Rights: |
|
Common Stock: The payment of dividends on our
Common Stock is at the discretion of our board of directors. No
dividends can be paid on any of our common stock until all
accrued and unpaid dividends on our Series C Preferred
Stock and Series D Preferred Stock are paid in full. We do
not anticipate that any dividends will be declared or paid on
shares of Common Stock in the foreseeable future. |
|
|
|
Series C: Dividends on the Series C
Preferred Stock are payable quarterly in cash and accrue at a
rate of 8.90% annually. The Company has not paid dividends on
the Series C Preferred Stock since October 2007. We do not
anticipate that any dividends will be declared or paid on shares
of Series C Preferred Stock in the foreseeable future. |
|
|
|
Optional Redemption: |
|
Common Stock: We do not have right to redeem
common stock. |
|
|
|
Series C: The Company, at its option,
upon giving notice to the Series C Holders, may redeem the
Series C Preferred Stock, in whole or from time to time in
part, for cash, at a redemption price of $25.00 per share, plus
all accumulated and unpaid dividends thereon to the date of
redemption, whether or not authorized. |
|
|
|
Mandatory Redemption: |
|
Common Stock: Holders have no right to require
redemption. |
|
|
|
Series C: Holders have no right to
require redemption. |
|
|
|
Optional Conversion: |
|
Common Stock: Not convertible. |
|
|
|
Series C: Not convertible. |
|
|
|
Forced Conversion: |
|
Common Stock: We have no right to force
conversion of Common Stock into another security. |
|
|
|
Series C: We have no right to force a
conversion of Series C Preferred Stock into another
security. |
|
|
|
Liquidation: |
|
Common Stock: Distributions only made to
holders of common stock if liquidation preferences of preferred
stock are satisfied. |
|
|
|
Series C: Series C Holders are
entitled to receive out of the assets of the Corporation
available for distribution to stockholders an amount equal to
$25.00 per share, plus any accumulated and unpaid dividends
thereon to the date of payment, whether or not authorized,
before any distribution of assets is made to holders of Common
Stock and any other shares of equity securities of the
Corporation that rank junior to the Series C Preferred
Stock as to liquidation rights. |
41
Series C
Offer Consideration Explanation and Examples
As described above, a Series C Holder who tenders his, her
or its Series C Preferred Stock is not guaranteed to
receive the Consideration Option elected for each of the
Series C Holders shares. If exactly 811,650 shares of
Series C Preferred Stock are exchanged for the
Cash-and-Stock
Option and exactly 2,178,350 shares of Series C
Preferred Stock are exchange for the Stock-Only Option, every
Series C Holder will receive the Consideration Option for
each share of his, her or its Series C Preferred Stock that
the Series C Holder selected.
Assuming 100% of the Series C Holders participate in the
Series C Offer, and less than 811,650 shares are
tendered for the
Cash-and-Stock
Option, all the Series C Holders who elect the
Cash-and-Stock
Option will receive the
Cash-and-Stock
Option for every tendered share of Series C Preferred
Stock, as elected. However, in that case, any Series C
Holder who tenders his, her or its shares and elected the
Stock-Only Option will receive the Stock-Only Option for some of
the shares of Series C Preferred Stock tendered for
exchange and the
Cash-and-Stock
Option for the rest of the shares of Series C Preferred
Stock tendered for exchange.
Assuming 100% of the Series C Holders participate in the
Series C Offer, and less than 2,178,350 shares are
tendered for the Stock-Only Option, all the Series C
Holders who elect the Stock-Only Option will receive the
Stock-Only Option for every tendered share of Series C
Preferred Stock, as elected. However, in that case, any
Series C Holder who tenders his, her or its shares and
elects the
Cash-and-Stock
Option will receive the
Cash-and-Stock
Option for some of the shares of Series C Preferred Stock
tendered for exchange and the Stock-Only Option for the rest of
the shares of Series C Preferred Stock tendered for
exchange.
Examples of the Consideration Options to be received for the
Series C Preferred Stock assuming all the shares of
Series C Preferred Stock are exchanged in the Series C
Offer and Consent Solicitation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Series C Preferred Stock
|
|
What You Would Receive If You Own
|
% Series C Holders Electing
|
|
Shares Electing
|
|
Receiving Elected Option
|
|
100 Series C Shares
|
Cash and
|
|
|
|
Cash and
|
|
|
|
Cash and
|
|
|
|
If You Elected
|
|
If You Elected
|
Stock
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Cash and Stock
|
|
Stock
|
Consideration
|
|
Consideration
|
|
Consideration
|
|
Consideration
|
|
Consideration
|
|
Consideration
|
|
|
|
Common
|
|
|
|
Common
|
Option
|
|
Option
|
|
Option
|
|
Option
|
|
Option
|
|
Option
|
|
Cash
|
|
Shares
|
|
Cash
|
|
Shares
|
|
|
0
|
%
|
|
|
100
|
%
|
|
|
0
|
|
|
|
2,990,000
|
|
|
|
N/A
|
|
|
|
73
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
54.29
|
|
|
|
1,466
|
|
|
25
|
%
|
|
|
75
|
%
|
|
|
747,500
|
|
|
|
2,242,500
|
|
|
|
100
|
%
|
|
|
97
|
%
|
|
$
|
200.00
|
|
|
|
300
|
|
|
$
|
5.72
|
|
|
|
1,854
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
1,495,000
|
|
|
|
1,495,000
|
|
|
|
54
|
%
|
|
|
100
|
%
|
|
$
|
108.58
|
|
|
|
1,031
|
|
|
$
|
|
|
|
|
1,900
|
|
|
75
|
%
|
|
|
25
|
%
|
|
|
2,242,500
|
|
|
|
747,500
|
|
|
|
36
|
%
|
|
|
100
|
%
|
|
$
|
72.39
|
|
|
|
1,321
|
|
|
$
|
|
|
|
|
1,900
|
|
|
100
|
%
|
|
|
0
|
%
|
|
|
2,990,000
|
|
|
|
0
|
|
|
|
27
|
%
|
|
|
N/A
|
|
|
$
|
54.29
|
|
|
|
1,466
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Assumes all Series C Shares are tendered.
Fractional
Shares
Fractional shares of Common Stock will not be tendered in
exchange for Series C Preferred Stock. Instead, each
Series C Holder who otherwise would have been entitled to
receive a fraction of a share of the Companys Common Stock
will receive an amount in cash equal to the product obtained by
multiplying the fractional share interest to which such
Series C Holder would otherwise be entitled by the
Companys average closing price over the
10-day
period preceding the Expiration Date.
Partial
Tenders
Partial tenders will not be accepted. To participate in the
Series C Offer, a Series C Holder must tender all
Series C Preferred Stock held by that Series C Holder.
Extension,
Termination and Amendment
We expressly reserve the right, in our sole discretion, at any
time on or prior to the Expiration Date, to extend the period of
time during which the Series C Offer and Consent
Solicitation are to remain open by giving written notice of such
extension to the holders of Series C Preferred Stock. There
can be no assurance that we will exercise our rights to extend
the Expiration Date and this Series C Offer and Consent
Solicitation. If we amend the Series C Offer and Consent
Solicitation, we will extend the Expiration Date and this
Series C
42
Offer and Consent Solicitation for a period of ten business days
if the Series C Offer and Consent Solicitation are
scheduled to expire prior thereto. During any such extension,
all shares of Series C Preferred Stock previously tendered
and not withdrawn will remain subject to the Series C Offer
and Consent Solicitation, subject to the right of a tendering
stockholder to withdraw his, her or its Series C Preferred
Stock. See The Series C Offer and Consent
Solicitation Withdrawal Rights. We reserve the
right to amend or terminate the Series C Offer and Consent
Solicitation and not exchange or accept for exchange any
Series C Preferred Stock not theretofore exchanged, or
accepted for exchange, upon the failure of any of the conditions
of the Series C Offer and Consent Solicitation to be
satisfied or waived on or before the Expiration Date. Any such
extension, termination, amendment or delay will be followed as
promptly as practicable by public announcement thereof, such
announcement in the case of an extension to be issued no later
than 9:00 a.m., Central Time, on the next business day
after the previously scheduled Expiration Date. Without limiting
the manner in which we may choose to make such public
announcement, we will not, unless otherwise required by rules of
the SEC, have any obligation to make any such public
announcement other than by making a release through PR Newswire.
If, prior to the Expiration Date, we increase the consideration
offered to holders of Series C Preferred Stock, such
increase will be applicable to all Series C Holders whose
shares of Series C Preferred Stock are accepted for
exchange pursuant to the Series C Offer and Consent
Solicitation and, if at the time notice of such increase is
first published, sent or given to Series C Holders, the
Series C Offer and Consent Solicitation are scheduled to
expire at any time earlier than the expiration of a period
ending on the tenth business day from and including the date
that such notice is first so published, sent or given, the
Series C Offer and Consent Solicitation will be extended
until the expiration of such period of ten business days. For
purposes of the Series C Offer and Consent Solicitation, a
business day means any day other than a Saturday,
Sunday or federal holiday and consists of the time period from
12:00 midnight through 11:59 p.m., Central Time.
Exchange
of Shares; Offer Consideration
Upon the terms and subject to the conditions of the
Series C Offer, the acceptance for exchange and the
exchange of the outstanding shares of Series C Preferred
Stock validly tendered and not withdrawn will be made promptly
after the Expiration Date.
For purposes of the Series C Offer and Consent
Solicitation, we will be deemed to have accepted for exchange
and thereby acquired tendered Series C Preferred Stock as,
if and when we give written notice to tendering holders of
Series C Preferred Stock of our acceptance of the tenders
of such shares of Series C Preferred Stock. Delivery of the
Offer Consideration in exchange for the Series C Preferred
Stock pursuant to the Series C Offer and Consent
Solicitation will be made by us with or promptly after the
Expiration Date of such notice. We expect the settlement date to
be within three business days after the Expiration Date. Under
no circumstances will interest be paid by us by reason of any
delay in making such exchange.
If any tendered shares of Series C Preferred Stock are not
acceptable for exchange pursuant to the terms and conditions of
the Series C Offer and Consent Solicitation for any reason,
or if certificates are submitted for more shares of
Series C Preferred Stock than are tendered, certificates
for such un-exchanged Series C Preferred Stock will be
returned to the tendering stockholder promptly following
consummation or termination of the Series C Offer and
Consent Solicitation.
Consequences
for Failure to Participate
If the Series C Offer closes, all shares of Series C
Preferred Stock that are not tendered in the Series C Offer
and Consent Solicitation will be automatically converted into
the right to receive, prorata per share of Series C
Preferred Stock that remain outstanding after the closing, the
remaining Offer Consideration. The remaining Offer Consideration
will be distributed pro rata per share to the non-tendering
former Series C Holders within 30 days of the
Expiration Date, as extended. Any Series C Holder who does
not participate in the Series C Offer will have no control
over the approximate mix of cash and Common Stock he, she or it
will receive.
Further, if holders of at least two-thirds of the Series C
Preferred Stock do not participate and the Company is not able
to complete the recapitalization, the Company may not be able to
meet its long-term financial obligations unless the Company
undertakes some other remedial measure. This could result in a
material adverse effect to the Company, which could include
bankruptcy.
43
Procedure
for Tendering Shares and Notice of Guaranteed Delivery
To tender shares of Series C Preferred Stock pursuant to
the Series C Offer and Consent Solicitation, a properly
completed and duly executed Letter of Transmittal (or facsimile
thereof), together with the certificates representing the
tendered Series C Preferred Stock and any other required
documents, must be transmitted to and received by the Exchange
Agent on the Letter of Transmittal. Because you must consent to
the Series C Offer and the Series D Exchange to
participate in the Series C offer, you must complete the
proxy card that accompanies this proxy statement/consent
solicitation/prospectus and mail it to the Company in the
enclosed return envelope. The method of delivery of all
required documents is as the option and risk of the tendering
stockholder. If delivery is by mail, registered mail with return
receipt requested, properly insured, is recommended.
If you have already tendered your Series C Preferred stock
for the Stock-Only Option or
Cash-and-Stock
Option, you do not need to take any further action to receive
your portion of the Offer Consideration. If you wish to revoke
your prior tender, you may do so by following the instructions
set forth above under Withdrawal Rights. Any holder
who withdraws a prior tender may tender for different Offer
Consideration by submitting a new Letter of Transmittal to the
Exchange Agent.
Signatures on all Letters of Transmittal must be guaranteed by a
firm that is a member of a registered national securities
exchange or of the National Association of Securities Dealers,
Inc., or by a commercial bank or trust company having an officer
or correspondent in the United States or by any other
eligible guarantor institution as defined in
Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended (each of
the foregoing being an Eligible Institution), in
cases where shares of Series C Preferred Stock are tendered
by a registered holder of Series C Preferred Stock who has
completed either the box entitled Special Payment
Instructions or the box entitled Special Delivery
Instructions on the Letter of Transmittal. If the
certificates are registered in the name of a person other than
the signer of the Letter of Transmittal, the certificates must
be endorsed or accompanied by appropriate stock powers, signed
exactly as the name or names of the registered owner or owners
appear on the certificates, with the signature(s) on the
certificates or stock powers guaranteed as described above.
If a Series C Holder desires to tender shares of
Series C Preferred Stock pursuant to the Series C
Offer, and such Series C Holders certificates are not
immediately available or time will not permit his, her or its
Letter of Transmittal, stock certificates or any other required
documents to reach the Exchange Agent prior to the Expiration
Date, that Series C Holders tender may nevertheless
be effected if all the following conditions are met:
(a) such tender is made by or through an Eligible
Institution (as defined in the Letter of Transmittal);
(b) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form provided by us
herewith is received by the Exchange Agent as provided below on
or prior to the Expiration Date; and (c) the certificates
for all tendered shares of Series C Preferred Stock,
together with a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) and any other documents
required by the Letter of Transmittal, are received by the
Exchange Agent within five business days after the date of
execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand to
the Exchange Agent or transmitted by telegram, telex, facsimile
transmission or mail to the Exchange Agent and must include a
signature guaranteed by an Eligible Institution in the form set
forth in such Notice.
In any event, the exchange of Offer Consideration for
Series C Preferred Stock tendered and accepted for exchange
pursuant to the Series C Offer and Consent Solicitation
will be made only after timely receipt by the Exchange Agent of
certificates therefore properly completed, duly executed
Letter(s) of Transmittal and any other required documents. In
addition, the Company must receive the proxy card with
Series C Holders consent to the Series C Offer
and Series D Exchange before Offer Consideration for
Series C Preferred Stock tendered and excepted for exchange
will be paid or issued by the Company for those shares of
Series C Preferred Stock.
To avoid backup federal income tax withholding with respect to
the Offer Consideration received by a Series C Holder
pursuant to the Series C Offer and Consent Solicitation,
the Series C Holder must provide the Exchange Agent with
his, her or its correct taxpayer identification number or
certify that he, she or it is not
44
subject to backup federal income tax withholding by completing
the Substitute
Form W-9
included in the Letter of Transmittal.
All questions as to the validity, form, eligibility (including
time of receipt) and acceptance of any tender of Series C
Preferred Stock will be determined by us in our sole discretion,
and our determination will be final and binding. We reserve the
absolute right to reject any or all tenders determined by it not
to be in proper form or the acceptance of or exchange for which
may, in the opinion of our counsel, be unlawful. We also reserve
the absolute right to waive, on or prior to the Expiration Date,
any of the conditions of the Series C Offer and Consent
Solicitation which we are legally permitted to waive (other than
the effectiveness of the Registration Statement) or any defect
or irregularity in the tender of any shares of Series C
Preferred Stock. No tender of Series C Preferred Stock will
be deemed to have been validly made until all defects and
irregularities have been cured or waived. Our interpretation of
the terms and conditions of the Series C Offer and Consent
Solicitation (including the Letter of Transmittal and
instructions thereto) will be final and binding. Neither we nor
any other person will be under any duty to give notification of
any defects or irregularities in the tender of any shares of
Series C Preferred Stock or will incur any liability for
failure to give any such notification.
A tender of Series C Preferred Stock pursuant to the
procedures described above will constitute a binding agreement
between the tendering Series C Holder and Company upon the
terms and subject to the conditions of the Series C Offer
and Consent Solicitation.
Withdrawal
Rights
Shares of Series C Preferred Stock tendered pursuant to the
Series C Offer and Consent Solicitation may be withdrawn at
any time prior to the Expiration Date.
For a withdrawal to be effective, a written or facsimile
transmission notice of withdrawal must be timely received by the
Exchange Agent at the address set forth on the Letter of
Transmittal and must specify the name, address and social
security number of the person having tendered the shares of
Series C Preferred Stock to be withdrawn, the certificate
number or numbers for such shares and the name of the registered
holder, if different from that of the person who tendered such
shares of Series C Preferred Stock.
If certificates have been delivered or otherwise identified to
the Exchange Agent, the name of the registered holder and the
serial numbers of the particular certificates evidencing the
shares of Series C Preferred Stock withdrawn must also be
furnished to the Exchange Agent as aforesaid prior to the
physical release of such certificates. All questions as to the
form and validity (including time of receipt) of notices of
withdrawal will be determined by us in our discretion, and our
determination will be final and binding. Neither we nor any
other person will be under any duty to give notification of any
defects or irregularities in any notice of withdrawal or will
incur any liability for failure to give any such notification.
Any shares of Series C Preferred Stock properly withdrawn
will be deemed not to have been validly tendered for purposes of
the Series C Offer and Consent Solicitation. However,
withdrawn shares of Series C Preferred Stock may be
re-tendered by following one of the procedures described under
Procedure for Tendering Shares at any
time prior to the Expiration Date.
Lost or
Missing Certificates
If a Series C Holder desires to tender Series C
Preferred Stock pursuant to the Series C Offer and Consent
Solicitation but the certificate evidencing such Series C
Preferred Stock has been mutilated, lost, stolen or destroyed,
the Series C Holder should write to or telephone us at the
address or telephone number listed below about procedures for
obtaining a replacement certificate for such Series C
Preferred Stock.
Computershare Trust Company N.A.
P.O. Box 43078
Providence, Rhode Island
02940-3078
1-800-884-4225
Attention: Lost and Securities
45
Conditions
of the Series C Offer and Consent Solicitation
Our obligation to accept Series C Preferred Stock pursuant
to the Series C Offer and Consent Solicitation is subject
to a number of conditions, which are described below:
Effective registration statement: The
Series C Offer is conditioned upon the Registration
Statement, of which this proxy statement/consent
solicitation/prospectus is a part, becoming effective. This is a
non-waivable
condition of the Series C Offer and Consent Solicitation.
Receipt of Series C Holders
Consents. The Series C Offer is conditioned
upon the Companys receipt of consent to the Series C
Offer and the Series D Exchange by the holders of
two-thirds of the outstanding Series C Preferred Stock.
Approval of the Amendments to our Charter. The
Series C Offer is conditioned upon the approval by the
shareholders entitled to vote on each Proposal presented at the
special meeting of each Amendment.
Completion of the Series D Exchange. The
Series C Offer is conditioned upon the completion of the
exchange of all issued and outstanding shares of the
Companys Series D Preferred Stock for an aggregate of
37,161,600 newly-issued shares of Common Stock and $1,377,600 in
cash.
In addition, we will not be required to accept for exchange or,
subject to any applicable rules or regulations of the SEC,
exchange any Series C Preferred Stock tendered for exchange
and may postpone the acceptance for exchange of any
Series C Preferred Stock tendered for exchange, and may
terminate or amend the Series C Offer and Consent
Solicitation as provided in this document if at any time on or
after the date of this Series C Offer and Consent
Solicitation and before the Expiration Date, any of the
following conditions have occurred:
No Adverse Proceeding. There shall have been
instituted or threatened or be pending any action or proceeding
before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other
person, in connection with the Series C Offer or Consent
Solicitation that is, or is reasonably likely to be, in our
reasonable judgment, materially adverse to our business,
operations, properties, condition (financial or otherwise),
assets, liabilities or prospects.
A Material Adverse Development in
Proceedings. There shall have occurred any
material adverse development, in our reasonable judgment, with
respect to any action or proceeding concerning us.
An Adverse Order or Law. An order, statute,
rule, regulation, executive order, stay, decree, judgment or
injunction shall have been proposed, enacted, entered, issued or
promulgated by any court or administrative agency or
instrumentality that, in our reasonable judgment, would or might
prohibit, prevent, restrict or delay consummation of the
Series C Offer or Consent Solicitation that is, or is
reasonably likely to be, materially adverse to our business,
operations, properties, condition (financial or otherwise),
assets, liabilities or prospects.
A Suspension of Trading, the Commencement of Hostilities, or
Other Serious Event. There shall have occurred:
|
|
|
|
|
any general suspension of, or limitation on prices for, trading
in securities in the United States securities or financial
markets,
|
|
|
|
any material adverse change in the price of the Series C
Preferred Stock in the United States or financial markets,
|
|
|
|
a material impairment in the trading market for securities,
|
|
|
|
a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States,
|
|
|
|
any limitation (whether or not mandatory) by any government or
governmental, administrative or regulatory authority or agency,
domestic or foreign, on, or other event that, in our reasonable
judgment, might affect, the extension of credit by banks or
other lending institutions,
|
|
|
|
a commencement of a war or armed hostilities or other national
or international calamity directly or indirectly involving the
United States,
|
46
|
|
|
|
|
any imposition of a general suspension or limitation of prices
quoted by Pink OTC Markets
inter-dealer
quotation service, or
|
|
|
|
in the case of any of the foregoing that exist on the date of
this document, a material acceleration or worsening of such
event.
|
The foregoing conditions are for our sole benefit and may be
asserted by us on or before the Expiration Date regardless of
the circumstances giving rise to any such conditions or may be
waived on or before the Expiration Date by us in whole or in
part, except to the extent that any such conditions arise out of
any action or inaction by us or any of our affiliates. The
failure by us to exercise any of the foregoing rights will not
be deemed a waiver of any such right, and each such right will
be deemed a continuing right which may be asserted at any time
and from time to time on or before the Expiration Date.
Waiver of
Conditions
We reserve the absolute right (but are not obligated), subject
to the rules and regulations of the SEC, to waive on or before
the Expiration Date any of the conditions of the Series C
Offer other than the condition regarding the effectiveness of
the registration statement.
If any of the waivable conditions are not satisfied prior to the
Expiration Date, we may, subject to applicable law:
|
|
|
|
|
terminate the Series C Offer and Consent Solicitation and
return all shares of Series C Preferred Stock to tendering
holders;
|
|
|
|
extend the Series C Offer and Consent Solicitation and
retain all tendered Series C Preferred Stock until the
extended Expiration Date;
|
|
|
|
amend the terms of the Series C Offer or Consent
Solicitation or modify the consideration to be paid by us
pursuant to the Series C Offer; or
|
|
|
|
waive the unsatisfied conditions with respect to the
Series C Offer and Consent Solicitation and accept all
Series C Preferred Stock tendered pursuant to the
Series C Offer and Consent Solicitation.
|
Source of
Funds
We intend to fund all cash payments to holders pursuant to the
Series C Offer, including any payments for fractional
shares of Common Stock, with cash on hand.
Fees and
Expenses
The Company will pay all expenses of the Series C Offer
including, but not limited to, the filing, legal, accounting and
appraisal fees, soliciting expenses and printing costs. Brokers,
dealers, commercial banks and trust companies will be reimbursed
by us for customary mailing and handling expenses incurred by
them in forwarding material to their customers.
Interest
of Certain Persons in the Series C Offer
Pursuant to the Articles Supplementary to the
Companys charter, whenever dividends on the Series C
Preferred Stock are in arrears for six or more quarters (whether
or not consecutive) the Series C Holders have the right to
elect two additional directors to the Board. Because dividends
on the Series C Preferred Stock were in arrears for six or
more quarters as of the 2009 Annual Shareholders Meeting,
two directors, Howard Amster and Barry Igdaloff, were elected at
that meeting to serve on the Board by the Series C Holders.
As part of the Series C Offer and Consent Solicitation, and
the Amendment contemplated by a Proposal 1,
Messrs. Amster and Igdaloff will not automatically continue
to serve on the Board beyond the special meeting. However, under
the Voting Agreement, dated December 10, 2010, the Company
and Messrs. Amster and Igdaloff have mutually agreed that
following a successful conclusion to the Series C Offer,
the Company will use its reasonable best efforts to expand the
Companys Board by two positions and appoint
Messrs. Amster and Igdaloff to fill the newly-created
positions. Moreover, at the next annual meeting of shareholders
of the Company occurring after the completion of the
Series C Offer, the Company will use its reasonable best
efforts to nominate Messrs. Amster and Igdaloff to
three-year terms as directors of the
47
Companys Board and Messrs. Amster and Igdaloff will accept
such nominations. Further, under the Voting Agreement,
Messrs. Amster and Igdaloff will vote for the
Proposals. For more information regarding the structure of the
Board upon filing the revised charter and the Board service of
Messrs. Amster and Igdaloff, see Directors, Executive
Officers and Control Persons Classified
Directors and Series C
Directors, respectively.
Messrs. Amster and Igdaloff did not serve on the special
committee of the Board which considered the recapitalization,
including the Series C Offer.
Mr. Amster owns 172,366 shares of Series C
Preferred Stock and is the trustee of two trusts which own
44,600 shares of Series C Preferred Stock,
collectively. Mr. Igdaloff owns 207,649 shares of
Series C Preferred Stock and as a registered investment
advisor he controls an additional 100,125 shares.
Messrs. Amster and Igdaloff will be entitled to participate
in the Series C Offer and Consent Solicitation on the same
terms as are being offered to other Series C Holders.
Messrs. Amster and Igdaloff have both indicated that they
will elect the Stock-Only Option in exchange for their
Series C Preferred Stock.
Appraisal
Rights and the Right to Petition for Fair Value
No stockholder of the Company will have appraisal rights with
respect to any matter to be acted upon at the special meeting.
However, dissenting Series C Holders will have the right to
petition for the fair value of their Series C Preferred
Stock if the Series C Offer is consummated. Fair value will
be determined as of the close of business on the day of the
upcoming special meeting. To be eligible to receive the fair
value for the Series C Preferred Stock, the dissenting
Series C Holder must file a written objection with the
Company at or before the special meeting. To receive fair value
through this process, the Series C Holder may not vote in
favor of the Proposals or consent to the Series C Offer or
Series D Exchange, and the Series C Holder must make a
written demand to the Company for payment of his, her or its
Series C Preferred Stock within 20 days after the
charter containing the Amendments are accepted by state of
Maryland.
The Series D Holders will have this same right to petition
for fair value of their Series D Preferred Stock, though
the Series D Holders have executed the Exchange Agreement
(see Review and Approval of Transaction with Related
Parties; Related Party Transactions Agreements
and Transactions with the Series D Holders) under
which the Series D Holders will exchange all of their
Series D Preferred Stock for Common Stock and cash. Thus,
we do not anticipate that there will be any dissenting
Series D Holders.
Exchange
Agent
We have engaged Computershare Trust Company, N.A. to act as the
Exchange Agent for the Series C Offer and Consent
Solicitation.
48
CAPITALIZATION
The following table sets forth our capitalization as of
September 30, 2010 (in thousands):
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis to give effect to the Series C Offer
(assuming 27.15% of the outstanding shares of Series C
Preferred Stock (811,650 shares) are each exchanged for
$2.00 in cash and 3 shares of Common Stock and 72.85% of
the outstanding shares of Series C Preferred Stock
(2,178,350 shares) are each exchanged for 19 shares of
Common Stock); and
|
|
|
|
on a pro forma basis to give effect to (i) the
Series C Offer (assuming 27.15% of the outstanding shares
of Series C Preferred Stock (811,650 shares) are each
exchanged for $2.00 in cash and 3 shares of Common Stock
and 72.85% of the outstanding shares of Series C Preferred Stock
(2,178,350 shares) are each exchanged for 19 shares of
Common Stock) and (ii) the Series D Exchange (assuming
100% of the outstanding shares of Series D Preferred Stock
(2,100,000 shares) are each exchanged for $0.656 in cash
and 17.7 shares of Common Stock); and
|
|
|
|
the common stock value on December 2, 2010 was assumed in
determining the difference between the fair value of the
consideration transferred to the holders of the Series C
Preferred Stock and Series D Preferred Stock and the carrying
amount of the Series C Preferred Stock and Series D
Preferred Stock to calculate a return to (from) the
Series C Holders and Series D Holders, and
|
|
|
|
on a pro forma basis the Junior Subordinated debentures will not
be impacted by the exchange and as of September 30, 2010,
the total amount outstanding is $78.0 million.
|
You should read this information together with our financial
statements and the notes to those statements appearing elsewhere
in this proxy statement/consent solicitation/prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma Series C
|
|
|
|
|
|
|
|
|
|
Offer and
|
|
|
|
|
|
|
Proforma Series C
|
|
|
Series D
|
|
|
|
Actual
|
|
|
Offer Only
|
|
|
Exchange
|
|
|
Series C Preferred Stock (redeemable preferred stock, $25
liquidating preference per share, 2,990,000, 0, 0 shares,
issued and outstanding)
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
Series D Preferred Stock (convertible participating
preferred stock, $25 liquidating preference per share;
2,100,000, 2,100,000, 0 shares, issued and outstanding)
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
Common stock, 9,368,053, 53,191,653 and 90,353,253 issued and
outstanding
|
|
|
94
|
|
|
|
532
|
|
|
|
904
|
|
Additional paid-in capital
|
|
|
787,281
|
|
|
|
747,377
|
|
|
|
773,491
|
|
Accumulated deficit
|
|
|
(894,510
|
)
|
|
|
(836,679
|
)
|
|
|
(837,845
|
)
|
Accumulated other comprehensive income
|
|
|
5,677
|
|
|
|
5,677
|
|
|
|
5,677
|
|
Other
|
|
|
(17
|
)
|
|
|
(17
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NFI shareholders deficit
|
|
|
(101,424
|
)
|
|
|
(83,089
|
)
|
|
|
(57,790
|
)
|
Noncontrolling interests
|
|
|
(1,221
|
)
|
|
|
(1,221
|
)
|
|
|
(1,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
|
(102,645
|
)
|
|
|
(84,310
|
)
|
|
|
(59,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
The following table sets forth the actual accrued and unpaid
dividends and the aggregate liquidating preferences of the
Series C Preferred Stock and Series D Preferred Stock
on the same bases as the preceding table. The accrued and unpaid
dividends on the Series C Preferred Stock and the Series D
Preferred Stock are assumed to be forgiven when giving effect to
the Series C Offer and Series D Exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma Series C
|
|
|
|
|
|
|
Offer and
|
|
|
|
|
Proforma Series C
|
|
Series D
|
|
|
Actual
|
|
Offer Only
|
|
Exchange
|
|
Accrued and unpaid dividends on the Series C Preferred Stock
|
|
$
|
19,958
|
|
|
|
|
|
|
|
|
|
Accrued and unpaid dividends on the Series D Preferred Stock
|
|
$
|
26,677
|
|
|
$
|
26,667
|
|
|
|
|
|
Series C Preferred Stock Aggregate Liquidating Preference
|
|
$
|
74,750
|
|
|
|
|
|
|
|
|
|
Series D Preferred Stock Aggregate Liquidating Preference
|
|
$
|
52,500
|
|
|
$
|
52,500
|
|
|
|
|
|
50
MARKET
FOR COMMON STOCK
In October 1997, our registration statement for our initial
public offering of Common Stock became effective and our Common
Stock shares commenced trading on the New York Stock Exchange
(the NYSE) under the symbol NFI. In
January 2008, our Common Stock was delisted from the NYSE and is
currently quoted by Pink OTC Markets inter-dealer
quotation service as an OTCQB security under the symbol
NOVS. There were approximately
[ ] holders of record of Common Stock as
of [ ], 2010.
The table below sets forth, for the periods indicated, the high
and low sales prices of our Common Stock as reported by the NYSE
and as quoted by Pink OTC Markets inter-dealer quotation
service.
Sales
Prices
|
|
|
|
|
|
|
|
|
2008
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
3.44
|
|
|
$
|
1.10
|
|
Second Quarter
|
|
|
2.03
|
|
|
|
1.00
|
|
Third Quarter
|
|
|
1.99
|
|
|
|
0.28
|
|
Fourth Quarter
|
|
|
1.01
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
0.65
|
|
|
$
|
0.20
|
|
Second Quarter
|
|
|
1.74
|
|
|
|
0.55
|
|
Third Quarter
|
|
|
1.35
|
|
|
|
0.75
|
|
Fourth Quarter
|
|
|
1.28
|
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
1.01
|
|
|
$
|
0.69
|
|
Second Quarter
|
|
|
1.04
|
|
|
|
0.80
|
|
Third Quarter
|
|
|
0.99
|
|
|
|
0.52
|
|
Fourth Quarter (through December 8, 2010)
|
|
|
0.91
|
|
|
|
0.58
|
|
On December [ ], 2010, the closing price
of our Common Stock as quoted by Pink OTC Markets
inter-dealer quotation service was $[ ]
per share.
DIVIDEND
POLICY AND DIVIDENDS PAID ON OUR COMMON STOCK
Dividend distributions will be made at the discretion of the
Board of Directors and will depend on earnings, financial
condition, cost of equity, investment opportunities and other
factors as the Board of Directors may deem relevant. In
addition, accrued and unpaid dividends on our Series C
Preferred Stock and Series D Preferred Stock must be paid
prior to the declaration of any dividends on our Common Stock.
We do not expect to declare any cash or stock dividend
distributions in the near future.
We did not pay dividends on our Common Stock in 2008 or 2009,
nor have we paid dividends on our Common Stock in 2010.
51
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to our financial
condition and results of operations for the relevant periods and
is based on, and should be read in conjunction with, our
financial statements appearing elsewhere in this prospectus. The
following discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these
forward-looking statements as a result of a number of factors,
including those set forth under Risk Factors. See
Cautionary Note Regarding Forward-Looking Statements
for cautionary statements concerning
forward-looking
statements.
Executive
Overview
Corporate Overview, Background and Strategy
We are a Maryland corporation formed on September 13, 1996.
We own 88% of StreetLinks National Appraisal Services LLC
(StreetLinks), a national residential appraisal and
real estate valuation management services company. StreetLinks
collects fees from lenders and borrowers in exchange for a
residential appraisal provided by an independent residential
appraiser. Most of the fee is passed through to an independent
residential appraiser with whom StreetLinks has a contractual
relationship. StreetLinks retains a portion of the fee to cover
its costs of managing the process to fulfill the appraisal order
and perform a quality control review of each appraisal.
StreetLinks also provides other real estate valuation management
services, such as field reviews and value validation.
We own 70% of Advent Financial Services LLC
(Advent), a
start-up
business which provides access to tailored banking accounts,
small dollar banking products and related services to low and
moderate income level individuals. Advent began its operations
in December 2009. Through this
start-up
period, management is evaluating the Advent business model to
determine its long-term viability. As anticipated by management,
Advent has not been a significant contributor to our 2010
operations and management believes this will remain the case
through at least year end.
StreetLinks owns 51% of Corvisa LLC (Corvisa), a
technology company that develops and markets its software
products to mortgage lenders. Its primary product is a
self-managed appraisal solution for lenders to manage their
appraisal process. Other products include analytical tools for
lender to manage their mortgage origination business.
Prior to changes in our business in 2007, we originated,
purchased, securitized, sold, invested in and serviced
residential nonconforming mortgage loans and mortgage
securities. We retained, in our mortgage securities investment
portfolio, significant interests in the nonconforming loans we
originated and purchased, and through our servicing platform,
serviced all of the loans in which we retained interests. We
discontinued our mortgage lending operations and sold our
mortgage servicing rights which subsequently resulted in the
closing of our servicing operations. The mortgage securities we
retained continue to be a primary source of our cash flow.
Because of severe declines in housing prices and national and
international economic crises which led to declining values of
our investments in mortgage loans and securities, we suffered
significant losses during 2009. Liquidity constraints forced us
to reduce operations and administrative staff and take other
measures to conserve cash.
Significant Recent Events On November 4,
2010, StreetLinks completed the acquisition of 51% of Corvisa,
see Note 16 to the condensed consolidated financial
statements for the quarterly period ended September 30,
2010 for additional details.
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Act) was signed into
federal law. Various government agencies are charged with
implementing new regulations under the Act. When fully
implemented, the Act will modify and provide for new regulation
of a wide range of financial activities, including residential
real estate appraisals and appraisal management companies.
On October 18, 2010, as required by the Act, the Federal
Reserve Board issued an interim final rule which amended
Regulation Z under the Truth in Lending Act (the
Appraisal Rule). The Appraisal Rule is subject to a
public comment period until December 17, 2010. Compliance
with the Appraisal Rule, as
52
amended to account for comments received, becomes mandatory as
of April 1, 2011. New requirements under the Appraisal Rule
specific to residential real estate appraisals will likely
include, but not be limited to, the following:
|
|
|
|
|
appraisers must be paid reasonable and customary
fees,
|
|
|
|
require regulatory agencies to implement uniform appraisal
standards for all federal appraisals,
|
|
|
|
require appraisal management companies to register with state
agencies, and
|
|
|
|
govern automated valuation models.
|
It is managements opinion that the Appraisal Rule and
other rules and regulations promulgated under the Act will
strengthen appraiser reform, leading to greater appraiser
independence and greater lender
non-compliance
liability and will likely increase lender and consumer costs. We
believe credible lenders will continue to rely on appraisal
management companies to mitigate their appraisal compliance risk
and manage their appraisal fulfillment processes. Any impact of
the Act on the Company will not be fully determined until all
rules and regulations thereunder, including the Appraisal Rule,
have been fully implemented.
Subsequent to December 31, 2009, certain events occurred
that required us to reconsider the accounting for three
consolidated loan trusts NHEL
2006-1, NHEL
2006-MTA1 and NHEL
2007-1. Upon
reconsideration we determined that all requirements for
derecognition were met under applicable accounting guidelines at
the time of the reconsideration event. As a result, we
derecognized the assets and liabilities of the trusts and
recorded a gain during 2010 of $993.1 million. These
transactions are discussed in greater detail in this report
under the heading Impact on Our Financial Statements of
Derecognition of Securitized Mortgage Assets.
Critical Accounting Policies We prepare our
consolidated financial statements in conformity with GAAP and,
therefore, are required to make estimates regarding the values
of our assets and liabilities and in recording income and
expenses. These estimates are based, in part, on our judgment
and assumptions regarding various economic conditions that we
believe are reasonable based on facts and circumstances existing
at the time of reporting. These estimates affect reported
amounts of assets, liabilities and accumulated other
comprehensive income at the date of the consolidated financial
statements and the reported amounts of income, expenses and
other comprehensive income during the periods presented. The
following summarizes the components of our consolidated
financial statements where understanding accounting policies is
critical to understanding and evaluating our reported financial
results, especially given the significant estimates used in
applying the policies. The discussion is intended to demonstrate
the significance of estimates to our financial statements and
the related accounting policies. Management has discussed the
development and selection of these critical accounting estimates
with the Audit Committee of our Board of Directors and the Audit
Committee has reviewed our disclosure.
Mortgage Securities
Available-for-Sale
and Trading. Our mortgage securities
available-for-sale
and trading represent beneficial interests we retained in
securitization and resecuritization transactions which include
residual securities and subordinated securities as well as bonds
issued by others which we have purchased. The residual
securities include interest-only mortgage securities, prepayment
penalty bonds and over-collateralization bonds. The subordinated
securities represent bonds which are senior to the residual
securities but are subordinated to the bonds sold to third-party
investors. All of the subordinated securities retained by us
have been classified as trading.
The residual securities we retained in securitization
transactions structured as sales primarily consist of the right
to receive the future cash flows from a pool of securitized
mortgage loans which include:
|
|
|
|
|
The interest spread between the coupon net of servicing fees on
the underlying loans, the cost of financing, mortgage insurance,
payments or receipts on or from derivative contracts and bond
administrative costs.
|
|
|
|
Prepayment penalties received from borrowers who pay off their
loans early in their life.
|
53
|
|
|
|
|
Overcollateralization which is designed to protect the primary
bondholder from credit loss on the underlying loans.
|
The subordinated securities we retained in our securitization
transactions have a stated principal amount and interest rate.
The performance of the securities is dependent upon the
performance of the underlying pool of securitized mortgage
loans. The interest rates these securities earn are variable and
are subject to an available funds cap as well as a maximum rate
cap. The securities receive principal payments in accordance
with a payment priority which is designed to maintain specified
levels of subordination to the senior bonds within the
respective securitization trust. Because the subordinated
securities are rated lower than AA, they are considered low
credit quality and we account for the securities based on
guidance set forth from Beneficial Interests in Securitized
Financial Assets using the effective yield method. The fair
value of the subordinated securities is based on quoted
third-party market prices compared to estimates based on
discounting the expected future cash flows of the collateral and
bonds.
The cash flows we receive are highly dependent upon the interest
rate environment. The interest rates on the bonds issued by the
securitization trust are indexed to short-term interest rates,
while the coupons on the pool of loans held by the
securitization trust are less interest rate sensitive. As a
result, as rates rise and fall, our cash flows will fall and
rise, because the cash we receive on our residual securities is
dependent on this interest rate spread. As our cash flows fall
and rise, the value of our residual securities will decrease or
increase. Additionally, the cash flows we receive are dependent
on the default and prepayment experience of the borrowers of the
underlying mortgage security collateral. Increasing or
decreasing cash flows will increase or decrease the yield on our
securities.
We believe the accounting estimates related to the valuation of
our mortgage securities
available-for-sale
and establishing the rate of income recognition on the mortgage
securities
available-for-sale
and trading are critical accounting estimates,
because they can materially affect net income and
shareholders equity and require us to forecast interest
rates, mortgage principal payments, prepayments and loan default
assumptions which are highly uncertain and require a large
degree of judgment. The rate used to discount the projected cash
flows is also critical in the valuation of our residual
securities. We use internal, historical collateral performance
data and published forward yield curves when modeling future
expected cash flows and establishing the rate of income
recognized on mortgage securities. We believe the value of our
residual securities is appropriate, but can provide no assurance
that future changes in interest rates, prepayment and loss
experience or changes in the market discount rate will not
require write-downs of the residual assets. For mortgage
securities classified as
available-for-sale,
impairments would reduce income in future periods when deemed
other-than-temporary.
As previously described, our mortgage securities
available-for-sale
and trading represent retained beneficial interests in certain
components of the cash flows of the underlying mortgage loans to
securitization trusts. Income recognition for our mortgage
securities
available-for-sale
and trading is based on the effective yield method. Under the
effective yield method, as payments are received, they are
applied to the cost basis of the mortgage-related security. Each
period, the accretable yield for each mortgage security is
evaluated and, to the extent there has been a change in the
estimated cash flows, it is adjusted and applied prospectively.
The estimated cash flows change as managements assumptions
about credit losses, borrower prepayments and interest rates are
updated. The assumptions are established using internally
developed models. We prepare analyses of the yield for each
security using a range of these assumptions. The accretable
yield used in recording interest income is generally set within
a range of assumptions. The accretable yield is recorded as
interest income with a corresponding increase to the cost basis
of the mortgage security.
At each reporting period subsequent to the initial valuation of
the residual securities, the fair value of the residual
securities is estimated based on the present value of future
expected cash flows to be received. Managements best
estimate of key assumptions, including credit losses, prepayment
speeds, expected call dates, market discount rates and forward
yield curves commensurate with the risks involved, are used in
estimating future cash flows. We estimate initial and subsequent
fair value for the subordinated securities based on quoted
market prices. See Note 3 to the consolidated financial
statements for the fiscal year ended December 31, 2009 for
the residual security sensitivity analysis and Note 4 to
the consolidated financial
54
statements for the fiscal year ended December 31, 2009 for
the current fair value of our residual securities. See
Note 4 to the condensed consolidated financial statements
for the quarterly period ended September 30, 2010 for the
residual security sensitivity analysis and Note 5 to the
condensed consolidated financial statements for the period ended
September 30, 2010 for the current fair value of our
residual securities.
To the extent that the cost basis of mortgage
securities
available-for-sale
exceeds the fair value and the unrealized loss is considered to
be other than temporary, an impairment charge is recognized and
the amount recorded in accumulated other comprehensive income or
loss is reclassified to earnings as a realized loss.
Allowance for Credit Losses. An allowance for
credit losses is maintained for mortgage loans
held-in-portfolio.
The amount of the allowance is based on the assessment by
management of probable losses incurred based on various factors
affecting our mortgage loan portfolio, including current
economic conditions, the makeup of the portfolio based on credit
grade,
loan-to-value
ratios, delinquency status, mortgage insurance we purchase and
other relevant factors. The allowance is maintained through
ongoing adjustments to operating income. The assumptions used by
management in estimating the amount of the allowance for credit
losses are highly uncertain and involve a great deal of judgment.
An internally developed migration analysis is the primary tool
used in analyzing our allowance for credit losses. This tool
takes into consideration historical information regarding
foreclosure and loss severity experience and applies that
information to the portfolio at the reporting date. We also take
into consideration our use of mortgage insurance as a method of
managing credit risk and current economic conditions, experience
and trends. We pay mortgage insurance premiums on a portion of
the loans maintained on our Consolidated Balance Sheets and have
included the cost of mortgage insurance in our statement of
operations.
Approximately 20% of our loans held in portfolio were greater
than 90 days delinquent at December 31, 2008, and
approximately 20% were in foreclosure. As of December 31,
2009, this delinquency percentage decreased to approximately 16%
while loans in foreclosure increased to approximately 36%. As
loans transition into REO status, an estimated loss is recorded
until the property is sold or liquidated. For the NHEL
2006-1 and
NHEL 2006-MTA1 transactions, we valued REO property at 50% of
its current principal balance as of December 31, 2009,
compared to 55% as of December 31, 2008. Because of the
increased loss severity, NHEL
2007-1
property was valued at 35% in 2009; a 5% decrease from 2008. Our
estimate of expected losses could increase if our actual loss
experience is different than originally estimated. In addition,
our estimate of expected losses could increase if economic
factors change the value we could reasonably expect to obtain
from the sale of the property.
The Company did not hold any mortgage loans-held-in-portfolio as
of September 30, 2010 due to the derecognition of the
securitization trusts and therefore did not have an allowance
for credit losses during 2010. See Note 3 to the condensed
consolidated financial statements for the quarterly period ended
September 30, 2010 for further details.
Real Estate Owned. Real Estate Owned, which
consists of residential real estate acquired in satisfaction of
loans, is carried at the lower of cost or estimated fair value
less estimated selling costs. We estimate fair value at the
assets liquidation value less selling costs using
managements assumptions which are based on historical loss
severities for similar assets. Adjustments to the loan carrying
value required at time of foreclosure are charged against the
allowance for credit losses. Costs related to the development of
real estate are capitalized and those related to holding the
property are expensed. Losses or gains from the ultimate
disposition of real estate owned are charged or credited to
earnings.
The Company did not hold any real estate owned as of
September 30, 2010 due to the derecognition of the
securitization trusts. See Note 3 to the condensed
consolidated financial statements for the quarterly period ended
September 30, 2010 for further details.
CDO Asset-Backed Bonds (CDO
ABB). We elected the fair value option for
the asset-backed bonds issued from NovaStar ABS CDO I in 2007.
We elected the fair value option for these liabilities to help
reduce earnings volatility which otherwise would arise if the
accounting method for this debt was not matched with the fair
value accounting for the related mortgage securities
trading. Fair value is estimated using quoted market prices of
the underlying assets.
55
The asset-backed bonds which are being carried at fair value are
included in the Other current liabilities line item
on the Consolidated Balance Sheets. We recognize fair value
adjustments for the change in fair value of the bonds which are
included in the Other expense line item on the
Consolidated Statements of Operations. We calculate interest
expense for these asset-backed bonds based on the prevailing
coupon rates of the specific classes of debt and record interest
expense in the period incurred. Interest expense amounts are
included in the Interest expense line item of the
Consolidated Statements of Operations.
Deferred Tax Asset, net. We recorded deferred
tax assets and liabilities for the future tax consequences
attributable to differences between the GAAP carrying amounts
and their respective income tax bases. A deferred tax liability
was recognized for all future taxable temporary differences,
while a deferred tax asset was recognized for all future
deductible temporary differences, operating loss carryforwards
and tax credit carryforwards. In accordance with Income Taxes
guidance, we recorded deferred tax assets and liabilities using
the enacted tax rate that is expected to apply to taxable income
in the periods in which the deferred tax asset or liability is
expected to be realized.
In determining the amount of deferred tax assets to recognize in
the financial statements, we evaluate the likelihood of
realizing such benefits in future periods. Income Taxes guidance
requires the recognition of a valuation allowance if it is more
likely than not that all or some portion of the deferred tax
asset will not be realized. Income Taxes guidance indicates the
more likely than not threshold is a level of likelihood that is
more than 50%.
Under Income Taxes guidance, companies are required to identify
and consider all available evidence, both positive and negative,
in determining whether it is more likely than not that all or
some portion of its deferred tax assets will not be realized.
Positive evidence includes, but is not limited to the following:
cumulative earnings in recent years, earnings expected in future
years, excess appreciated asset value over the tax basis and
positive industry trends. Negative evidence includes, but is not
limited to the following: cumulative losses in recent years,
losses expected in future years, a history of operating losses
or tax credits carryforwards expiring and adverse industry
trends.
The weight given to the potential effect of negative and
positive evidence should be commensurate with the extent to
which it can be objectively verified. Accordingly, the more
negative evidence that exists requires more positive evidence to
counter, thus making it more difficult to support a conclusion
that a valuation allowance is not needed for all or some of the
deferred tax assets. A cumulative loss in recent years is
significant negative evidence that is difficult to overcome when
determining the need for a valuation allowance. Similarly,
cumulative earnings in recent years represent significant
positive objective evidence. If the weight of the positive
evidence is sufficient to support a conclusion that it is more
likely than not that a deferred tax asset will be realized, a
valuation allowance should not be recorded.
We examine and weigh all available evidence (both positive and
negative and both historical and forecasted) in the process of
determining whether it is more likely than not that a deferred
tax asset will be realized. We consider the relevancy of
historical and forecasted evidence when there has been a
significant change in circumstances. Additionally, we evaluate
the realization of our recorded deferred tax assets on an
interim and annual basis. We do not record a valuation allowance
if the weight of the positive evidence exceeds the negative
evidence and is sufficient to support a conclusion that it is
more likely than not that our deferred tax asset will be
realized.
If the weighted positive evidence is not sufficient to support a
conclusion that it is more likely than not that all or some of
our deferred tax assets will be realized, we consider all
alternative sources of taxable income identified in determining
the amount of valuation allowance to be recorded. Alternative
sources of taxable income identified in Income Taxes guidance
include the following: 1) taxable income in prior carryback
year, 2) future reversals of existing taxable temporary
differences, 3) future taxable income exclusive of
reversing temporary differences and carryforwards, and
4) tax planning strategies.
Strategy Management is focused on building
the operations of StreetLinks and Advent. With the acquisition
of Corvisa subsequent to September 30, 2010, the Company
plans to expand its customer base and the real estate valuation
management services that it currently provides to customers. See
Note 16 to the
56
condensed consolidated financial statements for the quarterly
period ended September 30, 2010 for additional details. If
and when opportunities arise, we intend to use available cash
resources to invest in or start businesses that can generate
income and cash. Additionally, management will attempt to
renegotiate
and/or
restructure the components of our equity in order to realign the
capital structure with our current business model.
The key performance measures for executive management are:
|
|
|
|
|
maintaining
and/or
generating adequate liquidity to sustain us and allow us to take
advantage of investment opportunities, and
|
|
|
|
generating income for our shareholders.
|
The following key performance metrics are derived from our
condensed consolidated financial statements for the periods
presented and should be read in conjunction with the more
detailed information therein and with the disclosure included in
this report under the heading Managements Discussion
and Analysis of Financial Condition and Results of
Operations.
Table
1 Summary of Financial Highlights and Key
Performance Metrics
(dollars in thousands; except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
September
|
|
December
|
|
|
30, 2010
|
|
31, 2009
|
|
Cash and cash equivalents, excluding restricted cash
|
|
$
|
16,784
|
|
|
$
|
7,104
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
Ended September 30,
|
|
|
2010
|
|
2009
|
|
Net income (loss) available to common shareholders per diluted
share
|
|
$
|
86.86
|
|
|
$
|
(17.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash and cash equivalents, including restricted cash
|
|
$
|
12,446
|
|
|
$
|
30,836
|
|
Net loss available to common shareholders, per diluted share
|
|
|
(20.97
|
)
|
|
|
(72.37
|
)
|
Liquidity as of September 30, 2010
During the first nine months of 2010 we continued to develop
StreetLinks and significantly increased its appraisal volume.
For the nine months ended September 30, 2010, StreetLinks
had revenues of $50.2 million, as compared to
$22.0 million for the same period in 2009. For the year
ended December 31, 2009, StreetLinks had revenues of
$31.1 million, as compared to $2.5 million in 2008.
StreetLinks incurred significant
start-up
expenses to develop its infrastructure in 2009, which have not
been incurred during 2010. As a result, StreetLinks has produced
net positive cash flow and earnings in 2010 and is expected to
continue producing net positive cash flow and earnings for the
foreseeable future. During the nine months ended
September 30, 2010, we received $7.7 million in cash
on our securities portfolio, compared to $16.4 million for
the same period in 2009. During 2009, we received
$18.5 million in cash on our securities portfolio.
During the first three quarters, we used cash to pay for
corporate and administrative costs and invest in Advent. We
intend to continue to invest in Advent during the fourth quarter
of 2010. However, we will limit the negative impact on liquidity
and do not believe that Advent will be a significant use or
source of cash for the remainder of 2010.
As of September 30, 2010, we have $16.8 million in
unrestricted cash and cash equivalents. On November 4,
2010, StreetLinks completed the acquisition of 51% of Corvisa
for $1.5 million of cash plus contingent consideration
related to an earn-out opportunity based on future net income.
The amount of the future payments that the Company could be
required to make under the earn-out opportunity is
$0.6 million, see Note 16 to the condensed
consolidated financial statements for the quarterly period ended
September 30, 2010 for additional details.
57
StreetLinks and our mortgage securities are our primary source
of cash flows. The cash flows from our mortgage securities will
continue to decrease as the underlying mortgage loans are repaid
and could be significantly less than the current projections if
interest rate increases exceed the current assumptions. Our
liquidity consists solely of cash and cash equivalents and
future cash flows generated through our operating businesses.
Our condensed consolidated financial statements have been
prepared on a going concern basis of accounting which
contemplates continuity of operations, realization of assets,
liabilities and commitments in the normal course of business.
The Company has experienced significant losses over the past
several years and has a significant deficit in
shareholders equity. Notwithstanding these negative
factors, management believes that its current operations and its
cash availability is sufficient for the Company to discharge its
liabilities and meet its commitments in the normal course of
business. See Liquidity and Capital Resources for
further discussion of our liquidity position and steps we have
taken to preserve liquidity levels.
As of September 30, 2010, we had a working capital
deficiency of $29.3 million. This was mainly attributable
to dividends payable of $46.6 million being classified as a
current liability, although the Company does not expect to pay
the dividends due to managements effort to conserve cash.
Impact on
Our Financial Statements of Derecognition of Securitized
Mortgage Assets
During the first quarter of 2010, certain events occurred that
required us to reconsider the accounting for three consolidated
loan trusts NHEL
2006-1, NHEL
2006-MTA1 and NHEL
2007-1. As
all requirements for derecognition have been met under
applicable accounting guidelines, we derecognized the assets and
liabilities of the NHEL
2006-1, NHEL
2006-MTA1 and NHEL
2007-1
trusts during the nine months ending September 30, 2010.
The securitized loans in these trusts have suffered substantial
losses and through the date of the derecognition we recorded
significant allowances for these losses. These losses have
created large accumulated deficits for the trust balance sheets.
Upon derecognition, all assets, liabilities and accumulated
deficits were removed from our condensed consolidated financial
statements. The Company also recognized certain securities with
no value that were retained and were previously eliminated. A
gain of $993.1 million was recognized upon derecognition,
representing the net accumulated deficits in these trusts.
The following is summary balance sheet information for each of
the three derecognized loan trusts at the time of the
reconsideration event and the resulting gain recognized upon
derecognition:
Table
2 Assets and Liabilities of Loan Trusts and Gain
Recognized upon Derecognition
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NHEL 2006-
|
|
NHEL 2006-
|
|
|
|
Eliminations
|
|
|
|
|
MTA1
|
|
MTA1
|
|
NHEL 2007-1
|
|
(A)
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
held-in-
portfolio
|
|
$
|
528,388
|
|
|
$
|
399,507
|
|
|
$
|
1,033,296
|
|
|
$
|
(8,003
|
)
|
|
$
|
1,953,188
|
|
Allowance for loan losses
|
|
|
(147,147
|
)
|
|
|
(115,191
|
)
|
|
|
(440,563
|
)
|
|
|
|
|
|
|
(702,901
|
)
|
Accrued interest receivable
|
|
|
6,176
|
|
|
|
20,521
|
|
|
|
46,028
|
|
|
|
|
|
|
|
72,725
|
|
Real estate owned
|
|
|
11,842
|
|
|
|
17,919
|
|
|
|
25,548
|
|
|
|
|
|
|
|
55,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
399,259
|
|
|
|
322,756
|
|
|
|
664,309
|
|
|
|
(8,003
|
)
|
|
|
1,378,321
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed bonds
|
|
|
588,434
|
|
|
|
465,164
|
|
|
|
1,175,608
|
|
|
|
6,427
|
|
|
|
2,235,633
|
|
Due to servicer
|
|
|
17,298
|
|
|
|
32,835
|
|
|
|
81,639
|
|
|
|
|
|
|
|
131,772
|
|
Other liabilities
|
|
|
9,432
|
|
|
|
12,368
|
|
|
|
24,017
|
|
|
|
(41,770
|
)
|
|
|
4,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
615,164
|
|
|
|
510,367
|
|
|
|
1,281,264
|
|
|
|
(35,343
|
)
|
|
|
2,371,452
|
|
Gain on derecognition of securitization trusts
|
|
$
|
215,905
|
|
|
$
|
187,611
|
|
|
$
|
616,955
|
|
|
$
|
(27,340
|
)
|
|
$
|
993,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
(A) |
|
Eliminations relate to intercompany accounts at the consolidated
financial statement level, there are no intercompany balances
between the securitization trusts. |
Impact of
Recently Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 166, Accounting for the
Transfers of Financial Assets, an Amendment of FASB Statement
No. 140; this statement was codified in December 2009 as
Accounting Standards Codification (ASC) 860. This
guidance is effective for financial asset transfers beginning on
January 1, 2010 and will be used to determine whether the
transfer is accounted for as a sale under GAAP or as a secured
borrowing. In addition, also in June 2009, the FASB issued
SFAS No. 167, Amendments to FASB Interpretation
No. 46(R); this statement was also codified in December
2009 as ASC 810 and governs the consolidation of variable
interest entities. The consolidation guidance became effective
for all VIEs the Company held as of January 1, 2010. As
part of the Companys adoption of the amended consolidation
guidance, it was required to reconsider the Companys
previous consolidation conclusions pertaining to the
Companys variable interests in VIEs, including:
(i) whether an entity is a VIE; and (ii) whether the
Company is the primary beneficiary. Based on the Companys
assessment of its involvement in VIEs at January 1, 2010,
in accordance with the amended consolidation guidance, the
Company determined that it is not the primary beneficiary of any
mortgage loan securitization entities in which it held a
variable interest, as the Company does not have the power to
direct the activities that most significantly impact the
economic performance of these entities. The adoption of the
amended consolidation guidance did not result in the Company
consolidating or deconsolidating any VIEs for which it has
involvement. It should be noted, however, that the new guidance
also required the Company to reassess these conclusions, based
upon changes in the facts and circumstances pertaining to the
Companys VIEs, on an ongoing basis; thus, the
Companys assessments may therefore change and could result
in a material impact to the Companys financial statements
during subsequent reporting periods. The Company re-evaluated
the NHEL
2006-1, NHEL
2006-MTA1, and NHEL
2007-1
securitization transactions and determined that based on the
occurrence of certain events during January 2010, the
application of the amended Transfers and Servicing guidance
resulted in the Company reflecting as sales of financial assets
and extinguishment of liabilities the assets and liabilities of
the securitization trusts during the nine month period ended
September 30, 2010. As a result, the Company derecognized
the assets and liabilities of the NHEL
2006-1, NHEL
2006-MTA1, and NHEL
2007-1
securitization trusts and recorded a gain during the nine months
ended September 30, 2010. See Note 3 to the condensed
consolidated financial statements for the quarterly period ended
September 30, 2010 for further details.
In March 2010, the FASB issued new guidance clarifying the scope
exemption for embedded
credit-derivative
features. Embedded credit-derivative features related only to
the transfer of credit risk in the form of subordination of one
financial instrument to another are not subject to potential
bifurcation and separate accounting. However, other embedded
credit-derivative features are required to be analyzed to
determine whether they must be accounted for separately.
Additional guidance on whether embedded
credit-derivative
features in financial instruments issued by structures such as
collateralized debt obligations (CDOs) and synthetic
CDOs are subject to bifurcation and separate accounting. To
simplify compliance with this new guidance, an entity may make a
one-time election to apply the fair value option to any
investment in a beneficial interest in securitized financial
assets, regardless of whether such investments contain embedded
derivative features. This new guidance is effective as of
July 1, 2010, with early adoption being permitted at
April 1, 2010. The adoption of this guidance did have a
significant impact on our results of operations or financial
position.
In July 2010, the FASB issued Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit
Losses. The guidance will significantly expand the disclosures
that companies must make about the credit quality of financing
receivables and the allowance for credit losses. The disclosures
as of the end of the reporting period are effective for the
Companys interim and annual periods ending on or after
December 15, 2010. The disclosures about activity that
occurs during a reporting period are effective for the
Companys interim and annual periods beginning on or after
December 15, 2010. The objectives of the
59
enhanced disclosures are to provide financial statement users
with additional information about the nature of credit risks
inherent in the Companys financing receivables, how credit
risk is analyzed and assessed when determining the allowance for
credit losses, and the reasons for the change in the allowance
for credit losses. The adoption of this guidance requires
enhanced disclosures and is not expected to have a significant
effect on the Companys financial statements.
Inflation
Virtually all of our assets and liabilities are financial in
nature. As a result, interest rates and other factors drive our
performance far more than does inflation. Changes in interest
rates do not necessarily correlate with inflation rates or
changes in inflation rates. Our financial statements are
prepared in accordance with GAAP. As a result, financial
activities and the Consolidated Balance Sheets are measured with
reference to historical cost or fair market value without
considering inflation.
Financial
Condition as of September 30, 2010 as Compared to
December 31, 2009
The following provides explanations for material changes in the
components of our balance sheet when comparing amounts from
September 30, 2010 and December 31, 2009.
As discussed previously in this report under the heading
Impact on Our Financial Statements of Derecognition of
Securitized Mortgage Assets significant events occurred
related to three securitized loan trusts during the first
quarter of 2010 that caused us to derecognize the assets and
liabilities of these trusts. Upon derecognition during the first
quarter of 2010, all assets and liabilities of the trusts were
removed from our consolidated financial statements and,
therefore, their balances are zero as of September 30,
2010. These balances are not discussed further in the following
comparative analysis:
|
|
|
|
|
Mortgage Loans
Held-in-Portfolio
|
|
|
|
Allowance for Loan Losses
|
|
|
|
Accrued Interest Receivable
|
|
|
|
Real Estate Owned
|
|
|
|
Due to Servicer
|
|
|
|
Asset-backed Bonds Secured by Mortgage Assets
|
|
|
|
Other securitization trust liabilities
|
Cash and Cash Equivalents See Liquidity
and Capital Resources for discussion of our cash and cash
equivalents.
Mortgage Securities Substantially all of the
mortgage securities we own and classify as trading are
non-investment grade (BBB- or lower) and are owned by our CDO,
which we consolidate. We organized the securitization prior to
2009 and we retained a residual interest in the CDO. However,
due to poor performance of the securities within the CDO, our
residual interest is not providing any cash flow to us and has
no value. The value of these securities fluctuates as market
conditions change, including short-term interest rates, and
based on the performance of the underlying mortgage loans. The
liabilities of the securitization trust are included in Other
Current Liabilities in our Condensed Consolidated Balance Sheet.
The mortgage securities classified as available for sale include
primarily the value of four residual interests we own and were
issued by loan securitized trusts we organized prior to 2009.
The value of our mortgage securities is dependent on the
interest rate environment, specifically the interest margin
between the underlying coupon on the mortgage loans and the
asset-backed bonds issued by the securitization trust to finance
the loans. While interest rates remain low, the net margin has
continued to be strong on these securities and therefore the
securities provide cash flow to us. As a result, the value of
these securities has not changed substantially during the nine
months ended September 30, 2010. Following is a summary of
our mortgage securities that are classified as
available-for-sale.
60
Table
3 Values of Individual Mortgage
Securities
Available-for-Sale
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Constant
|
|
|
Expected
|
|
|
|
|
|
|
|
|
Constant
|
|
|
Expected
|
|
Securitization
|
|
Estimated
|
|
|
Discount
|
|
|
Pre-payment
|
|
|
Credit
|
|
|
Estimated
|
|
|
Discount
|
|
|
Pre-payment
|
|
|
Credit
|
|
Trust (A)
|
|
Fair Value
|
|
|
Rate
|
|
|
Rate
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Rate
|
|
|
Rate
|
|
|
Losses
|
|
|
2002-3
|
|
$
|
1,507
|
|
|
|
25
|
%
|
|
|
18
|
%
|
|
|
1.0
|
%
|
|
$
|
1,997
|
|
|
|
25
|
%
|
|
|
15
|
%
|
|
|
1.0
|
%
|
2003-1
|
|
|
2,642
|
|
|
|
25
|
|
|
|
19
|
|
|
|
2.1
|
|
|
|
3,469
|
|
|
|
25
|
|
|
|
13
|
|
|
|
2.1
|
|
2003-3
|
|
|
915
|
|
|
|
25
|
|
|
|
14
|
|
|
|
2.4
|
|
|
|
1,437
|
|
|
|
25
|
|
|
|
10
|
|
|
|
2.7
|
|
2003-4
|
|
|
920
|
|
|
|
25
|
|
|
|
18
|
|
|
|
2.5
|
|
|
|
|
|
|
|
25
|
|
|
|
12
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
We established the trust upon securitization of the underlying
loans, which generally were originated by us. |
Notes Receivable To maximize the use of our
excess cash flow, we have made loans to independent entities.
The borrowing entity used the proceeds to finance on-going and
current operations. The decrease in the balance primarily
results from payments received in excess of new borrowings.
Other Current Assets Other current assets
include restricted cash expected to be released from restriction
within one year from the reporting date, short-term investments,
prepaid expenses and other miscellaneous receivables.
Restrictions were lifted on approximately $1.8 million of
cash that was restricted as of December 31, 2009, resulting
in the substantial change in this category.
Goodwill Pursuant to the terms of our
purchase agreement for StreetLinks, we are obligated to make
earn out payments to StreetLinks minority owners
upon StreetLinks achieving certain earnings targets. The targets
were achieved during the nine months ended September 30,
2010. These amounts have been recorded as Goodwill.
Accounts Payable Accounts payable includes
amounts due to vendors in the normal course of business. The
increase in accounts payable results from the increased
StreetLinks volume of business, which leads to higher payments
due to independent appraisers at the end of the quarter.
Accrued Expenses Accrued expenses include
estimated unpaid obligations to employees, service providers,
vendors and other business partners. The amount of accrued
expenses varies based on timing of incurred but unpaid services.
Dividends Payable Dividends on Series C
Preferred Stock and Series D Preferred Stock we issued
prior to 2009 have not been paid since 2007. These dividends are
cumulative and therefore we continue to accrue these dividends.
Total Shareholders Deficit As of
September 30, 2010, our total liabilities exceeded our
total assets by $102.6 million as compared to
$1.1 billion as of December 31, 2009. The significant
decrease in our shareholders deficit during the nine and
three months ended September 30, 2010 results from our
large net income, driven primarily by the gain recognized upon
the derecognition of the assets and liabilities of three loan
securitization trusts as discussed previously under the heading
Impact on Our Financial Statements of Derecognition of
Securitized Mortgage Assets.
Financial
Condition as of December 31, 2009 as Compared to
December 31, 2008
Cash and Cash Equivalents. See Liquidity
and Capital Resources for discussion of our cash and cash
equivalents.
Mortgage Securities. The securities we own are
generally securities we retained after the securitization of
mortgage loans we originated prior to 2008. For all loan
securitizations, we retained the residual interest bond, which
means we receive the net of the principal and interest received
on the underlying loans within the
61
securitized trust less the principal and interest paid on the
bonds issued by the trust, mortgage insurance premiums,
servicing fees and other miscellaneous fees. For any loans that
incur prepayment penalty fees, we receive those fees through the
residual interest. In some securitization transactions, we also
retained regular principal and interest bonds. Generally, these
bonds were the lowest rated bonds issued by the trust or these
bonds were not rated. Additionally, we have purchased some
mortgage securities in the open market from unrelated entities.
Upon acquisition of the bonds, we classified the securities as
either trading or
available-for-sale.
No changes have been made to the classifications.
Significant deterioration in the quality of the mortgage loans
serving as collateral for our mortgage securities has caused a
devaluation of the securities. In general, the default rate on
the underlying loans has continued to increase over the past two
years. Defaults are the result of national economic conditions
that have led to job losses, severe declines in housing prices
and the inability for credit-challenged individuals to refinance
mortgage loans. In many cases, the securities we own have ceased
to generate cash flow and we expect cash flow to continue to
decline during the coming year.
We have classified our mortgage securities either as available
for sale or trading, as follows:
Table
4 Estimated Fair Value of Mortgage Securities
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Available-for-sale
|
|
$
|
6,903
|
|
|
$
|
12,788
|
|
Trading
|
|
|
1,087
|
|
|
|
7,085
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,990
|
|
|
$
|
19,873
|
|
|
|
|
|
|
|
|
|
|
The following tables provide additional details of our mortgage
securities.
Table
5 Values of Individual Mortgage
Securities
Available-for-Sale
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Constant
|
|
|
Expected
|
|
|
|
|
|
|
|
|
Constant
|
|
|
Expected
|
|
Securitization
|
|
Estimated
|
|
|
Discount
|
|
|
Pre-payment
|
|
|
Credit
|
|
|
Estimated
|
|
|
Discount
|
|
|
Pre-payment
|
|
|
Credit
|
|
Trust(A)
|
|
Fair Value
|
|
|
Rate
|
|
|
Rate
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Rate
|
|
|
Rate
|
|
|
Losses
|
|
|
NMFT Series :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002-3
|
|
$
|
1,997
|
|
|
|
25
|
%
|
|
|
15
|
%
|
|
|
1.0
|
%
|
|
$
|
2,041
|
|
|
|
25
|
%
|
|
|
16
|
%
|
|
|
0.8
|
%
|
2003-1
|
|
|
3,469
|
|
|
|
25
|
|
|
|
13
|
|
|
|
2.1
|
|
|
|
5,108
|
|
|
|
25
|
|
|
|
13
|
|
|
|
2.0
|
|
2003-2
|
|
|
|
|
|
|
25
|
|
|
|
12
|
|
|
|
1.9
|
|
|
|
2,272
|
|
|
|
25
|
|
|
|
12
|
|
|
|
1.9
|
|
2003-3
|
|
|
1,436
|
|
|
|
25
|
|
|
|
10
|
|
|
|
2.7
|
|
|
|
2,402
|
|
|
|
25
|
|
|
|
12
|
|
|
|
2.7
|
|
Other(B)
|
|
|
1
|
|
|
|
25
|
|
|
|
17
|
|
|
|
12.5
|
|
|
|
138
|
|
|
|
25
|
|
|
|
18
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
We established the trust upon securitization of the underlying
loans, which generally were originated by us. |
|
(B) |
|
Other than Estimated Fair Value, amounts consist of weighted
averages of multiple securities. |
62
Table
6 Mortgage Securities Trading
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Number of
|
|
|
Average
|
|
S&P Rating
|
|
Original Face
|
|
|
Cost Basis
|
|
|
Fair Value
|
|
|
Securities
|
|
|
Yield
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated securities non-investment grade(B)
|
|
$
|
435,114
|
|
|
$
|
103,638
|
|
|
$
|
959
|
|
|
|
89
|
|
|
|
2.10
|
%
|
Unrated residual securities
|
|
|
59,500
|
|
|
|
374
|
|
|
|
128
|
|
|
|
1
|
|
|
|
25.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
494,614
|
|
|
$
|
104,012
|
|
|
$
|
1,087
|
|
|
|
90
|
|
|
|
4.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Grade(A)
|
|
$
|
12,505
|
|
|
$
|
11,891
|
|
|
$
|
833
|
|
|
|
3
|
|
|
|
6.25
|
%
|
Non-investment Grade(B)
|
|
|
422,609
|
|
|
|
406,125
|
|
|
|
5,547
|
|
|
|
87
|
|
|
|
8.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Subordinated Securities
|
|
|
435,114
|
|
|
|
418,016
|
|
|
|
6,380
|
|
|
|
90
|
|
|
|
7.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrated residual securities
|
|
|
59,500
|
|
|
|
15,952
|
|
|
|
705
|
|
|
|
1
|
|
|
|
25.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
494,614
|
|
|
$
|
433,968
|
|
|
$
|
7,085
|
|
|
|
91
|
|
|
|
9.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Investment grade includes all securities with S&P ratings
above BB+. |
|
(B) |
|
Non-investment grade includes all securities with S&P
ratings below BBB-. |
Prior to 2008, we re-securitized, by way of a Collateralized
Debt Obligation (CDO), some of the mortgage
securities trading we own. We retained a residual
interest in the CDO. However, due to the poor performance of the
securities within the CDO, our residual interest in the CDO is
not providing any cash flow to us and has no economic value. As
discussed under the heading Principal Assets and
Liabilities of Consolidated Securitization Trusts, the
assets in the CDO have no economic benefit to us and we have no
control over these assets. We have also provided the assets and
liabilities of the trusts on a separate and combined basis.
Notes Receivable. In order to maximize the use
of our excess cash flow, we have made loans to independent
entities during 2009. The borrowing entities used the proceeds
to finance on-going and current operations. Management evaluates
for impairment based on the likelihood of repayments based upon
discussions with the borrowers and financial information.
Other Current Assets. Other current assets
include prepaid expenses, appraisal fee receivables, the current
portion of restricted cash, CDO receivables and other
miscellaneous receivables. The balance decreased in 2009 as
compared to 2008 due to a large portion of the restricted cash
being released from restriction which was slightly offset by an
increase in appraisal fee receivables due to the increased
production of StreetLinks.
Mortgage Loans
Held-in-Portfolio. Mortgage
loans
held-in-portfolio
consist of subprime mortgage loans which have been securitized
and are owned by three separate trusts: NHES
2006-1, NHES
2006MTA-1 and NHES
2007-1. We
consolidate these trusts for financial reporting under GAAP. See
Note 17 to the consolidated financial statements for
further details.
The mortgage loans
held-in-portfolio
balance has declined as their value has decreased significantly.
The value is dependent largely in part on their credit quality
and performance. The credit quality of the portfolio continues
to worsen and delinquencies have increased dramatically during
the past two years. Therefore, we continue to increase the
allowance for losses as a percentage of loan principal of those
remaining in the portfolio. The allowance has decreased from
$776.0 million as of December 31, 2008 to
$712.6 million as of December 31, 2009 due to the
principal balance declining by a greater amount which was
63
mainly due to borrower repayments and foreclosures. During 2009
and 2008, respectively, the trusts received repayments of the
mortgage loans totaling $98.9 million and
$288.2 million. These balances will continue to decline
either through normal borrower repayments or through continued
devaluation as delinquencies, foreclosures and losses occur.
As discussed under the heading Principal Assets and
Liabilities of Consolidated Securitization Trusts, these
assets have no economic benefit to us and we have no control
over these assets. We have also provided the assets and
liabilities of the trusts on a separate and combined basis.
Accrued Interest Receivable. Accrued interest
receivable includes the interest due from individual borrowers
to the trusts who own the mortgage loans
held-in-portfolio.
For all mortgage loans that do not carry mortgage insurance, the
accrual of interest on loans is discontinued when, in
managements opinion, the interest is not collectible in
the normal course of business, but in no case beyond when a loan
becomes 90 days delinquent. For mortgage loans that do
carry mortgage insurance, the accrual of interest is only
discontinued when in managements opinion, the interest is
not collectible. Management generally deems all of the accrued
interest on loans with mortgage insurance to be collectible.
Potential losses related to accrued interest receivable are
factored into the severity of losses as part of the allowance
for doubtful accounts calculation. The quantity of delinquent
loans has significantly increased, as a percentage of total
loans outstanding, from December 31, 2008 to
December 31, 2009. Therefore, the amount of accrued
interest has also decreased, although the amounts increased in
relation to the percentage of the outstanding principal.
Under Principal Assets and Liabilities of Securitization
Trusts, we have provided the assets and liabilities of the
trusts on a separate and combined basis.
Real Estate Owned. Real estate owned
(REO) includes the value of properties for
foreclosed loans owned by securitization trusts, as discussed
under Mortgage Loans
Held-in-Portfolio.
We consolidate the assets and liabilities as part of the
securitization trust. A servicer that is independent from us and
the trusts services the mortgage loans and processes defaults
for liquidation. Proceeds from liquidation of this real estate
will flow through the trust and will generally be paid to
third-party bondholders. The amount of real estate owned is
dependent upon the number of the overall mortgage loans
outstanding, the rate of defaults, the timing of liquidations
and the estimated fair value of the real estate. The decrease in
the amount of REO from December 31, 2008 to
December 31, 2009 resulted from the declining number of
total loans as well as the decreasing estimated value of the
real estate.
Under Principal Assets and Liabilities of Securitization
Trusts, we have provided the assets and liabilities of the
trusts on a separate and combined basis.
Fixed Assets, Net of Depreciation. Fixed
assets include capitalized furniture and office equipment, which
are net of depreciation. This balance increased in 2009 as
compared to 2008 due to purchases of furniture and equipment for
the infrastructure development for StreetLinks.
Other Assets. Other assets consist of
deposits, other legacy mortgage assets, and the noncurrent
portion of restricted cash. The increase in 2009 as compared to
2008 is mainly due to an increase in the noncurrent portion of
restricted cash relating to StreetLinks.
Accounts Payable and Accrued
Expenses. Accounts payable and accrued expenses
include interest payable on borrowings, including the
liabilities of the securitization trusts we consolidate, the
value of derivatives owned by the mortgage loan securitization
trusts, taxes payable, obligations under our corporate office
lease and miscellaneous accrued general and administrative
expenses. Generally, these liabilities have declined along with
the size of our business operations.
Dividends Payable. Prior to 2008, we issued
$74.8 million in Series C Preferred Stock with a
dividend equivalent to 8.9% and we issued $50 million of
Series D1 Preferred Stock with a dividend equivalent to
9.0%. We have failed to make all dividend payments since October
2007. As a result, the Series D1 Preferred Stock dividend
increased to an equivalent of 13.0%, retroactive and compounded
to the beginning of the first quarter in which the dividends
were not paid. The unpaid dividends continue to accrue and have
resulted in the large increase in unpaid dividends recorded in
our Consolidated Balance Sheets.
64
Other Current Liabilities. Other current
liabilities include the obligations of the CDO as discussed
above. The obligations have declined significantly when
comparing December 31, 2008 and December 31, 2009,
which as resulted in the significant decrease in the other
current liability balance.
Asset-backed Bonds Secured by Mortgage
Assets. Prior to 2008, we executed three mortgage
loans securitizations and one mortgage security
re-securitization (a CDO). We consolidate the assets and
liabilities of the securitization trusts under GAAP. The
asset-backed bonds are obligations of the trusts and will be
repaid using collections of the securitized assets. The trusts
have no recourse to our other, unsecuritized assets. The assets
securing these obligations are discussed under Mortgage
Loans
Held-in-Portfolio
and Mortgage Securities. The balances of the
asset-backed bonds have decreased during 2009 as the bonds have
repaid. We record the value of the bonds secured by loans at the
value of the proceeds, less repayments. We record the CDO
(secured by mortgage securities) at its fair value. These
balances will decrease going forward as the underlying assets
repay or may be charged off as the assets are deemed to be
insufficient to fully repay the bond obligations.
Under the Principal Assets and Liabilities of
Securitization Trusts, we have provided the assets and
liabilities of the trusts on a separate and combined basis.
Due to Servicer. The mortgage
loans
held-in-portfolio
on our Consolidated Balance Sheets have been securitized and we
consolidate the securitized trust. In accordance with the
agreements for the securitized mortgage loans, the servicer of
the loans is required to make regularly scheduled payments to
the bondholders, regardless of whether the borrower has made
payments as required. The servicer is required to make advances
from its own funds. Upon liquidation of defaulted loans, the
servicer is repaid the advanced funds. Until such time as the
loans liquidate, the trust has an obligation to the servicer,
which we have classified as Due to servicer on the
Consolidated Balance Sheets. The amount of the obligation is
dependent on the rate and timing of delinquencies of the
individual borrowers. During 2008 and 2009, the trusts
experienced a significant increase in the amount of
delinquencies, which increases the amount of advances the
servicer has made to the bondholders and therefore increases the
liability to the servicer.
Other Securitization
Trust Liabilities. Other securitization
trust liabilities contain accrued interest relating to the
Asset-Backed Bonds Secured by Mortgage Loans, derivative
instruments, and other miscellaneous accrued expenses. The large
decrease in 2009 as compared to 2008 was due to a large portion
of the derivatives expiring during 2009.
Junior Subordinated Debentures. We have
$78.1 million in principal amount of unsecured notes
payable to two unconsolidated trusts, the Consolidated Balance
Sheets includes $77.8 million which is net of debt issuance
costs. These notes secure trust preferred securities issued by
the trusts.
During 2009, the Company executed the necessary documents to
complete an exchange of the Notes for new preferred obligations.
The Company paid interest due through December 31, 2008, in
the aggregate amount of $5.3 million. In addition, the
Company paid $0.3 million in legal and administrative costs
on behalf of the Trusts which were recorded in the
Selling, general and administrative expense line
item on the Consolidated Statements of Operations.
The new preferred obligations require quarterly distributions of
interest to the holders at a rate equal to 1.0% per annum
beginning January 1, 2009 through December 31, 2009,
subject to reset to a variable rate equal to the three-month
LIBOR plus 3.5% upon the occurrence of an Interest
Coverage Trigger. For purposes of the new preferred
obligations, an Interest Coverage Trigger occurs when the ratio
of EBITDA for any quarter ending on or after December 31,
2008 and on or prior to December 31, 2009 to the product as
of the last day of such quarter, of the stated liquidation value
of all outstanding 2009 Preferred Securities (i) multiplied
by 7.5%, (ii) multiplied by 1.5 and (iii) divided by
4, equals or exceeds 1.00 to 1.00. The Company did not trigger
the Interest Coverage Trigger as of December 31, 2009,
although it could be triggered during 2010 under certain of our
projections. Beginning January 1, 2010 until the earlier of
February 18, 2019 or the occurrence of an Interest Coverage
Trigger, the unpaid principal amount of the new preferred
obligations will bear interest at a rate of 1.0% per annum and,
thereafter, at a variable rate, reset quarterly, equal to the
three-month LIBOR plus 3.5% per annum.
65
During 2008, these notes carried an interest rate of three-month
LIBOR plus 3.5%. During 2008, we purchased trust preferred
securities with a par value of $6.9 million for
$0.6 million. As a result, $6.9 million of principal
and accrued interest of $0.2 million of the notes was
retired and the principal amount, accrued interest, and related
unamortized debt issuance costs were removed from the
Consolidated Balance Sheets resulting in a gain of
$6.4 million, recorded to the Other expense
line item of the Consolidated Statements of Operations.
Other Liabilities. Other liabilities consist
of noncurrent tax liabilities and miscellaneous other noncurrent
liabilities.
Liabilities of Discontinued Operations. During
2007 and 2008, we discontinued our mortgage lending operations.
In the normal course of operations in 2009, we paid the
liabilities and obligations of the discontinued operations and
therefore had no liabilities of discontinued operations as of
December 31, 2009.
Shareholders Deficit. As of
December 31, 2009 and 2008 our total liabilities exceeded
our total assets under GAAP by $1.1 billion and
$876.8 million, respectively.
The liabilities of the securitization trusts exceed the assets
of those trusts as of December 31, 2009 and
December 31, 2008 by $1.0 billion and
$932.1 million, respectively. These amounts do not include
any adjustments for intercompany eliminations, see Table 17 for
further detail. The severe devaluation of the mortgage assets,
as discussed in the respective categories above, has resulted in
the significant deficit of these trusts. The assets and
liabilities of these trusts are consolidated under GAAP. Due to
the significant impact to our financial statements of these
trusts, we have also provided the assets and liabilities of the
trusts on a separate and combined basis under Principal
Assets and Liabilities of Securitization Trusts.
The significant increase in our shareholders deficit
during 2009 results from our large net loss, driven primarily by
valuation allowances taken on our mortgage loans.
Results
of Operations Consolidated Earnings
Comparisons
Results of Operations Consolidated Earnings
Comparisons for the Nine Months Ended September 30, 2010 as
Compared to the Nine Months Ended September 30, 2009
Securitization Trusts: Gain on Disposition of Mortgage
Assets As discussed previously in this report
under the heading Impact of Derecognition of Securitized
Mortgage Assets on Our Financial Statements significant
events that occurred related to three securitized loan trusts.
Prior to 2010, we consolidated the financial statements of these
trusts. Upon derecognition during the first quarter of 2010, all
assets and liabilities of the trusts were removed from our
condensed consolidated financial statements. Prior to
derecognition, we recognized interest income, interest expense,
gains or losses on derivative instruments which are included in
the other expense line item in the table below, servicing fees
and premiums for mortgage insurance related to these
securitization trusts. These income and expense items were
recognized for only a portion of the first quarter of 2010
through the date of derecognition. As a result, there was a
significant
66
variation in these balances when comparing the nine and three
months ended September 30, 2010 and the same periods in
2009. The following table presents the items affected by the
derecognition and their balances.
Table
7 Income (Expense) of Consolidated Loan
Securitization; Gain on Disposition of Mortgage Assets (dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
Ended September 30,
|
|
|
2010
|
|
2009
|
|
Gain on derecognition of securitization trusts
|
|
$
|
993,131
|
|
|
$
|
|
|
Interest income mortgage loans
|
|
|
10,681
|
|
|
|
93,933
|
|
Interest expense asset-backed bonds
|
|
|
(1,416
|
)
|
|
|
(16,448
|
)
|
Provision for credit losses
|
|
|
(17,433
|
)
|
|
|
(211,050
|
)
|
Servicing fees
|
|
|
(731
|
)
|
|
|
(8,343
|
)
|
Premiums for mortgage loan insurance
|
|
|
(308
|
)
|
|
|
(4,791
|
)
|
Other expense
|
|
|
(560
|
)
|
|
|
(1,187
|
)
|
In addition, the securitization trusts segment includes the
Companys CDO which was the main driver of the following
Condensed Consolidated Statements of Operations line items
during the nine and three months ended September 30, 2010
and September 30, 2009.
Interest Income mortgage
securities In general, our mortgage securities
have been significantly impaired due to national and
international economic crises, housing price deterioration and
mortgage loan credit defaults. Interest income has declined as
these assets have declined.
Selling, General and Administrative Expenses
Selling, general and administrative expenses have decreased
slightly for the nine and three months ended September 30,
2010, respectively as compared to the same periods in 2009 due
to a concerted effort by management to reduce corporate general
and administrative expenses, which were slightly offset with an
increase in appraisal and real estate valuation management
services selling, general and administrative expenses, which
were driven by higher appraisal production.
Servicing Fee Income and Cost of Services We
earn fees on the residential appraisals we complete and deliver
to our customers, generally residential mortgage lenders. Fee
revenue is directly related to the number of appraisals
completed (units). Cost of Services includes the cost of the
appraisal, which is paid to an independent party, and the
internal costs directly associated with completing the appraisal
order. The internal costs include compensation and benefits,
office administration, depreciation of equipment used in the
production process, and other expenses necessary to the
production process. The following is a summary of production and
revenues and expenses.
67
Table
8 Appraisal and Real Estate Valuation Management
Services Operations
(dollars in thousands, except unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
Per
|
|
|
|
|
|
Per
|
|
|
|
|
|
Per
|
|
|
|
Total
|
|
|
Unit
|
|
|
Total
|
|
|
Unit
|
|
|
Total
|
|
|
Unit
|
|
|
Total
|
|
|
Unit
|
|
|
Completed orders (units)
|
|
|
135,891
|
|
|
|
|
|
|
|
59,209
|
|
|
|
|
|
|
|
62,025
|
|
|
|
|
|
|
|
26,960
|
|
|
|
|
|
Service fee income
|
|
$
|
50,237
|
|
|
$
|
370
|
|
|
$
|
22,018
|
|
|
$
|
372
|
|
|
$
|
22,784
|
|
|
$
|
367
|
|
|
$
|
9,945
|
|
|
$
|
369
|
|
Cost of services
|
|
|
44,371
|
|
|
|
327
|
|
|
|
22,991
|
|
|
|
388
|
|
|
|
19,692
|
|
|
|
317
|
|
|
|
10,013
|
|
|
|
372
|
|
Selling, general and administrative expense
|
|
|
3,192
|
|
|
|
23
|
|
|
|
1,728
|
|
|
|
29
|
|
|
|
1,268
|
|
|
|
20
|
|
|
|
346
|
|
|
|
13
|
|
Other expense
|
|
|
77
|
|
|
|
1
|
|
|
|
47
|
|
|
|
1
|
|
|
|
36
|
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2,600
|
|
|
|
19
|
|
|
|
(2,748
|
)
|
|
|
(46
|
)
|
|
|
1,790
|
|
|
|
29
|
|
|
|
(419
|
)
|
|
|
(16
|
)
|
Less: Net income (loss) attributable to noncontrolling interests
|
|
|
317
|
|
|
|
2
|
|
|
|
(824
|
)
|
|
|
(14
|
)
|
|
|
218
|
|
|
|
4
|
|
|
|
(126
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to NFI
|
|
$
|
2,283
|
|
|
$
|
17
|
|
|
$
|
(1,924
|
)
|
|
$
|
(32
|
)
|
|
$
|
1,572
|
|
|
$
|
25
|
|
|
$
|
(293
|
)
|
|
$
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have generated substantial increases in order volume through
aggressive sales efforts, leading to significant increases in
the number of mortgage lender customers. We have also introduced
new products leading to increased order volume. Federal
regulatory changes have also contributed to increased customers
and order volume. The Appraisal Rule, described above, requires
that Federal Housing Administration loans obtain an independent
appraisal provided by an appraisal management company. The
Company also expects cash flows to increase due to a larger
customer base and operating efficiencies.
During 2009, we incurred costs to improve our operating
infrastructure which were included in all expense categories in
this segment. These improvements included adding facilities and
equipment and technology enhancements to improve customer
satisfaction and drive operating efficiencies. These costs are
generally not recurring and therefore our cost per unit has
improved.
Corporate: Interest Income Mortgage
Securities The interest on the mortgage
securities we own has decreased significantly when comparing to
the first nine and three months of 2010 to the same periods in
2009 as the securities have declined in value and as their cash
flow has decreased significantly. Management expects that the
interest income and cash flow from these securities will
continue to decline as the underlying loan collateral is repaid.
Interest expense on trust preferred
securities Interest expense on trust preferred
securities decreased from the nine months ended
September 30, 2009 as compared to the same period in 2010
due to the debt issuance cost becoming fully amortized on one of
the securities during the quarter. The interest expense on trust
preferred securities increased from the three months ended
September 30, 2009 as compared to the same period in 2010
due to the reversal of the interest expense at the previous rate
of LIBOR plus 3.5% to the new rate of 1.0% per annum during the
second quarter of 2009 as the exchange date took place in April
2009. See Note 6 to the condensed consolidated financial
statements for the quarterly period ending September 30,
2010 for further details.
Results of Operations Consolidated Earnings
Comparisons for the Year Ended December 31, 2009 as
Compared to the Year Ended December 31, 2008
Appraisal Management: Service Fee Income and Cost of
Services. We earn fees on the residential home
appraisals we complete and deliver to our customers, generally
residential mortgage lenders. Fee revenue is directly related to
the number of appraisals completed (units). Cost of servicing
includes the cost of the appraisal, which is paid to an
independent party, and the internal costs directly associated
with completion of the appraisal order. The internal costs
include compensation and benefits, office administration,
depreciation of
68
equipment used in the process, and other expenses necessary to
the production process. The following table is a summary of
production, revenues and expenses.
Table
9 Appraisal Management Segment Operations
(dollars in thousands, except unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Total
|
|
|
Per Unit
|
|
|
Total
|
|
|
Per Unit
|
|
|
Completed appraisal orders (units)
|
|
|
84,174
|
|
|
|
|
|
|
|
6,297
|
|
|
|
|
|
Service fee income
|
|
$
|
31,106
|
|
|
$
|
370
|
|
|
$
|
2,524
|
|
|
$
|
401
|
|
Cost of services
|
|
|
32,221
|
|
|
|
383
|
|
|
|
2,600
|
|
|
|
413
|
|
Selling, general and administrative expense
|
|
|
1,837
|
|
|
|
22
|
|
|
|
257
|
|
|
|
41
|
|
Other expense
|
|
|
46
|
|
|
|
1
|
|
|
|
7
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,998
|
)
|
|
|
(36
|
)
|
|
|
(340
|
)
|
|
|
(54
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
(829
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to NFI
|
|
$
|
(2,169
|
)
|
|
$
|
(26
|
)
|
|
$
|
(340
|
)
|
|
$
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since we acquired StreetLinks in August of 2008, we have
generated substantial increases in appraisal order volume
through aggressive sales efforts, leading to significant
increases in the number of mortgage lender customers. The
Company expects cash flows to increase due to a larger customer
base and operating efficiencies.
During 2009, we incurred costs to improve our operating
infrastructure which were included in all expense categories in
this segment. These improvements included adding facilities and
equipment and technology enhancements to improve customer
satisfaction and drive operating efficiencies. These costs are
generally not recurring and therefore our cost per unit has
improved.
Results of Operations Securitized Loan
Trusts. As discussed above under the heading
Impact of Consolidation of Securitized Mortgage Assets on
Our Financial Statements, we consolidate the financial
statements of three separate securitization loan trusts.
Following are the components of the operations of the
securitized loan trusts.
Table
10 Operations of Securitized Loan Trusts
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
Interest income mortgage loans
held-in-portfolio
|
|
$
|
131,301
|
|
|
$
|
186,601
|
|
Interest expense asset-backed bonds secured by
mortgage loans
|
|
|
(21,290
|
)
|
|
|
(95,012
|
)
|
Provision for credit losses
|
|
|
(260,860
|
)
|
|
|
(707,364
|
)
|
Servicing fee expense
|
|
|
(10,639
|
)
|
|
|
(13,596
|
)
|
Premiums for mortgage insurance
|
|
|
(6,041
|
)
|
|
|
(15,818
|
)
|
Interest Income and Expense. As discussed
above, in general, our mortgage assets have been significantly
impaired due to national and international economic crises,
housing price deterioration and mortgage loan credit defaults.
Interest income has declined as these assets have declined due
to repayments and liquidations. Interest expense has declined as
the related principal balances have declined. Also, interest
expense is adjustable, generally based on a spread to LIBOR.
LIBOR was lower during 2009 than 2008.
Provision for Credit Losses. The provision for
credit losses relates to mortgage loans which have been
securitized. As discussed above, in general, the credit quality
of the securitized mortgage loans significantly deteriorated
during 2008 and 2009 due to national and international economic
crises, housing price deterioration and mortgage loan credit
defaults. A significant portion of the securitized loans have
become
69
uncollectible or will only be partially collected. Approximately
20% of our loans held in portfolio were greater than
90 days delinquent at December 31, 2008, and
approximately 20% were in foreclosure. As of December 31,
2009, this delinquency percentage decreased to approximately 16%
while loans in foreclosure increased to approximately 36%. As
loans transition into REO status, an estimated loss is recorded
until the property is sold or liquidated. For the NHEL
2006-1 and
NHEL 2006-MTA1 transactions, we valued REO property at 50% of
its current principal balance as of December 31, 2009,
compared to 55% as of December 31, 2008. Because of the
increased loss severity, NHEL
2007-1
property was valued at 35% in 2009; a 5% decrease from 2008.
Provisions for these losses have increased in connection with
the declining credit quality of the loans. We took charges to
income totaling $260.9 million and $707.4 million
during the year ended December 31, 2009 and 2008,
respectively.
Premiums for Mortgage Loan Insurance. Premiums
for mortgage insurance are for credit default insurance for
mortgage loans
held-in-portfolio,
which have been securitized and are owned by securitization
trusts. The premiums are paid by the trust from the loan
proceeds. Premiums are based on a percentage of the individual
loan principal outstanding. The decrease in premiums on mortgage
loan insurance for 2009 as compared to 2008 is due to the
decrease in the principal balance of mortgage loans
held-in-portfolio.
Other Expenses. Other expenses includes
adjustments to the fair value of mortgage securities, losses on
derivative instruments and losses associated with the impairment
on mortgage securities
available-for-sale,
which are discussed below.
(Losses) Gains on Derivative
Instruments. Prior to 2008, we entered into
derivative instrument contracts that did not meet the
requirements for hedge accounting treatment, but contributed to
our overall risk management strategy by serving to reduce
interest rate risk related to short-term borrowing rates.
Substantially all of these derivatives matured prior to
December 31, 2009. The derivative instruments for which the
value is on our Consolidated Balance Sheets are owned by
securitization trusts. Derivative instruments transferred into a
securitization trust are administered by the trustee in
accordance with the trust documents. These derivative
instruments were used to mitigate interest rate risk within the
related securitization trust and will generally increase in
value as short-term interest rates increase and decrease in
value as rates decrease.
As a result of declining interest rates and declining values of
the credit default swaps (CDS), the losses on
derivative instruments from continuing operations were
$4.7 million and $18.1 million for the years ended
December 31, 2009 and 2008, respectively. The losses
decreased in 2009 as compared to 2008 due to the expiration of
many of the derivative instrument contracts during 2008 and 2009.
Fair Value Adjustments. Adjustment for changes
in value on our trading securities and the asset-backed bonds
issued in our CDO transaction executed are recorded as Fair
Value Adjustments. The significant value declines in 2009 and
2008 were a result of significant spread widening in the
subprime mortgage market for these types of asset-backed
securities as well as poor credit performance of the underlying
mortgage loans. By the end of 2008, the total value of the
trading securities and the asset-backed bonds had declined
significantly, resulting in a lower overall adjustment in 2009
when compared to 2008.
Impairment on Mortgage Securities
Available-for-Sale. To
the extent that the cost basis of mortgage
securities
available-for-sale
exceeds the fair value and the unrealized loss is considered to
be other than temporary, an impairment charge is recognized and
the amount recorded in accumulated other comprehensive income or
loss is reclassified to earnings as a realized loss. The large
impairments in 2009 and 2008 were primarily driven by an
increase in actual and projected losses due to the deteriorating
credit quality of the loans underlying the securities. By the
end of 2008, the total value of the
available-for-sale
securities had declined significantly, resulting in a lower
overall impairment in 2009 when compared to 2008.
Income Taxes. During 2009, we recognized tax
expense of $1.1 million from continuing operations.
$1.6 million of this was due to taxes related to excess
inclusion income, net of $0.5 million of income tax benefit
primarily attributed to the release of tax liability related to
uncertain tax positions due to the lapse of statute of
limitations and changes in managements judgment regarding
those positions.
During 2008, we recognized a tax benefit of $17.6 million
from continuing operations. Of this benefit, $13.8 million
will be reduced by the tax expense recorded on the gain in
discontinued operations. The
70
remaining $3.8 million of tax benefit is primarily
attributed to the release of tax liability related to uncertain
tax positions due to the lapse of statute of limitations and
changes in managements judgment regarding those positions.
Due to the valuation allowance recorded against deferred tax
assets, no tax benefit is recognized on tax losses incurred in
2009 and 2008.
As of December 31, 2009 and 2008, we reflect
$4.2 million and $3.8 million in other tax liability,
respectively which are recorded in Other
Liabilities. This balance is primarily comprised of tax
liability on uncertain tax positions, interest and penalties and
a portion of this amount is an obligation of one of the
Companys securitization trusts and as such will be paid
out of the trusts assets.
Contractual
Obligations
We have entered into certain long-term debt and lease
agreements, which obligate us to make future payments to satisfy
the related contractual obligations.
Table
11 Contractual Obligations
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
|
|
|
Less than 1
|
|
|
|
|
|
|
|
|
After 5
|
|
Contractual Obligations
|
|
Total
|
|
|
Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Years
|
|
|
Junior subordinated debentures
|
|
$
|
97,608
|
|
|
$
|
781
|
|
|
|
1,563
|
|
|
$
|
1,563
|
|
|
$
|
93,701
|
|
Operating leases
|
|
|
3,210
|
|
|
|
1,350
|
|
|
|
998
|
|
|
|
662
|
|
|
|
200
|
|
StreetLinks earnings target
|
|
|
2,195
|
|
|
|
2,195
|
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$
|
103,013
|
|
|
$
|
4,326
|
|
|
$
|
2,561
|
|
|
$
|
2,225
|
|
|
$
|
93,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
This amount was paid during October of 2010. |
The junior subordinated debentures mature in 2035 and 2036. The
contractual obligations for these debentures include expected
interest payments on the obligations based on the prevailing
interest rate of 1.0% per annum as of September 30, 2010
for each respective obligation. The junior subordinated
debentures are described in detail in Note 6 to our
condensed consolidated financial statements for the quarterly
period ended September 30, 2010. The operating lease
obligations do not include rental income of $0.7 million to
be received under sublease contracts.
Uncertain tax positions of $1.1 million, which are included
in the other liabilities line item of the Condensed Consolidated
Balance Sheets as of September 30, 2010, are not included
in the table above as the timing of payment cannot be reasonably
or reliably estimated.
Liquidity
and Capital Resources as of September 30, 2010
As of September 30, 2010, we had approximately
$16.8 million in unrestricted cash and cash equivalents.
Cash on hand and receipts from StreetLinks operations and our
mortgage securities are significant sources of liquidity. Gross
appraisal fee income was a substantial source of our cash flows
in the first three quarters of 2010. We have had significant
growth in the first nine months of 2010 compared to the same
period in 2009 and are currently projecting an increase in cash
flows over the course of the next year as we continue to
increase our customer base, although we cannot assure the same
rate of growth that we have experienced during the first three
quarters of 2010. New regulations issued by federal agencies,
especially those that became effective in the first quarter of
2010, have positively impacted StreetLinks sales efforts.
Infrastructure changes and added efficiencies gained through
automation have decreased selling, general and administrative
expenses relative to the increased production. We anticipate
that continued increases in appraisal volume and relatively
lower operating costs will drive positive earnings and cash flow
from StreetLinks during 2010. Advent does not currently have any
significant cash inflows or outflows. Management is continuing
to
71
evaluate it as a viable business and management does not believe
that cash inflows or outflows will be significant during fiscal
2010.
Based on the current projections, the cash flows from our
mortgage securities will decrease in the next several months as
the underlying mortgage loans are repaid, and could be
significantly less than the current projections if losses on the
underlying mortgage loans exceed the current assumptions or if
short-term interest rates increase significantly.
Our current projections indicate that sufficient cash and cash
flows are and will be available to meet payment needs. However,
our mortgage securities cash flows are volatile and uncertain,
and the amounts we receive could vary materially from our
projections though we believe that the increased cash flows from
StreetLinks will offset any reduction in our mortgage securities
cash flows. As discussed under the heading Legal
Proceedings in this report, we are the subject of various
legal proceedings, the outcome of which is uncertain. We may
also face demands in the future that are unknown to us today
related to our legacy lending and servicing operations.
If the cash flows from StreetLinks and our mortgage securities
are less than currently anticipated, it would negatively affect
our results of operations, financial condition, liquidity and
business prospects. However management believes that its current
operations and its cash availability are sufficient for the
Company to discharge its liabilities and meet its commitments in
the normal course of business.
Overview
of Cash Flow for the Nine Months Ended September 30,
2010
Following are the primary sources of cash receipts and
disbursements.
Table
12 Primary Sources of Cash Receipts and
Disbursements
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
Ended September 30,
|
|
|
2010
|
|
2009
|
|
Primary sources:
|
|
|
|
|
|
|
|
|
Fees received for appraisal and real estate valuation management
services
|
|
$
|
50,944
|
|
|
$
|
20,770
|
|
Cash flows received from mortgage securities
|
|
|
7,683
|
|
|
|
13,908
|
|
Primary uses:
|
|
|
|
|
|
|
|
|
Payments for appraisals and real estate valuation management
services and related administrative expenses
|
|
|
41,547
|
|
|
|
20,801
|
|
Payments of corporate, general and administrative expenses
|
|
|
6,427
|
|
|
|
22,950
|
|
Summary
of Statement of Cash Flows Operating, Investing and
Financing Activities
The following table provides a summary of our operating,
investing and financing cash flows as taken from our Condensed
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2010 and 2009
Table
13 Summary of Operating, Investing and Financing
Cash Flows
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
September 30,
|
|
|
2010
|
|
2009
|
|
Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
8,075
|
|
|
$
|
51,413
|
|
Cash flows provided by investing activities
|
|
|
37,079
|
|
|
|
178,008
|
|
Cash flows used in financing activities
|
|
|
(35,474
|
)
|
|
|
(239,393
|
)
|
72
Operating Activities. The cash provided by
operating activities in 2009 was primarily related to the
securitized loan trusts (deconsolidated January 2010). See a
discussion of the impact of the consolidated loan trusts under
the heading, Principal Assets and Liabilities of Loan
Trusts. The Company is now focusing on its appraisal and
real estate valuation management services business. For the nine
months ended September 30, 2010, StreetLinks has had
positive cash flows compared to the same period in 2009,
StreetLinks had negative operating cash flows. Although the
Company continues to fund the startup of Advent, which has used
approximately $3.9 million this year to pay for operating
expenses, the Company does not anticipate that Advent will be a
significant source or use of cash in 2010.
Investing Activities. Substantially all of the
cash flow from investing activities relates to either payments
on securitized loans or sales upon foreclosure of securitized
loans. See a discussion of the impact of the consolidated loan
trusts under the heading, Principal Assets and Liabilities
of Loan Trusts, since they were deconsolidated during the
first quarter of 2010. Our mortgage loan portfolio declined
significantly and borrower defaults increased, resulting in
lower repayments of our mortgage loans
held-in-portfolio
and lower cash proceeds from the sale of assets acquired through
foreclosure compared to prior years.
Financing Activities. The payments on
asset-backed bonds relates to bonds issued by securitization
loan trusts, which have decreased as the assets in the trusts
used to pay those bonds have declined. See a discussion of the
impact of the consolidated loan trusts under the heading,
Principal Assets and Liabilities of Loan Trusts,
since they were deconsolidated during the first quarter of 2010.
Future
Sources and Uses of Cash
Primary
Sources of Cash
Cash Received from Appraisal and Real Estate Valuation
Management Services As shown in Table 13 above,
cash receipts in our appraisal and real estate valuation
management service operations are a significant source of cash
and liquidity. These receipts have increased significantly as
the appraisal volume has increased as discussed previously.
Cash Received From Our Mortgage Securities
Portfolio For the nine months ended
September 30, 2010, we received $7.7 million in
proceeds from mortgage securities. The cash flows we receive on
our mortgage securities are highly dependent on the interest
rate spread between the underlying collateral and the bonds
issued by the securitization trusts and default and prepayment
experience of the underlying collateral. The following factors
have been the significant drivers in the overall fluctuations in
these cash flows:
|
|
|
|
|
As short-term interest rates declined and continue to remain
low, the net spread to us has increased and remains high,
|
|
|
|
Higher credit losses have decreased cash available to distribute
with respect to our securities,
|
|
|
|
We have lower average balances of our mortgage
securities
available-for-sale
portfolio as the securities have paid down and we have not
acquired new bonds.
|
In general, if short-term interest rates increase, the spread
(cash) we receive will decline.
Primary
Uses of Cash
Payments to Independent Appraisers We are
responsible for paying the independent appraisers we contract
with to provide residential mortgage appraisals. The cash
required for this is funded through receipts from customers and
the change in the cash requirements is directly related to the
appraisal volume and units completed.
Payments of Selling, General and Administrative
Expenses Selling, general and administrative
expenses include the administrative costs of business management
and include staff and management compensation and related
benefit payments, professional expenses for audit, tax and
related services, legal services, rent and general office
operational costs.
73
Overview
of Cash Flow for the Year Ended December 31, 2009
During 2007 and early 2008, we discontinued our mortgage lending
operations and sold our mortgage servicing rights which
subsequently resulted in the closing of our servicing
operations. Prior to exiting the lending business, we sold the
majority of the loans we originated to securitization trusts.
Three of these securitization trusts are consolidated for
financial reporting under GAAP, which means all of the assets
and the liabilities of the trust are included in our
consolidated financial statements. Our results of operations and
cash flows include the activity of these trusts. The cash
proceeds from the repayment of the loan collateral are owned by
the trust and serve to only repay the obligations of the trust.
We do not collect the cash and we are not responsible for the
obligations of the trust. Principal and interest on the bonds
(securities) of the trust can only be paid if there is
sufficient cash flow from the underlying collateral. We own some
of the securities issued by the trust, which are a significant
source of possible cash flow. As a result of the national
economic crises, the loans within these trusts have very high
rates of default. Therefore, the cash flow on the securities we
own has declined significantly within the past two years.
We have provided a summary of the cash flow for the
securitization trusts under Principal Assets and
Liabilities of Securitization Trusts.
The following table presents the primary and simplified sources
of cash receipts and disbursements, excluding the impact of the
securitization trusts.
Table
14 Primary Sources of Cash Receipts and
Disbursements
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
Primary sources:
|
|
|
|
|
|
|
|
|
Fees received for appraisal management services
|
|
$
|
30,607
|
|
|
$
|
2,263
|
|
Cash flows received from mortgage securities
|
|
|
18,479
|
|
|
|
59,912
|
|
Primary uses:
|
|
|
|
|
|
|
|
|
Payment of corporate, general and administrative expenses
|
|
|
(25,739
|
)
|
|
|
(37,832
|
)
|
Payments for appraisals and related administrative expenses
|
|
|
(30,140
|
)
|
|
|
(3,453
|
)
|
Payments for Advents startup and other expenses
|
|
|
(4,255
|
)
|
|
|
|
|
Issuance of notes and other receivables
|
|
|
(4,277
|
)
|
|
|
|
|
Repayment of short-term borrowings
|
|
|
|
|
|
|
(45,488
|
)
|
Statement
of Cash Flows Operating, Investing and Financing
Activities
The following table provides a summary of our operating,
investing and financing cash flows from our consolidated
statements of cash flows for years ended December 31, 2009
and 2008.
Table
15 Summary of Operating, Investing and Financing
Cash Flows
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
67,218
|
|
|
$
|
29,566
|
|
Cash flows provided by investing activities
|
|
|
246,616
|
|
|
|
493,579
|
|
Cash flows used in financing activities
|
|
|
(331,520
|
)
|
|
|
(523,719
|
)
|
Operating Activities. Net cash provided by
operating activities increased by $37.7 million in 2009 as
compared to 2008. The increase in cash provided by operating
activities was substantially related to the increase in the
balance of the amounts due to servicer. Operating activities,
other than the cash flow of the
74
securitized loan trusts, generated a net use of cash during the
year ended December 31, 2009. See a discussion of the
impact of the consolidated loan trusts under Principal
Assets and Liabilities of Securitization Trusts.
Investing Activities. In 2009, net cash
provided by investing activities decreased by
$247.0 million as compared to 2008. Substantially all of
the cash flow from investing activities relates to either
payments on securitized loans or sales upon foreclosure of
securitized loans. Our mortgage loan portfolio declined
significantly and borrower defaults increased, resulting in
lower repayments of our mortgage loans
held-in-portfolio
and lower cash proceeds from the sale of assets acquired through
foreclosure. We also experienced a decrease in payments received
on our mortgage securities during 2009 as compared to 2008 as a
result of poor credit performance of the underlying loans.
Financing Activities. Net cash used in
financing activities decreased by $192.2 million in 2009 as
compared to 2008. All short-term borrowings were paid off in
2008 and we also experienced a decrease in paydowns of our
asset-backed bonds during the year.
Consolidated
Securitization Trusts
During 2006 and 2007, we executed loan securitization
transactions that did not meet the criteria necessary for
derecognition of the securitized assets and liabilities pursuant
to Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions and related authoritative accounting
literature. As a result, the assets and liabilities relating to
this securitization are included in our consolidated financial
statements.
At the time these loans were securitized, we owned significant
beneficial interests in the securitized loan pools, including
various subordinated bond classes and the residual interests in
these pools. For the 2006 securitized loan pools, we owned the
right to unilaterally place certain derivative instruments into
the securitization trust and to repurchase a limited number of
loans from the trust for any reason and at any time. For the
2007 securitized loan pool, we determined that we excessively
benefited from the derivatives transferred to the trust at
inception.
During 2007, we also securitized certain mortgage securities
through a CDO structure.
During and prior to 2008, the following events occurred that
have significantly changed the economics of these securitized
loan pools including:
1. We sold a portion of the beneficial interests we owned,
2. The credit losses on the securitized loans increased to
the point where the remaining beneficial interests we own are
not significant,
3. We sold the right to service all securitized loans,
4. We executed amendments to the securitization agreements
for the 2006 loan pools whereby we relinquished all rights to
place certain derivative instruments into the securitization
trust and to repurchase a limited number of loans from the trust
for any reason and at any time, and
5. For the 2007 securitized loan pool, a significant
portion of the derivatives placed into the trust have expired
and the remaining derivatives will expire by January 2010.
While the securities, loans and bond liabilities, along with
miscellaneous related assets and liabilities, remain on our
Consolidated Balance Sheets as presented in accordance with
GAAP, we have no ability to control the assets, no obligations
related to the trust payables, and no significant economic
benefit from our ownership interests issued by the trust.
Likewise, the income and expenses associated with these assets
and liabilities represent earnings and costs of the
securitization trust, but have no bearing on our performance due
to the current economic condition of the trusts.
Subsequent to December 31, 2009, certain events occurred
that required the Company to reconsider the accounting for three
consolidated loan trusts: NHEL
2006-1, NHEL
2006-MTA1 and NHEL
2007-1. Upon
reconsideration, the Company determined that all requirements
for derecognition were met under applicable accounting guidance
at the time of the reconsideration event. As a result, the
Company derecognized the
75
assets and liabilities of the trusts on January 25, 2010.
These transactions are discussed in greater detail in
Note 17 to the consolidated financial statements.
Below is financial information for each of the securitization
trusts we consolidated and for the total of all consolidated
trusts combined as of December 31, 2009 and 2008,
respectively.
The discussion of the individual line items within this
financial information is included in the discussion of our
consolidated financial statements in the applicable forgoing
sections of this report and is considered non-GAAP financial
information.
Table
16 Principal Assets and Liabilities of
Securitization Trusts(A)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
NHES
|
|
|
NHES 2006
|
|
|
NHES
|
|
|
|
|
|
|
|
|
NHES
|
|
|
NHES 2006
|
|
|
NHES
|
|
|
|
|
|
|
CDO
|
|
|
2006-1
|
|
|
MTA1
|
|
|
2007-1
|
|
|
Total
|
|
|
CDO
|
|
|
2006-1
|
|
|
MTA1
|
|
|
2007-1
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held in portfolio, net of allowance
|
|
$
|
|
|
|
$
|
292,417
|
|
|
$
|
397,212
|
|
|
$
|
608,016
|
|
|
$
|
1,297,645
|
|
|
$
|
|
|
|
$
|
411,146
|
|
|
$
|
523,183
|
|
|
$
|
847,962
|
|
|
$
|
1,782,291
|
|
Trading securities
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
961
|
|
|
|
5,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,199
|
|
Real estate owned
|
|
|
|
|
|
|
20,490
|
|
|
|
14,327
|
|
|
|
29,184
|
|
|
|
64,001
|
|
|
|
|
|
|
|
23,289
|
|
|
|
9,233
|
|
|
|
37,958
|
|
|
|
70,480
|
|
Accrued interest receivable
|
|
|
|
|
|
|
21,053
|
|
|
|
6,503
|
|
|
|
46,470
|
|
|
|
74,026
|
|
|
|
|
|
|
|
22,566
|
|
|
|
10,134
|
|
|
|
44,592
|
|
|
|
77,292
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed bonds secured by mortgage loans
|
|
$
|
|
|
|
$
|
495,383
|
|
|
$
|
618,931
|
|
|
$
|
1,241,501
|
|
|
$
|
2,355,815
|
|
|
$
|
|
|
|
$
|
572,970
|
|
|
$
|
700,335
|
|
|
$
|
1,398,115
|
|
|
$
|
2,671,420
|
|
Asset-backed bonds secured by mortgage securities
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
961
|
|
|
|
5,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,384
|
|
Other liabilities
|
|
|
22,199
|
|
|
|
46,335
|
|
|
|
28,366
|
|
|
|
108,085
|
|
|
|
204,985
|
|
|
|
24,748
|
|
|
|
47,418
|
|
|
|
22,401
|
|
|
|
104,439
|
|
|
|
199,006
|
|
|
|
|
(A) |
|
Stand-alone balances do not include impact of intercompany
eliminations. |
Table
17 Principal Revenues and Expenses of Securitization
Trusts(A)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
For the Year Ended December 31, 2008
|
|
|
|
|
|
|
NHES
|
|
|
NHES 2006
|
|
|
NHES
|
|
|
|
|
|
|
|
|
NHES
|
|
|
NHES 2006
|
|
|
NHES
|
|
|
|
|
|
|
CDO
|
|
|
2006-1
|
|
|
MTA1
|
|
|
2007-1
|
|
|
Total
|
|
|
CDO
|
|
|
2006-1
|
|
|
MTA1
|
|
|
2007-1
|
|
|
Total
|
|
|
Interest Income
|
|
$
|
9,445
|
|
|
$
|
31,002
|
|
|
$
|
20,630
|
|
|
$
|
78,385
|
|
|
$
|
139,462
|
|
|
$
|
26,306
|
|
|
$
|
45,160
|
|
|
$
|
27,555
|
|
|
$
|
109,295
|
|
|
$
|
208,316
|
|
Interest expense
|
|
|
3,002
|
|
|
|
4,166
|
|
|
|
7,151
|
|
|
|
12,733
|
|
|
|
27,052
|
|
|
|
13,124
|
|
|
|
22,453
|
|
|
|
25,843
|
|
|
|
54,874
|
|
|
|
116,294
|
|
Provision for credit losses
|
|
|
|
|
|
|
(68,183
|
)
|
|
|
(59,882
|
)
|
|
|
(132,795
|
)
|
|
|
(260,860
|
)
|
|
|
|
|
|
|
(127,485
|
)
|
|
|
(165,063
|
)
|
|
|
(414,816
|
)
|
|
|
(707,364
|
)
|
Servicing fee expense
|
|
|
|
|
|
|
2,292
|
|
|
|
2,401
|
|
|
|
5,946
|
|
|
|
10,639
|
|
|
|
|
|
|
|
3,128
|
|
|
|
2,736
|
|
|
|
7,732
|
|
|
|
13,596
|
|
Mortgage insurance
|
|
|
|
|
|
|
798
|
|
|
|
171
|
|
|
|
5,072
|
|
|
|
6,041
|
|
|
|
|
|
|
|
4,216
|
|
|
|
292
|
|
|
|
11,310
|
|
|
|
15,818
|
|
Other income (expense)
|
|
|
(5,194
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,544
|
)
|
|
|
(9,738
|
)
|
|
|
(15,550
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,844
|
)
|
|
|
(20,394
|
)
|
|
|
|
(A) |
|
Stand-alone balances do not include impact of intercompany
eliminations. |
Table
18 Summary of Cash Flows of Securitization
Trusts(A)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
For the Year Ended December 31, 2008
|
|
|
|
|
NHES
|
|
NHES 2006
|
|
NHES
|
|
|
|
|
|
NHES
|
|
NHES 2006
|
|
NHES
|
|
|
|
|
CDO
|
|
2006-1
|
|
MTA1
|
|
2007-1
|
|
Total
|
|
CDO
|
|
2006-1
|
|
MTA1
|
|
2007-1
|
|
Total
|
|
Net cash flow from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(2,222
|
)
|
|
$
|
20,142
|
|
|
$
|
21,301
|
|
|
$
|
43,455
|
|
|
$
|
82,676
|
|
|
$
|
(7,441
|
)
|
|
$
|
20,927
|
|
|
$
|
(4,415
|
)
|
|
$
|
43,622
|
|
|
$
|
52,693
|
|
Investing activities
|
|
|
3,396
|
|
|
|
51,774
|
|
|
|
60,389
|
|
|
|
115,925
|
|
|
|
231,484
|
|
|
|
16,135
|
|
|
|
135,777
|
|
|
|
70,706
|
|
|
|
195,954
|
|
|
|
418,572
|
|
Financing activities
|
|
|
(1,174
|
)
|
|
|
(71,916
|
)
|
|
|
(81,690
|
)
|
|
|
(159,380
|
)
|
|
|
(314,160
|
)
|
|
|
(8,694
|
)
|
|
|
(156,704
|
)
|
|
|
(66,291
|
)
|
|
|
(239,576
|
)
|
|
|
(471,265
|
)
|
|
|
|
(A) |
|
Stand-alone balances do not include impact of intercompany
eliminations. |
76
DESCRIPTION
OF BUSINESS
Overview
We are a Maryland corporation formed on September 13, 1996.
Prior to significant changes in our business in 2007 and the
first quarter of 2008, we originated, purchased, securitized,
sold, invested in and serviced residential nonconforming
mortgage loans and mortgage securities. We retained, in our
mortgage securities investment portfolio, significant interests
in the nonconforming loans we originated and purchased, and
through our servicing platform, serviced all of the loans in
which we retained interests. We discontinued our mortgage
lending operations and sold our mortgage servicing rights which
subsequently resulted in the closing of our servicing operations.
The mortgage securities we retained continue to be a primary
source of our cash flow. Because of severe declines in housing
prices and national and international economic crises which led
to declining values of our investments in mortgage loans and
securities, we suffered significant losses during 2009.
Liquidity constraints forced us to reduce operations and
administrative staff and take other measures to conserve cash.
None of our employees are represented by a union or covered by a
collective bargaining agreement.
We are headquartered at 2114 Central Street, Suite 600,
Kansas City, Missouri 64108 and our telephone number is
(816) 237-7000.
StreetLinks
National Appraisal Services LLC
We own 88% of StreetLinks National Appraisal Services LLC
(StreetLinks), a national residential appraisal and
real estate valuation management services company. StreetLinks
collects fees from lenders and borrowers in exchange for a
residential appraisal provided by an independent residential
appraiser. Most of the fee is passed through to an independent
residential appraiser with whom StreetLinks has a contractual
relationship. StreetLinks retains a portion of the fee to cover
its costs of managing the process to fulfill the appraisal order
and perform a quality control review of each appraisal.
StreetLinks also provides other real estate valuation management
services, such as field reviews and value validation.
StreetLinks appraisal order volume has increased, in part,
as a result of increased restrictions and requirements for
appraisals established by government agencies and regulatory
authorities such as the Federal Housing Finance Agency and the
United States Department of Housing and Urban Development that,
among other things, require appraiser independence. With
StreetLinks infrastructure in place and added efficiencies
gained through automation, we expect the general and
administrative expenses to decrease in proportion to the
increased production.
On October 18, 2010, as required by the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the Act),
the Federal Reserve Board issued an interim final rule which
amended Regulation Z under the Truth in Lending Act (the
Appraisal Rule). The Appraisal Rule is subject to a
public comment period until December 17, 2010. Compliance
with the Appraisal Rule, as amended to account for comments
received, becomes mandatory as of April 1, 2011. New
requirements under the Appraisal Rule specific to residential
real estate appraisals will likely include, but not be limited
to, the following:
|
|
|
|
|
appraisers must be paid reasonable and customary
fees,
|
|
|
|
require regulatory agencies to implement uniform appraisal
standards for all federal appraisals,
|
|
|
|
require appraisal management companies to register with state
agencies, and
|
|
|
|
govern automated valuation models.
|
It is managements opinion that the Appraisal Rule and
other rules and regulations promulgated under the Act will
strengthen appraiser reform, leading to greater appraiser
independence and greater lender
non-compliance
liability and will likely increase lender and consumer costs. We
believe credible lenders will continue to rely on appraisal
management companies to mitigate their appraisal compliance risk
and manage their appraisal fulfillment processes. Any impact of
the Act on StreetLinks and the Company will not be fully
77
determined until all rules and regulations thereunder, including
the Appraisal Rule, have been fully implemented.
Advent
Financial Services LLC
We own 70% Advent Financial Services LLC (Advent), a
start-up
business which provides access to tailored banking accounts,
small dollar banking products and related services to low and
moderate income level individuals. Advent began its operations
in December 2009. Advent anticipates distributing its financial
products through business partners such as tax preparation
offices. However, certain legislation and regulations proposed
at the federal and state levels could, if adopted, increase
costs to Advent and its business partners that provide its
financial products, or could negatively impact or eliminate the
ability of Advent to provide financial products through
Advents business partners such as tax return preparation
offices. Through this
start-up
period, management is evaluating the Advent business model to
determine its long-term viability. As anticipated by management,
Advent has not been a significant contributor to our 2010
operations and management believes this will remain the case
through at least year end.
Corvisa
LLC
StreetLinks owns 51% of Corvisa LLC (Corvisa).
Corvisa is a technology company that develops and markets its
software products to mortgage lenders. Its primary product is a
self-managed appraisal solution for lenders to manage their
appraisal process. Other products include analytical tools for
lender to manage their mortgage origination business.
StreetLinks purchased equity in Corvisa on November 4,
2010, for $1.5 million of cash, plus contingent
consideration related to an earn-out opportunity based on future
net income. The amount of the future payments that we could be
required to make under the earn-out opportunity is
$0.6 million.
Employees
As of December [ ], 2010, we employed
296 total employees. Of that amount, 287 were classified as
full-time employees.
Property
The executive and administrative offices for NFI are located in
Kansas City, Missouri, and consist of approximately
12,142 square feet of leased office space. The lease
agreements on the premises expire in October 2013. The current
annual rent for these offices is approximately $0.2 million.
StreetLinks leases approximately 33,692 square feet of
office space in Indianapolis, Indiana. The lease agreements on
the premises expire in February 2014. The current annual rent
for these offices is approximately $0.4 million.
We are leasing office space in various other states which were
used for operations which were discontinued in 2007 and 2008. We
are not renewing any of these leases and the final lease for
this office space will expire May 2012. The current gross annual
rent on those premises not terminated as of September 30,
2010 is approximately $0.5 million, although the majority
of this space has been subleased which reduces our costs
significantly.
Legal
Proceedings
The Company is a party to various legal proceedings, all of
which, except as set forth below, are of an ordinary, routine
nature for a company in NFIs business, including, but not
limited to, breach of contract claims, tort claims, and claims
for violations of federal and state consumer protection laws.
Furthermore, the Company has received indemnification and loan
repurchase demands with respect to alleged violations of
representations and warranties made in loan sale and
securitization agreements. These indemnification and repurchase
demands have been addressed without significant loss to the
Company and the number of demands has steadily decreased, but
such claims could be significant if multiple loans are involved.
78
Due to the uncertainty of any potential loss due to pending
litigation, the Company has not accrued a loss contingency
related to the following matters in its condensed consolidated
financial statements. Although it is not possible to predict the
outcome of any legal proceeding, in the opinion of management,
other than those proceedings described in detail below, such
proceedings and actions should not, individually, or in the
aggregate, have a material adverse effect on the Companys
financial condition and liquidity. However, a material adverse
outcome in one or more of these proceedings could have a
material adverse impact on the results of operations in a
particular quarter or fiscal year.
On May 21, 2008, a purported class action case was filed in
the Supreme Court of the State of New York, New York County, by
the New Jersey Carpenters Health Fund, on behalf of itself
and all others similarly situated. Defendants in the case
include NovaStar Mortgage Funding Corporation (NMFC)
and its individual directors, several securitization trusts
sponsored by the Company, and several unaffiliated investment
banks and credit rating agencies. The case was removed to the
United States District Court for the Southern District of New
York. On June 16, 2009, the plaintiff filed an amended
complaint. Plaintiff seeks monetary damages, alleging that the
defendants violated sections 11, 12 and 15 of the
Securities Act of 1933 by making allegedly false statements
regarding mortgage loans that served as collateral for
securities purchased by plaintiff and the purported class
members. On August 31, 2009, the Company filed a motion to
dismiss the plaintiffs claims. The Company believes it has
meritorious defenses to the case and expects to defend the case
vigorously.
On December 31, 2009, ITS Financial, LLC (ITS)
filed a complaint against Advent and the Company alleging a
breach of contract by Advent for a contract for services related
to tax refund anticipation loans and early season loans. ITS
does business as Instant Tax Service. The defendants moved the
case to the United States District Court for the Southern
District of Ohio. The complaint alleges that the Company worked
in tandem and as one entity with Advent in all material
respects. The complaint also alleges fraud in the inducement,
tortious interference by the Company with the contract, breach
of good faith and fair dealing, fraudulent and negligent
misrepresentation, and liability of the Company by piercing the
corporate veil and joint and several liability. The plaintiff
references a $3.0 million loan made by the Company to
plaintiff and seeks a judgment declaring that this loan be
subject to an offset by the plaintiffs damages. On
September 13, 2010, the Court denied the Companys
motion to transfer the case to the United States District Court
for the Western District of Missouri, and on September 29,
2010, the Company answered the complaint and made a counterclaim
against the plaintiff for plaintiffs failure to repay the
loan. The Company believes that the defendants have meritorious
defenses to ITSs claims and plans to vigorously defend the
case and pursue its counterclaim.
On July 9, 2010, Cambridge Place Investment Management,
Inc. filed a complaint in the Suffolk, Massachusetts Superior
Court against NMFC and numerous other entities seeking damages
on account of losses associated with residential mortgage-backed
securities purchased by plaintiffs assignors. The
complaint alleges untrue statements and omissions of material
facts relating to loan underwriting and credit enhancement. The
complaint alleges a violation of Section 410 of the
Massachusetts Uniform Securities Act, (Chapter 110A of the
Massachusetts General Laws). Defendants have removed the case to
the United States District Court for the District of
Massachusetts, and plaintiff has filed a motion to remand the
case back to state court. The Company believes that it has
meritorious defenses to these claims and expects that the case
will be defended vigorously.
On or about July 16, 2010, NovaStar Mortgage, Inc. received
a Purchasers Notice of Election to Void Sale of
Securities regarding NovaStar Mortgage Funding
Trust Series 2005-4
from the Federal Home Loan Bank of Chicago. The notice was
allegedly addressed to several entities including NovaStar
Mortgage, Inc. and NMFC. The notice alleges joint and several
liability for a rescission of the purchase of a
$15.0 million security pursuant to Illinois Securities Law,
815 ILCS section 5/13(A). The notice does not specify the
factual basis for the claim. The Company will assess its defense
to the claim once the factual basis and additional information
have been provided.
79
DIRECTORS,
EXECUTIVE OFFICERS AND CONTROL PERSONS
The executive officers and directors of NovaStar Financial and
their positions are as follows:
|
|
|
|
|
|
|
Name
|
|
Position With NovaStar Financial
|
|
Age
|
|
W. Lance Anderson
|
|
Chairman of the Board and Chief Executive Officer
|
|
|
50
|
|
Rodney E. Schwatken
|
|
Senior Vice President and Chief Financial Officer
|
|
|
47
|
|
Gregory T. Barmore
|
|
Director
|
|
|
68
|
|
Donald M. Berman
|
|
Director
|
|
|
59
|
|
Art N. Burtscher
|
|
Director
|
|
|
60
|
|
Edward W. Mehrer
|
|
Director
|
|
|
71
|
|
Howard M. Amster
|
|
Director
|
|
|
62
|
|
Barry A. Igdaloff
|
|
Director
|
|
|
55
|
|
The mailing address and phone number of each executive officer
and director is 2114 Central Street, Suite 600, Kansas
City, Missouri 64108 and
(816) 237-7000.
Executive
Officers
The executive officers serve at the discretion of the Board of
Directors.
W. Lance Anderson is a co-founder, Chairman of the Board
and Chief Executive Officer (CEO) of NovaStar
Financial, and has been a member of the Board of Directors since
1996. Prior to Mr. Andersons appointment as CEO, he
served as President and Chief Operating Officer. Prior to
joining NovaStar Financial, Mr. Anderson served as
Executive Vice President of Dynex Capital, Inc., formerly
Resource Mortgage Capital, Inc., a New York Stock
Exchange-listed real estate investment trust
(Dynex). In addition, Mr. Anderson was
President and Chief Executive Officer of Dynexs
single-family mortgage operation, Saxon Mortgage.
The Board believes Mr. Anderson qualifications to sit on
the Board and serve as its Chairman include his extensive
executive and operational experience and his detailed knowledge,
as co-founder and an executive officer, of the Company and its
development. Mr. Andersons Board term will expire in
2013.
Rodney E. Schwatken assumed the responsibilities of Chief
Financial Officer of the Company as of January 3, 2008.
Since March 2006, Mr. Schwatken had been the Companys
Vice President-Strategic Initiatives where he was responsible
for special projects generally related to corporate development
and management of the Companys strategic transactions.
From March 1997 until March 2007, Mr. Schwatken held
various titles including Vice President, Secretary, Treasurer
and Controller (Chief Accounting Officer) of the Company and was
responsible for corporate accounting, including implementation
of accounting policies and procedures and developing and
implementing proper internal control over all financial
recordkeeping. From June 1993 to March 1997, when he joined the
Company, Mr. Schwatken was Accounting Manager with
U.S. Central Credit Union, a $30 billion dollar
investment, liquidity and technology resource for the credit
union industry. From January 1987 to June 1993,
Mr. Schwatken was employed by Deloitte & Touche
LLP in Kansas City, Missouri, most recently as an audit manager.
Classified
Directors
There are five classified directors. Upon the filing of the
Articles of Amendment and Restatement, the Company will have
four classified directors and Mr. Berman will no longer
serve on the Board. In addition to Mr. Anderson, whose
biography is set forth above, the four other current classified
directors and their biographies are below.
Gregory T. Barmore has served on the Board of Directors
since 1996. Mr. Barmore is Chairman of the Board of
Directors of ICO, Inc., a Houston, Texas based plastics products
company and is a member of its audit committee and governance
and nominating committee. In 1997, Mr. Barmore retired as
Chairman of the Board of GE Capital Mortgage Corporation
(GECMC), a subsidiary of General Electric Capital
Corporation headquartered in Raleigh, North Carolina. In that
capacity, he was responsible for overseeing the strategic
80
development of GECMCs residential real estate-affiliated
financial business, including mortgage insurance, mortgage
services and mortgage funding. Prior to joining GECMC in 1986,
Mr. Barmore was Chief Financial Officer of Employers
Reinsurance Corporation, one of the nations largest
property and casualty reinsurance companies.
The Board believes that Mr. Barmores qualifications
to serve on the Board include his executive level experience,
financial expertise, and service on multiple boards of
directors. Mr. Barmores term will expire in 2013.
Donald M. Berman has been a member of the Board of
Directors since 2005. Since 1987 Mr. Berman has been the
Chairman and Chief Executive Officer of CardWorks, L.P., a
privately-held consumer finance company based in Woodbury, New
York. As Chief Executive Officer of CardWorks, Mr. Berman
oversees two wholly owned subsidiaries: Cardholder Management
Services, Inc. (CMS), based in Woodbury, New York,
which was founded by Mr. Berman in 1987, and Merrick Bank,
located in Salt Lake City, Utah, which was established by CMS in
1997. Mr. Berman has been a senior marketing executive with
Eastern States Bankcard Association, a bankcard industry
consultant and a Vice President in the Financial Institutions
Division of Smith Barney.
The Board believes Mr. Bermans qualifications to
serve on the Board include his executive level experience and
knowledge of the bankcard and consumer finance industries.
Mr. Bermans term will expire in 2011.
Art N. Burtscher has been a member of the Board of
Directors since 2001. Since 2004, Mr. Burtscher has been
chairman of McCarthy Group Advisors, L.L.C., an Omaha, Nebraska,
investment advisory firm. McCarthy Group Advisors was acquired
by Westwood Holdings Group, Inc. (whg) in November, 2010.
Mr. Burtscher remains with Westwood as Senior Vice
President. From 2000 to 2004, he was president of McCarthy
Group Asset Management. From 1988 to 2000, Mr. Burtscher
served as President and Chief Executive Officer of Great,
Western Bank in Omaha, Nebraska. Mr. Burtscher also serves
on the board of directors of NIC, Inc., an Overland Park, Kansas
eGovernment service provider, is its lead independent director
and is a member of the Audit Committee. Additionally,
Mr. Burtscher serves on the boards of directors of
AmeriSphere Multi-Family Finance, L.L.C., The Durham Museum,
SilverStone Group, Jet Linx, United Way of the Midlands
Foundation and Methodist Health System. He is also a consultant
to the board of Olsson & Associates and is a trustee
for DLR Group.
The Board believes that Mr. Burtschers qualifications
to serve on the Board include his experience in the financial
services industry, his extensive knowledge of financial,
business and investment matters and his service on numerous
boards of directors. Mr. Burtschers term will expire
in 2012.
Edward W. Mehrer has been a member of the Board of
Directors since 1996. Mr. Mehrer served as Interim
President & Chief Executive Officer of Cydex, Inc., a
pharmaceutical company based in Overland Park, Kansas, from
November 2002 through June 2003, and as its Chief Financial
Officer from November 1996 through December 2003. Prior to
joining Cydex, Mr. Mehrer was associated with Hoechst
Marion Roussel, formerly Marion Merrell Dow, Inc., an
international pharmaceutical company (Marion). From
December 1991 to December 1995, he served as Executive Vice
President and Chief Financial and Administrative Officer of
Marion and a director and member of its executive committee.
From 1976 to 1986, Mr. Mehrer was a partner with the public
accounting firm of Peat, Marwick, Mitchell & Co., a
predecessor firm to KPMG LLP, in Kansas City, Missouri.
Mr. Mehrer also serves on the Board of Directors of FBL
Financial Group, Inc., a Des Moines, Iowa insurance company and
is a member of both the audit committee and the nominating and
governance committee.
The Board believes that Mr. Mehrers qualifications to
serve on the Board include his experience as a practicing CPA
and his executive level experience and board service for
multiple public companies. Mr. Mehrers term will
expire in 2012.
81
Series C
Directors
In addition to the five classified directors described above,
two directors are elected to the Board by the holders of the
Companys Series C Preferred Stock pursuant to the
Articles Supplementary to the Companys Charter that
established the Series C Preferred Stock. The terms of the
Series C Preferred Stock provide that whenever dividends on
the Series C Preferred Stock are in arrears for six or more
quarters (whether or not consecutive) the holders of the
Series C Preferred Stock have the right to elect two
additional directors to the Board. On March 17, 2009, the
Company notified the holders of the Series C Preferred
Stock that the Company would not make its scheduled dividend
payment on the Series C Preferred Stock due March 31,
2009, and as of such date, dividends on the Series C
Preferred Stock would be in arrears for six or more quarters and
the holders of the Series C Preferred Stock had the right
to elect, as a separate class, two additional directors to the
Companys Board of Directors to serve as Series C
directors until such time as all accrued dividend have been
paid. The notice included a Series C Director Nomination
Form permitting holders of the Series C Preferred Stock to
make nominations for the election of the Series C directors
to occur by vote of the holders of the Series C Preferred
Stock at the Companys 2009 Annual Shareholder Meeting. At
the meeting, the holders of the Series C Preferred Stock
elected Howard M. Amster and Barry A. Igdaloff as Series C
directors to serve until all dividends accumulated on the
Series C Preferred Stock for the past dividend periods and
the then current dividend period have been paid in full or
authorized and a sum sufficient for the payment thereof has been
set aside for payment.
As part of the Series C Offer and Consent Solicitation and
the amendment contemplated in Proposal 1, despite the fact
that all dividends accumulated on the Series C Preferred
Stock have not been paid, the Series C directors will not
automatically continue to serve on the Board beyond the 2011
Annual Shareholder Meeting. Upon the filing of the Articles of
Amendment and Restatement, the Company will be comprised four
classified directors (Messrs. Anderson, Barmore, Burtscher
and Mehrer) and Messrs. Amster and Igdaloff will no longer
serve on the board. Immediately following the filing of the
Articles of Amendment and Restatement, however, the board
anticipates increasing the classified board positions from four
to six and appointing Messrs. Amster and Igdaloff to fill
the newly-created vacancies. However, under a Voting Agreement,
dated December 10, 2010, between the Company and the
Series C directors, the Company agreed to include
Messrs. Amster and Igdaloff on the slate of director
nominees recommended by management to the shareholders at the
2011 Annual Shareholder Meeting. If elected at the 2011 Annual
Shareholder Meeting, Messrs. Amster and Igdaloffs
terms will both expire in 2014.
Howard M. Amster is an owner and operator of multiple
real estate investments. Since March 1998, Mr. Amster has
served as President of Pleasant Lake Apts. Corp., the corporate
general partner of Pleasant Lake Apts. Limited Partnership.
Mr. Amster also serves as a director of Maple Leaf
Financial, Inc., the holding company for Geauga Savings Bank,
and newAX, Inc. (formerly Astrex, Inc.) and since 2000, has
served as a Principal with Ramat Securities Ltd., a securities
brokerage firm. From 1992 to 2000, Mr. Amster was an
investment consultant with First Union Securities (formerly
EVEREN Securities and formerly Kemper Securities).
While Mr. Amster was nominated and elected by the holders
of the Companys Series C Preferred Stock, the Board
believes Mr. Amsters qualifications to serve on the
Board include his investment experience and his service on
multiple boards of directors.
Barry A. Igdaloff has served as the sole proprietor of
Rose Capital, a registered investment advisor in Columbus, Ohio,
since 1995. Mr. Igdaloff has been a director of Dynex
Capital, Inc. since 2000, and is a member of its audit committee
and nominating and corporate governance committee. Previously,
Mr. Igdaloff was a director of Guest Supply, Inc. prior to
its acquisition by Sysco Foods in 2001. Prior to entering the
investment business, Mr. Igdaloff was an employee of
Ernst & Whinneys international tax department.
Mr. Igdaloff is a non-practicing CPA and a non-practicing
attorney.
While Mr. Igdaloff was nominated and elected to the Board
by the holders of the Companys Series C Preferred
Stock, the Board believes Mr. Igdaloffs
qualifications to serve on the Board include his financial
expertise, his years of experience as an investment advisor,
attorney, and CPA and his service on multiple boards of
directors.
82
BENEFICIAL
OWNERSHIP
Beneficial
Ownership of Common Stock and Series D Preferred Stock by
Directors, Management and Large Securityholders
The following table sets forth sets forth certain information
with respect to the Companys Common Stock and
Series D Preferred Stock beneficially owned by:
(i) each person known by the Company to own of record or
beneficially 5% or more of the Companys Common Stock,
(ii) each director, (iii) each Named Executive Officer
and (iv) all officers and directors of the Company as a
group, in each case based upon information available as of
December 9, 2010 (unless otherwise noted).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
|
|
|
|
|
|
|
Beneficial
|
|
Ownership of
|
|
|
|
|
|
|
Ownership of
|
|
Series D
|
|
|
|
|
|
|
Name and Address of
|
|
Common Stock
|
|
Preferred Stock
|
|
Voting Power(2)
|
|
|
Beneficial Owner(1)
|
|
Shares
|
|
Percent
|
|
Shares
|
|
Percent
|
|
Votes
|
|
Percent
|
|
|
|
W. Lance Anderson(3)
|
|
|
251,016
|
|
|
|
2.65
|
%
|
|
|
|
|
|
|
|
|
|
|
251,016
|
|
|
|
2.19
|
%
|
|
|
|
|
Edward W. Mehrer(4)
|
|
|
40,288
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
40,288
|
|
|
|
*
|
|
|
|
|
|
Gregory T. Barmore(5)
|
|
|
26,270
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
26,270
|
|
|
|
*
|
|
|
|
|
|
Art N. Burtscher(6)
|
|
|
23,440
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
23,440
|
|
|
|
*
|
|
|
|
|
|
Rodney E. Schwatken(7)
|
|
|
49,277
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
49,277
|
|
|
|
*
|
|
|
|
|
|
Donald M. Berman(8)
|
|
|
8,216
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
8,216
|
|
|
|
*
|
|
|
|
|
|
Howard M. Amster(9)
|
|
|
1,875
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
1,250
|
|
|
|
*
|
|
|
|
|
|
Barry A. Igdaloff(10)
|
|
|
1,875
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
1,875
|
|
|
|
*
|
|
|
|
|
|
All current directors and executive officers as a group
(8 persons)(11)
|
|
|
401,632
|
|
|
|
4.29
|
%
|
|
|
|
|
|
|
|
|
|
|
401,632
|
|
|
|
3.57
|
%
|
|
|
|
|
Massachusetts Mutual Life Insurance Company(12)
|
|
|
192,950
|
|
|
|
2.06
|
%
|
|
|
1,050,000
|
|
|
|
50.00
|
%
|
|
|
1,130,450
|
|
|
|
10.05
|
%
|
|
|
|
|
1295 State Street
Springfield, MA 01111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jefferies Capital Partners IV LLC(13)
|
|
|
|
|
|
|
|
|
|
|
1,050,000
|
|
|
|
50.00
|
%
|
|
|
937,500
|
|
|
|
8.34
|
%
|
|
|
|
|
520 Madison Avenue,
12th Floor New York, NY 10022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Less than 1% |
|
(1) |
|
The mailing address of each beneficial owner is 2114 Central
Street, Suite 600, Kansas City, Missouri 64108, unless
otherwise shown. |
|
(2) |
|
The holders of the Series D Preferred Stock are entitled to
one vote for each share of common stock into which the
Series D Preferred Stock held as of the record date is
convertible, on each matter on which the holders of the common
stock have a right to vote. Consequently, total votes include
one vote for each share of the Companys common stock
outstanding, and one vote for each share of common stock into
which outstanding shares of the Companys Series D
Preferred Stock may be converted. |
|
(3) |
|
Consists of 294,274 shares of common stock held directly;
463,401 shares of stock owned jointly with his spouse;
8,415 shares of common stock held in the NovaStar Financial
401(k) Plan; 187,342 shares of common stock issuable
pursuant to options exercisable within 60 days of
December 9, 2010; and 76,882 shares of restricted
stock. |
|
(4) |
|
Consists of 17,018 shares of common stock held directly;
1,000 shares of common stock owned by his spouse; and
22,271 shares of common stock issuable pursuant to options
exercisable within 60 days of December 9, 2010. |
|
(5) |
|
Consists of 12,673 shares of common stock held directly;
and 13,597 shares of common stock issuable pursuant to
options exercisable within 60 days of December 9, 2010. |
|
(6) |
|
Consists of 1,125 shares of common stock held directly and
22,315 shares of common stock issuable pursuant to options
exercisable within 60 days of December 9, 2010. |
83
|
|
|
(7) |
|
Consists of 2,181 shares of common stock held directly;
5,088 shares of stock owned by the
Rodney E. Schwatken Trust; 3,141 shares of common
stock held in the NovaStar Financial 401(k) Plan;
38,341 shares of common stock issuable pursuant to options
exercisable within 60 days of December 9, 2010; and
526 shares of restricted stock. |
|
(8) |
|
Consists of shares of common stock issuable pursuant to options
exercisable within 60 days of December 9, 2010. |
|
(9) |
|
Consists of shares of common stock issuable pursuant to options
exercisable within 60 days of December 9, 2010. |
|
(10) |
|
Consists of shares of common stock issuable pursuant to options
exercisable within 60 days of December 9, 2010. |
|
(11) |
|
Includes 155,513 shares of common stock issuable pursuant
to options exercisable within 60 days of December 9,
2010. |
|
(12) |
|
Based on an amended Schedule 13D filed on October 9,
2007. The amended Schedule 13D indicates that Massachusetts
Mutual Life Insurance Company has shared voting and dispositive
power with Babson Capital Management LLC, in its capacity as
investment advisor. |
|
(13) |
|
Based on an amended Schedule 13D dated October 9,
2007. The amended Schedule 13D indicates that Jefferies
Capital Partners IV LLC (the Manager) is the
manager of, and may be deemed the beneficial owner of shares
held by, Jefferies Capital Partners IV LP (holds
911,659 shares of Series D1 Preferred Stock currently
convertible into 813,981 shares of common stock (7.2%)),
Jefferies Employee Partners IV LLC (holds
105,002 shares of Series D1 Preferred Stock currently
convertible into 93,752 shares of common stock (0.8%)), and
JCP Partners IV LLC (holds 33,339 shares of
Series D1 Preferred Stock currently convertible into
29,767 shares of common stock (0.3%)) (together,
Jefferies Capital Partners), which collectively hold
the indicated shares of Series D1 Preferred Stock. The
amended Schedule 13D indicates further that the Manager has
shared voting and dispositive power with Jefferies Capital
Partners and with Brian P. Friedman and James L. Luikart,
managing members of the Manager, who also may be deemed
beneficial owners of these shares. |
84
EXECUTIVE
COMPENSATION
Introduction
This section provides information regarding the compensation of
the persons who served as our principal executive officer and
principal financial officer during 2009 (collectively our
Named Executive Officers). Our Named Executive
Officers for 2009, and the positions they held during 2009, were
as follows:
|
|
|
Name
|
|
Title
|
|
W. Lance Anderson
|
|
Chairman of the Board and Chief Executive Officer
|
Rodney E. Schwatken
|
|
Chief Financial Officer
|
Summary
Compensation Table
The following table sets forth the compensation of our Named
Executive Officers during the fiscal year ended
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
Stock
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)(2)
|
|
($)(2)
|
|
($)(3)
|
|
($)
|
|
W. Lance Anderson,
|
|
|
2009
|
|
|
|
665,784
|
|
|
|
|
|
|
|
164,687
|
|
|
|
149,719
|
|
|
|
97,241
|
|
|
|
1,090,326
|
|
Chief Executive Officer
|
|
|
2008
|
|
|
|
665,784
|
|
|
|
|
|
|
|
201,791
|
|
|
|
157,456
|
|
|
|
31,033
|
|
|
|
1,056,064
|
|
Rodney E. Schwatken,
|
|
|
2009
|
|
|
|
165,000
|
|
|
|
100,000
|
(1)
|
|
|
10,276
|
|
|
|
4,552
|
|
|
|
|
|
|
|
283,001
|
|
Chief Financial Officer
|
|
|
2008
|
|
|
|
165,000
|
|
|
|
100,000
|
(1)
|
|
|
6,120
|
|
|
|
5,277
|
|
|
|
|
|
|
|
276,397
|
|
|
|
|
(1) |
|
Represents quarterly retention bonuses of $25,000. |
|
(2) |
|
Represents the dollar amount recognized for financial reporting
purposes for the fiscal year ended December 31, 2009, in
accordance with FASB ASC Topic 718 (disregarding estimates of
forfeitures). The stock awards column includes amounts for
restricted stock granted in 2004, 2005, 2006 and 2007. The
option awards column includes amounts for stock option awards
granted in 2005, 2006 and 2007 and 2009. See Note 15 to the
consolidated financial statements for the fiscal year ended
December 31, 2009 for a discussion of the assumptions used in
calculating these amounts. Substantially all of Mr.
Andersons options awards were granted when the
Companys stock was trading at substantially higher prices
and as a result, his option awards are underwater or
out of the money (meaning the exercise price exceeds
the market price of the Companys stock). |
|
(3) |
|
All Other Compensation for the named executives is set forth in
the following table. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of
|
|
Tax
|
|
Total All Other
|
|
|
|
|
Founders Notes
|
|
Gross-Ups
|
|
Compensation
|
Name
|
|
Year
|
|
($)(A)
|
|
($)(B)
|
|
($)(C)
|
|
W. Lance Anderson
|
|
|
2009
|
|
|
|
31,331
|
|
|
|
65,910
|
|
|
|
97,241
|
|
|
|
|
2008
|
|
|
|
31,033
|
|
|
|
|
|
|
|
31,033
|
|
|
|
|
(A) |
|
Represents forgiveness of principal under
Mr. Andersons promissory note in favor of the
Company. This amount does not include the forgiveness of
capitalized interest as that amount is not reportable
compensation for the named executive. See Review and
Approval of Transactions with Related Persons; Related Party
Transactions for additional information. |
|
(B) |
|
During 2009, Mr. Anderson was paid for tax
gross-ups on
the forgiveness of the note received for 2007, 2008 and 2009. |
|
(C) |
|
The total value of all perquisites and other personal benefits
did not exceed $10,000 for any named executive officer for
fiscal years 2008 and 2009 so the amounts have been excluded
from the Summary Compensation Table. |
85
Outstanding
Equity Awards at Fiscal Year-End 2009
The following table sets forth the outstanding stock options and
stock awards for each of our Named Executive Officers as of
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Market
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
Shares or
|
|
Value of
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
Units of
|
|
Shares or
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
Stock That
|
|
Units of
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
Have Not
|
|
Stock That
|
|
|
Options (#)
|
|
Options (#)
|
|
Exercise
|
|
Expiration
|
|
Vested
|
|
Have Not
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Price ($)
|
|
Date
|
|
(#)(5)
|
|
Vested ($)(5)(6)
|
|
W. Lance Anderson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,375
|
(1)
|
|
|
|
|
|
|
48.88
|
|
|
12/18/2012
|
|
|
|
|
|
|
|
|
|
|
|
3,465
|
|
|
|
|
|
|
|
168.52
|
|
|
2/7/2015
|
|
|
|
|
|
|
|
|
|
|
|
4,575
|
|
|
|
1,526
|
(2)
|
|
|
124.84
|
|
|
2/8/2016
|
|
|
|
|
|
|
|
|
|
|
|
16,463
|
|
|
|
16,464
|
(3)
|
|
|
16.72
|
|
|
3/14/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,999
|
|
|
|
20,699
|
|
Rodney E. Schwatken
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
168.52
|
|
|
2/7/2015
|
|
|
|
|
|
|
|
|
|
|
|
175
|
|
|
|
59
|
(2)
|
|
|
124.84
|
|
|
2/8/2016
|
|
|
|
|
|
|
|
|
|
|
|
321
|
|
|
|
322
|
(3)
|
|
|
16.72
|
|
|
3/14/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
(4)
|
|
|
0.97
|
|
|
11/10/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523
|
|
|
|
471
|
|
|
|
|
(1) |
|
For options that vested prior to January 1, 2005, a
recipient is entitled to receive additional shares of Company
Common Stock upon the exercise of the options as a result of
dividend equivalent rights (DERs) that accrue at a
rate equal to the number of shares underlying the option
outstanding multiplied by 60% of the dividends paid on each
share of Common Stock. The DERs convert to shares by dividing
the dollar value of the DERs by the closing price of the
Companys Common Stock on the dividend payment date. At
December 31, 2009, Mr. Anderson was entitled to
receive an additional 1,757 shares of stock upon exercise
of their options with an expiration date of December 18,
2012. |
|
(2) |
|
Options vested on February 8, 2010. |
|
(3) |
|
Options will vest in 1/2 increments on March 14 of the years
2010 2011. |
|
(4) |
|
Options will vest in 1/4 increments on November 10 of the years
2010 2013. |
|
(5) |
|
The vesting dates of the shares of restricted stock held at
fiscal-year end 2009 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant
|
|
Shares
|
|
|
Name
|
|
Date
|
|
Outstanding
|
|
Vesting Schedule
|
|
W. Lance Anderson
|
|
|
2/7/2005
|
|
|
|
1,100
|
|
|
100% on 2/7/2015
|
|
|
|
2/8/2006
|
|
|
|
2,678
|
|
|
100% on 2/8/2011
|
|
|
|
3/14/2007
|
|
|
|
19,221
|
|
|
100% on 3/14/2012
|
Rodney E. Schwatken
|
|
|
2/7/2005
|
|
|
|
44
|
|
|
100% on 2/7/2015
|
|
|
|
2/8/2006
|
|
|
|
103
|
|
|
100% on 2/8/2011
|
|
|
|
3/14/2007
|
|
|
|
376
|
|
|
100% on 3/14/2012
|
|
|
|
(6) |
|
The closing market price of the Companys Common Stock on
December 31, 2009 (the last trading day of 2009) was
$0.90. |
Employment
Agreements
Due to the termination of Mr. Andersons employment
agreement by the mutual agreement of Mr. Anderson and the
Company on December 17, 2008, the following discussion of
the Companys employment agreements is limited to that of
Mr. Schwatken. Mr. Anderson will continue to serve as
the Companys Chief Executive Officer on an at-will basis
at the same base salary as he received under his employment
agreement.
86
Rodney
E. Schwatken
Mr. Schwatken entered into an employment agreement with the
Company on January 7, 2008 pursuant to which he serves as
the Chief Financial Officer of the Company. Under the terms of
the agreement, Mr. Schwatken is to receive an annual base
salary of $165,000, subject to annual increases, agreed upon
incentive compensation for each of 2008 and 2009 of $25,000 per
quarter, and such other incentive pay determined by the Company
from time to time. The Company may increase or decrease
Mr. Schwatkens base salary and incentive compensation
at any time in its sole discretion. At the November 2009 meeting
of the Compensation Committee of the Board (the
Compensation Committee), the Compensation Committee
approved, pursuant to the agreement, an increase in
Mr. Schwatkens annual base salary to $225,000,
effective as of January 1, 2010, and a new bonus plan for
2010. The new bonus plan involves a maximum bonus payout of
$100,000 based on four criteria identified by the Compensation
Committee: (i) the success of StreetLinks, (ii) the
success of Advent, (iii) balance sheet clean up items, and
(iv) board discretion with particular focus on capital
restructuring, shareholder communications and other areas to be
identified by the Compensation Committee and Mr. Anderson.
The agreement does not specify a termination date but provides
that Mr. Schwatkens employment relationship with the
Company is at-will and may be terminated at any time by either
party with or without cause and for any reason or no reason.
In the event that Mr. Schwatkens employment is
terminated by the Company without cause or by
Mr. Schwatken for good reason,
Mr. Schwatken will immediately receive any unpaid portion
of the $100,000
agreed-upon
2009 incentive compensation and, over a period of 12 months
following termination, compensation at an annual rate equal to
his then existing annual base salary, in exchange for consulting
services outlined in the Employment Agreement. If termination by
the Company without cause or by Mr. Schwatken
for good reason occurs following a change of
control then, in addition to the foregoing,
Mr. Schwatken will receive a lump-sum severance amount
equal to the greater of $200,000 or the sum of his then existing
annual base salary and actual incentive pay for the prior fiscal
year, and all outstanding equity awards will immediately vest
upon the date of such termination. Mr. Schwatken is bound
by certain
non-competition,
non-solicitation, confidentiality and similar obligations under,
and as more particularly described in, the Employment Agreement.
For purposes of the employment agreement with Mr. Schwatken:
Acts or omissions that constitute cause include:
|
|
|
|
|
breach of any of the terms of the employment agreement;
|
|
|
|
failure to perform material duties in accordance with the
standards from time to time established by the Company;
|
|
|
|
neglect in performance of failure to attend to the performance
of material duties;
|
|
|
|
insubordination or willful breach of policies and procedures of
the Company;
|
|
|
|
breach of fiduciary duties; or
|
|
|
|
conduct that the Company determines in good faith may impair or
tend to impair the integrity of the Company, including but not
limited to commission of a felony, theft, misappropriation,
embezzlement, dishonesty, or criminal misconduct.
|
Good reason means the occurrence, without the
executives written consent, of any one or more of the
following events:
|
|
|
|
|
a material reduction in compensation of the executive or a
decrease in the responsibilities of the executive to a level
that, on the whole, is materially inconsistent with the position
for which the executive is employed, except in connection with
the Companys termination of the executives
employment for cause or as otherwise expressly
contemplated in the employment agreement;
|
87
|
|
|
|
|
the Company requires that the executive relocate more than
50 miles from the location at which the executive is
employed by the Company as of the date of the employment
agreement; or
|
|
|
|
the Companys material breach of any of the provisions of
the employment agreement.
|
Change in control shall be deemed to have
occurred if any of the conditions set forth below shall have
been satisfied:
|
|
|
|
|
any person as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of
1934 (the Exchange Act) (other than the Company; any
trustee or other fiduciary holding securities under an executive
benefit plan of the Company; or any company owned, directly or
indirectly, by the stockholders of the Company in substantially
the same proportions as their ownership of the stock of the
Company), is or becomes the beneficial owner (as
defined by
Rule 13d-3
under the Exchange Act), directly or indirectly, of the
securities of the Company (not including securities beneficially
owned by such person, any securities acquired directly from the
Company or from a transferor in a transaction expressly approved
or consented to by the Board of Directors) representing more
than 25% of the combined voting power of the Companys then
outstanding securities;
|
|
|
|
during any period of two consecutive years (not including any
period prior to the execution of the employment agreement),
individuals who at the beginning of such period constitute the
Board of Directors and any new director (other than a director
designated by a person who has entered into an agreement with
the Company to effect a transaction described in three
immediately preceding bulleted paragraphs), (i) whose
election by the Board of Directors or nomination for election by
the Companys stockholders was approved by a vote of at
least (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election
or nomination for election was previously so approved or
(ii) whose election is to replace a person who ceases to be
a director due to death, disability or age, cease for any reason
to constitute a majority thereof;
|
|
|
|
the stockholders of the Company approve a merger or
consolidation of the Company with another corporation, other
than (i) a merger or consolidation which would result in
the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity), in combination with the ownership of any
trustee or other fiduciary holding securities under an executive
benefit plan of the Company, at least 75% of the combined voting
power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected
to implement a recapitalization of the Company (or similar
transaction) in which no person acquires more than 50% of the
combined voting power of the Companys then outstanding
securities; or
|
|
|
|
the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all the
Companys assets.
|
88
DIRECTOR
COMPENSATION
Pursuant to its 2005 Compensation Plan for Independent
Directors, NovaStar Financial pays
non-employee
directors an annual retainer of $35,000 plus $1,500 for each day
of board or committee meetings attended. In addition, each
independent director is granted (i) upon becoming a
director, options to purchase that number of shares of NovaStar
Financial Common Stock which has a fair market value of $100,000
at the time of the grant but not to exceed 10,000 shares
(2,500 shares after taking into effect the Companys
one-for-four
reverse stock split effective July 20, 2007 (the
Reverse Split) (the New Director Grant),
exercisable in accordance with the NovaStar Financial 2004
Incentive Stock Plan (the Incentive Plan) and
subject to a four year vesting schedule, and (ii) on the
day after each annual meeting of stockholders, fully vested
options to purchase 5,000 shares of Common Stock
(1,250 shares after taking into effect the Reverse Split)
(the Annual Grant), exercisable in accordance with
the Incentive Plan. Finally, the chairperson of each of the
Audit, Compensation and Nominating and Corporate Governance
Committees is paid an annual retainer fee of $10,000, $5,000 and
$5,000, respectively.
All directors receive reimbursement of reasonable
out-of-pocket
expenses incurred in connection with meetings of the Board of
Directors. No director who is an employee of NovaStar Financial
will receive separate compensation for services rendered as a
director.
The following table sets forth the compensation for each of our
non-employee directors for the fiscal year ended
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
Option
|
|
|
|
|
Paid in Cash
|
|
Awards
|
|
Total
|
Name
|
|
($)
|
|
($)(1)
|
|
($)
|
|
Gregory T. Barmore
|
|
$
|
52,000
|
|
|
$
|
1,278
|
(2)
|
|
$
|
53,278
|
|
Art N. Burtscher
|
|
|
52,000
|
|
|
|
1,278
|
(3)
|
|
|
53,278
|
|
Edward W. Mehrer
|
|
|
57,000
|
|
|
|
1,278
|
(4)
|
|
|
58,278
|
|
Donald M. Berman
|
|
|
47,000
|
|
|
|
10,843
|
(5)
|
|
|
57,843
|
|
Howard M. Amster
|
|
|
20,500
|
|
|
|
359
|
(6)
|
|
|
20,859
|
|
Barry A. Igdaloff
|
|
|
20,500
|
|
|
|
359
|
(7)
|
|
|
20,859
|
|
|
|
|
(1) |
|
Represents the dollar amount recognized for financial reporting
purposes for the fiscal year ended December 31, 2009, in
accordance with FASB ASC Topic 718 (disregarding estimates of
forfeitures), and includes amounts from stock option awards
granted in 2005 through 2009. See Note 15 to the consolidated
financial statements for the fiscal year ended December 31, 2009
for a discussion of the relevant assumptions used in calculating
these amounts. |
|
(2) |
|
Mr. Barmore received an Annual Grant of 1,250 fully-vested
options in 2009. The grant date fair value of Mr. Barmores
option award was $1,278. The aggregate number of option awards
outstanding at December 31, 2009 for Mr. Barmore was 11,249. |
|
(3) |
|
Mr. Burtscher received an Annual Grant of 1,250 fully-vested
options in 2009. The grant date fair value of Mr.
Burtschers option award was $1,278. The aggregate number
of option awards outstanding at December 31, 2009 for Mr.
Burtscher was 15,000. |
|
(4) |
|
Mr. Mehrer received an Annual Grant of 1,250 fully-vested
options in 2009. The grant date fair value of Mr. Mehrers
option award was $1,278. The aggregate number of option awards
outstanding at December 31, 2009 for Mr. Mehrer was 13,347. |
|
(5) |
|
Represents the amortization of the vesting of Mr. Bermans
New Director Grant of 1,966 options upon his election to the
Board in July 2005 and the $1,278 grant date fair value of Mr.
Bermans Annual Grant of 1,250 fully-vested options in
2009. The aggregate number of option awards outstanding at
December 31, 2009 for Mr. Berman was 6,966. |
|
(6) |
|
Mr. Amster received a New Director Grant of 2,500 options upon
his election to the Board in June 2009. The grant date fair
value of Mr. Amsters option award was $2,703 and the
options are subject to a four year vesting period. Because Mr.
Amster received a New Director Grant in 2009, he was not
eligible to receive |
89
|
|
|
|
|
the Annual Grant for that year. The aggregate number of option
awards outstanding at December 31, 2009 for Mr. Amster was 2,500. |
|
(7) |
|
Mr. Igdaloff received a New Director Grant of 2,500 options upon
his election to the Board in June 2009. The grant date fair
value of Mr. Igdaloffs option award was $2,703 and the
options are subject to a four year vesting period. Because Mr.
Igdaloff received a New Director Grant in 2009, he was not
eligible to receive the Annual Grant for that year. The
aggregate number of option awards outstanding at December 31,
2009 for Mr. Igdaloff was 2,500. |
CORPORATE
GOVERNANCE AND RELATED MATTERS
Director
Independence
A majority of the directors of the Board must meet the criteria
for independence as established by the Board. The Companys
criteria provide that a director will not qualify as independent
unless the Board affirmatively determines that the director has
no material relationship with the Company. The Board has
adopted, upon recommendation from the Nominating and Corporate
Governance Committee, a set of categorical standards to form the
basis for the Boards independence determinations (the
Director Independence Standards). Although the
Companys securities are no longer listed on the New York
Stock Exchange, the Director Independence Standards are
substantively the same as those provided for in the rules of the
New York Stock Exchange.
The Nominating and Corporate Governance Committee and the Board
have evaluated the relationships between each director nominee
or director (and his or her immediate family members and related
interests) and the Company and its subsidiaries. As a result of
this evaluation, the Board has affirmatively determined, upon
recommendation from the Nominating and Corporate Governance
Committee, that each of the following director nominees or
current directors has no material relationship with the Company
and is independent under the Director Independence Standards:
Gregory T. Barmore, Donald M. Berman, Art N. Burtscher, Edward
W. Mehrer, Howard M. Amster and Barry A. Igdaloff.
Board
Leadership Structure
W. Lance Anderson, the Companys Chief Executive
Officer serves as the Chairman of the Board. The Board has
combined the roles of Chairman of the Board and Chief Executive
Officer in Mr. Anderson because it believes that this
structure enables the Company to most effectively pursue its
business strategy and allows Mr. Anderson to more
effectively represent the Company with it various constituents.
Additionally, Mr. Andersons in-depth knowledge of the
Company and its business provides the Board with the leadership
needed to set the strategic focus and direction for the Company.
At the same time, the Boards Lead Independent Director
role provides and effective means for the independent directors
to exercise appropriate independent oversight of management.
Lead
Independent Director
Gregory T. Barmore currently serves as the Companys Lead
Independent Director. The primary responsibilities of the Lead
Independent Director are to:
|
|
|
|
|
Approve an appropriate schedule of the Boards meetings,
seeking to ensure the independent directors can perform their
duties responsibly while not interfering with the flow of the
Companys operations;
|
|
|
|
Review agendas for the Board and committee meetings;
|
|
|
|
Assess the quality, quantity and timeliness of the flow of
information from management that is necessary for the
independent directors to effectively and responsibly perform
their duties, and although management is responsible for the
preparation of materials for the Board, the Lead Independent
Director may specifically request the inclusion of certain
material;
|
|
|
|
Whenever appropriate, direct the retention of consultants who
report directly to the Board;
|
90
|
|
|
|
|
Assist the Board and the Companys officers in assuring
compliance with and implementation of the Corporate Governance
Guidelines and be principally responsible for recommending
revisions to the Corporate Governance Guidelines;
|
|
|
|
Coordinate an agenda for the Boards independent directors;
|
|
|
|
Evaluate, along with the members of the Compensation Committee
and the full Board, the Chief Executive Officers
performance and meet with the Chief Executive Officer to discuss
the Boards evaluation; and
|
|
|
|
Review the membership and performance of the various Board
Committees and Committee Chairs.
|
The Lead Independent Director is elected annually for a maximum
tenure of three years. The performance of the Lead Independent
Director is evaluated annually by the Board and where the Lead
Independent Director is not sufficiently active or successful in
providing meaningful leadership for the Board, the Lead
Independent Director will be replaced.
Board
Attendance and Annual Meeting Policy
During 2009, there were seven meetings of the Board of
Directors. Each director participated in at least 75% of the
meetings of the Board and the committees on which he served
during the periods for which he has been a director or committee
member. Independent directors are not expected to attend the
annual shareholders meetings.
Board
Committee Membership and Meetings
The Board of Directors has three committees: Audit, Nominating
and Corporate Governance and Compensation. The Nominating and
Corporate Governance Committee makes recommendations to the
Board concerning committee memberships and appointment of
chairpersons for each committee, and the Board appoints the
members and chairpersons of each committee. Descriptions of the
committees are provided below. These descriptions are qualified
in their entirety by the full text of the written committee
charters that may be found on the Companys website as
described below.
|
|
|
|
|
Audit Committee. The Audit Committee of the
Board of Directors consists of five directors, all of whom are
independent under the Director Independence Standards and other
SEC rules and regulations applicable to audit committees. The
following directors are currently members of the Audit
Committee: Gregory T. Barmore, Donald M. Berman, Art N.
Burtscher, Barry Igdaloff and Edward M. Mehrer, who serves as
the chairman. The Board of Directors has determined that Edward
W. Mehrer qualifies as an audit committee financial expert, as
such term is defined by Item 407(d)(5)(ii) of
Regulation S-K
of the Exchange Act. During 2009, the Audit Committee met five
times.
|
The purpose of the Audit Committee is to assist the Board in
fulfilling its oversight responsibility relating to:
(i) the integrity of the Companys financial
statements and financial reporting process and its system of
internal accounting and financial controls, (ii) the
performance of the internal audit function, (iii) the
performance of the independent auditors, which would include an
evaluation of the independent auditors qualifications and
independence, (iv) the Companys compliance with legal
and regulatory requirements, including disclosure controls and
procedures, and (v) the preparation of an Audit Committee
report to be included in the Companys annual proxy
statement.
|
|
|
|
|
Nominating and Corporate Governance
Committee. The Nominating and Corporate
Governance Committee of the Board of Directors consists of four
directors, all of whom are independent under the Director
Independence Standards. The following directors are currently
members of the Nominating and Corporate Governance Committee:
Gregory T. Barmore, Donald T. Berman, Art N. Burtscher and
Edward M. Mehrer, with Mr. Burtscher serving as the
chairman. The Nominating and Corporate Governance Committee did
not meet in separate session during 2009.
|
The purpose of the Nominating & Corporate Governance
Committee is to: (i) identify individuals qualified to
become Board members, consistent with the criteria established
by the Board, (ii) recommend to
91
the Board the director nominees for the next annual shareholders
meeting, (iii) leading the Board in the annual review of
the Boards performance and the review of managements
performance, and (iv) shape the corporate governance
policies and practices including developing a set of corporate
governance principles applicable to the Company and recommending
them to the Board.
|
|
|
|
|
Compensation Committee. The Compensation
Committee of the Board of Directors consists of five directors,
all of whom are independent under the Director Independence
Standards and SEC rules and regulations applicable to
compensation committees. The following directors are currently
members of the Compensation Committee: Gregory T. Barmore,
Donald T. Berman, Art N. Burtscher, Edward M. Mehrer and Howard
M. Amster, with Mr. Barmore serving as the chairman. The
Committee is scheduled to meet quarterly, and more frequently as
circumstances dictate. During 2009, the Compensation Committee
met three times.
|
The responsibilities of the Compensation Committee are set forth
in its charter and include: (i) review and approve the
goals, objectives and compensation structure for our Chief
Executive Officer and senior management; (ii) review,
approve and recommend to the Board any new
incentive-compensation and
equity-based
plans that are subject to Board approval and (iii) approve
any required disclosure on executive officer compensation for
inclusion in the Companys annual proxy statement and
annual report on
Form 10-K.
The Compensation Committee also reviews and approves the
compensation structure for the Board of Directors. The
Compensation Committee may delegate certain of its authority to
a subcommittee comprised of one or more members of the
Compensation Committee.
Corporate
Governance Documents
The Companys Corporate Governance Guidelines, Code of
Conduct and charters of the Companys Audit, Compensation
and Nominating and Corporate Governance Committees may be
obtained at the Corporate Governance section of the
Companys website at www.novastarfinancial.com. The Company
will also provide copies of these documents free of charge to
any stockholder who sends a written request to: NovaStar
Financial, Inc., Investor Relations, 2114 Central Street,
Suite 600, Kansas City, MO 64108.
Executive
Sessions
Executive sessions of non-management directors are held at least
three times a year. The sessions are scheduled and chaired by
Mr. Burtscher, who is the Chair of the Nominating and
Corporate Governance Committee. Any non-management director can
request that an additional executive session be scheduled.
Communications
with the Board
Individuals may communicate directly with any member of the
Board of Directors or any individual chairman of a committee of
the Board of Directors by writing directly to those individuals
at the following address: NovaStar Financial, Inc., 2114 Central
Street, Suite 600, Kansas City, MO 64108. Communications
that are intended for the non-management, independent directors
generally should be marked to the attention of the Chair of the
Nominating and Corporate Governance Committee. The
Companys general policy is to forward, and not to
intentionally screen, any mail received at the Companys
corporate office unless the Company believes the communication
may pose a security risk.
Risk
Oversight
The Board of Directors oversees an enterprise-wide approach to
risk management, designed to support the achievement of Company
objectives, improve long-term Company performance and create
shareholder value. A fundamental part of risk management is
understanding the risks the Company faces and what steps
management is taking to manage those risks, but also
understanding what level of risk is appropriate for the Company.
The involvement of the full Board of Directors in setting the
Companys business strategy and objectives is integral to
the Boards assessment of the Companys risk and also
a determination of what constitutes an appropriate level of risk
for the Company. The full Board of Directors conducts an annual
risk
92
assessment of the Companys financial risk,
legal/compliance risk and operational/strategic risk and
addresses individual risk issues throughout the year as
necessary.
While the Board of Directors has the ultimate oversight
responsibility for the risk management process, the Board
delegates responsibility for certain aspects of risk management
to the Audit Committee. Per its charter, the Audit Committee
focuses on key financial risks and related controls and
processes and discusses with management the Companys major
financial reporting exposures and the steps management has taken
to monitor and control such exposures.
The Board believes its leadership structure enhances overall
risk oversight. While the Board requires risk assessments from
management, the combination of Board member experience,
diversity of perspectives, continuing education and independence
of governance processes provide an effective basis for testing,
overseeing and supplementing management assessments.
Consideration
of Director Nominees by Stockholders
The policy of the Nominating and Corporate Governance Committee
is to consider properly-submitted stockholder nominations for
candidates for membership on the Board of Directors as described
below.
Identifying
and Evaluating Nominees for Directors
The Nominating and Corporate Governance Committee intends to
utilize a variety of methods for identifying and evaluating
nominees for director. The Nominating and Corporate Governance
Committee will regularly assess the appropriate size of the
Board of Directors, and whether any vacancies on the Board of
Directors are expected due to retirement or otherwise. In the
event that vacancies are anticipated, or otherwise arise, the
Nominating and Corporate Governance Committee will consider
various potential candidates for director. Candidates may come
to the attention of the Nominating and Corporate Governance
Committee through current members of the Board of Directors,
professional search firms, shareholders or other persons. These
candidates are evaluated at regular or special meetings of the
Nominating and Corporate Governance Committee, and may be
considered at any point during the year. Shareholder nominations
should be addressed to: NovaStar Financial, Inc., 2114 Central
Street, Suite 600, Kansas City, MO 64108, attention
Corporate Secretary. The Nominating and Corporate Governance
Committee will consider properly submitted stockholder
nominations for candidates for the Board of Directors, following
verification of the stockholder status of persons proposing
candidates. If any materials are provided by a stockholder in
connection with the nominating of a director candidate such
material will be forwarded to the Nominating and Corporate
Governance Committee. The Nominating and Corporate Governance
Committee will also review materials provided by professional
search firms or other parties. In evaluating such nominations,
the Nominating and Corporate Governance Committee seeks to
achieve a balance of knowledge, experience and capability on the
Board of Directors.
Directors
Minimum Qualifications
The Nominating and Corporate Governance Committee considers
candidates for the Board of Directors based upon several
criteria set forth in the Companys Corporate Governance
Guidelines, including their broad-based business and
professional skills and experience, education, accounting and
financial expertise, age, diversity, reputation, civic and
community relationships, concern for the long-term interest of
stockholders, personal integrity and judgment, and knowledge and
experience in the Companys industry. The Nominating and
Corporate Governance Committee does not assign specific weights
to the criteria and no particular criterion is necessarily
applicable to all prospective nominees. When evaluating
nominees, the composition of the entire Board of Directors is
also taken into account including the need for a majority of
independent directors. In addition, the assessment of a
candidate includes consideration of the number of public boards
on which he or she serves because of the time requirements for
duties and responsibilities associated with serving on the Board
of Directors. The Nominating and Governance Committee believes
that the backgrounds and qualifications of the directors,
considered as a group, should provide a significant composite
mix of experience, knowledge and abilities that will allow the
Board to fulfill its responsibilities.
93
The Nominating and Governance Committee assesses the
effectiveness of the Corporate Governance Guidelines, including
with respect to director nominations and qualifications and
achievement of having directors with a broad range of experience
and backgrounds, through completion of the annual
self-evaluation process.
REVIEW
AND APPROVAL OF TRANSACTIONS WITH
RELATED PARTIES; RELATED PARTY TRANSACTIONS
The Company has adopted a written policy that addresses the
review, approval or ratification of any transaction,
arrangement, or relationship or series of similar transactions,
arrangements or relationships, including any indebtedness or
guarantee of indebtedness, between the Company and any related
party, in which the aggregate amount involved exceeds the lesser
of $120,000 or 1% of the average of the Companys total
assets at year end for the last two completed fiscal years.
Under the policy, a related party of the Company includes:
|
|
|
|
|
Any executive officer, or any director or nominee for election
as a director;
|
|
|
|
Any person who owns more than 5% of the Companys voting
securities;
|
|
|
|
Any immediate family member of any of the foregoing; or
|
|
|
|
Any entity in which any of the foregoing persons is employed or
is a partner or principal or in a similar position or in which
such person has a 10% beneficial ownership interest.
|
Under the policy, the Board reviews the material facts of any
related party transaction and approves it prior to its
occurrence. If advance approval is not feasible, then the Board
will either ratify transaction at its next regularly scheduled
meeting or the transaction will be rescinded. In making its
determination to approve or ratify any related party
transaction, the Board may consider such factors as (i) the
extent of the related partys interest in the transaction,
(ii) if applicable, the availability of other sources of
comparable products or services, (iii) whether the terms of
the transaction are no less favorable than terms generally
available to Company in unaffiliated transactions under like
circumstances, (iv) the benefit to the Company, and
(v) the aggregate value of the transaction.
No director may engage in any Board discussion or approval of
any related party transaction in which he or she is a related
party; but that director is required to provide the Board with
all material information reasonably requested concerning the
transaction.
In conjunction with adopting this policy, the Board reviewed and
approved any existing related party transactions.
Loan to
Mr. Anderson
Prior to the enactment of the Sarbanes-Oxley Act of 2002, the
Audit and Compensation Committees of the Board of Directors
approved a loan to Mr. Anderson in the aggregate principal
amount of $1,393,208 pursuant to a
10-year
non-recourse, non-interest bearing promissory note dated
January 1, 2001. The transaction was executed to
restructure a previously issued promissory note executed in
favor of the Company by Mr. Anderson. As of
December 31, 2009, Mr. Anderson had pledged 36,111 of
his shares of our common stock as security for the promissory
note. The note is forgiven in equal annual installments in the
aggregate amount of $139,321 over a
10-year
period so long as the executive remains employed by the Company.
In addition, the note will be forgiven in the event of death,
disability, a change in control of the Company,
termination by the Company other than for cause or
resignation by the executive for good reason as
those terms are defined in the executives employment
agreement. The balance of the note was $139,321 as of
January 1, 2009, which was the largest aggregate amount
outstanding under the notes for the fiscal year ended
December 31, 2009. As of December 31, 2010, the full
balance of the promissory note will have been forgiven by the
Company.
94
Agreements
and Transactions with the Series D Holders
On July 16, 2007, the Company entered into a Securities
Purchase Agreement (the Securities Purchase
Agreement) with Massachusetts Mutual Life Insurance
Company (MassMutual), Jefferies Capital
Partners IV L.P., Jefferies Employee Partners IV LLC,
and JCP Partners IV LLC (collectively, Jefferies
Capital Partners, and together with MassMutual, the
Investors), pursuant to which the Investors
purchased for $48,825,000.00 in cash, in the aggregate,
2,100,000 shares of the Companys Series D
Preferred Stock in a private placement not registered under the
Securities Act of 1933, as amended (the Securities
Act). MassMutual and Jefferies Capital Partners each
purchased 50% of such securities and, as a result, each holds
securities having more than 5% of the total outstanding voting
rights of the Companys securities.
In connection with the Investors purchase of the
Series D Preferred Stock, the Company and the Investors
entered into a Standby Purchase Agreement (the Standby
Purchase Agreement), pursuant to which the Investors
committed to purchase up to $101,175,000 of the Companys
9.00% Series D2 Mandatory Convertible Preferred Stock (the
Series D2 Preferred Stock) upon completion of a
planned rights offering of such shares by the Company (the
Rights Offering). The Standby Purchase Agreement
terminated prior to issuance of any Series D2 Preferred
Stock as a result of the Companys cancellation of the
planned Rights Offering.
Also in connection with the Investors purchase of the
Series D Preferred Stock, the Company and the Investors
entered into a Registration Rights and Shareholders Agreement
(the Terminating Registration Rights Agreement).
Certain rights under the Terminating Registration Rights
Agreement relate to the Series D1 Preferred Stock purchased
by the Investors under the Securities Purchase Agreement and to
any shares of Series D2 Preferred Stock into which such
Series D Preferred Stock may be converted (collectively,
the Series D Preferred Stock).
Under the Terminating Registration Rights Agreement, the
Investors can require that the Company register shares of
Series D Preferred Stock held by the Investors, shares of
the Companys common stock issuable upon conversion
thereof, shares of the Companys common stock acquired by
the Investors after the date of the Terminating Registration
Rights Agreement, and any other securities received by the
Investors on account of any such securities, subject to certain
limitations.
The Terminating Registration Rights Agreement grants the
Investors certain rights to designate up to four individuals for
election to the Companys Board of Directors, depending on
the percentage of shares owned by the Investors. In lieu of
designating members of the Board, the Investors have the right
to designate board observers who receive, subject to
certain exceptions, all materials that are provided to Board
members and who are entitled to attend, but not vote at, all
Board meetings. MassMutual and Jefferies Capital Partners have
each designated one Board observer.
The Terminating Registration Rights Agreement further provides
that so long as any Investor owns at least 25% of the shares of
Series D Preferred Stock purchased pursuant to the
Securities Purchase Agreement, the Investors have the right to
approve (1) any Change of Control (as defined in the
Terminating Registration Rights Agreement), any Liquidation
Event (as defined in the Terminating Registration Rights
Agreement), or any voluntary bankruptcy of the Company or its
subsidiaries unless, in each case, the Investors receive certain
proceeds in connection with such transactions; (2) subject
to certain exceptions, the creation, authorization, or issuance
of, or the increase in the authorized amount of, any
Series D Preferred Stock, any series of capital stock that
ranks pari passu with the Series D Preferred Stock,
any capital stock of any subsidiary of the Company, or any
obligation or security convertible into, or exercisable or
exchangeable for, such stock; (3) any amendment of any
terms of the Series D Preferred Stock; (4) any
reclassification of any authorized shares of the Companys
capital stock into Series D Preferred Stock, any securities
that rank pari passu with the Series D Preferred
Stock, or any obligation or security convertible into or
excisable for such stock; (5) except as provided in the
Terminating Registration Rights Agreement, any change in the
number of, or method of electing, any directors or any members
of any committee of the Companys Board of Directors;
(6) any transactions between the Company and any of its
affiliates, other than wholly owned subsidiaries, that are not
on an arms-length basis; and (7) the consummation of any
transactions that could reasonably be
95
expected, individually or in the aggregate, to adversely affect
the rights, privileges or preferences of the Investors, as
holders of the Companys capital stock.
The Terminating Registration Rights Agreement also provides for
certain anti-dilution adjustments and preemptive purchase
rights. In addition, upon a Change of Control, the Investors can
require that the Company redeem all or a portion of their
Series D Preferred Stock, at a price equal to the greater
of (1) the aggregate liquidation preference of the shares
or (2) an amount equal to $37.50, less all cash dividends
paid on such shares, subject to adjustment in the event of a
stock split or combination. In the event of any sale of all or
substantially all of the Companys assets or any other
Change of Control in which the Company is not the surviving
entity, each Investor is entitled to receive securities of the
acquiring entity in form and substance substantially similar to
the Series D1 Preferred Stock, to the extent it did not
elect to have its Series D Preferred Stock redeemed. In
addition, the Company must ensure that the Investors have the
right to acquire, in exchange for such replacement securities
following such Change in Control, the shares of stock,
securities or assets that would have been received by the
Investors had they converted their Series D Preferred Stock
into common stock prior to such Change in Control.
Under the Terminating Registration Rights Agreement, the
Companys Board of Directors waived certain transfer
restrictions, otherwise imposed upon the Series D Preferred
Stock held by the Investors or their respective affiliates, that
are intended to help the Company preserve the potential tax
benefits of certain net operating loss carryovers and net
unrealized built-in losses. The waiver applies to any transfer
that an Investor or the applicable affiliate thereof did not
know would result in a substantial limitation on the
Companys use of net operating loss carryovers and net
unrealized built-in losses, and to any transfer by an Investor
or any of its affiliates (1) pursuant to a registered
public offering or a sale through a broker, dealer or
market-maker pursuant to Rule 144 promulgated under the
Securities Act; (2) to affiliates of the Investor or any of
their respective affiliates; or (3) that is approved by the
Companys Board of Directors. The Board also waived, with
respect to the Investors and their respective affiliates, the
application of any other restrictions (except as may be required
by law) that may be in effect from time to time on the transfer,
sale or other disposition of shares of capital stock of the
Company that are similar in nature to the transfer restrictions
imposed on the Series D Preferred Stock.
The Securities Purchase Agreement, the Standby Purchase
Agreement, and the Terminating Registration Rights Agreement
were filed as exhibits to the Companys
Form 8-K
filed with the Securities and Exchange Commission on
July 20, 2007.
On December 10, 2010, the Company entered into an Exchange
Agreement with the Series D Holders to exchange all issued
and outstanding shares of the Series D Preferred Stock for
an aggregate of 37,162,000 newly-issued shares of Common Stock
and $1,377,000 in cash. If the Series D Exchange closes,
all of the agreements mentioned in this Agreements with
the Series D Holders subsection, and any rights and
obligations under those agreements, will be terminated, other
than the Exchange Agreement.
Under the Exchange Agreement, at the completion of the
Series C Offer, the Series D Holders collectively
shall tender to the Company all 2,100,000 shares of issued
and outstanding Series D Preferred Stock and receive an
aggregate of 37,161,600 newly-issued shares of Common Stock and
$1,377,000 in cash (the Series D Exchange). The
shares of Common Stock issued in the Series D Exchange will
be issued pursuant to an exemption from registration under
Regulation D of the Securities Act and therefore will be
restricted securities. In the Exchange Agreement the
Series D Holders have agreed to consent to and vote their
Series D Preferred Stock in favor of the proposals
described herein. The Series D Holder have also agreed to
vote the shares of Common Stock each will receive in the
Series D Exchange in favor of the Companys slate of
nominees to the board of directors at the next annual meeting of
shareholders. The Series D Holders will not be permitted to
sell or transfer (except to certain affiliates) the Common Stock
issued to each until the earlier of either (a) three years
has passed, (b) an ownership change has occurred resulting
in the loss of the Companys existing net operating losses,
(c) an ownership change is authorized by the Companys
board that will resulting in the loss of the Companys
existing net operating losses, or (d) a determination by
the Companys board that the Companys net operating
losses will not be realized in whole or in part (the
Lock-Up
Period). Upon the closing of the Series C Offer and during
the Lock-Up Period the
96
Series D Holders has the right to appoint either an
observer (without voting rights) or a board director (with
voting rights) (a Board Director) to the
Companys Board. In the event a Series D Holder elects
to appoint a representative to the Companys Board, the
Company will be required to expand the size of its Board
pursuant to the companys bylaws and appoint such Board
Director to the Companys Board. The Series D Exchange
is complete subject to certain conditions beyond the control of
the Company or the Series D Holders. One such condition is
the completion of the Series C Offer. Upon completion of
the Series C Offer and consummation of the Series D
Exchange, the Series D Holders and the Company will execute
a registration rights agreement in the form as attached to the
Exchange Agreement (Registration Rights Agreement).
The Registration Rights Agreement will obligate the Company to
register the Common Stock issued in the Series D Exchange
at the end of the
Lock-Up
Period so that such shares of Common Stock will become freely
tradable.
Agreements
and Transactions with the Series C Directors
Messrs. Amster and Mr. Igdaloff serve on the board of
directors of the Company. Mr. Amster owns
172,366 shares of Series C Preferred Stock and is the
trustee of two trusts which own 44,600 shares of
Series C Preferred Stock, collectively. Mr. Igdaloff
owns 207,649 shares of Series C Preferred Stock and as
a registered investment advisor he controls an additional
100,125. Messrs. Amster and Igdaloff will be entitled to
participate in the Series C Offer and Consent Solicitation
on the same terms as are being offered to other Series C
Holders and will vote their Series C Preferred Stock at the
special meeting.
On December 10, 2010, Messrs. Amster and Igdaloff (the
Committed Directors) entered into a voting agreement
with the Company (Voting Agreement). Under the terms
of the Voting Agreement, the Committed Directors have agreed to
be present, in person or by proxy, at each and every shareholder
meeting of the Company as part of the Series C Offer, and
to vote or consent, or cause to be voted or consented, all
shares of Series C Preferred owned or controlled directly
or indirectly by the Committed Directors in favor of any
proposal that receives the recommendation of Companys
board of directors. The Voting Agreement will end upon the
earlier of (i) mutual agreement of the Company and the
Committed Directors, (ii) June 30, 2011 or
(iii) completion of the Series C Offer. Until the
termination of the Voting Agreement, the Committed Directors
shall not (x) offer, pledge, transfer, announce the
intention to sell, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise
transfer or dispose of any shares of the Companys
securities, or (y) enter into any swap or other agreement
that transfers, in whole or in part, any of the economic
consequences of ownership of shares of the Companys issued
securities. In the Voting Agreement, the Company and the
Committed Directors have mutually agreed that following a
successful conclusion to the Series C Offer the Company
will use its reasonable best efforts to expand the
Companys board of directors by two positions and appoint
the Committed Directors to fill the newly-created positions.
Moreover, at the next annual meeting of shareholders of the
Company occurring after the completion of the Series C
Offer, the Company will use its reasonable best efforts to
nominate the Committed Directors to three-year terms as
directors of the Companys board of directors and the
Committed Directors will accept such nomination. For more
information regarding the interests of Messrs. Amster and
Igdaloff in the Series C Offer, see The Series C
Offer and Consent Solicitation Interest of Certain
Persons in the Series C Offer.
DESCRIPTION
OF SECURITIES
The following is a brief description of the material terms of
our securities that may be offered under this prospectus. This
description does not purport to be complete and is subject in
all respects to applicable Maryland law and to the provisions of
our charter and bylaws, which are filed as exhibits to the
registration statement of which this prospectus is a part, and
any applicable amendments or supplements thereto, copies of
which are on file with the Commission as described under
How to Obtain Additional Information.
General
We may offer under this prospectus shares of common stock, par
value $0.01 per share. Our charter provides that we have
authority to issue up to 50,000,000 shares of capital
stock, par value $0.01 per share.
97
Our common stock is quoted by Pink OTC Markets
inter-dealer quotation service as an OTCQB security under the
ticker symbol NOVS.
Common
Stock
Holders of our common stock are entitled to share ratably in our
assets legally available for distribution to our stockholders in
the event of our liquidation, dissolution or winding up, after
payment of or adequate provision for all of our known debts and
liabilities. These rights are subject to the preferential rights
of any other class or series of our capital stock and to the
provisions of our charter regarding restrictions on transfer of
our capital stock.
Subject to our charter restrictions on the transfer of our
capital stock, each outstanding share of common stock entitles
the holder to one vote on all matters submitted to a vote of
stockholders, including the election of directors. Except as
provided with respect to any other class or series of capital
stock, the holders of our common stock, along with the holders
of our Series D Preferred Stock, will possess the exclusive
voting power. There is no cumulative voting in the election of
directors, which means that the holders of a majority of the
outstanding shares of common stock and Series D Preferred
Stock can elect all of the directors then standing for election,
and the holders of the remaining shares will not be able to
elect any directors.
Holders of our common stock have no preference, conversion,
exchange, sinking fund or redemption rights and have no
preemptive rights to subscribe for any of our securities.
Subject to our charter restrictions on the transfer of our
capital stock, all shares of common stock will have equal
dividend, liquidation and other rights.
Holders of our common stock are entitled to receive dividends
if, as and when authorized and declared by our board of
directors out of assets legally available for the payment of
dividends. Distributions to stockholders will generally be
subject to tax as ordinary income, although a portion of the
distributions may be designated by us as capital gain or may
constitute a tax-free return of capital. We generally do not
intend to declare dividends that would result in a return of
capital for tax purposes. Annually, our transfer agent will
furnish to each of our stockholders a statement of distributions
paid during the preceding year and their characterization as
ordinary income, capital gains or return of capital.
Power to
Reclassify Shares of Our Capital Stock; Issuance of Additional
Shares
Our charter authorizes our board of directors to classify and
reclassify from time to time any unissued shares of our capital
stock into other classes or series of capital stock, including
preferred stock, and to cause the issuance of such shares. Prior
to issuance of shares of each class or series of capital stock,
our board of directors is required by Maryland law and by our
charter to set, subject to our charter restrictions on the
transfer of our capital stock, the terms, preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each
class or series. When issued, all shares of our capital stock
offered by this proxy statement/prospectus will be duly
authorized, fully paid and nonassessable.
We believe that the power to issue additional shares of common
stock or preferred stock and to classify or reclassify unissued
shares of common or preferred stock and thereafter to issue the
classified or reclassified shares provides us with increased
flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. These
actions can be taken without stockholder approval, unless
stockholder approval is required by applicable law or the rules
of any national securities exchange or automated quotation
system on which our securities may be listed or traded. Although
we have no present intention of doing so, we could issue a class
or series of capital stock that could delay, defer or prevent a
transaction or a change in control of us that might involve a
premium price for holders of common stock or otherwise be in
their best interest.
Preferred
Stock
Our charter authorizes our board of directors to classify from
time to time any unissued shares of capital stock in one or more
classes or series of preferred stock and to reclassify any
previously classified but unissued preferred stock of any class
or series, in one or more classes or series. As of the date of
this prospectus, there are two classes of preferred stock
authorized and outstanding: our 8.90% Series C
Cumulative Redeemable
98
Preferred Stock, par value $0.01 per share (the
Series C Preferred Stock), and our 9.00%
Series D1 Mandatory Convertible Preferred Stock, par value
$0.01 per share (the Series D Preferred Stock).
Series C
Preferred Stock
As of December [ ], 2010 we had
2,990,000 shares of our Series C Preferred Stock
outstanding. The Series C Preferred Stock is quoted by Pink
OTC Markets inter-dealer quotation service as an OTCQB
security under the ticker symbol NOVSP. The
following is a summary of the material terms and provisions of
our Series C Preferred Stock.
The Series C Preferred Stock, with respect to dividend and
distribution rights, ranks (a) senior to all classes or
series of our common stock and to all equity securities the
terms of which specifically provide that such equity securities
rank junior to the Series C Preferred Stock; (b) on a
parity with all equity securities issued by us other than those
referred to in clauses (a) and (c); and (c) junior to
all equity securities issued by us the terms of which
specifically provide that such equity securities rank senior to
such Series C Preferred Stock.
Upon our liquidation, dissolution or winding up, holders of
Series C Preferred Stock are entitled to receive from our
assets available for distribution an amount equal to $25.00 per
share, plus accumulated and unpaid dividends.
Holders of Series C Preferred Stock are entitled to
receive, when, as and if authorized and declared by our board of
directors out of assets legally available for the payment of
dividends, cumulative preferential cash dividends at the rate of
8.90% of the liquidation preference per annum (which is
equivalent to $2.225 per share). Dividends on the Series C
Preferred Stock are payable quarterly in arrears, generally on
the last calendar day of each March, June, September and
December. To the extent that dividends on the Series C
Preferred Stock have not been paid, no dividends may be
authorized or paid on, and generally, we may not redeem,
purchase or otherwise acquire for consideration, equity
securities ranking junior to or on parity with the Series C
Preferred Stock, including our common stock. We have not paid
dividends on our Series C Preferred Stock since October
2007.
Holders of Series C Preferred Stock do not have any voting
rights, except as set forth below. Whenever dividends on the
Series C Preferred Stock are in arrears for six or more
quarterly periods (whether or not consecutive), the holders of
Series C Preferred Stock are be entitled, voting together
as a single class with all other series of preferred stock of
ours upon which like voting rights have been conferred and are
exercisable, to elect a total of two additional directors to our
board of directors until all dividends accumulated on the
Series C Preferred Stock and the then current dividend
period shall have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment, at
which time such voting rights shall cease and the terms of such
directors shall expire. On March 17, 2009, the Company
notified the holders of the Series C Preferred Stock that
the Company would not make its scheduled dividend payment on the
Series C Preferred Stock due March 31, 2009, and as of
such date, dividends on the Series C Preferred Stock would
be in arrears for six or more quarters. Thus, the Series C
Holders elected two director representatives at the 2009 Annual
Meeting of the Company. In addition, so long as any shares of
Series C Preferred Stock remain outstanding, we may not,
without the affirmative vote of holders of at least two-thirds
of the outstanding Series C Preferred Stock voting
separately as a class:
|
|
|
|
|
authorize, create, or increase the authorized or issued amount
of, any class or series of equity securities ranking senior to
the outstanding Series C Preferred Stock with respect to
the payment of dividends or the distribution of assets upon our
voluntary or involuntary liquidation, dissolution or winding up;
|
|
|
|
reclassify any authorized equity securities into any such senior
equity securities;
|
|
|
|
create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase any such
senior equity securities; or
|
|
|
|
amend, alter or repeal the provisions of our charter (including
the Articles Supplementary for the Series C Preferred
Stock), whether by merger, consolidation or otherwise, so as to
materially and adversely affect any right, preference, privilege
or voting power of the Series C Preferred Stock or the
holders thereof.
|
Subject to certain limitations and requirements, on or after
January 22, 2009, we, at our option, may redeem the
Series C Preferred Stock, in whole or from time to time in
part, for cash, at a redemption price of
99
$25.00 per share, plus all accumulated and unpaid dividends to
the date of redemption, whether or not authorized and declared.
The shares of Series C Preferred Stock are not convertible
into or exchangeable for our property or securities. The
Series C Preferred Stock does not have a stated maturity
and is not subject to any sinking fund or mandatory redemption
provisions.
After the Series C Offer closes, the Series C
Preferred Stock will be cancelled. See The Series C
Offer and Consent Solicitation General.
Series D
Preferred Stock
As of [ ], 2010, we had
2,100,000 shares of our Series D Preferred Stock
outstanding. The Series D Preferred Stock is not listed on
an exchange. The following is a summary of the material terms
and provisions of our Series D Preferred Stock.
The Series D Preferred Stock is convertible into the
Companys common stock at any time at the option of holders
of Series D Preferred Stock. Moreover, The Series D
Preferred Stock will convert into shares of 9.00% Series D2
Mandatory Convertible Preferred Stock, par value $0.01 per share
(the Series D2 Preferred Stock) automatically
on the date the requisite shareholders of the Company approve
certain anti-dilution protection for the Series D Preferred
Stock and Series D2 Preferred Stock that, upon such
shareholder approval, would apply in the event the we issue
additional common stock for a price below the price at which the
Series D Preferred Stock (or the Series D2 Preferred
Stock into which the Series D Preferred Stock has been
converted, if any) may be converted into common stock.
We may elect to convert all of the Series D Preferred Stock
(or the Series D2 Preferred Stock into which the
Series D Preferred Stock has been converted, if any) into
common stock, if at such time, the Companys common stock
is publicly traded and the common stock price is greater than
200% of the then existing conversion price for 40 of 50
consecutive trading days preceding delivery of the forced
conversion notice. Adjusting for the
one-for-four
reverse stock split on July 27, 2007, the existing
conversion price of the Series D Preferred Stock is $28.00.
Given the current share price of the Companys common
stock, its unlikely that the Company can meet the share price
requirement in the near-term.
On July 16, 2016, the Series D Preferred Stock (or the
Series D2 Preferred Stock into which the Series D
Preferred Stock has been converted, if any) will automatically
convert into shares of common stock. If converted as of
[ ], 2010, each share of Series D
Preferred Stock (or the Series D2 into which the
Series D Preferred Stock has been converted, if any) would
be converted into 25/28 shares of common stock.
The Series D Preferred Stock, with respect to dividend and
distribution rights rank (a) senior to all classes or
series of our common stock and to all equity securities the
terms of which do not specifically provide that such equity
securities rank senior or pari passu with the Series D
Preferred Stock; (b) on a parity with Series C
Preferred Stock, the 9.00% Series D2 Convertible Preferred
Stock, the 9.00% Series E Mandatory Convertible Preferred
Stock and each class or series of the Company, the terms of
which specify that such class or series ranks pari passu with
the Series D Preferred Stock; and (c) junior to each
other class or series of share of the Company, the terms of
which provide that such class or series ranks senior to the
Series D Preferred Stock.
Upon our liquidation, dissolution or winding up, holders of
Series D Preferred Stock are entitled to receive from our
assets available for distribution the greater of (a) $25.00
per share, plus accumulated and unpaid dividends, or
(b) the amount such holder would have been entitled to
receive if it had exercised its right to convert all of its
Series D Preferred stock into shares of common stock.
Dividends on the Series D Preferred Stock are cumulative
and accumulate daily (on a non-compounding basis), whether or
not such dividends have been declared and whether or not there
are profits, surplus or other funds of the Company legally
available for the payment of cash dividend at the rate of 9.00%
per annum. Dividends are to be paid by the Company when, as and
if authorized by our board of directors and declared by the
Company out of funds legally available for the payment of
dividends, semi-annually on (i) January 16
100
and July 16 of each year to the holders of record at the close
of business on the preceding December 16 and June 16,
respectively, and (ii) upon a conversion of the
Series D Preferred Stock into common stock or
Series D2 Preferred Stock.
If the Company fails to pay a dividend on the Series D
Preferred Stock on any dividend payment date, whether or not
such dividends have been authorized by our board of directors
and declared by the Company or whether or not there are funds
legally available for such dividends, then the dividend rate is
automatically increased to 13% per annum, compounded quarterly,
both with respect to the unpaid dividend and all subsequently
accumulating dividends until our board of directors authorizes
and the Company pays to the holders all accumulated dividends on
the Series D Preferred Stock.
The Company remains liable to pay to the holders any accumulated
and unpaid dividends notwithstanding the conversion of the
Series D Preferred Stock into common stock or
Series D2 Preferred Stock until all accumulated dividends
on such shares have been paid in full. We cannot issue a
dividend to holders of common stock unless we also issue to each
holder of Series D Preferred Stock a dividend equal the
distribution such holder would have been entitled to receive if
such holder had exercised its right to convert all of its
Series D Preferred Stock for shares of common stock.
Our board of directors has suspended the payment of dividends on
the Companys Series D Preferred Stock. We have not
paid dividends on our Series D Preferred Stock since July
2007. As a result, dividends continue to accrue on the
Series D Preferred Stock, and a dividend rate of 13.0%,
compounded quarterly, effective October 16, 2007 with
respect to all unpaid dividends and subsequently accruing
dividends. Accrued and unpaid dividends payable related to the
Series D Preferred Stock were approximately
$19.4 million as of December 31, 2009, and
$21.8 million as of March 31, 2010.
Holders of Series D Preferred Stock are entitled to vote on
the same terms as holders of common stock, as a single class
with common stock. Each holder of Series D Preferred Stock
has the number of votes equal to the whole number of shares into
which such shares of Series D Preferred Stock may be
converted as of the record date of the vote. Additionally, the
affirmative vote of holders of at least two-thirds of the
outstanding Series D Preferred Stock voting separately as a
class is required for us to:
|
|
|
|
|
authorize, create, issue or increase (including by way of a
recapitalization) the authorized amount of, or create, issue or
authorize any obligation or security convertible into, or
exercisable or exchangeable for, or evidencing a right to
purchase any Series D Preferred Stock, parity or senior
shares except for in conjunction with certain contractual
requirements;
|
|
|
|
approve or make any amendment to the terms of the Series D
Preferred Stock or the corresponding Articles Supplementary;
|
|
|
|
amend, alter, change, repeal or waive any provision of the
charter or Bylaws of the Corporation, if such amendment,
alteration, change, repeal or waiver adversely affects the
rights of the Series D Preferred Stock;
|
|
|
|
reclassify any authorized shares of the Company into any
Series D Preferred Stock, or shares on parity or senior to
Series D Preferred Stock, or any obligation or security
convertible into or exercisable or exchangeable for, or
evidencing a right to purchase any, Series D Preferred
Stock, or shares on parity or senior to Series D Preferred
Stock;
|
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Tax
Consequences to Holders of Series C Preferred Stock
The following discussion sets forth the material United States
federal income tax consequences to holders of our Series C
Preferred Stock that participate in the Series C Offer.
This discussion is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the Code), the
final, temporary and proposed Treasury Regulations promulgated
thereunder, and administrative rulings and judicial decisions
now in effect, all of which are subject to change (possibly with
retroactive effect) or different interpretations. This
discussion does not purport to deal with all aspects of
U.S. federal income taxation that may be relevant to an
investors decision
101
to participate in the Series C Offer, nor any tax
consequences arising under the laws of any state, local or
foreign jurisdiction. This discussion is not intended to be
applicable to all categories of investors, such as: dealers in
securities or currency, financial institutions, insurance
companies, tax-exempt organizations, persons that hold the
preferred stock through an entity treated as a partnership or
other pass-through entities for United States federal
income tax purposes or as part of a straddle, hedging or
conversion transaction, or deemed sold via constructive sale, or
holders subject to the alternative minimum tax, which may be
subject to special rules.
In addition, this discussion is limited to persons who hold our
Series C Preferred Stock as a capital asset
(generally, property held for investment) within the meaning of
Section 1221 of the Code.
As used herein, the term U.S. holder means a
beneficial owner of Series C Preferred Stock, that is, for
U.S. federal income tax purposes:
|
|
|
|
|
an individual who is a citizen or resident of the United States;
|
|
|
|
a corporation, or other entity taxable as a corporation for
U.S. federal income tax purposes, created or organized in
or under the laws of the United States or any political
subdivision thereof;
|
|
|
|
a trust if it (1) is subject to the primary supervision of
a court within the United States and one or more
U.S. persons have the authority to control all substantial
decisions of the trust or (2) has a valid election in
effect under applicable U.S. Treasury Regulations to be
treated as a U.S. person; or
|
|
|
|
an estate the income of which is subject to U.S. federal
income taxation regardless of its source.
|
As used herein, the term
non-U.S. holder
means a beneficial owner of Series C Preferred Stock that
is neither a U.S. holder nor a partnership or an entity
treated as a partnership for U.S. federal income tax
purposes.
If a partnership (including any entity treated as a partnership
for U.S. federal income tax purposes) is a beneficial owner
of Series C Preferred Stock, the tax treatment of a partner
in the partnership generally will depend upon the status of the
partner and the activities of the partnership. A beneficial
owner that is a partnership and partners in such a partnership
should consult their tax advisors about the U.S. federal
income tax consequences of the Series C Offer.
This summary does not address any tax consequences under any
state, local or foreign laws or U.S. federal tax or other
laws other than those pertaining to the U.S. federal income
tax that may apply to holders.
Holders are urged to consult their own tax advisors with
respect to the application of the U.S. federal income tax
laws to their particular situations as well as any tax
consequences arising under the U.S. federal estate or gift
or other rules or under the laws of any state, local or foreign
taxing jurisdiction or under any applicable tax treaty.
This discussion is not binding on the Internal Revenue Service
(IRS). We have not sought, and will not seek, any
ruling from the IRS with respect to the statements made in the
following discussion, applicable to Holders of our Series C
Preferred Stock that participate in the Series C Offer, and
there can be no assurance that the IRS will not take a position
contrary to such statements or that any such contrary position
taken by the IRS would not be sustained by a court. There can be
no assurance and none is given that the IRS or the courts will
not adopt a position that is contrary to the statements
contained in this discussion. Accordingly, we urge you to
consult your own tax advisor to determine the specific
consequences of participating in the Series C Offer.
Consequences of Receiving Common Stock and Cash, if any, in
the Series C Offer.
General. The receipt of shares of our Common
Stock pursuant to the Stock-Only Option and Common Stock and
cash pursuant to the
Cash-and-Stock
Option, for shares of our Series C Preferred Stock, will be
treated as a recapitalization for U.S. federal income tax
purposes. Notwithstanding such treatment, as described below,
you may recognize taxable income as a result of the
Series C Offer.
Loss. As a result of the exchange being
treated as a recapitalization, a holder of Series C
Preferred Stock will not be entitled to recognize any loss
realized as a result of the Series C Offer.
Your tax basis in
102
the shares of our Common Stock you receive will be the same as
the adjusted tax basis of the shares of Series C Preferred
Stock exchanged therefor, reduced by the amount of any cash you
receive in the Series C Offer. Your holding period for the
shares of Common Stock you receive will include the holding
period during which you held the shares of our Series C
Preferred Stock.
Recognized Gain. As a result of the exchange
being treated as a recapitalization, you will recognize gain
(Recognized Gain), if any, equal to the lesser of
(i) the amount of cash, if any, you receive in the
Series C Offer; and (ii) the amount of gain
realized in the transaction. The amount of gain you
will realize will equal the amount by which
(a) the cash, if any, you receive in the Series C
Offer plus the fair market value of the shares of our Common
Stock you receive, exceeds (b) your adjusted tax basis in
your shares of Series C Preferred Stock. Your Recognized
Gain, if any, will be taxed either as a capital gain or a
dividend, as described in Dividends below. Your tax
basis in the shares of our Common Stock you receive will be the
same as the adjusted tax basis of the shares of Series C
Preferred Stock exchanged therefor, increased by your Recognized
Gain, if any, and reduced by the amount of any cash you receive
in the Series C Offer. Your holding period for the shares
of Common Stock you receive will include the holding period
during which you held the shares of our Series C Preferred
Stock. If you exchange more than one block of our
Series C Preferred Stock (that is, groups of Series C
Preferred Stock that you purchased at different times or at
different prices), you must calculate your Recognized Gain
separately on each block, and the results for each block may not
be netted in determining your overall Recognized Gain. Instead,
you will recognize gain on those shares on which gain is
realized.
Treatment of Recognized Gain. If you have
Recognized Gain as a result of your participation in the
Series C Offer, such Recognized Gain may be treated either
as dividend income or capital gain for U.S. federal income
tax purposes. The treatment of your Recognized Gain depends on a
determination of whether the cash you receive pursuant to the
exchange offer has the effect of a dividend distribution for
U.S. federal income tax purposes. In order to make this
determination, you will be treated under Section 356(a)(2)
of the Code as if (i) you had not participated in the
Series C Offer and you instead exchanged all of your shares
of Series C Preferred Stock for shares of our Common Stock
and (ii) immediately thereafter we redeemed a portion of
your shares of our Common Stock in exchange for cash (in an
amount equal to the cash you received in the Series C
Offer). The cash you receive in this deemed redemption will be
taxed as capital gain if the cash you receive (a) is
substantially disproportionate with respect to you,
(b) results in a complete redemption of your
interest in us or (c) is not essentially equivalent
to a dividend with respect to you. These tests (the
Section 302 tests) are explained more fully
below.
If this deemed redemption does not meet any of the
Section 302 tests, you will be treated as receiving a
dividend equal to the amount of your Recognized Gain, assuming
that your ratable share of our earnings and profits exceeds such
Recognized Gain. See Dividends below. If your
Recognized Gain exceeds your ratable share of our earnings and
profits, if any, such excess will first reduce your basis in the
Common Stock, and any further excess will be taxed as a capital
gain.
Dividends. The amount of gain or deemed
distribution, if any, that is characterized as a dividend to an
exchanging holder is limited to the extent we have current or
accumulated earnings and profits. The calculation of earnings
and profits for federal income tax purposes involves difficult
factual and legal determinations. We do not believe we had
accumulated earnings and profits for the taxable periods through
December 31, 2009. For these purposes current earnings and
profits means our earnings and profits for the current taxable
year which will not end until December 31, 2010. We are
unable to predict whether we will have earnings and profits for
2010. Accordingly, if there is gain that is characterized as a
dividend or an amount treated as a deemed distribution, we are
unable to determine how much, if any, will be taxable as a
dividend.
Under current law, if you are an individual holder of our
Series C Preferred Stock, and you are treated as receiving
a dividend, as described above, such dividend generally will
qualify for a special 15% tax rate on qualified dividend
income through December 31, 2010. If you are a
corporate holder of our Series C Preferred Stock, and you
are treated as receiving a dividend, as described above, you may
be permitted to deduct from gross income, subject to certain
limitations (relating to, among other things, your holding
period for your shares of our preferred stock and whether you
financed your purchase of such preferred stock with debt),
70 percent of the amount of cash you receive (the
dividend received deduction). However,
Section 1059(e) of the Code may cause
103
the entire amount of cash received by you to be treated as an
extraordinary dividend, with the result that, to the
extent you take a dividend received deduction with respect to
the cash you receive, you will be required to reduce the tax
basis of your shares of our common stock (but not below zero) by
the amount of the dividend received deduction. If the amount of
your dividend received deduction were to exceed the basis of
your remaining shares of Common Stock, the excess generally
would be taxed to you as gain on the sale of such stock.
Section 302 Tests. One of the following
tests must be satisfied in order for the receipt of cash
pursuant to the deemed redemption, as described above, to be
taxed as capital gain, rather than as a dividend distribution,
for U.S. federal income tax purposes.
|
|
|
|
|
The Receipt of Cash is Substantially Disproportionate as to
You. The receipt of cash by you will be
substantially disproportionate with respect to you if
(i) your percentage of our total outstanding voting shares
that you actually and constructively own immediately following
the exchange offer is less than 80% of the percentage of our
total outstanding voting shares that you actually and
constructively own immediately before the exchange offer and
(ii) you have a similar reduction in your percentage
ownership of our total outstanding common stock.
|
|
|
|
Your Interest in the Company is
Terminated. The receipt of cash by you will be a
complete redemption of your interest in us if, as a result of
the exchange offer, you no longer actually or constructively own
any of our outstanding shares of stock.
|
|
|
|
The Receipt of Cash by You is Not Essentially Equivalent to a
Dividend. The receipt of cash by you will not be
essentially equivalent to a dividend if the exchange offer
results in a meaningful reduction of your proportionate interest
in our stock. Whether the receipt of cash by you results in a
meaningful reduction of your proportionate interest in our stock
will depend on your particular facts and circumstances. However,
in certain circumstances, in the case of a stockholder holding a
small minority (e.g., less than 1%) of our stock, even a small
reduction may satisfy this test.
|
Constructive Ownership of Our Stock. In
determining whether any of the Section 302 tests is
satisfied, you must take into account not only shares of our
stock that you actually own, but also shares of our stock that
you constructively own within the meaning of Section 318 of
the Code. Under Section 318 of the Code, you may
constructively own shares of our stock actually owned, and in
some cases constructively owned, by certain related individuals
and certain entities in which you have an interest, or that have
an interest in you.
Contemporaneous Dispositions and Acquisitions of Our
Stock. Contemporaneous dispositions or
acquisitions of shares by you (or persons or entities related to
you) may be deemed to be part of a single integrated transaction
which will be taken into account in determining whether any of
the Section 302 tests has been satisfied with respect to
shares of our preferred stock exchanged pursuant to the exchange
offer. For example, if you sell shares of our preferred stock to
persons other than us at or about the time you participate in
the exchange offer, and these transactions are part of an
overall plan to reduce or terminate your proportionate interest
in our stock, then the sales to persons other than us may, for
U.S. federal income tax purposes, be integrated with you
exchange of shares of our preferred stock pursuant to the
exchange offer and, if integrated, should be taken into account
in determining whether you satisfy any of the Section 302
tests described above.
If you are contemplating participating in the exchange offer, we
urge you to consult your tax advisors regarding the
Section 302 tests, including the effect of the attribution
rules and the possibility that a substantially contemporaneous
sale of shares of our preferred stock to persons other than us
may assist in satisfying one or more of the Section 302
tests.
Treatment of Accrued and Unpaid Dividends on Series C
Preferred Stock. As noted above, the receipt of
shares of our Common Stock and cash pursuant to the
Series C Offer for shares of our Series C Preferred
Stock will be treated as a recapitalization for
U.S. federal income tax purposes. At the time of the
Series C Offer, our Series C Preferred Stock will have
accrued but unpaid dividends (a dividend arrearage).
U.S. Treasury regulations provide that despite the fact
that the exchange of Series C Preferred Stock for Common Stock
is a tax-free recapitalization it may nonetheless result in a
deemed distribution if (i) the recapitalization is
conducted pursuant to a plan to periodically increase a
shareholders proportionate interest in the assets or
earnings and profits of the corporation or (ii) a
shareholder owning preferred stock with
104
dividends in arrears exchanges the preferred stock for other
stock in a recapitalization and the exchange results in a
proportionate increase in the exchanging preferred
stockholders interest in the assets or earnings and
profits of the corporation. We do not believe the
recapitalization would be considered to meet (i) above. With
respect to (ii), under U.S. Treasury regulations, such
proportionate increase occurs where either the fair market value
or liquidation preference of the stock received exceeds the
issue price of the Series C Preferred Stock surrendered.
The amount of such deemed distribution is equal to the lesser of
(i) the excess of the fair market value or the liquidation
preferences of the stock received over the issue price of the
stock surrendered or (ii) the amount of the dividends in
arrears. Any such distribution is treated as a dividend
distribution to the extent of the corporations earnings
and profits and then as a tax-free return of basis. To the
extent that the amount of the deemed distribution exceeds basis,
the excess would be taxed as a capital gain. For a more detailed
explanation of the taxation of distributions, see
Consequences of Ownership of Shares of our Common
Stock, below.
Consequences
of Ownership of Shares of Our Common Stock
Distributions paid by us out of our current or accumulated
earnings and profits (as determined for U.S. federal income
tax purposes) on Common Stock received as part of the
Series C Offer will constitute a dividend and will be
includible in your income when received. For a more detailed
explanation of the taxation of dividends See
Dividends above. Distributions in excess of our
current or accumulated earnings and profits will be treated as a
return of capital to the extent of your basis in your Common
Stock and thereafter, as capital gain.
Upon a disposition of our Common Stock, you generally will
recognize capital gain or loss equal to the difference between
the amount realized and your adjusted tax basis in the Common
Stock. Such capital gain or loss generally will be long-term
capital gain or loss if you held such Common Stock for more than
one year on the date of such disposition. Long-term capital
gains of a U.S. holder that is an individual are eligible
for reduced rates of taxation. The deductibility of capital
losses is subject to limitations.
Consequences
of Receiving Solely Cash in Exchange for Series C Preferred
Stock.
Exercise of your right to petition for fair value may result in
you receiving solely cash in exchange for shares of our Series C
Preferred Stock and a termination of your interest in the
Company if, as a result of the exchange, you no longer actually
or constructively own any of our outstanding shares of stock. If
your interest in the Company is actually and constructively
terminated as a result of the exchange, your exchange will be a
redemption rather than a recapitalization. The receipt of solely
cash for Series C Preferred Stock resulting in such a
termination of your interest in the Company will be a taxable
transaction for U.S. federal income tax purposes. In general,
for U.S. federal income tax purposes, you will recognize capital
gain or loss equal to the difference between (a) the amount of
cash received in exchange for such Series C Preferred Stock, and
(b) your adjusted tax basis in such Series C Preferred Stock. If
your holding period in the Series C Preferred Stock exchanged is
greater than one year as of the date of the exchange of the
Series C Preferred Stock, the gain or loss will be long-term
capital gain or loss. The deductibility of a capital loss
recognized on the exchange is subject to limitations under the
Code. If a U.S. holder acquired different blocks of Series C
Preferred Stock at different times and different prices, such
holder must determine its adjusted tax basis and holding period
separately with respect to each block of Series C Preferred
Stock.
Backup
Withholding and Information Reporting
Generally, U.S. holders will be subject to information
reporting on the cash received in the Series C Offer unless
such U.S. holder is a corporation or other exempt
recipient. In addition, unless a U.S. holder is a
corporation or other exempt recipient, backup withholding
(currently at a rate of 28%) may apply with respect to the
amount of cash received if the U.S. holder:
|
|
|
|
|
fails to furnish a taxpayer identification number
(TIN) within a reasonable time after a request
therefore;
|
|
|
|
furnishes an incorrect TIN;
|
105
|
|
|
|
|
is notified by the IRS that it failed to report interest or
dividends properly; or
|
|
|
|
fails, under certain circumstances, to provide a certified
statement, signed under penalty of perjury, that the TIN
provided is correct and that such U.S. holder is not
subject to backup withholding.
|
Backup withholding is not an additional tax. Any amount withheld
from a payment to a U.S. holder under these rules will be
allowed as a credit against such holders U.S. federal
income tax liability and may entitle such holder to a refund,
provided that the required information is furnished to the IRS
in a timely manner.
Certain penalties apply for failure to furnish correct
information and for failure to include reportable payments in
income. Each holder should consult with such holders own
tax advisor as to such holders qualification for exemption
from backup withholding and the procedure for obtaining such
exemption. Tendering holders of Shares, that are
U.S. persons, may be able to prevent backup withholding by
completing the Substitute
Form W-9
included in the Letter of Transmittal.
Non-U.S.
Holders Participating in the Exchange Offer
The following discussion applies to you if you are a
non-U.S. holder
of our Series C Preferred Stock that participates in the
exchange offer. Special rules may apply to you and the tax
consequences of participating in the Series C Offer may be
materially different than those described below if you are a
controlled foreign corporation or a passive
foreign investment company, or you own more than five
percent of our Series C Preferred Stock, own more than five
percent of our common stock or are otherwise subject to special
treatment under the Code. If you are or may be subject to these
special rules, you are strongly encouraged to consult your own
tax advisor to determine the particular U.S. federal, state
and local and other tax consequences applicable to you of
participating in the exchange offer.
Participation in the Series C Offer. If
you are a
non-U.S. holder,
we or our withholding agent will withhold 30% of the amount of
any cash proceeds you receive in the Series C Offer in
order to satisfy certain withholding requirements, unless you
certify your
non-U.S. status
under penalties of perjury (i.e., by providing the appropriate
properly executed IRS
Form W-8),
or otherwise establishes an exemption. Backup withholding is
required only on payments that are subject to the information
reporting requirements, discussed above, and only if other
requirements are satisfied. Backup withholding is not an
additional tax. Any amount withheld from a payment to a
non-U.S. holder
under these rules will be allowed as a credit against such
holders U.S. federal income tax liability and may
entitle such holder to a refund, provided that the required
information is furnished timely to the IRS.
Disposition of Common Stock. You generally
will not be subject to U.S. federal income tax on any gain
recognized on the sale or other disposition of Common Stock
unless:
|
|
|
|
|
the gain is considered effectively connected with your conduct
of a trade or business within the United States; or
|
|
|
|
you are an individual who holds the Common Stock as a capital
asset and are present in the United States for 183 or more
days in the taxable year of the sale or other
disposition; or
|
Information Reporting and Backup Withholding
Tax. We must report annually to the IRS and to
each of you the amount of dividends paid to you and the tax
withheld with respect to those dividends, regardless of whether
withholding was required. Copies of the information returns
reporting those dividends and withholding may also be made
available to the tax authorities in the country in which you
reside under the provisions of an applicable tax treaty or other
applicable agreements.
You generally will be subject to backup withholding tax
(currently at a rate of 30%) with respect to dividends paid on
shares of our stock unless you certify your
non-U.S. status.
The payment of proceeds of a sale of Common Stock effected by or
through a U.S. office of a broker also is subject to both
backup withholding and information reporting unless you certify
your
non-U.S. status
or you otherwise establish an exemption. You generally can
satisfy the certification requirement by providing the
appropriate
Form W-8,
as applicable. In general, backup withholding and information
reporting will not apply to the payment of the proceeds of a
sale of shares of our
106
stock by or through a foreign office of a broker. If, however,
such broker is, for U.S. federal income tax purposes, a
United States person, a controlled foreign corporation, a
foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the
United States, or a foreign partnership that at any time during
its tax year either is engaged in the conduct of a trade or
business in the United States or has as partners one or more
United States persons that, in the aggregate, hold more than 50%
of the income or capital interest in the partnership, such
payments will be subject to information reporting, but not
backup withholding, unless such broker has documentary evidence
in its records that you are a
non-U.S. Holder
and certain other conditions are met or you otherwise establish
an exemption.
The amount of any backup withholding from a payment to you will
be allowed as a credit against your U.S. federal income tax
liability and may entitle you to a refund, provided that the
required information is furnished to the IRS.
Tax
Consequences to the Company
Net Operating Loss Carryforwards. Federal and
state tax laws impose restrictions on the utilization of net
operating loss and tax credit carryforwards in the event of an
ownership change for tax purposes as defined by
Section 382 of the Internal Revenue Code. Under
Section 382 of the Internal Revenue Code, if a corporation
undergoes an ownership change (generally defined as
greater than 50% increase (by value) in the stock ownership of
5-percent shareholders over a three year period), the
corporations ability to use its
pre-change
net operating loss carryforwards, recognized built-in losses and
other pre-change tax attributes to offset its post-change income
may be limited. The Company has requested and anticipates
receiving a private letter ruling from the Internal Revenue
Service to apply the hold constant principle with respect to the
Series D Exchange. Provided the Company receives the
requested ruling, we believe the Series C Offer and
Series D Exchange will not result in an ownership change,
however, future stock issuances, redemptions or transactions by
5-percent shareholders or acquisitions could result in an
ownership change.
LEGAL
MATTERS
The legality of the securities offered by this proxy
statement/consent solicitation/prospectus will be passed upon
for us by Bryan Cave LLP, Kansas City, Missouri.
EXPERTS
The financial statements as of December 31, 2009 and 2008,
and for each of the two years in the period ended
December 31, 2009, included in this Prospectus, and the
effectiveness of NovaStar Financial Inc.s internal control
over financial reporting have been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their reports appearing
herein and elsewhere in the Registration Statement. Such
financial statements are included in reliance upon the reports
of such firm given upon their authority as experts in accounting
and auditing.
107
NOVASTAR
FINANCIAL, INC.
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
Unaudited Interim Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-10
|
|
Audited Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-37
|
|
|
|
|
F-38
|
|
|
|
|
F-39
|
|
|
|
|
F-40
|
|
|
|
|
F-42
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
NovaStar Financial, Inc.
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of
NovaStar Financial, Inc. and subsidiaries (the
Company) as of December 31, 2009 and 2008, and
the related consolidated statements of operations,
shareholders deficit, and cash flows for the years then
ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2009 and 2008, and the results
of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 31, 2010 expressed an adverse
opinion on the Companys internal control over financial
reporting because of a material weakness.
/s/ DELOITTE &
TOUCHE LLP
Kansas City, Missouri
March 31, 2010 (November 18, 2010 as to the effects of
the financial statement presentation changes described in
Note 17)
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
NovaStar Financial, Inc.
Kansas City, Missouri
We have audited NovaStar Financial, Inc. and subsidiaries
(the Company) internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
that risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented or detected on a timely basis.
The following material weakness has been identified and included
in managements assessment: internal control over financial
reporting was not effective because there was a lack of
segregation of duties within the Companys accounting
department. This material weakness was considered in determining
the nature, timing, and extent of audit tests applied in our
audit of the consolidated financial statements as of and for the
year ended December 31, 2009, of the Company and this
report does not affect our report on such financial statements.
F-3
In our opinion, because of the effect of the material weakness
identified above on the achievement of the objectives of the
control criteria, the Company has not maintained effective
internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2009, of the Company and our report dated
March 31, 2010 (November 18, 2010 as to the effects of
the financial statement presentation changes described in
Note 17) expressed an unqualified opinion on those
financial statements.
/s/ DELOITTE &
TOUCHE LLP
Kansas City, Missouri
March 31, 2010
F-4
NOVASTAR
FINANCIAL, INC.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited; dollars in thousands, except share and per share
amounts)
|
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,784
|
|
|
$
|
7,104
|
|
Mortgage securities (includes CDO securities of $1,230 and $959,
respectively)
|
|
|
7,214
|
|
|
|
7,990
|
|
Notes receivable, net of allowance of $742 and $300, respectively
|
|
|
4,317
|
|
|
|
4,920
|
|
Other current assets (includes CDO other assets of $348 and
$428, respectively)
|
|
|
5,885
|
|
|
|
7,501
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
34,200
|
|
|
|
27,515
|
|
Securitization Trust Assets
|
|
|
|
|
|
|
|
|
Mortgage loans
held-in-portfolio,
net of allowance of $0 and $712,614, respectively
|
|
|
|
|
|
|
1,289,474
|
|
Accrued interest receivable
|
|
|
|
|
|
|
74,025
|
|
Real estate owned
|
|
|
|
|
|
|
64,179
|
|
|
|
|
|
|
|
|
|
|
Total securitization trust assets
|
|
|
|
|
|
|
1,427,678
|
|
Non-Current Assets
|
|
|
|
|
|
|
|
|
Fixed assets, net of depreciation
|
|
|
1,439
|
|
|
|
1,803
|
|
Goodwill
|
|
|
3,170
|
|
|
|
|
|
Other assets
|
|
|
2,329
|
|
|
|
2,495
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
6,938
|
|
|
|
4,298
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
41,138
|
|
|
$
|
1,459,491
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,360
|
|
|
$
|
1,949
|
|
Accrued expenses
|
|
|
8,172
|
|
|
|
6,801
|
|
Dividends payable
|
|
|
46,636
|
|
|
|
34,402
|
|
Other current liabilities (includes CDO debt and other
liabilities of $1,578 and $1,396, respectively)
|
|
|
3,305
|
|
|
|
2,962
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
63,473
|
|
|
|
46,114
|
|
Securitization Trust Liabilities
|
|
|
|
|
|
|
|
|
Due to servicer
|
|
|
|
|
|
|
136,855
|
|
Other securitization trust liabilities
|
|
|
|
|
|
|
3,729
|
|
Asset-backed bonds secured by mortgage loans
|
|
|
|
|
|
|
2,270,602
|
|
|
|
|
|
|
|
|
|
|
Total securitization trust liabilities
|
|
|
|
|
|
|
2,411,186
|
|
Non-Current Liabilities
|
|
|
|
|
|
|
|
|
Junior subordinated debentures
|
|
|
78,027
|
|
|
|
77,815
|
|
Other liabilities
|
|
|
2,283
|
|
|
|
928
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
80,310
|
|
|
|
78,743
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
143,783
|
|
|
|
2,536,043
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Shareholders deficit:
|
|
|
|
|
|
|
|
|
Capital stock, $0.01 par value, 50,000,000 shares
authorized:
|
|
|
|
|
|
|
|
|
Redeemable preferred stock, $25 liquidating preference per
share; 2,990,000 shares, issued and outstanding
|
|
|
30
|
|
|
|
30
|
|
Convertible participating preferred stock, $25 liquidating
preference per share; 2,100,000 shares, issued and
outstanding
|
|
|
21
|
|
|
|
21
|
|
Common stock, 9,368,053, issued and outstanding
|
|
|
94
|
|
|
|
94
|
|
Additional paid-in capital
|
|
|
787,281
|
|
|
|
786,989
|
|
Accumulated deficit
|
|
|
(894,510
|
)
|
|
|
(1,868,398
|
)
|
Accumulated other comprehensive income
|
|
|
5,677
|
|
|
|
5,111
|
|
Other
|
|
|
(17
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Total NovaStar Financial, Inc. (NFI)
shareholders deficit
|
|
|
(101,424
|
)
|
|
|
(1,076,223
|
)
|
Noncontrolling interests
|
|
|
(1,221
|
)
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
|
(102,645
|
)
|
|
|
(1,076,552
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders deficit
|
|
$
|
41,138
|
|
|
$
|
1,459,491
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-5
NOVASTAR
FINANCIAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited; dollars in thousands, except per share
amounts)
|
|
|
Income and Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee income
|
|
$
|
50,237
|
|
|
$
|
22,018
|
|
|
$
|
22,784
|
|
|
$
|
9,945
|
|
Interest income mortgage loans
|
|
|
10,848
|
|
|
|
93,933
|
|
|
|
|
|
|
|
34,793
|
|
Interest income mortgage securities
|
|
|
7,302
|
|
|
|
19,553
|
|
|
|
2,804
|
|
|
|
4,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
68,387
|
|
|
|
135,504
|
|
|
|
25,588
|
|
|
|
48,853
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
44,371
|
|
|
|
22,991
|
|
|
|
19,692
|
|
|
|
10,013
|
|
Interest expense asset-backed bonds
|
|
|
1,416
|
|
|
|
16,448
|
|
|
|
|
|
|
|
5,246
|
|
Provision for credit losses
|
|
|
17,433
|
|
|
|
211,050
|
|
|
|
|
|
|
|
42,062
|
|
Servicing fees
|
|
|
731
|
|
|
|
8,343
|
|
|
|
|
|
|
|
2,482
|
|
Premiums for mortgage loan insurance
|
|
|
308
|
|
|
|
4,908
|
|
|
|
|
|
|
|
(944
|
)
|
Selling, general and administrative expense
|
|
|
14,083
|
|
|
|
15,991
|
|
|
|
4,588
|
|
|
|
5,208
|
|
Gain on derecognition of securitization trusts
|
|
|
(993,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense
|
|
|
(704
|
)
|
|
|
13,736
|
|
|
|
(401
|
)
|
|
|
1,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(915,493
|
)
|
|
|
293,467
|
|
|
|
23,879
|
|
|
|
65,993
|
|
Other income (expense)
|
|
|
968
|
|
|
|
966
|
|
|
|
(43
|
)
|
|
|
(444
|
)
|
Interest expense on trust preferred securities
|
|
|
(823
|
)
|
|
|
(980
|
)
|
|
|
(251
|
)
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
984,025
|
|
|
|
(157,977
|
)
|
|
|
1,415
|
|
|
|
(17,899
|
)
|
Income tax (benefit) expense
|
|
|
(1,293
|
)
|
|
|
245
|
|
|
|
(1,921
|
)
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
985,318
|
|
|
|
(158,222
|
)
|
|
|
3,336
|
|
|
|
(18,015
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
(804
|
)
|
|
|
(1,174
|
)
|
|
|
(105
|
)
|
|
|
(395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to NFI
|
|
$
|
986,122
|
|
|
$
|
(157,048
|
)
|
|
$
|
3,441
|
|
|
$
|
(17,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share attributable to NFI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
86.86
|
|
|
$
|
(17.98
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(2.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
86.86
|
|
|
$
|
(17.98
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(2.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-6
NOVASTAR
FINANCIAL, INC.
CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NFI Shareholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
Participating
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
Noncontrolling
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Other
|
|
|
Interests
|
|
|
Deficit
|
|
|
|
(Unaudited; dollars in thousands)
|
|
|
Balance, January 1, 2010
|
|
$
|
30
|
|
|
$
|
21
|
|
|
$
|
94
|
|
|
$
|
786,989
|
|
|
$
|
(1,868,398
|
)
|
|
$
|
5,111
|
|
|
$
|
(70
|
)
|
|
$
|
(329
|
)
|
|
$
|
(1,076,552
|
)
|
Forgiveness of founders notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
53
|
|
Compensation recognized under stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292
|
|
Accumulating dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,234
|
)
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88
|
)
|
|
|
(88
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
986,122
|
|
|
|
|
|
|
|
|
|
|
|
(804
|
)
|
|
|
985,318
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
985,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
$
|
30
|
|
|
$
|
21
|
|
|
$
|
94
|
|
|
$
|
787,281
|
|
|
$
|
(894,510
|
)
|
|
$
|
5,677
|
|
|
$
|
(17
|
)
|
|
$
|
(1,221
|
)
|
|
$
|
(102,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-7
NOVASTAR
FINANCIAL, INC.
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited; dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
985,318
|
|
|
$
|
(158,222
|
)
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Accretion of available-for-sale and trading securities
|
|
|
(2,635
|
)
|
|
|
(21,414
|
)
|
Impairments on notes receivable
|
|
|
442
|
|
|
|
|
|
Interest capitalized on loans
held-in-portfolio
|
|
|
|
|
|
|
(1,550
|
)
|
Amortization of premiums on mortgage loans
|
|
|
430
|
|
|
|
2,774
|
|
Amortization of deferred debt issuance costs
|
|
|
538
|
|
|
|
1,026
|
|
Provision for credit losses
|
|
|
17,433
|
|
|
|
211,050
|
|
Impairments on mortgage securities available-for-sale
|
|
|
|
|
|
|
1,155
|
|
Fair value adjustments
|
|
|
(775
|
)
|
|
|
6,597
|
|
Gain on derecognition of securitization trusts
|
|
|
(993,131
|
)
|
|
|
|
|
(Gains) losses on derivative instruments
|
|
|
(26
|
)
|
|
|
4,817
|
|
Other
|
|
|
6
|
|
|
|
|
|
Forgiveness of founders notes receivable
|
|
|
53
|
|
|
|
52
|
|
Compensation recognized under stock compensation plans
|
|
|
292
|
|
|
|
532
|
|
Depreciation expense
|
|
|
546
|
|
|
|
677
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
1,300
|
|
|
|
2,450
|
|
Other assets and other liabilities
|
|
|
734
|
|
|
|
(401
|
)
|
Due to servicer
|
|
|
(5,080
|
)
|
|
|
23,458
|
|
Accounts payable and other liabilities
|
|
|
2,630
|
|
|
|
(21,558
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
8,075
|
|
|
|
51,413
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from paydowns of mortgage securities
available-for-sale
|
|
|
3,359
|
|
|
|
12,030
|
|
Proceeds from paydowns of mortgage securities trading
|
|
|
588
|
|
|
|
4,397
|
|
Proceeds from repayments of mortgage loans
held-in-portfolio
|
|
|
15,040
|
|
|
|
74,426
|
|
Proceeds from sales of assets acquired through foreclosure
|
|
|
15,154
|
|
|
|
86,425
|
|
Restricted cash, net
|
|
|
3,940
|
|
|
|
1,752
|
|
Proceeds from notes receivable
|
|
|
452
|
|
|
|
|
|
Issuance of notes receivable
|
|
|
(657
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
(188
|
)
|
|
|
(1,026
|
)
|
Proceeds from disposal of property and equipment
|
|
|
|
|
|
|
2
|
|
Acquisition of business, net of cash acquired
|
|
|
(609
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
37,079
|
|
|
|
178,008
|
|
F-8
NOVASTAR
FINANCIAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited; dollars in thousands)
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on asset-backed bonds
|
|
|
(35,341
|
)
|
|
|
(239,543
|
)
|
(Distributions to) contributions from noncontrolling interests
|
|
|
(88
|
)
|
|
|
150
|
|
Other
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(35,474
|
)
|
|
|
(239,393
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
9,680
|
|
|
|
(9,972
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
7,104
|
|
|
|
24,790
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
16,784
|
|
|
$
|
14,818
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
Ended September 30,
|
|
|
2010
|
|
2009
|
|
|
(Unaudited; dollars in thousands)
|
|
Cash paid for interest
|
|
$
|
4,183
|
|
|
$
|
27,846
|
|
Cash paid for income taxes
|
|
|
224
|
|
|
|
347
|
|
Cash received on mortgage securities
available-for-sale with no cost basis
|
|
|
4,667
|
|
|
|
1,861
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Assets acquired through foreclosure
|
|
|
6,283
|
|
|
|
99,193
|
|
Exchange of noncontrolling interests notes receivable for
contingent earnings payout
|
|
|
366
|
|
|
|
|
|
Preferred stock dividends accrued, not yet paid
|
|
|
12,234
|
|
|
|
11,361
|
|
Acquisition contingent earnings payout accrued, not yet paid
|
|
|
2,195
|
|
|
|
|
|
Transfer of assets and liabilities upon derecognition of
securitization trusts:
|
|
|
|
|
|
|
|
|
Mortgage loans
held-in-portfolio,
net of allowance
|
|
|
1,250,287
|
|
|
|
|
|
Accrued interest receivable
|
|
|
72,725
|
|
|
|
|
|
Real estate owned
|
|
|
55,309
|
|
|
|
|
|
Asset-backed bonds secured by mortgage loans
|
|
|
2,235,633
|
|
|
|
|
|
Due to servicer
|
|
|
131,772
|
|
|
|
|
|
Other liabilities
|
|
|
4,047
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-9
NOVASTAR
FINANCIAL, INC.
As of
and for the period ended September 30, 2010
(Unaudited)
|
|
Note 1.
|
Financial
Statement Presentation
|
Description of Operations NovaStar Financial,
Inc. and its subsidiaries (NFI or the
Company) own 88% of StreetLinks National Appraisal
Services LLC (StreetLinks), a national residential
appraisal and mortgage real estate valuation management services
company. StreetLinks charges a fee for services which is
collected from lenders and borrowers. The majority of
StreetLinks business is generated from the management of the
appraisal process for its customers. Most of the fee is passed
through to an independent residential appraiser. StreetLinks
retains a portion of the fee to cover its costs of managing the
process of fulfilling the appraisal order and performing a
quality control review of all appraisals. StreetLinks also
provides other real estate valuation management services, such
as field reviews and value validation.
The Company also owns 70% of Advent Financial Services LLC
(Advent), a
start-up
business which provides access to tailored banking accounts,
small dollar banking products and related services to meet the
needs of low and moderate-income level individuals. Advent began
its operations in December 2009. Through this
start-up
period, management is evaluating the Advent business model to
determine its long-term viability.
Prior to changes in its business in 2007, the Company
originated, purchased, securitized, sold, invested in and
serviced residential nonconforming mortgage loans and
mortgage-backed securities. The Company retained, through its
mortgage securities investment portfolio, significant interests
in the nonconforming loans it originated and purchased, and
through its servicing platform, serviced all of the loans in
which it retained interests. The Company continues to hold
nonconforming residential mortgage securities.
During January of 2010, certain events occurred that required
the Company to reconsider the accounting for three consolidated
loan trusts NHEL
2006-1, NHEL
2006-MTA1 and NHEL
2007-1. Upon
reconsideration, the Company determined that all requirements
for derecognition were met under applicable accounting
guidelines at the time of the reconsideration event. As a
result, the Company derecognized the assets and liabilities of
the trusts on January 25, 2010 and recorded a gain during
the nine months ended September 30, 2010 of
$993.1 million. These transactions are discussed in greater
detail in Note 3 to the condensed consolidated financial
statements. The Companys collateralized debt obligation
(CDO) is the only trust that is consolidated in the
financial statements as of September 30, 2010.
Financial Statement Presentation The
Companys condensed consolidated financial statements have
been prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP). The
preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements
and the reported amounts of income and expense during the
period. The Company uses estimates and judgments in establishing
the fair value of its mortgage securities, notes receivable,
goodwill, CDO debt and in estimating appropriate accrual rates
on mortgage securities available-for-sale. While the
condensed consolidated financial statements and footnotes
reflect the best estimates and judgments of management at the
time, actual results could differ significantly from those
estimates.
The condensed consolidated financial statements of the Company
include the accounts of all wholly-owned and majority-owned
subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation. Interim results are not necessarily
indicative of results for a full year.
Historically, the Company has prepared its Condensed
Consolidated Balance Sheets on an unclassified basis because the
operating cycle of its nonconforming mortgage operations
exceeded one year. As a result of the derecognition and changes
in the Companys business, the assets and liabilities are
now presented on a classified basis for all periods presented
except for the assets and liabilities of the securitization
trusts which continue to be presented on an unclassified basis.
Certain line items on the Condensed Consolidated Statement of
Operations have been reclassified to better present the
Companys current operating businesses.
F-10
The Companys condensed consolidated financial statements
as of September 30, 2010 and for the nine and three months
ended September 30, 2010 and 2009 are unaudited. In the
opinion of management, all necessary adjustments have been made,
which were of a normal and recurring nature, for a fair
presentation of the condensed consolidated financial statements.
The Companys condensed consolidated financial statements
should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations
and the consolidated financial statements of the Company and the
notes thereto included in the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009.
Business Plan As discussed above, the Company
acquired a majority interest in StreetLinks, an appraisal and
real estate valuation management services company during the
third quarter of 2008 and increased its ownership percentage in
the fourth quarter of 2009. In addition, the Company acquired a
majority interest in Advent, a financial services company
offering low cost banking products and services, in April 2009.
Management continues to grow and develop these operating
entities. Additionally, the Company will continue to focus on
minimizing expenses, preserving liquidity, and exploring
additional investments in operating companies.
StreetLinks and the residual mortgage securities are currently
the Companys significant sources of cash flows. The
Company expects the cash flows from the mortgage securities to
decrease going forward as the underlying mortgage loans are
repaid, and could be significantly less than recent experience
if interest rate increases exceed the current assumptions. The
Company expects the cash flows from StreetLinks to continue to
increase due to a larger customer base and operating
efficiencies.
Liquidity The Company had $16.8 million
in cash and cash equivalents as of September 30, 2010,
which was an increase of $9.7 million from
December 31, 2009. In addition to the Companys
operating expenses, the Company has quarterly interest payments
due on its junior subordinated debt. The Companys current
projections indicate sufficient available cash and cash flows
from StreetLinks and its mortgage securities to meet these
payment needs.
The Company continues its strategy of growing and developing
StreetLinks and significantly increasing its appraisal volume.
For the nine and three months ended September 30, 2010,
StreetLinks had revenues of $50.2 million and
$22.8 million, respectively, as compared to
$22.0 million and $9.9 million in the same periods in
2009, respectively. StreetLinks incurred significant
start-up
expenses to develop its infrastructure in 2009, which have not
been incurred during 2010.
Subsequent to September 30, 2010, the Company purchased
Corvisa LLC for $1.5 million plus contingent consideration,
see Note 16 to the condensed consolidated financial
statements for additional details.
As of September 30, 2010, the Company had a working capital
deficiency of $29.3 million. This was mainly attributable
to dividends payable of $46.6 million being classified as a
current liability, although the Company does not expect to pay
the dividends.
During 2009, the Company used significant amounts of cash to pay
for costs related to our legacy mortgage lending and servicing
operations, for current administrative costs and to invest in
StreetLinks and Advent. The Company continues to evaluate the
Advent business model during 2010.
The Companys condensed consolidated financial statements
have been prepared on a going concern basis of accounting which
contemplates continuity of operations, realization of assets,
liabilities and commitments in the normal course of business.
The Company has experienced significant losses over the past
several years and has a significant deficit in
shareholders equity. Notwithstanding these negative
factors, management believes that its current operations and its
cash availability are sufficient for the Company to discharge
its liabilities and meet its commitments in the normal course of
business.
|
|
Note 2.
|
New
Accounting Pronouncements
|
In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 166, Accounting for the
Transfers of Financial Assets, an Amendment of
F-11
FASB Statement No. 140; this statement was codified
in December 2009 as Accounting Standards Codification
(ASC) 860. This guidance is effective for financial
asset transfers beginning on January 1, 2010 and will be
used to determine whether the transfer is accounted for as a
sale under GAAP or as a secured borrowing. In addition, also in
June 2009, the FASB issued SFAS No. 167, Amendments
to FASB Interpretation No. 46
®;
this statement was also codified in December 2009 as ASC 810 and
governs the consolidation of variable interest entities. The
consolidation guidance became effective for all variable
interest entities (each a VIE) the Company held as
of January 1, 2010. As part of the Companys adoption
of the amended consolidation guidance, it was required to
reconsider the Companys previous consolidation conclusions
pertaining to the Companys variable interests in VIEs,
including: (i) whether an entity is a VIE; and
(ii) whether the Company is the primary beneficiary. Based
on the Companys assessment of its involvement in VIEs at
January 1, 2010, in accordance with the amended
consolidation guidance, the Company determined that it is not
the primary beneficiary of any mortgage loan securitization
entities in which it held a variable interest, as the Company
does not have the power to direct the activities that most
significantly impact the economic performance of these entities.
The adoption of the amended consolidation guidance did not
result in the Company consolidating or deconsolidating any VIEs
for which it has involvement. It should be noted, however, that
the new guidance also required the Company to reassess these
conclusions, based upon changes in the facts and circumstances
pertaining to the Companys VIEs, on an ongoing basis;
thus, the Companys assessments may therefore change and
could result in a material impact to the Companys
financial statements during subsequent reporting periods. The
Company re-evaluated the NHEL
2006-1, NHEL
2006-MTA1, and NHEL
2007-1
securitization transactions and determined that based on the
occurrence of certain events during January 2010, the
application of the amended Transfers and Servicing guidance
resulted in the Company reflecting as sales of financial assets
and extinguishment of liabilities the assets and liabilities of
the securitization trusts during the nine month period ended
September 30, 2010. As a result, the Company derecognized
the assets and liabilities of the NHEL
2006-1, NHEL
2006-MTA1, and NHEL
2007-1
securitization trusts and recorded a gain during the nine months
ended September 30, 2010. See Note 3 to the condensed
consolidated financial statements for further details.
In March 2010, the FASB issued new guidance clarifying the scope
exemption for embedded credit-derivative features. Embedded
credit-derivative features related only to the transfer of
credit risk in the form of subordination of one financial
instrument to another are not subject to potential bifurcation
and separate accounting. However, other embedded
credit-derivative features are required to be analyzed to
determine whether they must be accounted for separately.
Additional guidance on whether embedded credit-derivative
features in financial instruments issued by structures such as
CDOs and synthetic CDOs are subject to bifurcation and separate
accounting. To simplify compliance with this new guidance, an
entity may make a one-time election to apply the fair value
option to any investment in a beneficial interest in securitized
financial assets, regardless of whether such investments contain
embedded derivative features. This new guidance is effective as
of July 1, 2010, with early adoption being permitted at
April 1, 2010. The adoption of this guidance did not have a
significant impact on our results of operations or financial
position.
In July 2010, the FASB issued Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit
Losses. The guidance will significantly expand the
disclosures that companies must make about the credit quality of
financing receivables and the allowance for credit losses. The
disclosures as of the end of the reporting period are effective
for the Companys interim and annual periods ending on or
after December 15, 2010. The disclosures about activity
that occurs during a reporting period are effective for the
Companys interim and annual periods beginning on or after
December 15, 2010. The objectives of the enhanced
disclosures are to provide financial statement users with
additional information about the nature of credit risks inherent
in the Companys financing receivables, how credit risk is
analyzed and assessed when determining the allowance for credit
losses, and the reasons for the change in the allowance for
credit losses. The adoption of this guidance requires enhanced
disclosures and is not expected to have a significant effect on
the Companys financial statements.
F-12
|
|
Note 3.
|
Derecognition
of Securitization Trusts
|
During January of 2010, certain events occurred that required
the Company to reconsider the accounting for three consolidated
loan trusts: NHEL
2006-1, NHEL
2006-MTA1 and NHEL
2007-1.
During the first quarter of 2010, the Company attempted to sell
the mezzanine-level bonds the Company owns from the NHEL
2006-1 and
NHEL 2006-MTA1 securitization trusts. No bids were received for
the bonds, which prompted a reconsideration of the
Companys conclusion with respect to the trusts
consolidation. As all requirements for derecognition have been
met under applicable accounting guidelines, the Company
derecognized the assets and liabilities of the NHEL
2006-1 and
NHEL 2006-MTA1 trusts during the nine month period ended
September 30, 2010.
During January of 2010, the final derivative of the NHEL
2007-1 loan
securitization trust expired. The expiration of this derivative
is a reconsideration event. As all requirements for
derecognition have been met under applicable accounting
guidelines, the Company derecognized the assets and liabilities
of the
2007-1
securitization trust during the nine month period ended
September 30, 2010.
The securitized loans in these derecognized trusts have suffered
substantial losses and through the date of derecognition the
Company recorded significant allowances for these losses. These
losses have created large accumulated deficits for the trust
balance sheets. Upon derecognition, all assets, liabilities and
accumulated deficits were removed from our condensed
consolidated financial statements. A gain of $993.1 million
was recognized upon derecognition, representing the net
accumulated deficits in these trusts.
The assets and liabilities of the securitization trusts and the
resulting gain recognized upon derecognition consisted of the
following at the time of the reconsideration event (dollars in
thousands):
|
|
|
|
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
Mortgage loans
held-in-portfolio
|
|
$
|
1,953,188
|
|
Allowance for loan losses
|
|
|
(702,901
|
)
|
Accrued interest receivable
|
|
|
72,725
|
|
Real estate owned
|
|
|
55,309
|
|
|
|
|
|
|
Total assets
|
|
|
1,378,321
|
|
Liabilities:
|
|
|
|
|
Asset-backed bonds secured by mortgage loans
|
|
|
2,235,633
|
|
Due to servicer
|
|
|
131,772
|
|
Other liabilities
|
|
|
4,047
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,371,452
|
|
Gain on derecognition of securitization trusts
|
|
$
|
993,131
|
|
|
|
|
|
|
F-13
|
|
Note 4.
|
Mortgage
Loans
Held-in-Portfolio
|
Mortgage loans
held-in-portfolio,
all of which were secured by residential properties, consisted
of the following as of December 31, 2009 (dollars in
thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Mortgage loans
held-in-portfolio(A):
|
|
|
|
|
Outstanding principal
|
|
$
|
1,985,483
|
|
Net unamortized deferred origination costs
|
|
|
16,605
|
|
|
|
|
|
|
Amortized cost
|
|
|
2,002,088
|
|
Allowance for credit losses
|
|
|
(712,614
|
)
|
|
|
|
|
|
Mortgage loans
held-in-portfolio
|
|
$
|
1,289,474
|
|
|
|
|
|
|
Weighted average coupon
|
|
|
6.94
|
%
|
|
|
|
|
|
|
|
|
(A) |
|
The Company did not hold any mortgage loans-held-in-portfolio as
of September 30, 2010 due to the derecognition of the
securitization trusts, see Note 3 to the condensed
consolidated financial statements for further details. |
As of December 31, 2009, mortgage loans
held-in-portfolio
consisted of loans that the Company had securitized in
structures that were accounted for as financings. These
securitizations were structured legally as sales, but for
accounting purposes were treated as financings under the
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities guidance. See below for
details of the Companys securitization transactions that
were structured as financings.
At inception the NHEL
2006-1 and
NHEL 2006-MTA1 securitizations did not meet the qualifying
special purpose entity criteria necessary for derecognition
because after the loans were securitized the securitization
trusts were able to acquire derivatives relating to beneficial
interests retained by the Company; additionally, the Company had
the unilateral ability to repurchase a limited number of loans
back from the trusts. The NHEL
2007-1
securitization did not meet the qualifying special purpose
entity criteria necessary for derecognition because of the
excessive benefit the Company received at inception from the
derivative instruments delivered into the trust to counteract
interest rate risk.
Accordingly, the loans in these securitizations remained on the
balance sheet as Mortgage loans
held-in-portfolio
through January 2010. Given this treatment, retained interests
were not created, and securitization bond financing were
reflected on the balance sheet as a liability. The Company
recorded interest income on loans
held-in-portfolio
and interest expense on the bonds issued in the securitizations.
Deferred debt issuance costs and discounts related to the bonds
were amortized on a level yield basis over the estimated life of
the bonds.
Activity in the allowance for credit losses on mortgage
loans
held-in-portfolio
is as follows for the nine and three months ended
September 30, 2010 and 2009, respectively (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning of period
|
|
$
|
712,614
|
|
|
$
|
776,001
|
|
|
$
|
|
|
|
$
|
810,274
|
|
Provision for credit losses
|
|
|
17,433
|
|
|
|
211,050
|
|
|
|
|
|
|
|
42,062
|
|
Charge-offs, net of recoveries
|
|
|
(27,146
|
)
|
|
|
(240,349
|
)
|
|
|
|
|
|
|
(105,634
|
)
|
Derecognition of the securitization trusts
|
|
|
(702,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
|
|
|
$
|
746,702
|
|
|
$
|
|
|
|
$
|
746,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
In accordance with new consolidation guidance effective
January 1, 2010, the Company is deemed to have a
controlling financial interest and is the primary beneficiary of
a VIE if it has both the power to direct the activities of the
VIE that most significantly impact the VIEs economic
performance and an obligation to absorb losses or the right to
receive benefits that could potentially be significant to the
VIE. The entity that has a controlling financial interest in a
VIE is referred to as the primary beneficiary and consolidates
the VIE. As a result of this change in accounting, the Company
was required to re-assess all VIEs as of January 1, 2010 to
determine if they should be consolidated. Based on the
Companys assessment of its involvement in VIEs at
January 1, 2010, in accordance with the amended
consolidation guidance, the Company determined that it is not
the primary beneficiary of any mortgage loan securitization
entities in which it held a variable interest, as the Company
does not have the power to direct the activities that most
significantly impact the economic performance of these entities.
The adoption of the amended consolidation guidance did not
result in the Company consolidating or deconsolidating any VIEs
for which it has involvement. It should be noted, however, that
the new guidance also required the Company to reassess these
conclusions, based upon changes in the facts and circumstances
pertaining to the Companys VIEs, on an ongoing basis;
thus, the Companys assessments may therefore change and
could result in a material impact to the Companys
financial statements during subsequent reporting periods.
Certain tables below present the assets and liabilities of
consolidated and unconsolidated VIEs that the Company has a
variable interest in the VIE. For consolidated VIEs, these
amounts are net of intercompany balances. The tables also
present the Companys exposure to loss resulting from its
involvement with consolidated VIEs and unconsolidated VIEs in
which the Company holds a variable interest as of
September 30, 2010 and December 31, 2009. The
Companys maximum exposure to loss is based on the unlikely
event that all of the assets in the VIEs become worthless.
The Companys only continued involvement, relating to these
transactions, is retaining interests in the VIEs which are
included in the mortgage securities line item in the condensed
consolidated financial statements.
For the purposes of this disclosure, transactions with VIEs are
categorized as follows:
Securitization transactions. Securitization
transactions include transactions where the Company transferred
mortgage loans and accounted for the transfer as a sale and thus
are not consolidated. This category is reflected in the
securitization section of this Note.
Mortgage Loan VIEs. The Company initially
consolidated securitization transactions that are structured
legally as sales, but for accounting purposes are treated as
financings as defined by the previous FASB guidance. The NHEL
2006-1 and
NHEL 2006-MTA1 securitizations at inception did not meet the
criteria necessary for derecognition under the previous FASB
guidance and related interpretations because after the loans
were securitized the securitization trusts were able to acquire
derivatives relating to beneficial interests retained by the
Company; additionally, the Company had the unilateral ability to
repurchase a limited number of loans back from the trust. These
provisions were removed effective September 30, 2008. Since
the removal of these provisions did not substantively change the
transactions economics, the original accounting conclusion
remained the same. During January 2010, certain events occurred
that required the Company to reconsider the accounting for these
mortgage loan VIEs. Upon reconsideration, the Company determined
that all requirements for derecognition were met under
applicable accounting guidelines at the time of the
reconsideration event. As a result, the Company derecognized the
assets and liabilities of the trusts and these mortgage loan
VIEs are now considered securitization transactions. See
Note 3 to the condensed consolidated financial statements
for further details.
At inception, the NHEL
2007-1
securitization did not meet the qualifying special purpose
entity criteria necessary for derecognition under the previous
FASB guidance and related interpretations because of the
excessive benefit the Company received at inception from the
derivative instruments delivered into the trust to counteract
interest rate risk. During January 2010, certain events occurred
that required the Company to reconsider the accounting for this
mortgage loan VIE. Upon reconsideration, the Company determined
that all requirements for derecognition were met under
applicable accounting guidelines at the time of the
reconsideration event. As a result, the Company derecognized the
assets and liabilities of the trust and this mortgage loan VIE
is now considered a securitization transaction. See Note 3
to the condensed consolidated financial statements for further
details.
F-15
These transactions must be re-assessed during each quarterly
period and could require reconsolidation and related disclosures
in future periods. The Company has no control over the mortgage
loans held by these VIEs due to their legal structure. The
beneficial interest holders in these trusts have no recourse to
the general credit of the Company; rather, their investments are
paid exclusively from the assets in the trust.
Collateralized Debt Obligations. In the first
quarter of 2007, the Company closed a CDO. The collateral for
this transaction consisted of subordinated securities which the
Company retained from its securitization transactions as well as
subordinated securities purchased from other issuers. The CDO
was structured legally as a sale, but for accounting purposes
was accounted for as a financing as it did not meet the
qualifying special purpose entity criteria under the applicable
accounting guidance. Accordingly, the securities remain on the
Companys condensed consolidated balance sheet, retained
interests were not created, and securitization bond financing
replaced the short-term debt used to finance the securities. In
accordance with Consolidation accounting guidance, the Company
is required to re-assess during each quarterly period and the
Company determined that it should continue to be consolidated.
Variable
Interest Entities
The Consolidation accounting guidance requires an entity to
consolidate a VIE if that entity is considered the primary
beneficiary. VIEs are required to be reassessed for
consolidation quarterly and when reconsideration events occur.
See Mortgage Loan VIEs above for details relating to
current period reconsideration events.
The table below provides the disclosure information required for
VIEs that are consolidated by the Company (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets After Intercompany
|
|
Liabilities After
|
|
|
|
|
|
|
Eliminations
|
|
Intercompany
|
|
Recourse to the
|
Consolidated VIEs
|
|
Total Assets
|
|
Unrestricted
|
|
Restricted(A)
|
|
Eliminations
|
|
Company(B)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDO(C)
|
|
$
|
1,230
|
|
|
$
|
|
|
|
$
|
1,230
|
|
|
$
|
1,230
|
|
|
$
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loan VIEs(D)
|
|
$
|
1,435,671
|
|
|
$
|
|
|
|
$
|
1,427,501
|
|
|
$
|
2,453,181
|
|
|
$
|
|
|
CDO(C)
|
|
|
1,389
|
|
|
|
|
|
|
|
1,387
|
|
|
|
1,387
|
|
|
|
|
|
|
|
|
(A) |
|
Assets are considered restricted when they cannot be freely
pledged or sold by the Company. |
|
(B) |
|
This column reflects the extent, if any, to which investors have
recourse to the Company beyond the assets held by the VIE and
assumes a total loss of the assets held by the VIE.l |
|
(C) |
|
For the CDO, assets are primarily recorded in Mortgage
securities and liabilities are recorded in Other
current liabilities. |
|
(D) |
|
For Mortgage Loan VIEs, assets are primarily recorded in
Mortgage loans
held-in-portfolio.
Liabilities are primarily recorded in Asset-backed bonds
secured by mortgage assets. |
Securitization
Transactions
Prior to changes in its business in 2007, the Company
securitized residential nonconforming mortgage loans. The
Companys involvement with VIEs that are used to securitize
financial assets consists of holding securities issued by VIEs.
The following table relates to securitizations where the Company
is the retained interest holder of assets issued by the entity
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets on
|
|
|
|
Maximum
|
|
Year to
|
|
|
|
|
Size/Principal
|
|
Balance
|
|
Liabilities on
|
|
Exposure to
|
|
Date Loss
|
|
Year to Date
|
|
|
Outstanding(A)
|
|
Sheet(B)
|
|
Balance Sheet
|
|
Loss(C)
|
|
on Sale
|
|
Cash Flows
|
|
September 30, 2010
|
|
$
|
7,434,265
|
(D)
|
|
$
|
5,984
|
|
|
$
|
|
|
|
$
|
5,984
|
|
|
$
|
|
|
|
$
|
7,683
|
|
December 31, 2009
|
|
|
6,570,308
|
|
|
|
7,031
|
|
|
$
|
|
|
|
|
7,031
|
|
|
$
|
|
|
|
|
13,401
|
(E)
|
F-16
|
|
|
(A) |
|
Size/Principal Outstanding reflects the estimated principal of
the underlying assets held by the VIE. |
|
(B) |
|
Assets on balance sheet are securities issued by the entity
which are recorded in Mortgage securities. |
|
(C) |
|
The maximum exposure to loss assumes a total loss on the
retained interests held by the Company. |
|
(D) |
|
Due to derecognition of securitization trusts during the nine
months ended September 30, 2010, size/principal outstanding
includes NHEL
2006-1, NHEL
2006-MTA1 and NHEL
2007-1 as of
September 30, 2010. |
|
(E) |
|
For the nine months ended September 30, 2009. |
Retained interests are recorded in the Condensed Consolidated
Balance Sheet at fair value within mortgage securities. The
Company estimates fair value based on the present value of
expected future cash flows using managements best
estimates of credit losses, prepayment rates, forward yield
curves, and discount rates, commensurate with the risks
involved. Retained interests are either held as trading
securities, with changes in fair value recorded in the Condensed
Consolidated Statements of Operations, or as available-for-sale
securities, with changes in fair value included in accumulated
other comprehensive income.
Retained interests are reviewed periodically for impairment.
Retained interests in securitized assets held as
available-for-sale and trading were approximately
$6.0 million and $6.9 million at September 30,
2010 and December 31, 2009, respectively.
The following table presents information on retained interests
held by the Company as of September 30, 2010 arising from
the Companys residential mortgage-related securitization
transactions. The pre-tax sensitivities of the current fair
value of the retained interests to immediate 10% and 25% adverse
changes in assumptions and parameters are also shown (dollars in
thousands):
|
|
|
|
|
Carrying amount/fair value of residual interests
|
|
$
|
5,984
|
|
Weighted average life (in years)
|
|
|
3.14
|
|
Weighted average prepayment speed assumption (CPR) (percent)
|
|
|
17.2
|
|
Fair value after a 10% increase in prepayment speed
|
|
$
|
5,353
|
|
Fair value after a 25% increase in prepayment speed
|
|
$
|
4,579
|
|
Weighted average expected annual credit losses (percent of
current collateral balance)
|
|
|
25.8
|
|
Fair value after a 10% increase in annual credit losses
|
|
$
|
5,124
|
|
Fair value after a 25% increase in annual credit losses
|
|
$
|
4,669
|
|
Weighted average residual cash flows discount rate (percent)
|
|
|
25.0
|
%
|
Fair value after a 500 basis point increase in discount rate
|
|
$
|
5,796
|
|
Fair value after a 1000 basis point increase in discount
rate
|
|
$
|
5,618
|
|
Market interest rates:
|
|
|
|
|
Fair value after a 100 basis point increase in market rates
|
|
$
|
4,021
|
|
Fair value after a 200 basis point increase in market rates
|
|
$
|
2,519
|
|
The preceding sensitivity analysis is hypothetical and should be
used with caution. In particular, the effect of a variation in a
particular assumption on the fair value of the retained interest
is calculated independent of changes in any other assumption; in
practice, changes in one factor may result in changes in
another, which might magnify or counteract the sensitivities.
Further, changes in fair value based on a 10% or 25% variation
in an assumption or parameter generally cannot be extrapolated
because the relationship of the change in the assumption to the
change in fair value may not be linear.
F-17
|
|
Note 5.
|
Mortgage
Securities
|
Mortgage securities consist of securities classified as
available-for-sale and trading as of September 30, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Mortgage securities available-for-sale
|
|
$
|
5,984
|
|
|
$
|
6,903
|
|
Mortgage securities trading
|
|
|
1,230
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
Total mortgage securities
|
|
$
|
7,214
|
|
|
$
|
7,990
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, mortgage securities
available-for-sale consisted entirely of the Companys
investment in the residual securities issued by securitization
trusts sponsored by the Company, but did not include the NHEL
2006-1, NHEL
2006-MTA1, NHEL
2007-1, and
NMFT
Series 2007-2
residual securities, which were designated as trading. As of
December 31, 2009, mortgage securities
available-for-sale consisted entirely of the Companys
investment in the residual securities issued by securitization
trusts sponsored by the Company, but did not include the NMFT
Series 2007-2
residual security, which was designated as trading. Residual
securities consist of interest-only, prepayment penalty and
overcollateralization bonds. Management estimates the fair value
of the residual securities by discounting the expected future
cash flows of the collateral and bonds.
The following table presents certain information on the
Companys portfolio of mortgage securities
available-for-sale as of September 30, 2010 and
December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Estimated Fair
|
|
Average
|
|
|
Cost Basis
|
|
Gain
|
|
Value
|
|
Yield(A)
|
|
As of September 30, 2010
|
|
$
|
307
|
|
|
$
|
5,677
|
|
|
$
|
5,984
|
|
|
|
407.9
|
%
|
As of December 31, 2009
|
|
|
1,792
|
|
|
|
5,111
|
|
|
|
6,903
|
|
|
|
132.9
|
|
|
|
|
(A) |
|
The average yield is calculated from the cost basis of the
mortgage securities and does not give effect to changes in fair
value that are reflected as a component of shareholders
deficit. |
During the nine and three months ended September 30, 2009,
management concluded that the decline in value on certain
securities in the Companys mortgage securities
available-for-sale portfolio were other-than-temporary. As a
result, the Company recognized impairments on mortgage
securities available-for-sale of $1.2 million
and $0.7 million during the nine and three months ended
September 30, 2009. There were no impairments for the nine
and three months ended September 30, 2010.
Maturities of mortgage securities owned by the Company depend on
repayment characteristics and experience of the underlying
financial instruments.
As of September 30, 2010, mortgage securities
trading consisted of the NHEL
2006-1, NHEL
2006-MTA1, NHEL
2007-1, and
NMFT
Series 2007-2
residual securities and subordinated securities retained by the
Company from securitization transactions as well as subordinated
securities purchased from other issuers in the open market. As
of December 31, 2009, mortgage securities
trading consisted of the NMFT
Series 2007-2
residual security and subordinated securities retained by the
Company from securitization transactions as well as subordinated
securities purchased from other issuers in the open market.
Management estimates the fair value of the residual securities
by discounting the expected future cash flows of the collateral
and bonds. The fair value of the subordinated securities is
estimated based on quoted broker prices. Refer to Note 9
for a description of the valuation methods as of
September 30, 2010 and December 31, 2009.
F-18
The following table summarizes the Companys mortgage
securities trading as of September 30, 2010 and
December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
Average
|
|
|
|
Original Face
|
|
|
Cost Basis
|
|
|
Fair Value
|
|
|
Yield(A)
|
|
|
As of September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated securities pledged to CDO
|
|
$
|
369,507
|
|
|
$
|
80,742
|
|
|
$
|
1,230
|
|
|
|
|
|
Other subordinated securities
|
|
|
215,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
584,787
|
|
|
$
|
80,742
|
|
|
$
|
1,230
|
|
|
|
2.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
$
|
435,114
|
|
|
$
|
104,012
|
|
|
$
|
1,087
|
|
|
|
4.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Calculated from the ending fair value of the securities. |
The Company recognized a nominal amount of net trading losses
and net trading gains of $0.1 million for the nine and
three months ended September 30, 2010, respectively as
compared to net trading losses of $11.3 million and
$1.6 million for the same periods of 2009. These net
trading losses are included in the other (income) expense line
on the Companys Condensed Consolidated Statements of
Operations.
There were no trading securities pledged as collateral as of
September 30, 2010 and December 31, 2009.
Junior
Subordinated Debentures
NFIs wholly-owned subsidiary NovaStar Mortgage, Inc.
(NMI) has approximately $78.1 million in
principal amount of unsecured notes (collectively, the
Notes) outstanding to NovaStar Capital Trust I
and NovaStar Capital Trust II (collectively, the
Trusts) which secure trust preferred securities
issued by the Trusts. $50.0 million of the principal amount
matures in March 2035 and the remaining $28.1 million
matures in June 2036. NFI has guaranteed NMIs obligations
under the Notes. NMI failed to make quarterly interest payments
that were due on all payment dates in 2008 and through
April 24, 2009 on these Notes.
On April 24, 2009 (the Exchange Date), the
parties executed the necessary documents to complete an exchange
of the Notes for new preferred obligations. On the Exchange
Date, the Company paid interest due through December 31,
2008, in the aggregate amount of $5.3 million.
The new preferred obligations require quarterly distributions of
interest to the holders at a rate equal to 1.0% per annum
beginning January 1, 2009 through December 31, 2009,
subject to reset to a variable rate equal to the three-month
LIBOR plus 3.5% upon the occurrence of an Interest
Coverage Trigger. For purposes of the new preferred
obligations, an Interest Coverage Trigger occurs when the ratio
of EBITDA for any quarter ending on or after December 31,
2008 and on or prior to December 31, 2009 to the product as
of the last day of such quarter, of the stated liquidation value
of all outstanding 2009 Preferred Securities (i) multiplied
by 7.5%, (ii) multiplied by 1.5 and (iii) divided by
4, equals or exceeds 1.00 to 1.00. Beginning January 1,
2010 until the earlier of February 18, 2019 or the
occurrence of an Interest Coverage Trigger, the unpaid principal
amount of the new preferred obligations will bear interest at a
rate of 1.0% per annum and, thereafter, at a variable rate,
reset quarterly, equal to the three-month LIBOR plus 3.5% per
annum. The Company did not exceed the Interest Coverage Trigger
for the quarter ended September 30, 2010.
|
|
Note 7.
|
Commitments
and Contingencies
|
Completed
Litigation
On January 10, 2008, the City of Cleveland, Ohio filed suit
against the Company and approximately 20 other mortgage,
commercial and investment bankers alleging a public nuisance had
been created in the City of Cleveland by the operation of the
subprime mortgage industry. The case was filed in state court
and promptly removed to the United States District Court for the
Northern District of Ohio. The plaintiff sought damages for loss
of property values in the City of Cleveland and for increased
costs of providing services and
F-19
infrastructure as a result of foreclosures of subprime
mortgages. On October 8, 2008, the City of Cleveland filed
an amended complaint in federal court which did not include
claims against the Company but made similar claims against NMI,
a wholly-owned subsidiary of NFI. On November 24, 2008, the
Company filed a motion to dismiss the claims against NMI, which
motion the court granted on May 15, 2009. The City of
Cleveland filed an appeal, but on July 27, 2010, the United
States Court of Appeals for the Sixth Circuit affirmed the
decision of the District Court dismissing the case.
Pending
Litigation
The Company is a party to various legal proceedings, all of
which, except as set forth below, are of an ordinary, routine
nature for a company in NFIs business, including, but not
limited to, breach of contract claims, tort claims, and claims
for violations of federal and state consumer protection laws.
Furthermore, the Company has received indemnification and loan
repurchase demands with respect to alleged violations of
representations and warranties made in loan sale and
securitization agreements. These indemnification and repurchase
demands have been addressed without significant loss to the
Company and the number of demands has steadily decreased, but
such claims could be significant if multiple loans are involved.
Due to the uncertainty of any potential loss due to pending
litigation, the Company has not accrued a loss contingency
related to the following matters in its condensed consolidated
financial statements. Although it is not possible to predict the
outcome of any legal proceeding, in the opinion of management,
other than those proceedings described in detail below, such
proceedings and actions should not, individually, or in the
aggregate, have a material adverse effect on the Companys
financial condition and liquidity. However, a material adverse
outcome in one or more of these proceedings could have a
material adverse impact on the results of operations in a
particular quarter or fiscal year.
On May 21, 2008, a purported class action case was filed in
the Supreme Court of the State of New York, New York County, by
the New Jersey Carpenters Health Fund, on behalf of itself
and all others similarly situated. Defendants in the case
include NovaStar Mortgage Funding Corporation (NMFC)
and its individual directors, several securitization trusts
sponsored by the Company, and several unaffiliated investment
banks and credit rating agencies. The case was removed to the
United States District Court for the Southern District of New
York. On June 16, 2009, the plaintiff filed an amended
complaint. Plaintiff seeks monetary damages, alleging that the
defendants violated sections 11, 12 and 15 of the
Securities Act of 1933 by making allegedly false statements
regarding mortgage loans that served as collateral for
securities purchased by plaintiff and the purported class
members. On August 31, 2009, the Company filed a motion to
dismiss the plaintiffs claims. The Company believes it has
meritorious defenses to the case and expects to defend the case
vigorously.
On December 31, 2009, ITS Financial, LLC (ITS)
filed a complaint against Advent and the Company alleging a
breach of contract by Advent for a contract for services related
to tax refund anticipation loans and early season loans. ITS
does business as Instant Tax Service. The defendants moved the
case to the United States District Court for the Southern
District of Ohio. The complaint alleges that the Company worked
in tandem and as one entity with Advent in all material
respects. The complaint also alleges fraud in the inducement,
tortious interference by the Company with the contract, breach
of good faith and fair dealing, fraudulent and negligent
misrepresentation, and liability of the Company by piercing the
corporate veil and joint and several liability. The plaintiff
references a $3.0 million loan made by the Company to
plaintiff and seeks a judgment declaring that this loan be
subject to an offset by the plaintiffs damages. On
September 13, 2010, the Court denied the Companys
motion to transfer the case to the United States District Court
for the Western District of Missouri, and on September 29,
2010, the Company answered the complaint and made a counterclaim
against the plaintiff for plaintiffs failure to repay the
loan. The Company believes that the defendants have meritorious
defenses to this case and expects to vigorously defend the case
and pursue its counterclaim.
On July 9, 2010, Cambridge Place Investment Management,
Inc. filed a complaint in the Suffolk, Massachusetts Superior
Court against NMFC and numerous other entities seeking damages
on account of losses associated with residential mortgage-backed
securities purchased by plaintiffs assignors. The
complaint
F-20
alleges untrue statements and omissions of material facts
relating to loan underwriting and credit enhancement. The
complaint alleges a violation of Section 410 of the
Massachusetts Uniform Securities Act, (Chapter 110A of the
Massachusetts General Laws). Defendants have removed the case to
the United States District Court for the District of
Massachusetts, and plaintiff has filed a motion to remand the
case back to state court. The Company believes that it has
meritorious defenses to these claims and expects that the case
will be defended vigorously.
On or about July 16, 2010, NovaStar Mortgage, Inc. received
a Purchasers Notice of Election to Void Sale of
Securities regarding NovaStar Mortgage Funding
Trust Series 2005-4
from the Federal Home Loan Bank of Chicago. The notice was
allegedly addressed to several entities including NovaStar
Mortgage, Inc. and NMFC. The notice alleges joint and several
liability for a rescission of the purchase of a
$15.0 million security pursuant to Illinois Securities Law,
815 ILCS section 5/13(A). The notice does not specify the
factual basis for the claim. The Company will assess its defense
to the claim once the factual basis and additional information
have been provided.
|
|
Note 8.
|
Comprehensive
Income
|
The following is a rollforward of accumulated other
comprehensive income (loss) for the nine and three months ended
September 30, 2010 and 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net income (loss)
|
|
$
|
985,318
|
|
|
$
|
(158,222
|
)
|
|
$
|
3,336
|
|
|
$
|
(18,015
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain on mortgage securities
available-for-sale
|
|
|
566
|
|
|
|
(5,511
|
)
|
|
|
291
|
|
|
|
(3,446
|
)
|
Change in unrealized gain on derivative instruments used in cash
flow hedges
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Impairment on mortgage securities available-for-sale
reclassified to earnings
|
|
|
|
|
|
|
1,155
|
|
|
|
|
|
|
|
702
|
|
Net settlements of derivative instruments used in cash flow
hedges reclassified to earnings
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
566
|
|
|
|
(4,264
|
)
|
|
|
291
|
|
|
|
(2,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
985,884
|
|
|
|
(162,486
|
)
|
|
|
3,627
|
|
|
|
(20,759
|
)
|
Comprehensive loss attributable to noncontrolling interests
|
|
|
804
|
|
|
|
1,174
|
|
|
|
105
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) attributable to NFI
|
|
$
|
986,688
|
|
|
$
|
(161,312
|
)
|
|
$
|
3,732
|
|
|
$
|
(20,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Due to the valuation allowance the Company has recorded on
deferred income taxes, there is no net income tax expense
recorded against other comprehensive income (loss). |
|
|
Note 9.
|
Fair
Value Accounting
|
Fair
Value Measurements
The Fair Value Measurements guidance, defines fair value,
establishes a consistent framework for measuring fair value and
expands disclosure requirements about fair value measurements.
Fair Value Measurements, among other things, requires the
Company to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
F-21
These valuation techniques are based upon observable and
unobservable inputs. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs
reflect the Companys market assumptions. These two types
of inputs create the following fair value hierarchy:
|
|
|
|
|
Level 1 Quoted prices for identical instruments
in active markets.
|
|
|
|
Level 2 Quoted prices for similar instruments
in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant
value drivers are observable.
|
|
|
|
Level 3 Instruments whose significant value
drivers are unobservable.
|
The Company determines fair value based upon quoted broker
prices when available or through the use of alternative
approaches, such as discounting the expected cash flows using
market interest rates commensurate with the credit quality and
duration of the investment. The methods the Company uses to
determine fair value on an instrument specific basis are
detailed in the section titled Valuation Methods,
below.
The following tables present for each of the fair value
hierarchy levels, the Companys assets and liabilities
which are measured at fair value on a recurring basis as of
September 30, 2010 and December 31, 2009 (dollars in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
Fair Value at
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
September 30,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage securities trading
|
|
$
|
1,230
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,230
|
|
Mortgage securities available-for-sale
|
|
|
5,984
|
|
|
|
|
|
|
|
|
|
|
|
5,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,214
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed bonds secured by mortgage securities
|
|
$
|
1,230
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,230
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
Fair Value at
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage securities trading
|
|
$
|
1,087
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,087
|
|
Mortgage securities available-for-sale
|
|
|
6,903
|
|
|
|
|
|
|
|
|
|
|
|
6,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,990
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed bonds secured by mortgage securities
|
|
$
|
968
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
968
|
|
Derivative instruments, net
|
|
|
157
|
|
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,125
|
|
|
$
|
|
|
|
$
|
157
|
|
|
$
|
968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
The following tables provide a reconciliation of the beginning
and ending balances for the Companys mortgage
securities trading which are measured at fair value
on a recurring basis using significant unobservable inputs
(Level 3) for the nine and three months ended
September 30, 2010 and 2009 (dollars in thousands).
Activity in the Companys asset-backed bonds secured by
mortgage securities is substantially the same as the activity in
the mortgage securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
of Mortgage
|
|
|
|
Cost Basis
|
|
|
Unrealized Loss
|
|
|
Securities
|
|
|
As of December 31, 2009
|
|
$
|
104,013
|
|
|
$
|
(102,926
|
)
|
|
$
|
1,087
|
|
Increases (decreases) to mortgage securities trading
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income
|
|
|
761
|
|
|
|
|
|
|
|
761
|
|
Proceeds from paydowns of securities
|
|
|
(588
|
)
|
|
|
|
|
|
|
(588
|
)
|
Other than temporary impairments
|
|
|
(23,444
|
)
|
|
|
23,444
|
|
|
|
|
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
(30
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase to mortgage securities
trading
|
|
|
(23,271
|
)
|
|
|
23,414
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
$
|
80,742
|
|
|
$
|
(79,512
|
)
|
|
$
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
of Mortgage
|
|
|
|
Cost Basis
|
|
|
Unrealized Loss
|
|
|
Securities
|
|
|
As of December 31, 2008
|
|
$
|
433,968
|
|
|
$
|
(426,883
|
)
|
|
$
|
7,085
|
|
Increases (decreases) to mortgage securities trading
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income
|
|
|
9,992
|
|
|
|
|
|
|
|
9,992
|
|
Proceeds from paydowns of securities
|
|
|
(4,397
|
)
|
|
|
|
|
|
|
(4,397
|
)
|
Other than temporary impairments
|
|
|
(265,711
|
)
|
|
|
265,711
|
|
|
|
|
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
(11,255
|
)
|
|
|
(11,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase to mortgage securities
trading
|
|
|
(260,116
|
)
|
|
|
254,456
|
|
|
|
(5,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
$
|
173,852
|
|
|
$
|
(172,427
|
)
|
|
$
|
1,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
of Mortgage
|
|
|
|
Cost Basis
|
|
|
Unrealized Loss
|
|
|
Securities
|
|
|
As of June 30, 2010
|
|
$
|
80,677
|
|
|
$
|
(79,598
|
)
|
|
$
|
1,079
|
|
Increases (decreases) to mortgage securities trading
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income
|
|
|
257
|
|
|
|
|
|
|
|
257
|
|
Proceeds from paydowns of securities
|
|
|
(165
|
)
|
|
|
|
|
|
|
(165
|
)
|
Other than temporary impairments
|
|
|
(27
|
)
|
|
|
27
|
|
|
|
|
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
59
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase to mortgage securities trading
|
|
|
65
|
|
|
|
86
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
$
|
80,742
|
|
|
$
|
(79,512
|
)
|
|
$
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
of Mortgage
|
|
|
|
Cost Basis
|
|
|
Unrealized Loss
|
|
|
Securities
|
|
|
As of June 30, 2009
|
|
$
|
402,192
|
|
|
$
|
(399,747
|
)
|
|
$
|
2,445
|
|
Increases (decreases) to mortgage securities trading
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income
|
|
|
1,292
|
|
|
|
|
|
|
|
1,292
|
|
Proceeds from paydowns of securities
|
|
|
(762
|
)
|
|
|
|
|
|
|
(762
|
)
|
Other than temporary impairments
|
|
|
(228,870
|
)
|
|
|
228,870
|
|
|
|
|
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
(1,550
|
)
|
|
|
(1,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase to mortgage securities
trading
|
|
|
(228,340
|
)
|
|
|
227,320
|
|
|
|
(1,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
$
|
173,852
|
|
|
$
|
(172,427
|
)
|
|
$
|
1,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables provide a reconciliation of the beginning
and ending balances for the Companys mortgage
securities available-for-sale which are measured at
fair value on a recurring basis using significant unobservable
inputs (Level 3) for the nine and three months ended
September 30, 2010 and 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
of Mortgage
|
|
|
|
|
|
|
Cost Basis
|
|
|
Unrealized Gain
|
|
|
Securities
|
|
|
|
|
|
As of December 31, 2009
|
|
$
|
1,794
|
|
|
$
|
5,109
|
|
|
$
|
6,903
|
|
|
|
|
|
Increases (decreases) to mortgage securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income(A)
|
|
|
1,874
|
|
|
|
|
|
|
|
1,874
|
|
|
|
|
|
Proceeds from paydowns of securities(A)(B)
|
|
|
(3,359
|
)
|
|
|
|
|
|
|
(3,359
|
)
|
|
|
|
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
566
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase to mortgage securities
available-for-sale
|
|
|
(1,485
|
)
|
|
|
566
|
|
|
|
(919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
$
|
309
|
|
|
$
|
5,675
|
|
|
$
|
5,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Cash received on mortgage securities with no cost basis was
$4.7 million for the nine months ended September 30,
2010. |
|
(B) |
|
For mortgage securities with a remaining cost basis, the Company
reduces the cost basis by the amount of cash that is received
from the securitization trusts. In contrast, for mortgage
securities in which the cost basis has previously reached zero,
the Company records the amount of cash that is received from the
securitization trusts in interest income. |
F-24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
of Mortgage
|
|
|
|
Cost Basis
|
|
|
Unrealized Gain
|
|
|
Securities
|
|
|
As of December 31, 2008
|
|
$
|
3,771
|
|
|
$
|
9,017
|
|
|
$
|
12,788
|
|
Increases (decreases) to mortgage securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income(A)
|
|
|
11,421
|
|
|
|
|
|
|
|
11,421
|
|
Proceeds from paydowns of securities(A)(B)
|
|
|
(12,030
|
)
|
|
|
|
|
|
|
(12,030
|
)
|
Impairment on mortgage securities available-for -sale
|
|
|
(1,155
|
)
|
|
|
|
|
|
|
(1,155
|
)
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
(4,355
|
)
|
|
|
(4,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase to mortgage securities
available-for-sale
|
|
|
(1,764
|
)
|
|
|
(4,355
|
)
|
|
|
(6,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
$
|
2,007
|
|
|
$
|
4,662
|
|
|
$
|
6,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Cash received on mortgage securities with no cost basis was
$1.9 million for the nine months ended September 30,
2009. |
|
(B) |
|
For mortgage securities with a remaining cost basis, the Company
reduces the cost basis by the amount of cash that is received
from the securitization trusts. In contrast, for mortgage
securities in which the cost basis has previously reached zero,
the Company records the amount of cash that is received from the
securitization trusts in interest income. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
of Mortgage
|
|
|
|
|
|
|
Cost Basis
|
|
|
Unrealized Gain
|
|
|
Securities
|
|
|
|
|
|
As of June 30, 2010
|
|
$
|
469
|
|
|
$
|
5,384
|
|
|
$
|
5,853
|
|
|
|
|
|
Increases (decreases) to mortgage securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income(A)
|
|
|
475
|
|
|
|
|
|
|
|
475
|
|
|
|
|
|
Proceeds from paydowns of securities(A)(B)
|
|
|
(635
|
)
|
|
|
|
|
|
|
(635
|
)
|
|
|
|
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
291
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase to mortgage securities
available-for-sale
|
|
|
(160
|
)
|
|
|
291
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
$
|
309
|
|
|
$
|
5,675
|
|
|
$
|
5,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Cash received on mortgage securities with no cost basis was
$2.1 million for the three months ended September 30,
2010. |
|
(B) |
|
For mortgage securities with a remaining cost basis, the Company
reduces the cost basis by the amount of cash that is received
from the securitization trusts. In contrast, for mortgage
securities in which the cost basis has previously reached zero,
the Company records in interest income the amount of cash that
is received from the securitization trusts. |
F-25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
of Mortgage
|
|
|
|
Cost Basis
|
|
|
Unrealized Gain
|
|
|
Securities
|
|
|
As of June 30, 2009
|
|
$
|
2,314
|
|
|
$
|
7,405
|
|
|
$
|
9,719
|
|
Increases (decreases) to mortgage securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income(A)
|
|
|
3,445
|
|
|
|
|
|
|
|
3,445
|
|
Proceeds from paydowns of securities(A)(B)
|
|
|
(3,049
|
)
|
|
|
|
|
|
|
(3,049
|
)
|
Impairment on mortgage securities available-for -sale
|
|
|
(703
|
)
|
|
|
|
|
|
|
(703
|
)
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
(2,743
|
)
|
|
|
(2,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase to mortgage securities
available-for-sale
|
|
|
(307
|
)
|
|
|
(2,743
|
)
|
|
|
(3,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
$
|
2,007
|
|
|
$
|
4,662
|
|
|
$
|
6,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Cash received on mortgage securities with no cost basis was
$0.7 million for the three months ended September 30,
2009. |
|
(B) |
|
For mortgage securities with a remaining cost basis, the Company
reduces the cost basis by the amount of cash that is received
from the securitization trusts. In contrast, for mortgage
securities in which the cost basis has previously reached zero,
the Company records in interest income the amount of cash that
is received from the securitization trusts. |
The following table provides quantitative disclosures about the
fair value measurements for the Companys assets which are
measured at fair value on a nonrecurring basis as of
December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
Significant Other
|
|
Significant
|
|
|
Real Estate
|
|
Identical Assets
|
|
Observable
|
|
Unobservable Inputs
|
Fair Value at
|
|
Owned (A)
|
|
(Level 1)
|
|
Inputs (Level 2)
|
|
(Level 3)
|
|
December 31, 2009
|
|
$
|
64,179
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
64,179
|
|
|
|
|
(A) |
|
The Company did not hold any Real Estate Owned as of
September 30, 2010. |
At the time a mortgage loan
held-in-portfolio
becomes real estate owned, the Company records the property at
the lower of its carrying amount or fair value. Upon foreclosure
and through liquidation, the Company evaluates the
propertys fair value as compared to its carrying amount
and records a valuation adjustment when the carrying amount
exceeds fair value. Any valuation adjustments at the time the
loan becomes real estate owned is charged to the allowance for
credit losses.
F-26
The following table provides a summary of the impact to earnings
for the nine and three months ended September 30, 2010 and
2009 from the Companys assets and liabilities which are
measured at fair value on a recurring and nonrecurring basis
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Adjustments For the
|
|
|
Adjustments For the
|
|
|
|
|
|
|
Fair Value
|
|
Nine Months Ended
|
|
|
Three Months
|
|
|
|
|
Asset or Liability Measured
|
|
Measurement
|
|
September 30,
|
|
|
Ended September 30,
|
|
|
Statement of Operations Line
|
|
at Fair Value
|
|
Frequency
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Item Impacted
|
|
|
Mortgage securities trading
|
|
Recurring
|
|
$
|
(30
|
)
|
|
$
|
(11,255
|
)
|
|
$
|
59
|
|
|
$
|
(1,550
|
)
|
|
|
Other income (expense
|
)
|
Mortgage securities available-for-sale
|
|
Recurring
|
|
|
|
|
|
|
(1,155
|
)
|
|
|
|
|
|
|
(703
|
)
|
|
|
Other income (expense
|
)
|
Real estate owned
|
|
Nonrecurring
|
|
|
(178
|
)
|
|
|
(9,164
|
)
|
|
|
|
|
|
|
|
|
|
|
Other income (expense
|
)
|
Derivative instruments, net
|
|
Recurring
|
|
|
157
|
|
|
|
5,124
|
|
|
|
|
|
|
|
2,345
|
|
|
|
Other income (expense
|
)
|
Asset-backed bonds secured by mortgage securities
|
|
Recurring
|
|
|
805
|
|
|
|
4,658
|
|
|
|
239
|
|
|
|
1,153
|
|
|
|
Other income (expense
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value losses
|
|
|
|
$
|
754
|
|
|
$
|
(11,792
|
)
|
|
$
|
298
|
|
|
$
|
1,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
Methods
Mortgage securities
trading. Trading securities are recorded at fair
value with gains and losses, realized and unrealized, included
in earnings. The Company uses the specific identification method
in computing realized gains or losses. The Companys
estimated fair value for its subordinated securities are based
on quoted broker prices compared to estimates based on
discounting the expected future cash flows of the collateral and
bonds. Due to the unobservable inputs used by the Company in
determining the expected future cash flows, the Company
considers its valuation methodology as Level 3.
In addition, upon the closing of its NMFT
Series 2007-2
securitization, the Company classified the residual security it
retained as trading. The Company also classified the NHEL
2006-1, NHEL
2006-MTA1 and NHEL
2007-1
residual securities as trading upon the derecognition of these
securitization trusts. The Company estimates fair value based on
the present value of expected future cash flows using
managements best estimates of credit losses, prepayment
rates, forward yield curves, and discount rates, commensurate
with the risks involved. Due to the unobservable inputs used by
the Company in determining the expected future cash flows, the
Company determined its valuation methodology for residual
securities would qualify as Level 3. See Mortgage
securities available-for-sale for further
discussion of the Companys valuation policies relating to
residual securities.
Mortgage securities
available-for-sale. Mortgage
securities available-for-sale represent beneficial
interests the Company retains in securitization and
resecuritization transactions which include residual securities.
Mortgage securities classified as available-for-sale are
reported at their estimated fair value with unrealized gains and
losses reported in accumulated other comprehensive income. To
the extent that the cost basis of mortgage securities exceeds
the fair value and the unrealized loss is considered to be
other-than-temporary, an impairment charge is recognized and the
amount recorded in accumulated other comprehensive income or
loss is reclassified to earnings as a realized loss. The
specific identification method is used in computing realized
gains or losses.
The Company estimates fair value based on the present value of
expected future cash flows using managements best
estimates of credit losses, prepayment rates, forward yield
curves, and discount rates, commensurate with the risks
involved. Managements best estimate of key assumptions,
including credit losses, prepayment speeds, the market discount
rates and forward yield curves commensurate with the risks
involved, are used in estimating future cash flows. Due to the
unobservable inputs used by the Company in determining the
expected future cash flows, the Company considers its valuation
methodology as Level 3.
F-27
Derivative instruments. The fair value of
derivative instruments is estimated by discounting the projected
future cash flows using appropriate market rates. The fair value
of derivative instruments is obtained from model-derived
valuations whose significant value drivers are observable,
therefore the Company considers its valuation methodology as
Level 2.
Real estate owned. Real estate owned is
carried at the lower of cost or fair value less estimated
selling costs. The Company estimates fair value at the
assets liquidation value less selling costs using
managements assumptions which are based on historical loss
severities for similar assets. Due to the unobservable inputs
used by the Company in determining the assets liquidation
value and selling costs, the Company considers its valuation
methodology as Level 3.
Asset-backed bonds secured by mortgage
securities. See discussion under Fair Value
Option for Financial Assets and Financial Liabilities.
Fair
Value Option for Financial Assets and Financial
Liabilities
The Company elected the fair value option for asset-backed bonds
issued from the CDO to help reduce earnings volatility which
otherwise would arise if the accounting method for this debt was
not matched with the fair value accounting for the related
mortgage securities. The asset-backed bonds which are being
carried at fair value are included in the Other current
liabilities line item on the Condensed Consolidated
Balance Sheets. The Company recognized fair value adjustments of
$0.8 million and $0.2 million for the nine and three
months ended September 30, 2010, respectively, and
$4.7 million and $1.2 million for the same periods in
2009, respectively, which is included in the Other
(income) expenses line item on the Condensed Consolidated
Statements of Operations.
The Company has not elected fair value accounting for any other
balance sheet items as allowed by the guidance from Fair Value
Option for Financial Assets and Financial Liabilities.
The following table shows the difference between the unpaid
principal balance and the fair value of the asset-backed bonds
secured by mortgage securities for which the Company has elected
fair value accounting as of September 30, 2010 and
December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal
|
|
Year to Date Gain
|
|
|
Unpaid Principal Balance as of
|
|
Balance
|
|
Recognized
|
|
Fair Value
|
|
September 30, 2010
|
|
$
|
324,478
|
|
|
$
|
805
|
|
|
$
|
1,230
|
|
December 31, 2009
|
|
|
323,999
|
|
|
|
4,658
|
(A)
|
|
|
968
|
|
|
|
|
(A) |
|
For the nine months ended September 30, 2009. |
Substantially all of the change in fair value of the
asset-backed bonds during the nine and three months ended
September 30, 2010 is considered to be related to specific
credit risk as all of the bonds are floating rate.
During the nine months ended September 30, 2010, payments
of approximately $1.0 million were made to the former
majority owners of StreetLinks upon certain earnings targets
being achieved. In addition, during the nine and three months
ended September 30, 2010, targets were achieved for
additional payments of approximately $2.2 million which
will be made in the fourth quarter of 2010. In accordance with
the Business Combinations guidance that was utilized by
the Company at the time of acquisition during August 2008, any
contingent payments made in excess of amounts assigned to assets
acquired and liabilities recognized should be recorded as
goodwill. As all consideration paid had previously been assigned
to the assets acquired and liabilities assumed, the
$3.2 million was recorded as goodwill during the nine
months ended September 30, 2010.
Goodwill is tested for impairment at least annually and
impairments are charged to results of operations only in periods
in which the recorded carrying value is more than the estimated
fair value. As of September 30, 2010, goodwill totaled
$3.2 million, there was no goodwill as of December 31,
2009.
F-28
Goodwill activity is as follows for the nine and three months
ended September 30, 2010 and 2009, respectively (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
For the Three
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning of period
|
|
$
|
|
|
|
$
|
|
|
|
$
|
975
|
|
|
$
|
1,190
|
|
Advent acquisition
|
|
|
|
|
|
|
1,190
|
|
|
|
|
|
|
|
|
|
StreetLinks earnings target payment
|
|
|
3,170
|
(A)
|
|
|
|
|
|
|
2,195
|
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
3,170
|
|
|
$
|
1,190
|
(B)
|
|
$
|
3,170
|
|
|
$
|
1,190
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
The $2.2 million earnings target payment was achieved as of
September 30, 2010, but will not be paid until the fourth
quarter of 2010. This amount is included in the Other
Current Liabilities line item of the Condensed
Consolidated Balance Sheets. |
|
(B) |
|
The Advent acquisition goodwill was impaired during the fourth
quarter of 2009. |
Goodwill will be tested in November of each year for impairment.
Goodwill is tested for impairment using a two-step process that
begins with an estimation of fair value. The first step compares
the estimated fair value of StreetLinks with its carrying
amount, including goodwill. If the estimated fair value exceeds
its carrying amount, goodwill is not considered impaired.
However, if the carrying amount exceeds its estimated fair
value, a second step would be performed that would compare the
implied fair value to the carrying amount of goodwill. An
impairment loss would be recorded to the extent that the
carrying amount of goodwill exceeds its implied fair value.
|
|
Note 11.
|
Derivative
Financial Instruments
|
Prior to 2009, the Company entered into various derivative
financial instruments in the management of its investment
portfolio. All derivative financial instruments acquired by the
Company were ultimately transferred to mortgage loan or mortgage
security trusts. The Company did not hold any derivative
instruments as of September 30, 2010. As of
December 31, 2009, the Company owned non-hedge derivative
financial instruments with a notional amount of
$40.0 million and with a fair value of $(0.2) million.
Based on the evidence available as of September 30, 2010
and December 31, 2009, the Company believes that it is more
likely than not that the Company will not realize its deferred
tax assets. Based on this conclusion, the Company recorded a
valuation allowance against its entire net deferred tax assets
as of September 30, 2010 and December 31, 2009. The
Companys effective tax rate is close to 0% due to the
valuation allowance recorded against the deferred tax assets.
The Company recognizes tax benefits in accordance with the
Accounting for Uncertainty in Income Taxes guidance. This
guidance establishes a more-likely-than-not
recognition threshold that must be met before a tax benefit can
be recognized in the financial statements. As of
September 30, 2010 and December 31, 2009, the total
gross amount of unrecognized tax benefits was $1.1 million
and $0.9 million, respectively. The net increase of
$0.1 million is primarily attributed to an increase in
unrecognized tax benefits of $0.4 million for tax positions
related to the current and prior years which is included in the
Income tax (benefit) expense line item of the
Condensed Consolidated Statement of Operations and a decrease of
$0.3 related to the derecognition of the securitization trusts,
which is included in the Gain on derecognition of
securitization trusts line item of the Condensed
Consolidated Statement of Operations. See Note 3 to the
condensed consolidated financial statements for further details
on the derecognition of securitization trusts.
F-29
|
|
Note 13.
|
Segment
Reporting
|
During 2009, the Company changed segments to realign with the
way management views the business. The segment information for
the nine and three months ended September 30, 2009 has been
recast in accordance with the new segments. The Company reviews,
manages and operates its business in three segments:
securitization trusts, corporate and appraisal and real estate
valuation management services. The securitization trusts
segments operating results are driven from the income
generated on the on-balance sheet securitizations less
associated costs. Due to the derecognition of the securitization
trusts during the nine and three months ended September 30,
2010, the securitization trusts segment will consist of solely
the Companys CDO going forward. Corporate operating
results include income generated from mortgage securities
retained from securitizations, corporate, general and
administrative expenses and Advent. The appraisal and real
estate valuation management segments operations include
the fee income and related expenses from the Companys
majority-owned subsidiary StreetLinks.
The following is a summary of the operating results of the
Companys segments for the nine and three months ended
September 30, 2010 and 2009 (dollars in thousands):
For the
Nine Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appraisal and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
Securitization
|
|
|
|
|
|
Valuation
|
|
|
|
|
|
|
|
|
|
Trusts
|
|
|
Corporate
|
|
|
Management
|
|
|
Eliminations
|
|
|
Total
|
|
|
Income and Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50,237
|
|
|
$
|
|
|
|
$
|
50,237
|
|
Interest income mortgage loans
|
|
|
10,681
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
|
10,848
|
|
Interest income mortgage securities
|
|
|
683
|
|
|
|
6,619
|
|
|
|
|
|
|
|
|
|
|
|
7,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,364
|
|
|
|
6,619
|
|
|
|
50,237
|
|
|
|
167
|
|
|
|
68,387
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
|
|
|
|
|
|
|
|
44,371
|
|
|
|
|
|
|
|
44,371
|
|
Interest expense asset-backed bonds
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,416
|
|
Provision for credit losses
|
|
|
17,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,433
|
|
Servicing fees
|
|
|
731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731
|
|
Premiums for mortgage loan insurance
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
308
|
|
Selling, general and administrative expense
|
|
|
14
|
|
|
|
10,877
|
|
|
|
3,192
|
|
|
|
|
|
|
|
14,083
|
|
Gain on derecognition of securitization trusts
|
|
|
(993,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(993,131
|
)
|
Other expenses (income)
|
|
|
1,913
|
|
|
|
(2,972
|
)
|
|
|
77
|
|
|
|
278
|
|
|
|
(704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(971,316
|
)
|
|
|
7,905
|
|
|
|
47,640
|
|
|
|
278
|
|
|
|
(915,493
|
)
|
Other income
|
|
|
|
|
|
|
965
|
|
|
|
3
|
|
|
|
|
|
|
|
968
|
|
Interest expense on trust preferred securities
|
|
|
|
|
|
|
(823
|
)
|
|
|
|
|
|
|
|
|
|
|
(823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit
|
|
|
982,680
|
|
|
|
(1,144
|
)
|
|
|
2,600
|
|
|
|
(111
|
)
|
|
|
984,025
|
|
Income tax benefit
|
|
|
|
|
|
|
(1,293
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
982,680
|
|
|
|
149
|
|
|
|
2,600
|
|
|
|
(111
|
)
|
|
|
985,318
|
|
Less: Net (loss) income attributable to noncontrolling interests
|
|
|
|
|
|
|
(1,121
|
)
|
|
|
317
|
|
|
|
|
|
|
|
(804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to NFI
|
|
$
|
982,680
|
|
|
$
|
1,270
|
|
|
$
|
2,283
|
|
|
$
|
(111
|
)
|
|
$
|
986,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,578
|
|
|
$
|
27,972
|
|
|
$
|
14,965
|
(A)
|
|
$
|
(3,377
|
)
|
|
$
|
41,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes goodwill of $3.2 million. |
F-30
For the
Nine Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appraisal and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
Securitization
|
|
|
|
|
|
Valuation
|
|
|
|
|
|
|
|
|
|
Trusts
|
|
|
Corporate
|
|
|
Management
|
|
|
Eliminations
|
|
|
Total
|
|
|
Income and Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22,018
|
|
|
$
|
|
|
|
$
|
22,018
|
|
Interest income mortgage loans
|
|
|
92,796
|
|
|
|
|
|
|
|
|
|
|
|
1,137
|
|
|
|
93,933
|
|
Interest income mortgage securities
|
|
|
6,807
|
|
|
|
15,265
|
|
|
|
|
|
|
|
(2,519
|
)
|
|
|
19,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
99,603
|
|
|
|
15,265
|
|
|
|
22,018
|
|
|
|
(1,382
|
)
|
|
|
135,504
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
|
|
|
|
|
|
|
|
22,991
|
|
|
|
|
|
|
|
22,991
|
|
Interest expense asset-backed bonds
|
|
|
16,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,448
|
|
Provision for credit losses
|
|
|
211,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211,050
|
|
Servicing fees
|
|
|
8,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,343
|
|
Premiums for mortgage loan insurance
|
|
|
4,791
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
4,908
|
|
Selling, general and administrative expense
|
|
|
214
|
|
|
|
14,123
|
|
|
|
1,728
|
|
|
|
(74
|
)
|
|
|
15,991
|
|
Other expenses
|
|
|
1,187
|
|
|
|
12,502
|
|
|
|
47
|
|
|
|
|
|
|
|
13,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
242,033
|
|
|
|
26,742
|
|
|
|
24,766
|
|
|
|
(74
|
)
|
|
|
293,467
|
|
Other income
|
|
|
116
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
966
|
|
Interest expense on trust preferred securities
|
|
|
|
|
|
|
(980
|
)
|
|
|
|
|
|
|
|
|
|
|
(980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(142,314
|
)
|
|
|
(11,607
|
)
|
|
|
(2,748
|
)
|
|
|
(1,308
|
)
|
|
|
(157,977
|
)
|
Income tax expense
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(142,314
|
)
|
|
|
(11,852
|
)
|
|
|
(2,748
|
)
|
|
|
(1,308
|
)
|
|
|
(158,222
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
(350
|
)
|
|
|
(824
|
)
|
|
|
|
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to NFI
|
|
$
|
(142,314
|
)
|
|
$
|
(11,502
|
)
|
|
$
|
(1,924
|
)
|
|
$
|
(1,308
|
)
|
|
$
|
(157,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,437,059
|
|
|
$
|
26,706
|
|
|
$
|
4,164
|
|
|
$
|
(8,438
|
)
|
|
$
|
1,459,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
For the
Three Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appraisal and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
Securitization
|
|
|
|
|
|
Valuation
|
|
|
|
|
|
|
|
|
|
Trusts
|
|
|
Corporate
|
|
|
Management
|
|
|
Eliminations
|
|
|
Total
|
|
|
Income and Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22,784
|
|
|
$
|
|
|
|
$
|
22,784
|
|
Interest income mortgage securities
|
|
|
233
|
|
|
|
2,571
|
|
|
|
|
|
|
|
|
|
|
|
2,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
233
|
|
|
|
2,571
|
|
|
|
22,784
|
|
|
|
|
|
|
|
25,588
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
|
|
|
|
|
|
|
|
19,692
|
|
|
|
|
|
|
|
19,692
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
3,320
|
|
|
|
1,268
|
|
|
|
|
|
|
|
4,588
|
|
Other expenses (income)
|
|
|
658
|
|
|
|
(1,211
|
)
|
|
|
36
|
|
|
|
116
|
|
|
|
(401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
658
|
|
|
|
2,109
|
|
|
|
20,996
|
|
|
|
116
|
|
|
|
23,879
|
|
Other (expenses) income
|
|
|
|
|
|
|
(45
|
)
|
|
|
2
|
|
|
|
|
|
|
|
(43
|
)
|
Interest expense on trust preferred securities
|
|
|
|
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax benefit
|
|
|
(425
|
)
|
|
|
166
|
|
|
|
1,790
|
|
|
|
(116
|
)
|
|
|
1,415
|
|
Income tax benefit
|
|
|
|
|
|
|
(1,921
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(425
|
)
|
|
|
2,087
|
|
|
|
1,790
|
|
|
|
(116
|
)
|
|
|
3,336
|
|
Less: Net (loss) income attributable to noncontrolling interests
|
|
|
|
|
|
|
(323
|
)
|
|
|
218
|
|
|
|
|
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to NFI
|
|
$
|
(425
|
)
|
|
$
|
2,410
|
|
|
$
|
1,572
|
|
|
$
|
(116
|
)
|
|
$
|
3,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
For the
Three Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appraisal and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
Securitization
|
|
|
|
|
|
Valuation
|
|
|
|
|
|
|
|
|
|
Trusts
|
|
|
Corporate
|
|
|
Management
|
|
|
Eliminations
|
|
|
Total
|
|
|
Income and Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,945
|
|
|
$
|
|
|
|
$
|
9,945
|
|
Interest income mortgage loans
|
|
|
34,014
|
|
|
|
|
|
|
|
|
|
|
|
779
|
|
|
|
34,793
|
|
Interest income mortgage securities
|
|
|
661
|
|
|
|
3,633
|
|
|
|
|
|
|
|
(179
|
)
|
|
|
4,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
34,675
|
|
|
|
3,633
|
|
|
|
9,945
|
|
|
|
600
|
|
|
|
48,853
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
|
|
|
|
|
|
|
|
10,013
|
|
|
|
|
|
|
|
10,013
|
|
Interest expense asset-backed bonds
|
|
|
5,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,246
|
|
Provision for credit losses
|
|
|
42,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,062
|
|
Servicing fees
|
|
|
2,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,482
|
|
Premiums for mortgage loan insurance
|
|
|
(1,042
|
)
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
(944
|
)
|
Selling, general and administrative expense
|
|
|
54
|
|
|
|
4,807
|
|
|
|
346
|
|
|
|
1
|
|
|
|
5,208
|
|
Other (income) expenses
|
|
|
(4,333
|
)
|
|
|
6,254
|
|
|
|
5
|
|
|
|
|
|
|
|
1,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
44,469
|
|
|
|
11,159
|
|
|
|
10,364
|
|
|
|
1
|
|
|
|
65,993
|
|
Other income (expenses)
|
|
|
15
|
|
|
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
|
(444
|
)
|
Interest expense on trust preferred securities
|
|
|
|
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(9,779
|
)
|
|
|
(8,300
|
)
|
|
|
(419
|
)
|
|
|
599
|
|
|
|
(17,899
|
)
|
Income tax expense
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,779
|
)
|
|
|
(8,416
|
)
|
|
|
(419
|
)
|
|
|
599
|
|
|
|
(18,015
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
(269
|
)
|
|
|
(126
|
)
|
|
|
|
|
|
|
(395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to NFI
|
|
$
|
(9,779
|
)
|
|
$
|
(8,147
|
)
|
|
$
|
(293
|
)
|
|
$
|
599
|
|
|
$
|
(17,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14.
|
Earnings
Per Share
|
As a result of the convertible participating preferred stock
being considered participating securities, the earnings per
share information below is calculated under the two-class
method, which is discussed in the Earnings per Share
accounting guidance. In determining the number of diluted
shares outstanding, the guidance requires disclosure of the more
dilutive earnings per share result between the if-converted
method calculation and the two-class method calculation. For the
nine months ended September 30, 2010, the two-class method
calculation was more dilutive; therefore, the earnings per share
information below is presented following the two-class method
which includes convertible participating preferred stock assumed
to be converted to 1,875,000 shares of common stock that
share in distributions with common shareholders on a 1:1 basis.
For the three months ended September 30, 2010 and the nine
and three months ended September 30, 2009, as the
convertible participating preferred stockholders do not have an
obligation to participate in losses, no allocation of
undistributed losses was necessary.
F-33
The following table presents computations of basic and diluted
earnings per share for the nine and three months ended
September 30, 2010 and 2009 (dollars in thousands, except
share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
985,318
|
|
|
$
|
(158,222
|
)
|
|
$
|
3,336
|
|
|
$
|
(18,015
|
)
|
Less loss attributable to noncontrolling interests
|
|
|
(804
|
)
|
|
|
(1,174
|
)
|
|
|
(105
|
)
|
|
|
(395
|
)
|
Dividends on preferred shares
|
|
|
(12,234
|
)
|
|
|
(11,361
|
)
|
|
|
(4,183
|
)
|
|
|
(3,880
|
)
|
Allocation of undistributed income to convertible participating
preferred stock
|
|
|
(162,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
811,026
|
|
|
$
|
(168,409
|
)
|
|
$
|
(742
|
)
|
|
$
|
(21,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding dilutive
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
105.53
|
|
|
$
|
(16.89
|
)
|
|
$
|
0.36
|
|
|
$
|
(1.92
|
)
|
Less loss attributable to noncontrolling interests
|
|
|
(0.08
|
)
|
|
|
(0.12
|
)
|
|
|
(0.01
|
)
|
|
|
(0.04
|
)
|
Dividends on preferred shares
|
|
|
(1.31
|
)
|
|
|
(1.21
|
)
|
|
|
(0.45
|
)
|
|
|
(0.41
|
)
|
Allocation of undistributed income to convertible participating
preferred stock
|
|
|
(17.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
86.86
|
|
|
$
|
(17.98
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(2.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
105.53
|
|
|
$
|
(16.89
|
)
|
|
$
|
0.36
|
|
|
$
|
(1.92
|
)
|
Less loss attributable to noncontrolling interests
|
|
|
(0.08
|
)
|
|
|
(0.12
|
)
|
|
|
(0.01
|
)
|
|
|
(0.04
|
)
|
Dividends on preferred shares
|
|
|
(1.31
|
)
|
|
|
(1.21
|
)
|
|
|
(0.45
|
)
|
|
|
(0.41
|
)
|
Allocation of undistributed income to convertible participating
preferred stock
|
|
|
(17.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
86.86
|
|
|
$
|
(17.98
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(2.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
The following table reflects stock options to purchase shares of
common stock that were outstanding during each period presented,
but were not included in the computation of diluted earnings
(loss) per share because the number of shares assumed to be
repurchased, as calculated, was greater than the number of
shares to be obtained upon exercise, and therefore, the effect
would be antidilutive (in thousands, except exercise prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
For the Three Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Number of stock options
|
|
|
280
|
|
|
|
114
|
|
|
|
285
|
|
|
|
114
|
|
Weighted average exercise price of stock options
|
|
$
|
22.00
|
|
|
$
|
52.98
|
|
|
$
|
21.66
|
|
|
$
|
52.98
|
|
The Company had 30,846 of nonvested restricted shares
outstanding as of September 30, 2010 and September 30,
2009 which have original cliff vesting schedules ranging between
five and ten years. The nonvested restricted shares for each
period were not included in the earnings per share because the
effect would be anti-dilutive.
|
|
Note 15.
|
Fair
Value of Financial Instruments
|
The following disclosure of the estimated fair value of
financial instruments presents amounts that have been determined
using available market information and appropriate valuation
methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that could be realized in a current
market exchange. The use of different market assumptions or
estimation methodologies could have a material impact on the
estimated fair value amounts.
The estimated fair values of the Companys financial
instruments related to continuing operations are as follows as
of September 30, 2010 and December 31, 2009 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
As of December 31, 2009
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,784
|
|
|
$
|
16,784
|
|
|
$
|
7,104
|
|
|
$
|
7,104
|
|
Restricted cash
|
|
|
1,402
|
|
|
|
1,334
|
|
|
|
5,342
|
|
|
|
5,206
|
|
Mortgage loans
held-in-portfolio
|
|
|
|
|
|
|
|
|
|
|
1,289,474
|
|
|
|
1,160,527
|
|
Mortgage securities trading
|
|
|
1,230
|
|
|
|
1,230
|
|
|
|
1,087
|
|
|
|
1,087
|
|
Mortgage securities available-for-sale
|
|
|
5,984
|
|
|
|
5,984
|
|
|
|
6,903
|
|
|
|
6,903
|
|
Accrued interest receivable
|
|
|
|
|
|
|
|
|
|
|
74,025
|
|
|
|
74,025
|
|
Notes receivable
|
|
|
4,317
|
|
|
|
4,317
|
|
|
|
4,920
|
|
|
|
4,920
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed bonds secured by mortgage loans
|
|
|
|
|
|
|
|
|
|
|
2,270,602
|
|
|
|
1,297,980
|
|
Asset-backed bonds secured by mortgage securities
|
|
|
1,230
|
|
|
|
1,230
|
|
|
|
968
|
|
|
|
968
|
|
Junior subordinated debentures
|
|
|
78,027
|
|
|
|
17,114
|
|
|
|
77,815
|
|
|
|
6,225
|
|
Accrued interest payable
|
|
|
392
|
|
|
|
392
|
|
|
|
751
|
|
|
|
751
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
(157
|
)
|
|
|
(157
|
)
|
Cash and cash equivalents The fair value of
cash and cash equivalents approximates its carrying value.
F-35
Restricted Cash The fair value of restricted
cash was estimated by discounting estimated future release of
the cash from restriction.
Mortgage loans
held-in-portfolio
The fair value of mortgage loans
held-in-portfolio
was estimated using the carrying value less a market discount.
The internal rate of return is less than what an outside
investor would require due to the embedded credit risk,
therefore, at December 31, 2009, a market discount is
required to get to the fair value.
Mortgage securities trading See
Note 9 to the condensed consolidated financial statements
for fair value method utilized.
Mortgage securities
available-for-sale See Note 9 to the
condensed consolidated financial statements for fair value
method utilized.
Accrued interest receivable The fair value of
accrued interest receivable approximates its carrying value.
Notes receivable The fair value of notes
receivable approximates its carrying value.
Asset-backed bonds secured by mortgage loans
The fair value of asset-backed bonds secured by mortgage loans
and the related accrued interest payable was estimated using the
fair value of mortgage loans
held-in-portfolio
as the trusts have no recourse to the Companys other
unsecuritized assets.
Asset-backed bonds secured by mortgage
securities See Note 9 to the condensed
consolidated financial statements for fair value method utilized.
Junior subordinated debentures As of
September 30, 2010, the fair value of junior subordinated
debentures is estimated by discounting future projected cash
flows using a discount rate commensurate with the risks
involved. As of December 31, 2009, the fair value of junior
subordinated debentures is estimated using the price from the
repurchase transaction that the Company completed during 2008.
Accrued interest payable The fair value of
accrued interest payable approximates its carrying value.
Derivative instruments The fair value of
derivative instruments was estimated by discounting the
projected future cash flows using appropriate rates.
|
|
Note 16.
|
Subsequent
Events
|
On November 4, 2010, the Company completed the acquisition
of 51% of Corvisa LLC (Corvisa). Corvisa is a
technology company that develops and markets its software
products to mortgage lenders. Its primary product is a
self-managed appraisal solution for lenders to manage their
appraisal process. Other products include analytical tools for
lender to manage their mortgage origination business. The
purchase price was comprised of $1.5 million of cash, plus
contingent consideration related to an earn-out opportunity
based on future net income. The amount of the future payments
that the Company could be required to make under the earn-out
opportunity is $0.6 million. The Company is evaluating the
purchase price allocation to the fair value of the assets
acquired, the liabilities assumed and the liability for the
contingent consideration related to this acquisition.
F-36
NOVASTAR
FINANCIAL, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except share amounts)
|
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents
|
|
$
|
7,104
|
|
|
$
|
24,790
|
|
Mortgage securities (includes CDO securities of $959 and $4,798,
respectively)
|
|
|
7,990
|
|
|
|
19,873
|
|
Notes receivable, net of allowance of $300 and $0, respectively
|
|
|
4,920
|
|
|
|
|
|
Other current assets (includes CDO other assets of $428 and
$2,043, respectively)
|
|
|
7,501
|
|
|
|
9,335
|
|
Current assets of discontinued operations
|
|
|
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
27,515
|
|
|
|
54,322
|
|
Securitization Trust Assets
|
|
|
|
|
|
|
|
|
Mortgage loans
held-in-portfolio,
net of allowance of $712,614 and $776,001, respectively
|
|
|
1,289,474
|
|
|
|
1,772,838
|
|
Accrued interest receivable
|
|
|
74,025
|
|
|
|
77,292
|
|
Real estate owned
|
|
|
64,179
|
|
|
|
70,480
|
|
|
|
|
|
|
|
|
|
|
Total securitization trust assets
|
|
|
1,427,678
|
|
|
|
1,920,610
|
|
Non-Current Assets
|
|
|
|
|
|
|
|
|
Fixed assets, net of depreciation
|
|
|
1,803
|
|
|
|
1,247
|
|
Other assets
|
|
|
2,495
|
|
|
|
1,168
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
1,117
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
4,298
|
|
|
|
3,532
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,459,491
|
|
|
$
|
1,978,464
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,949
|
|
|
$
|
495
|
|
Accrued expenses
|
|
|
6,801
|
|
|
|
17,785
|
|
Dividends payable
|
|
|
34,402
|
|
|
|
19,088
|
|
Other current liabilities (includes CDO debt and other
liabilities of $1,396 and $5,376, respectively)
|
|
|
2,962
|
|
|
|
8,824
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
|
1,936
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
46,114
|
|
|
|
48,128
|
|
Securitization Trust Liabilities
|
|
|
|
|
|
|
|
|
Due to servicer
|
|
|
136,855
|
|
|
|
117,635
|
|
Other securitization trust liabilities
|
|
|
3,729
|
|
|
|
11,631
|
|
Asset-backed bonds secured by mortgage loans
|
|
|
2,270,602
|
|
|
|
2,599,351
|
|
|
|
|
|
|
|
|
|
|
Total securitization trust liabilities
|
|
|
2,411,186
|
|
|
|
2,728,617
|
|
Non-Current Liabilities
|
|
|
|
|
|
|
|
|
Junior subordinated debentures
|
|
|
77,815
|
|
|
|
77,323
|
|
Other liabilities
|
|
|
928
|
|
|
|
569
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
78,743
|
|
|
|
78,492
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,536,043
|
|
|
|
2,855,237
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
Shareholders deficit:
|
|
|
|
|
|
|
|
|
Capital stock, $0.01 par value, 50,000,000 shares
authorized:
|
|
|
|
|
|
|
|
|
Redeemable preferred stock, $25 liquidating preference per
share; 2,990,000 shares, issued and outstanding
|
|
|
30
|
|
|
|
30
|
|
Convertible participating preferred stock, $25 liquidating
preference per share; 2,100,000 shares, issued and
outstanding
|
|
|
21
|
|
|
|
21
|
|
Common stock, 9,368,053, issued and outstanding
|
|
|
94
|
|
|
|
94
|
|
Additional paid-in capital
|
|
|
786,989
|
|
|
|
786,279
|
|
Accumulated deficit
|
|
|
(1,868,398
|
)
|
|
|
(1,671,984
|
)
|
Accumulated other comprehensive income
|
|
|
5,111
|
|
|
|
8,926
|
|
Other
|
|
|
(70
|
)
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
Total NFI shareholders deficit
|
|
|
(1,076,223
|
)
|
|
|
(876,773
|
)
|
Noncontrolling interests
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
|
(1,076,552
|
)
|
|
|
(876,773
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders deficit
|
|
$
|
1,459,491
|
|
|
$
|
1,978,464
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-37
NOVASTAR
FINANCIAL, INC.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except share amounts)
|
|
|
Income and Revenues:
|
|
|
|
|
|
|
|
|
Service fee income
|
|
$
|
31,106
|
|
|
$
|
2,524
|
|
Interest income mortgage loans
|
|
|
131,301
|
|
|
|
186,601
|
|
Interest income mortgage securities
|
|
|
21,656
|
|
|
|
46,997
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
184,063
|
|
|
|
236,122
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
32,221
|
|
|
|
2,600
|
|
Interest expense asset-backed bonds
|
|
|
21,290
|
|
|
|
95,012
|
|
Provision for credit losses
|
|
|
260,860
|
|
|
|
707,364
|
|
Servicing fees
|
|
|
10,639
|
|
|
|
13,596
|
|
Premiums for mortgage loan insurance
|
|
|
6,178
|
|
|
|
15,847
|
|
Selling, general and administrative expense
|
|
|
20,777
|
|
|
|
23,510
|
|
Other expense
|
|
|
13,905
|
|
|
|
73,815
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
365,870
|
|
|
|
931,744
|
|
Other income
|
|
|
887
|
|
|
|
977
|
|
Interest expense on trust preferred securities
|
|
|
(1,128
|
)
|
|
|
(6,261
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(182,048
|
)
|
|
|
(700,906
|
)
|
Income tax expense (benefit)
|
|
|
1,108
|
|
|
|
(17,594
|
)
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(183,156
|
)
|
|
|
(683,312
|
)
|
Income from discontinued operations, net of income tax
|
|
|
|
|
|
|
22,830
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(183,156
|
)
|
|
|
(660,482
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
(2,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to NFI
|
|
$
|
(181,102
|
)
|
|
$
|
(660,482
|
)
|
|
|
|
|
|
|
|
|
|
Earnings Per Share attributable to NFI:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(20.97
|
)
|
|
$
|
(72.37
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(20.97
|
)
|
|
$
|
(72.37
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
9,368,053
|
|
|
|
9,338,131
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
9,368,053
|
|
|
|
9,338,131
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-38
NOVASTAR
FINANCIAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
Participating
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
Share-holders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Other
|
|
|
Deficit
|
|
|
|
(Dollars in thousands, except share amounts)
|
|
|
Balance, January 1, 2008
|
|
$
|
30
|
|
|
$
|
21
|
|
|
$
|
94
|
|
|
$
|
786,342
|
|
|
$
|
(996,649
|
)
|
|
$
|
(1,117
|
)
|
|
$
|
(209
|
)
|
|
$
|
(211,488
|
)
|
Forgiveness of founders notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
70
|
|
Compensation recognized under stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
Accumulating dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,273
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,273
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
420
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(660,482
|
)
|
|
|
|
|
|
|
|
|
|
|
(660,482
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,043
|
|
|
|
|
|
|
|
10,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(650,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
30
|
|
|
$
|
21
|
|
|
$
|
94
|
|
|
$
|
786,279
|
|
|
$
|
(1,671,984
|
)
|
|
$
|
8,926
|
|
|
$
|
(139
|
)
|
|
$
|
(876,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NovaStar Financial, Inc. Shareholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
Participating
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
Noncontrolling
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Other
|
|
|
Interest
|
|
|
Deficit
|
|
|
|
(Dollars in thousands, except share amounts)
|
|
|
Balance, January 1, 2009
|
|
$
|
30
|
|
|
$
|
21
|
|
|
$
|
94
|
|
|
$
|
786,279
|
|
|
$
|
(1,671,984
|
)
|
|
$
|
8,926
|
|
|
$
|
(139
|
)
|
|
$
|
|
|
|
$
|
(876,773
|
)
|
Forgiveness of founders notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
69
|
|
Compensation recognized under stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
710
|
|
Accumulating dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,312
|
)
|
Contribution from noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
525
|
|
|
|
525
|
|
Acquisition of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200
|
|
|
|
1,200
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181,102
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,054
|
)
|
|
|
(183,156
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,815
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(186,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
30
|
|
|
$
|
21
|
|
|
$
|
94
|
|
|
$
|
786,989
|
|
|
$
|
(1,868,398
|
)
|
|
$
|
5,111
|
|
|
$
|
(70
|
)
|
|
$
|
(329
|
)
|
|
$
|
(1,076,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-39
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(183,156
|
)
|
|
$
|
(660,482
|
)
|
Income from discontinued operations
|
|
|
|
|
|
|
22,830
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(183,156
|
)
|
|
|
(683,312
|
)
|
Adjustments to reconcile loss from continuing operations to net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
Impairment on mortgage securities available-for-sale
|
|
|
1,198
|
|
|
|
23,100
|
|
Losses on derivative instruments
|
|
|
4,665
|
|
|
|
18,094
|
|
Depreciation expense
|
|
|
869
|
|
|
|
1,124
|
|
Amortization of deferred debt issuance costs
|
|
|
2,239
|
|
|
|
3,081
|
|
Compensation recognized under stock compensation plans
|
|
|
710
|
|
|
|
(63
|
)
|
Provision for credit losses
|
|
|
260,860
|
|
|
|
707,364
|
|
Amortization of premiums on mortgage loans
|
|
|
2,443
|
|
|
|
13,366
|
|
Interest capitalized on loans
held-in-portfolio
|
|
|
(1,550
|
)
|
|
|
(19,858
|
)
|
Forgiveness of founders promissory notes
|
|
|
69
|
|
|
|
70
|
|
Provision for deferred income taxes
|
|
|
|
|
|
|
(13,805
|
)
|
Fair value adjustments
|
|
|
6,743
|
|
|
|
25,743
|
|
Accretion of available-for-sale and trading securities
|
|
|
(23,528
|
)
|
|
|
(50,399
|
)
|
Gains on debt extinguishment
|
|
|
|
|
|
|
(6,418
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
3,267
|
|
|
|
(15,588
|
)
|
Other assets
|
|
|
(4,170
|
)
|
|
|
6,327
|
|
Due to servicer
|
|
|
19,220
|
|
|
|
61,185
|
|
Accounts payable and other liabilities
|
|
|
(21,566
|
)
|
|
|
(26,030
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities from continuing
operations
|
|
|
68,313
|
|
|
|
43,981
|
|
Net cash used in operating activities from discontinued
operations
|
|
|
(1,095
|
)
|
|
|
(14,415
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
67,218
|
|
|
|
29,566
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from mortgage securities available-for-sale
|
|
|
13,594
|
|
|
|
26,899
|
|
Proceeds from mortgage securities trading
|
|
|
4,885
|
|
|
|
59,912
|
|
Proceeds from mortgage loans
held-in-portfolio
|
|
|
98,933
|
|
|
|
288,243
|
|
Proceeds from sales of assets acquired through foreclosure
|
|
|
129,815
|
|
|
|
114,194
|
|
Restricted cash, net
|
|
|
705
|
|
|
|
2,952
|
|
Purchases of property and equipment
|
|
|
(1,324
|
)
|
|
|
(25
|
)
|
Proceeds from disposal of property and equipment
|
|
|
6
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
2
|
|
|
|
(710
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
246,616
|
|
|
|
491,465
|
|
Net cash provided by investing activities from discontinued
operations
|
|
|
|
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
246,616
|
|
|
|
493,579
|
|
|
|
|
|
|
|
|
|
|
F-40
NOVASTAR
FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Continued
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on asset-backed bonds
|
|
|
(331,670
|
)
|
|
|
(477,662
|
)
|
Contributions from noncontrolling interest
|
|
|
150
|
|
|
|
|
|
Net change in short-term borrowings
|
|
|
|
|
|
|
(45,488
|
)
|
Repurchase of trust preferred debt
|
|
|
|
|
|
|
(550
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities from continuing operations
|
|
|
(331,520
|
)
|
|
|
(523,700
|
)
|
Net cash used in financing activities from discontinued
operations
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(331,520
|
)
|
|
|
(523,719
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(17,686
|
)
|
|
|
(574
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
24,790
|
|
|
|
25,364
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
7,104
|
|
|
$
|
24,790
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Cash paid for interest
|
|
$
|
33,726
|
|
|
$
|
111,949
|
|
Cash (refunded) paid for income taxes
|
|
|
(38
|
)
|
|
|
3,679
|
|
Cash received on mortgage securities
available-for-sale with no cost basis
|
|
|
1,872
|
|
|
|
3,401
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Assets acquired through foreclosure
|
|
|
123,190
|
|
|
|
108,172
|
|
Preferred stock dividends accrued, not yet paid
|
|
|
15,312
|
|
|
|
15,273
|
|
See notes to consolidated financial statements.
F-41
NOVASTAR
FINANCIAL, INC.
|
|
Note 1.
|
Basis of
Presentation, Business Plan, Liquidity and Going Concern
Considerations
|
Description of Operations NovaStar Financial,
Inc. and its subsidiaries (NFI or the
Company) hold certain non-conforming residential
mortgage securities. StreetLinks National Appraisal Services LLC
(StreetLinks), a majority-owned subsidiary of the
Company, is a residential mortgage appraisal management company.
Advent Financial Services LLC (Advent), a
majority-owned subsidiary of the Company, provides access to
tailored banking accounts, small dollar banking products and
related services to meet the needs of low and moderate income
level individuals.
Effective August 1, 2008, the Company acquired a 75%
interest in StreetLinks for an initial cash purchase price of
$750,000 plus future payments contingent upon StreetLinks
reaching certain earnings targets. Results of operations from
August 1, 2008 forward are included in the consolidated
statement of operations. Simultaneously with the acquisition,
the Company transferred ownership of 5% of StreetLinks to the
Chief Executive Officer of StreetLinks. The Company has
contributed additional capital to StreetLinks subsequent to our
initial acquisition, bringing the Companys total ownership
to 88%. If StreetLinks achieves certain performance targets by
December 31, 2010, the Company will transfer 8% of its
membership interest in StreetLinks to certain existing members
and employees.
On April 26, 2009, the Company acquired a 70% interest in
Advent for an initial cash contribution into Advent of
$2 million plus future contributions contingent upon Advent
reaching certain earnings and other performance targets. Results
of operations from April 26, 2009 forward are included in
the consolidated statement of operations.
Prior to changes in its business in 2007, the Company
originated, purchased, securitized, sold, invested in and
serviced residential nonconforming mortgage loans and mortgage
backed securities. The Company retained, through its mortgage
securities investment portfolio, significant interests in the
nonconforming loans it originated and purchased, and through its
servicing platform, serviced all of the loans in which it
retained interests.
Financial Statement Presentation The
Companys consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP) and
prevailing practices within the financial services industry. The
preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements
and the reported amounts of income and expense during the
period. The Company uses estimates and employs the judgments of
management in determining the amount of its allowance for credit
losses, amortizing premiums or accreting discounts on its
mortgage assets, establishing the fair value of its mortgage
securities, reserve for losses on third party sales, derivative
instruments, CDO debt and estimating appropriate accrual rates
on mortgage securities available-for-sale. While the
consolidated financial statements and footnotes reflect the best
estimates and judgments of management at the time, actual
results could differ significantly from those estimates. In
accordance with Subsequent Event guidance, the Company evaluated
all events or transactions that occurred after December 31,
2009 through the date of the issuance of these financial
statements. Subsequent events are discussed in Note 17 to
the financial statements.
The consolidated financial statements of the Company include the
accounts of all wholly-owned and majority-owned subsidiaries,
all other entities that would be consolidated under the
Consolidation guidance have been considered. Investments in
entities for which the Company has significant influence are
accounted for under the equity method. Intercompany accounts and
transactions have been eliminated in consolidation.
Historically, the Company has prepared its balance sheet on an
unclassified basis because the operating cycle of its
nonconforming mortgage operations exceeded one year. As a result
of changes in the Companys business, which included
discontinuing its mortgage lending operations and selling its
servicing operations, the assets and liabilities are now
presented on a classified basis for all periods presented except
for the assets and
F-42
liabilities of the securitization trusts which continue to be
presented on an unclassified basis. Certain line items on the
consolidated statement of operations have been reclassified to
better present the Companys current operating businesses.
Business Plan As discussed above, the Company
acquired a majority interest in an appraisal management company,
StreetLinks, during the third quarter of 2008 and increased its
ownership percentage in the fourth quarter of 2009. In addition,
the Company acquired a majority interest in Advent in April
2009. Management continues to grow and develop these operating
entities. Additionally, the Company will continue to focus on
minimizing expenses, preserving liquidity, and exploring
additional investments in operating companies.
StreetLinks and the Companys residual mortgage securities
are currently the significant source of cash flows. The Company
expects the cash flows from the mortgage securities to decrease
during 2010 as the underlying mortgage loans are repaid, and
could be significantly less than recent experience if losses on
the underlying mortgage loans exceed the current assumptions.
The Company expects the cash flows from StreetLinks to continue
to increase as partially attributable to new legislation which
went into effect in the first quarter of 2010 that will
positively impact StreetLinks business. The Company also
expects cash flows to increase due to a larger customer base and
operating efficiencies.
Liquidity The Company had $7.1 million
in unrestricted cash and cash equivalents at December 31,
2009, which was a decrease of $17.7 million from
December 31, 2008. As of March 30, 2010, the Company
had approximately $15.5 million in available cash on hand
(including $1.8 million of restricted cash). In addition to
the Companys operating expenses, the Company has quarterly
interest payments due on its trust preferred securities. The
Companys current projections indicate sufficient available
cash and cash flows from StreetLinks and its mortgage securities
to meet these payment needs.
During 2009, the Company continued its strategy of growing and
developing StreetLinks and significantly increased its appraisal
volume. For the year ended December 31, 2009, StreetLinks
had revenues of $31.1 million, as compared to
$2.5 million in 2008. StreetLinks incurred significant
start-up
expenses to develop its infrastructure in 2009, which are not
expected to be recurring. As a result, management expects
StreetLinks to produce positive net cash flows and earnings
going forward.
Cash flows from mortgage loans
held-in-portfolio
are used to repay the asset-backed bonds secured by mortgage
loans and are not available to pay the Companys other
debts, the asset-backed bonds are obligations of the
securitization trusts and will be repaid using collections of
the securitized assets. The trusts have no recourse to the
Companys other unsecuritized assets.
During 2009, the Company used significant amounts of cash to pay
for costs related to our legacy mortgage lending and servicing
operations, pay for current administrative costs and invest in
StreetLinks and Advent. The Company will continue to evaluate
the Advent business model, however the Company does not believe
that Advent will be a significant source or use of cash during
2010.
The Companys consolidated financial statements have been
prepared on a going concern basis of accounting which
contemplates continuity of operations, realization of assets,
liabilities and commitments in the normal course of business.
The Company has experienced significant losses over the past
several years and has a significant deficit in
stockholders equity. Notwithstanding these negative
factors, management believes that its current operations and its
cash availability are sufficient for the Company to discharge
its liabilities and meet its commitments in the normal course of
business.
|
|
Note 2.
|
Summary
of Significant Accounting and Reporting Policies
|
Cash and Cash Equivalents The Company
considers investments with original maturities of three months
or less at the date of purchase to be cash equivalents. The
Company maintains cash balances at several major financial
institutions in the United States. Accounts at each institution
are secured by the Federal Deposit Insurance Corporation up to
$250,000, through December 31, 2013. At December 31,
2009 and 2008, respectively, 41% and 43% of the Companys
cash and cash equivalents, including restricted cash, were with
one institution. The uninsured balances of the Companys
unrestricted cash and cash equivalents
F-43
and restricted cash aggregated $11.3 million and
$29.8 million as of December 31, 2009 and 2008,
respectively.
Restricted Cash Restricted cash includes
funds the Company is required to post as cash collateral or
transfer to escrow accounts and its release is subject to
contractual requirements and time restrictions. The cash may not
be released to the Company without the consent of the
counterparties, which is generally at their discretion. The cash
could also be subject to the indemnification of losses incurred
by the counterparties. The Company received approximately
$2.9 million during February 2010.
Other Current Assets Other current assets
include prepaid expenses, the current portion of restricted cash
and other miscellaneous receivables expected to be realized
within the next year. As of December 31, 2009, and
December 31, 2008, prepaid expenses were $1.8 million.
Mortgage Loans Mortgage loans include loans
originated by the Company and acquired from other originators.
Mortgage loans are recorded net of deferred loan origination
fees and associated direct costs and are stated at amortized
cost. Mortgage loan origination fees and associated direct
mortgage loan origination costs on mortgage loans
held-in-portfolio
are deferred and recognized over the estimated life of the loan
as an adjustment to yield using the effective yield method. The
Company uses actual and estimated cash flows, which consider the
actual and future estimated prepayments of the loans, to derive
an effective level yield.
Interest is recognized as revenue when earned according to the
terms of the mortgage loans and when, in the opinion of
management, it is collectible. For all mortgage loans that do
not carry mortgage insurance, the accrual of interest on loans
is discontinued when, in managements opinion, the interest
is not collectible in the normal course of business, but in no
case beyond when a loan becomes 90 days delinquent. For
mortgage loans that do carry mortgage insurance, the accrual of
interest is only discontinued when in managements opinion,
the interest is not collectible. Interest collected on
non-accrual loans is recognized as income upon receipt.
The mortgage loan portfolio is collectively evaluated for
impairment as the individual loans are smaller-balance and are
homogeneous in nature. For mortgage loans
held-in-portfolio,
the Company maintains an allowance for credit losses inherent in
the portfolio at the Consolidated Balance Sheet dates. The
allowance is based upon the assessment by management of various
factors affecting its mortgage loan portfolio, including current
economic conditions, the makeup of the portfolio based on credit
grade, loan-to-value, delinquency status, historical credit
losses, whether the Company purchased mortgage insurance and
other factors deemed to warrant consideration. The allowance is
maintained through ongoing adjustments to operating income. The
assumptions used by management regarding key economic indicators
are highly uncertain and involve a great deal of judgment.
An internally developed migration analysis is the primary tool
used in analyzing the adequacy of the allowance for credit
losses. This tool takes into consideration historical
information regarding foreclosure and loss severity experience
and applies that information to the portfolio at the reporting
date. Management also takes into consideration the use of
mortgage insurance as a method of managing credit risk. The
Company pays mortgage insurance premiums on loans maintained on
the Consolidated Balance Sheets and includes the cost of
mortgage insurance in the consolidated statements of income.
Managements estimate of expected losses could increase if
the actual loss experience is different than originally
estimated. In addition, the estimate of expected losses could
increase if economic factors change the value that can be
reasonably expected to obtain from the sale of the property. If
actual losses increase, or if amounts reasonably expected to be
obtained from property sales decrease, the provision for losses
would increase.
Mortgage Securities Mortgage securities
consist of securities classified as available-for-sale and
trading.
Mortgage securities available-for-sale represent
beneficial interests the Company retains in securitization and
resecuritization transactions which include residual interests
(the residual securities). The residual securities
include interest-only mortgage securities, prepayment penalty
bonds and
F-44
overcollateralization bonds. The subordinated securities
represent investment-grade and non-investment grade rated bonds
which are senior to the residual interests but subordinated to
the bonds sold to third party investors. Mortgage securities
classified as available-for-sale are reported at their estimated
fair value with unrealized gains and losses reported in
accumulated other comprehensive income. To the extent that the
cost basis of mortgage securities exceeds the fair value and the
unrealized loss is considered to be other than temporary, an
impairment charge is recognized and the amount recorded in
accumulated other comprehensive income or loss is reclassified
to earnings as a realized loss. The specific identification
method was used in computing realized gains or losses.
Interest-only mortgage securities represent the contractual
right to receive excess interest cash flows from a pool of
securitized mortgage loans. Interest payments received by the
independent trust are first applied to the principal and
interest bonds (held by outside investors), servicing fees and
administrative fees. The excess, if any, is remitted to the
Company related to its ownership of the interest-only mortgage
security. Prepayment penalty bonds give the holder the
contractual right to receive prepayment penalties collected by
the independent trust on the underlying mortgage loans.
Overcollateralization bonds represent the contractual right to
excess principal payments resulting from over collateralization
of the obligations of the trust.
As previously described, mortgage securities-available-for-sale
represent retained beneficial interests in certain components of
the cash flows of the underlying mortgage loans to
securitization trusts. As payments are received on both the
residual and subordinated securities, the payments are applied
to the cost basis of the related mortgage securities. Each
period, the accretable yield for each mortgage security is
evaluated and, to the extent there has been a change in the
estimated cash flows, it is adjusted and applied prospectively.
The estimated cash flows change as managements assumptions
for credit losses, borrower prepayments and interest rates are
updated. The assumptions are established using proprietary
models the Company has developed. The accretable yield is
recorded as interest income with a corresponding increase to the
cost basis of the mortgage security.
The Company estimates the fair value of its residual securities
retained based on the present value of future expected cash
flows to be received. Managements best estimate of key
assumptions, including credit losses, prepayment speeds, market
discount rates and forward yield curves commensurate with the
risks involved, are used in estimating future cash flows.
Mortgage securities trading consist of mortgage
securities purchased by the Company as well as retained by the
Company in its securitization transactions. Trading securities
are recorded at fair value with gains and losses, realized and
unrealized, included in earnings. The Company uses the specific
identification method in computing realized gains or losses.
Mortgage Securities trading consisted of one
residual security at December 31, 2009 and 2008 with the
remaining balance comprised of subordinated securities.
The Company estimates fair value for the subordinated securities
based on quoted market prices obtained from brokers which are
compared to internal discounted cash flows.
Notes Receivable Notes receivable represent
loans to independent third-party entities. Notes receivable are
carried at the lower of cost or estimated fair value,
impairments are charged to earnings as incurred.
Real Estate Owned Real Estate Owned, which
consists of residential real estate acquired in satisfaction of
loans, is carried at the lower of cost or estimated fair value
less estimated selling costs. Adjustments to the loan carrying
value required at time of foreclosure are charged against the
allowance for credit losses. Costs related to the development of
real estate are capitalized and those related to holding the
property are expensed. Losses or gains from the ultimate
disposition of Real Estate Owned are charged or credited to
earnings.
Fixed Assets, net Leasehold improvements,
furniture and fixtures and office and computer equipment are
stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated
useful lives of the related assets. The estimated useful lives
of the assets are leasehold improvements, lesser of 5 years
or remaining lease term; furniture and fixtures, 5 years;
and office and
F-45
computer equipment, 3 to 5 years. Accumulated depreciation
consisted of $3.0 million and $2.7 million as of
December 31, 2009 and 2008, respectively.
Maintenance and repairs are charged to expense. Major renewals
and improvements are capitalized. Gains and losses on
dispositions are credited or charged to earnings as incurred.
Depreciation expense related to continuing operations for the
years ended December 31, 2009 and 2008 was
$0.8 million and $1.1 million, respectively. There was
no depreciation expense related to discontinued operations for
the years ended December 31, 2009 and 2008.
Premiums for Mortgage Loan Insurance The
Company uses lender paid mortgage insurance to mitigate the risk
of loss on loans that are originated. For those loans
held-in-portfolio,
the premiums for mortgage insurance are expensed by the Company
as the costs of the premiums are incurred. For those loans sold
in securitization transactions accounted for as a sale, the
independent trust assumes the obligation to pay the premiums and
obtains the right to receive insurance proceeds.
Due to Servicer Principal and interest
payments (the monthly repayment obligations) on
asset-backed bonds secured by mortgage loans recorded on the
Companys Consolidated Balance Sheets are remitted to
bondholders on a monthly basis by the securitization trust (the
remittance period). Funds used for the monthly
repayment obligations are based on the monthly scheduled
principal and interest payments of the underlying mortgage loan
collateral, as well as actual principal and interest collections
from borrower prepayments. When a borrower defaults on a
scheduled principal and interest payment, the servicer must
advance the scheduled principal and interest to the
securitization trust to satisfy the monthly repayment
obligations. The servicer must continue to advance all
delinquent scheduled principal and interest payments each
remittance period until the loan is liquidated. Upon
liquidation, the servicer may recover their advance through the
liquidation proceeds. During the period the servicer has
advanced funds to a securitization trust which the Company
accounts for as a financing, the Company records a liability
representing the funds due back to the servicer.
Service Fee Income Appraisal fees are
collected as part of the appraisal management process performed
by StreetLinks based on negotiated rates with each appraiser.
Revenue is recognized when the appraisal is completed and
provided to the lender or borrower, depending on who placed the
order.
Stock-Based Compensation At December 31,
2009, the Company had one stock-based employee compensation
plan, which is described more fully in Note 15 and is
accounted for using Share-Based Payment guidance.
Income Taxes In determining the amount of
deferred tax assets to recognize in the financial statements,
the Company evaluates the likelihood of realizing such benefits
in future periods. The Income Taxes guidance requires the
recognition of a valuation allowance if it is more likely than
not that all or some portion of the deferred tax asset will not
be realized. Income Taxes guidance indicates the more likely
than not threshold is a level of likelihood that is more than
50%.
Under the Income Taxes guidance, companies are required to
identify and consider all available evidence, both positive and
negative, in determining whether it is more likely than not that
all or some portion of its deferred tax assets will not be
realized. Positive evidence includes, but is not limited to the
following: cumulative earnings in recent years, earnings
expected in future years, excess appreciated asset value over
the tax basis and positive industry trends. Negative evidence
includes, but is not limited to the following: cumulative losses
in recent years, losses expected in future years, a history of
operating losses or tax credits carryforwards expiring and
adverse industry trends.
The weight given to the potential effect of negative and
positive evidence should be commensurate with the extent to
which it can be objectively verified. Accordingly, the more
negative evidence that exists requires more positive evidence to
counter, thus making it more difficult to support a conclusion
that a valuation allowance is not needed for all or some of the
deferred tax assets. Cumulative losses in recent years are
significant negative evidence that is difficult to overcome when
determining the need for a valuation allowance. Similarly,
cumulative earnings in recent years represent significant
positive objective evidence. If
F-46
the weight of the positive evidence is sufficient to support a
conclusion that it is more likely than not that a deferred tax
asset will be realized, a valuation allowance should not be
recorded.
The Company examines and weighs all available evidence (both
positive and negative and both historical and forecasted) in the
process of determining whether it is more likely than not that a
deferred tax asset will be realized. The Company considers the
relevancy of historical and forecasted evidence when there has
been a significant change in circumstances. Additionally, the
Company evaluates the realization of its recorded deferred tax
assets on an interim and annual basis. The Company does not
record a valuation allowance if the weight of the positive
evidence exceeds the negative evidence and is sufficient to
support a conclusion that it is more likely than not that its
deferred tax asset will be realized.
If the weighted positive evidence is not sufficient to support a
conclusion that it is more likely than not that all or some of
the Companys deferred tax assets will be realized, the
Company considers all alternative sources of taxable income
identified in determining the amount of valuation allowance to
be recorded. Alternative sources of taxable income identified in
the Income Taxes guidance include the following: 1) taxable
income in prior carryback year, 2) future reversals of
existing taxable temporary differences, 3) future taxable
income exclusive of reversing temporary differences and
carryforwards, and 4) tax planning strategies.
The Company evaluates whether a tax position taken by the
company will more likely than not be sustained upon
examination by the appropriate taxing authority. The company
measures the amount of benefit to recognize in its financial
statements as the largest amount of benefit that is greater than
50% likely of being realized upon ultimate settlement. It is the
Companys policy to recognize interest and penalties
related to income tax matters in income tax expense (benefit).
Earnings Per Share (EPS) Basic EPS
excludes dilution and is computed by dividing net income
available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
Diluted EPS is calculated assuming all options, restricted
stock, performance based awards and warrants on the
Companys common stock have been exercised, unless the
exercise would be antidilutive.
New
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 166, Accounting for the
Transfers of Financial Assets, an Amendment of FASB Statement
No. 140; this statement was codified in December 2009 as
Accounting Standards Codification (ASC) 860. This
guidance is effective for financial asset transfers beginning on
January 1, 2010 and will be used to determine whether the
transfer is accounted for as a sale under GAAP or as a secured
borrowing. In addition, also in June, 2009 the FASB issued
SFAS No. 167, Amendments to FASB Interpretation
No. 46®;
this statement was also codified in December 2009 as ASC 810 and
governs the consolidation of variable interest entities. The
consolidation guidance will become effective for all VIEs the
Company held as of January 1, 2010. As part of the
Companys adoption of the amended consolidation guidance,
it was required to reconsider the Companys previous
consolidation conclusions pertaining to the Companys
variable interests in VIEs, including: (i) whether an
entity is a VIE; and (ii) whether the Company is the
primary beneficiary. Based on the Companys assessment of
its involvement in VIEs at January 1, 2010, in accordance
with the amended consolidation guidance, the Company determined
that it is not the primary beneficiary of any mortgage loan
securitization entities in which it held a variable interest, as
the Company does not have the power to direct the activities
that most significantly impact the economic performance of these
entities. The adoption of the amended consolidation guidance
will therefore not result in the Company consolidating or
deconsolidating any VIEs for which it has involvement. It should
be noted, however, that the new guidance also requires the
Company to reassess these conclusions, based upon changes in the
facts and circumstances pertaining to the Companys VIEs,
on an ongoing basis; thus the Companys assessments may
therefore change and could result in a material impact to the
Companys financial statements during
F-47
subsequent reporting periods. The Company will provide the
presentation and disclosure requirements in the amended
consolidation guidance in its financial statements for the three
month period ending March 31, 2010.
Subsequent to December 31, 2009, there were certain events
which the Company has determined should result in a reassessment
of the consolidation of the NHEL
2006-1, MTA
2006-1, and
NHEL 2007-1
securitizations. Based on the provisions of the amended guidance
and the conclusion by Company management that a new transfer
date has occurred for the NHEL
2006-1, MTA
2006-1, and
NHEL 2007-1
securitizations, the Company believes that it will deconsolidate
the assets and liabilities of the NHEL
2006-1, MTA
2006-1, and
NHEL 2007-1
securitization trusts and will record a gain during the
three-month period ending March 31, 2010. See Note 17
to the consolidated financial statements for further details.
As a result of the analysis, the Company does not anticipate any
impact to the Companys financial statements upon the
Companys initial adoption of the amended Transfers and
Servicing guidance and the amended Consolidation guidance on
January 1, 2010. However, as discussed above, the Company
re-evaluated the NHEL
2006-1, MTA
2006-1, and
NHEL 2007-1
securitization transactions and determined that based on the
occurrence of certain events during 2010, the application of the
amended Transfers and Servicing guidance will result in the
Company reflecting as sales of financial assets and
extinguishment of liabilities the assets and liabilities of the
securitization trusts during the three-month period ending
March 31, 2010. See Note 17 to the consolidated
financial statements for further details.
Improving Disclosures about Fair Value
Measurements. In January 2010, the Financial
Accounting Standards Board (FASB) issued new fair
value disclosure guidance. The new guidance requires disclosing
the amounts of significant transfers in and out of Level 1
and 2 fair value measurements and to describe the reasons for
the transfers. The disclosures are effective for reporting
periods beginning after December 15, 2009. Additionally,
disclosures of the gross purchases, sales, issuances and
settlements activity in Level 3 fair value measurements
will be required for fiscal years beginning after
December 15, 2010.
|
|
Note 3.
|
Mortgage
Loans
Held-in-Portfolio
|
Mortgage loans
held-in-portfolio,
all of which are secured by residential properties, consisted of
the following as of December 31, 2009 and 2008 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Mortgage loans
held-in-portfolio:
|
|
|
|
|
|
|
|
|
Outstanding principal
|
|
$
|
1,985,483
|
|
|
$
|
2,529,791
|
|
Net unamortized deferred origination costs
|
|
|
16,605
|
|
|
|
19,048
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
2,002,088
|
|
|
|
2,548,839
|
|
Allowance for credit losses
|
|
|
(712,614
|
)
|
|
|
(776,001
|
)
|
|
|
|
|
|
|
|
|
|
Mortgage loans
held-in-portfolio
|
|
$
|
1,289,474
|
|
|
$
|
1,772,838
|
|
|
|
|
|
|
|
|
|
|
Weighted average coupon
|
|
|
6.94
|
%
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
Mortgage loans
held-in-portfolio
consist of loans that the Company has securitized in structures
that are accounted for as financings. These securitizations are
structured legally as sales, but for accounting purposes are
treated as financings under the Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities guidance. See below for details of the
Companys securitization transactions structured as
financings.
At inception the NHES
2006-1 and
NHES 2006-MTA1 securitizations did not meet the qualifying
special purpose entity criteria necessary for derecognition
because after the loans were securitized the securitization
trusts were able to acquire derivatives relating to beneficial
interests retained by the Company; additionally, the Company had
the unilateral ability to repurchase a limited number of loans
back from these two trusts. The NHES
2007-1
securitization does not meet the qualifying special purpose
entity criteria necessary for derecognition because of the
excessive benefit the Company received at inception from the
derivative instruments delivered into the trust to counteract
interest rate risk.
F-48
Accordingly, the loans in these securitizations remain on the
Consolidated Balance Sheets as Mortgage loans
held-in-portfolio.
Given this treatment, retained interests are not created, and
securitization bond financing is reflected on the Consolidated
Balance Sheets as a liability. The Company records interest
income on loans
held-in-portfolio
and interest expense on the bonds issued in the securitizations
over the life of the securitizations. Deferred debt issuance
costs and discounts related to the bonds are amortized using an
effective yield basis over the estimated life of the bonds.
Mortgage loans
held-in-portfolio
are serviced by a third-party entity. During the year ended
December 31, 2009, the servicer modified loans totaling
$230.0 million in principal with weighted-average interest
rates of 8.59% and 4.87% before and after modification,
respectively. The modifications are offered to borrowers
experiencing financial difficulties and serve to reduce monthly
payments and defer unpaid interest. The Companys estimates
for the allowance for loan losses and related provision include
the projected impact of the modified loans.
At December 31, 2009, all of the loans classified as
held-in-portfolio
were pledged as collateral for financing purposes.
The table below presents quantitative information about
delinquencies, net credit losses, and components of securitized
financial assets and other assets managed together with them
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount of
|
|
|
|
|
|
|
Total Principal Amount of
|
|
|
Loans 60 Days or More
|
|
|
Net Credit Losses
|
|
|
|
Loans(A) for the Year
|
|
|
Past Due for the Year
|
|
|
During the Year Ended
|
|
|
|
Ended December 31,
|
|
|
Ended December 31,
|
|
|
December 31,(B)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Loans securitized
|
|
$
|
6,570,308
|
|
|
$
|
8,121,668
|
|
|
$
|
3,296,863
|
|
|
$
|
3,371,720
|
|
|
$
|
735,892
|
|
|
$
|
469,182
|
|
Loans
held-in-portfolio
|
|
|
2,138,500
|
|
|
|
2,684,213
|
|
|
|
1,243,731
|
|
|
|
1,270,261
|
|
|
|
321,097
|
|
|
|
155,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans securitized or
held-in-portfolio
|
|
$
|
8,708,808
|
|
|
$
|
10,805,881
|
|
|
$
|
4,540,594
|
|
|
$
|
4,641,981
|
|
|
$
|
1,056,989
|
|
|
$
|
624,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes assets acquired through foreclosure. |
|
(B) |
|
Represents the realized losses as reported by the securitization
trusts for each period presented. |
Collateral for 25% and 23% of the mortgage loans
held-in-portfolio
outstanding as of December 31, 2009 was located in
California and Florida, respectively. Collateral for 27% and 21%
of the mortgage loans
held-in-portfolio
outstanding as of December 31, 2008 was located in
California and Florida, respectively. Interest only loan
products made up 10% and 22% of the loans classified as
held-in-portfolio
as of December 31, 2009 and 2008, respectively. In
addition, as of December 31, 2009, moving treasury average
(MTA) loan products made up 26% of the loans
classified as
held-in-portfolio
compared to 27% as of December 31, 2008. These MTA loans
had $1.6 million and $19.9 million in negative
amortization during 2009 and 2008, respectively. The Company has
no other significant concentration of credit risk on mortgage
loans.
Mortgage loans
held-in-portfolio
that the Company has placed on non-accrual status totaled
$712.6 million and $755.5 million at December 31,
2009 and 2008, respectively. At December 31, 2009, the
Company had $433.4 million in mortgage loans
held-in-portfolio
past due 90 days or more, which were still accruing
interest as compared to $436.2 million at December 31,
2008. These loans carried mortgage insurance and the accrual
will be discontinued when in managements opinion the
interest is not collectible.
Activity in the allowance for credit losses on mortgage
loans
held-in-portfolio
is as follows for the two years ended December 31, 2009
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance, beginning of period
|
|
$
|
776,001
|
|
|
$
|
230,138
|
|
Provision for credit losses
|
|
|
260,860
|
|
|
|
707,364
|
|
Charge-offs, net of recoveries
|
|
|
(324,247
|
)
|
|
|
(161,501
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
712,614
|
|
|
$
|
776,001
|
|
|
|
|
|
|
|
|
|
|
F-49
The FASB Staff Position, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities (VIE Guidance),
which was adopted by the Company on December 31, 2008,
provides the disclosure requirements for transactions with VIEs
or special purpose entities and transfers of financial assets in
securitizations or asset-backed financing arrangements. Under
the VIE Guidance, the Company is required to disclose
information for consolidated VIEs, for VIEs in which the Company
is the sponsor as defined below or is a significant variable
interest holder (Sponsor/Significant VIH) and for
VIEs that are established for securitizations and asset-backed
financing arrangements. The VIE Guidance has expanded the
population of VIEs for which disclosure is required.
The Company has defined sponsor to include all
transactions where the Company has transferred assets to a VIE
and/or
structured the VIE, regardless of whether or not the asset
transfer has met the sale conditions in the previous guidance.
The Company discloses all instances where continued involvement
with the assets exposes it to potential economic gain/(loss),
regardless of whether or not that continued involvement is
considered to be a variable interest in the VIE.
The Companys only continued involvement, relating to these
transactions, is retaining interests in the VIEs.
For the purposes of this disclosure, transactions with VIEs are
categorized as follows:
Securitization transactions. For the purposes
of this disclosure, securitization transactions include
transactions where the Company transferred mortgage loans and
accounted for the transfer as a sale. This category includes
Qualifying Special Purpose Entities (QSPEs) and is
reflected in the securitization section of this Note. QSPEs are
commonly used by the Company in securitization transactions as
described below. In accordance with VIE Guidance, the
Company does not consolidate QSPEs.
Mortgage Loan VIEs. The Company consolidates
securitization transactions that are structured legally as
sales, but for accounting purposes are treated as financings as
defined by the previous guidance. The NHES
2006-1 and
NHES 2006-MTA1 securitizations at inception did not meet the
criteria necessary for derecognition under the previous guidance
and related interpretations because after the loans were
securitized the securitization trusts was able to acquire
derivatives relating to beneficial interests retained by the
Company; additionally, the Company, had the unilateral ability
to repurchase a limited number of loans back from the trust.
These provisions were removed effective September 30, 2008.
Since the removal of these provisions were not considered
substantive, the original accounting conclusion remains the
same. The NHES
2007-1
securitization does not meet the qualifying special purpose
entity criteria necessary for derecognition under the previous
guidance and related interpretations because of the excessive
benefit the Company received at inception from the derivative
instruments delivered into the trust to counteract interest rate
risk. These transactions could continue to fail QSPE status and
require consolidation and related disclosures. The Company has
no control over the mortgage loans held by these VIEs due to
their legal structure. Therefore, these mortgage loans have been
pledged to the bondholders in the VIEs, and these assets are
included in the assets pledged balance reported within this
footnote. The beneficial interest holders in these VIEs have no
recourse to the Company; rather their investments are paid
exclusively from the assets in the VIE. Securitization VIEs that
hold loan assets are typically financed through the issuance of
several classes of debt (i.e., tranches).
Collateralized Debt Obligations
(CDO). In the first quarter of 2007,
the Company closed a CDO. The collateral for this securitization
consisted of subordinated securities which the Company retained
from its loan securitizations as well as subordinated securities
purchased from other issuers. This securitization was structured
legally as a sale, but for accounting purposes was accounted for
as a financing under the accounting guidance. This
securitization did not meet the qualifying special purpose
entity criteria under the accounting guidance. Accordingly, the
securities remain on the Companys Consolidated Balance
Sheets, retained interests were not created, and securitization
bond financing replaced the short-term debt used to finance the
securities. The Company is not the primary beneficiary in this
transaction.
F-50
Transactions with these VIEs are reflected in the
Sponsor/Significant VIE table in instances where the Company has
not transferred the assets to the VIE or in the tables where the
Company has transferred assets and has accounted for the
transfer as a sale.
Variable
Interest Entities
The VIE Guidance requires an entity to consolidate a VIE if that
entity holds a variable interest that will absorb a majority of
the VIEs expected losses, receive a majority of the
VIEs expected residual returns, or both. The entity
required to consolidate a VIE is known as the primary
beneficiary. VIEs are reassessed for consolidation when
reconsideration events occur. Reconsideration events include,
changes to the VIEs governing documents that reallocate
the expected losses/returns of the VIE between the primary
beneficiary and other variable interest holders or sales and
purchases of variable interests in the VIE.
There were no material reconsideration events during the period.
The table below provides the disclosure information required by
the VIE guidance for VIEs that are consolidated by the Company
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets After Intercompany
|
|
Liabilities After
|
|
|
|
|
|
|
Eliminations
|
|
Intercompany
|
|
Recourse to the
|
Consolidated VIEs
|
|
Total Assets
|
|
Unrestricted
|
|
Restricted(A)
|
|
Eliminations
|
|
Company(B)
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loan VIEs(C)
|
|
$
|
1,435,671
|
|
|
$
|
|
|
|
$
|
1,427,501
|
|
|
$
|
2,453,181
|
|
|
$
|
|
|
CDO(D)
|
|
|
1,389
|
|
|
|
|
|
|
|
1,387
|
|
|
|
1,387
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loan VIEs(C)
|
|
$
|
1,930,063
|
|
|
$
|
|
|
|
$
|
1,920,610
|
|
|
$
|
2,730,280
|
|
|
$
|
|
|
CDO(D)
|
|
|
7,435
|
|
|
|
|
|
|
|
7,035
|
|
|
|
8,557
|
|
|
|
|
|
|
|
|
(A) |
|
Assets are considered restricted when they cannot be freely
pledged or sold by the Company. |
|
(B) |
|
This column reflects the extent, if any, to which investors have
recourse to the Company beyond the assets held by the VIE and
assumes a total loss of the assets held by the VIE. |
|
(C) |
|
For Mortgage Loan VIEs, assets are primarily recorded in
Mortgage loans
held-in-portfolio.
Liabilities are primarily recorded in Asset-backed bonds
secured by mortgage loans. |
|
(D) |
|
For the CDO, assets are primarily recorded in Mortgage
securities and liabilities are recorded in Other
current liabilities. |
Securitizations
Prior to changes in its business in 2007, the Company
securitized residential nonconforming mortgage loans. The
Companys involvement with VIEs that are used to securitize
financial assets consists of owning securities issued by VIEs.
The following table relates to securitizations where the Company
is the retained interest holder of assets issued by the entity
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Size/Principal
|
|
|
Assets on
|
|
|
Liabilities on
|
|
|
Exposure to
|
|
|
Year to Date
|
|
|
Year to Date
|
|
|
|
Outstanding(A)
|
|
|
Balance Sheet
|
|
|
Balance Sheet
|
|
|
Loss(B)
|
|
|
Loss on Sale
|
|
|
Cash Flows
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans(C)
|
|
$
|
6,570,308
|
|
|
$
|
7,031
|
|
|
$
|
|
|
|
$
|
7,031
|
|
|
$
|
|
|
|
$
|
15,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 Residential mortgage loans(C)
|
|
$
|
8,121,668
|
|
|
$
|
15,919
|
|
|
$
|
|
|
|
$
|
15,919
|
|
|
$
|
|
|
|
$
|
58,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Size/Principal Outstanding reflects the estimated principal of
the underlying assets held by the VIE/SPEs. |
F-51
|
|
|
(B) |
|
The maximum exposure to loss includes the following: the assets
held by the Company retained interests in the VIEs/SPEs. The
maximum exposure to loss assumes a total loss on the referenced
assets held by the VIE. |
|
(C) |
|
For residential mortgage loans QSPEs, assets on balance sheet
are primarily securities issued by the entity and are recorded
in Mortgage securities. |
In certain instances, the Company retains interests in the
subordinated tranche and residual tranche of securities issued
by VIEs that are created to securitize assets. The gain or loss
on the sale of the assets is determined with reference to the
previous carrying amount of the financial assets transferred,
which is allocated between the assets sold and the retained
interests, if any, based on their relative fair values at the
date of transfer.
Retained interests are recorded in the Consolidated Balance
Sheets at fair value. The Company estimates fair value for the
retained residual securities based on the present value of
expected future cash flows using managements best
estimates of credit losses, prepayment rates, forward yield
curves, and discount rates, commensurate with the risks
involved. The fair value of retained subordinated securities is
estimated using quoted market prices compared to internal
discounted cash flows. Retained interests are either held as
mortgage securities trading, with changes in fair
value recorded in the Consolidated Statements of Operations, or
as mortgage securities available-for-sale, with
changes in fair value included in accumulated other
comprehensive income.
Retained interests are reviewed periodically for impairment. The
retained interests consisted of $6.9 million of residual
interests as of December 31, 2009 and $13.5 million of
residual interests and $2.4 million of retained
subordinated interests as of December 31, 2008,
respectively.
The following table presents information on retained interests
excluding the offsetting benefit of financial instruments used
to hedge risks, held by the Company as of December 31, 2009
arising from the Companys residential mortgage-related
securitization transactions. The pre-tax sensitivities of the
current fair value of the retained interests to immediate 10%
and 25% adverse changes in assumptions and parameters are also
shown (dollars in thousands):
|
|
|
|
|
|
|
|
|
Carrying amount/fair value of residual interests
|
|
|
|
|
|
$
|
7,031
|
|
Weighted average life (in years)
|
|
|
|
|
|
|
3.72
|
|
Weighted average prepayment speed assumption (CPR) (percent)
|
|
|
|
|
|
|
17.0
|
|
Fair value after a 10% increase in prepayment speed
|
|
|
|
|
|
$
|
6,816
|
|
Fair value after a 25% increase in prepayment speed
|
|
|
|
|
|
$
|
6,249
|
|
Weighted average expected annual credit losses (percent of
current collateral balance)
|
|
|
|
|
|
|
25.7
|
|
Fair value after a 10% increase in annual credit losses
|
|
|
|
|
|
$
|
6,833
|
|
Fair value after a 25% increase in annual credit losses
|
|
|
|
|
|
$
|
6,572
|
|
Weighted average residual cash flows discount rate (percent)
|
|
|
|
|
|
|
25.0
|
|
Fair value after a 500 basis point increase in discount rate
|
|
|
|
|
|
$
|
6,811
|
|
Fair value after a 1000 basis point increase in discount
rate
|
|
|
|
|
|
$
|
6,604
|
|
Market interest rates:
|
|
|
|
|
|
|
|
|
Fair value after a 100 basis point increase in market rates
|
|
|
|
|
|
$
|
4,873
|
|
Fair value after a 200 basis point increase in market rates
|
|
|
|
|
|
$
|
2,910
|
|
The preceding sensitivity analysis is hypothetical and should be
used with caution. In particular, the effect of a variation in a
particular assumption on the fair value of the retained interest
is calculated independent of changes in any other assumption; in
practice, changes in one factor may result in changes in
another, which might magnify or counteract the sensitivities.
Further, changes in fair value based on a 10% or 25% variation
in an assumption or parameter generally cannot be extrapolated
because the relationship of the change in the assumption to the
change in fair value may not be linear. Also, the sensitivity
analysis does not include the offsetting benefit of financial
instruments that the Company utilizes to hedge risks, including
credit, interest rate, and prepayment risk, that are inherent in
the retained interests. These hedging strategies
F-52
are structured to take into consideration the hypothetical
stress scenarios above, such that they would be effective in
principally offsetting the Companys exposure to loss in
the event that these scenarios occur.
|
|
Note 4.
|
Mortgage
Securities
|
Mortgage securities consist of securities classified as
available-for-sale and trading as of December 31, 2009 and
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Mortgage securities available-for-sale
|
|
$
|
6,903
|
|
|
$
|
12,788
|
|
Mortgage securities trading
|
|
|
1,087
|
|
|
|
7,085
|
|
|
|
|
|
|
|
|
|
|
Total mortgage securities
|
|
$
|
7,990
|
|
|
$
|
19,873
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 and 2008, mortgage
securities available-for-sale consisted entirely of
the Companys investment in the residual securities issued
by securitization trusts sponsored by the Company, but did not
include the NMFT
Series 2007-2
residual security. Residual securities consist of interest-only,
prepayment penalty and overcollateralization bonds. Management
estimates the fair value of the residual securities by
discounting the expected future cash flows of the collateral and
bonds.
The following table presents certain information on the
Companys portfolio of mortgage securities
available-for-sale as of December 31, 2009 and
December 31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Less than Twelve
|
|
Estimated Fair
|
|
Average
|
|
|
Cost Basis
|
|
Gain
|
|
Months
|
|
Value
|
|
Yield(A)
|
|
As of December 31, 2009
|
|
$
|
1,792
|
|
|
$
|
5,111
|
|
|
|
|
|
|
$
|
6,903
|
|
|
|
132.90
|
%
|
As of December 31, 2008
|
|
|
3,771
|
|
|
|
9,017
|
|
|
|
|
|
|
|
12,788
|
|
|
|
38.2
|
|
|
|
|
(A) |
|
The average yield is calculated from the cost basis of the
mortgage securities and does not give effect to changes in fair
value that are reflected as a component of shareholders
equity. |
During the years ended December 31, 2009 and 2008
management concluded that the decline in value on certain
securities in the Companys mortgage securities
available-for-sale portfolio were other-than-temporary. As a
result, the Company recognized impairments on mortgage
securities available-for-sale of $1.2 million
and $23.1 million during the years ended December 31,
2009 and 2008, respectively.
Maturities of mortgage securities owned by the Company depend on
repayment characteristics and experience of the underlying
financial instruments.
Mortgage securities trading consist of the NMFT
Series 2007-2
residual security, and subordinated securities retained by the
Company from securitization transactions and subordinated
securities purchased from other issuers in the open market.
Management estimates the fair value of the residual securities
by discounting the expected future cash flows of the collateral
and bonds. The fair value of the subordinated securities is
estimated based on quoted market prices and compared to
estimates based on discounting the expected future cash flows of
the collateral and bonds. Refer to Note 9 for a description
of the valuation methods as of December 31, 2009 and
December 31, 2008. The following table summarizes the
Companys mortgage securities trading as of
December 31, 2009 and December 31, 2008 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Original Face
|
|
|
Amortized Cost Basis
|
|
|
Fair Value
|
|
|
Yield(A)
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated securities pledged to CDO
|
|
$
|
332,489
|
|
|
$
|
103,638
|
|
|
$
|
959
|
|
|
|
|
|
Other subordinated securities
|
|
|
102,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual securities
|
|
|
|
|
|
|
374
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
435,114
|
|
|
$
|
104,012
|
|
|
$
|
1,087
|
|
|
|
4.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Original Face
|
|
|
Amortized Cost Basis
|
|
|
Fair Value
|
|
|
Yield(A)
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated securities pledged to CDO
|
|
$
|
332,489
|
|
|
$
|
321,293
|
|
|
$
|
4,798
|
|
|
|
|
|
Other subordinated securities
|
|
|
102,625
|
|
|
|
96,723
|
|
|
|
1,582
|
|
|
|
|
|
Residual securities
|
|
|
|
|
|
|
15,952
|
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
435,114
|
|
|
$
|
433,968
|
|
|
$
|
7,085
|
|
|
|
9.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Calculated from the ending fair value of the securities. |
The Company recognized net trading losses of $11.8 million
and $88.7 million for the years ended December 31,
2009 and 2008, respectively, which are included in the other
expense line of the Companys Consolidated Statements of
Operations.
Junior
Subordinated Debentures
NFIs wholly owned subsidiary NovaStar Mortgage, Inc.
(NMI) has approximately $77.8 million in
principal amount of unsecured notes (collectively, the
Notes) outstanding to NovaStar Capital Trust I
and NovaStar Capital Trust II (collectively, the
Trusts) which secure trust preferred securities
issued by the Trusts. NFI has guaranteed NMIs obligations
under the Notes. NMI failed to make quarterly interest payments
that were due on all payment dates in 2008 and through
April 24, 2009 on these Notes.
On April 24, 2009 (the Exchange Date), the
parties executed the necessary documents to complete an exchange
of the Notes for new preferred obligations. On the Exchange
Date, the Company paid interest due through December 31,
2008, in the aggregate amount of $5.3 million. In addition,
the Company paid $0.3 million in legal and administrative
costs on behalf of the Trusts which was recorded in the
Selling, general and administrative expense line
item on the Consolidated Statements of Operations.
The new preferred obligations require quarterly distributions of
interest to the holders at a rate equal to 1.0% per annum
beginning January 1, 2009 through December 31, 2009,
subject to reset to a variable rate equal to the three-month
LIBOR plus 3.5% upon the occurrence of an Interest
Coverage Trigger. For purposes of the new preferred
obligations, an Interest Coverage Trigger occurs when the ratio
of EBITDA for any quarter ending on or after December 31,
2008 and on or prior to December 31, 2009 to the product as
of the last day of such quarter, of the stated liquidation value
of all outstanding 2009 Preferred Securities (i) multiplied
by 7.5%, (ii) multiplied by 1.5 and (iii) divided by
4, equals or exceeds 1.00 to 1.00. Beginning January 1,
2010 until the earlier of February 18, 2019 or the
occurrence of an Interest Coverage Trigger, the unpaid principal
amount of the new preferred obligations will bear interest at a
rate of 1.0% per annum and, thereafter, at a variable rate,
reset quarterly, equal to the three-month LIBOR plus 3.5% per
annum.
Collateralized
Debt Obligation Issuance (CDO)
In the first quarter of 2007 the Company closed a CDO. The
collateral for this securitization consisted of subordinated
securities which the Company retained from its loan
securitizations as well as subordinated securities purchased
from other issuers. This securitization was structured legally
as a sale, but for accounting purposes was accounted for as a
financing. This securitization did not meet the qualifying
special purpose entity criteria. Accordingly, the securities
remain on the Companys Consolidated Balance Sheets,
retained interests were not created, and securitization bond
financing replaced the short-term debt used to finance the
securities. The Company records interest income on the
securities and interest expense on the bonds issued in the
securitization over the life of the related securities and bonds.
The Company elected the fair value option for the asset-backed
bonds issued from NovaStar ABS CDO I. The election was made for
these liabilities to help reduce income statement volatility
which otherwise would arise if the accounting method for this
debt was not matched with the fair value accounting for the
mortgage securities. Fair value is estimated using quoted market
prices. The Company recognized fair value adjustments
F-54
of $5.1 and $63.0 million for the years ended
December 31, 2009 and 2008, respectively, which is included
in the Other expense line item on the Consolidated
Statements of Operations.
On January 30, 2008, an event of default occurred under the
CDO bond indenture agreement due to the noncompliance of certain
overcollateralization tests. As a result, the trustee, upon
notice and at the direction of a majority of the secured
noteholders, may declare all of the secured notes to be
immediately due and payable including accrued and unpaid
interest. No such notice has been given as of March 30,
2010. As there is no recourse to the Company, it does not expect
any significant impact to its financial condition, cash flows or
results of operation as a result of the event of default.
Asset-backed Bonds (ABB). The
Company issued ABB secured by its mortgage loans and ABB secured
by its mortgage securities in certain transactions treated as
financings as a means for long-term non-recourse financing. For
financial reporting purposes, the mortgage loans
held-in-portfolio
and mortgage securities, as collateral, are recorded as assets
of the Company and the ABB are recorded as debt. Interest and
principal on each ABB is payable only from principal and
interest on the underlying mortgage loans or mortgage securities
collateralizing the ABB. Interest rates reset monthly and are
indexed to one-month LIBOR. The estimated weighted-average
months to maturity are based on estimates and assumptions made
by management. The actual maturity may differ from expectations.
For ABB secured by mortgage loans, the Company retained a
clean up call option to repay the ABB, and reacquire
the mortgage loans, when the remaining unpaid principal balance
of the underlying mortgage loans falls below 10% of their
original amounts. The Company subsequently sold all of these
clean-up
call rights, to the buyer of our mortgage servicing rights. The
Company did retain separate independent rights to require the
buyer of our mortgage servicing rights to repurchase loans from
the trusts and subsequently sell them to us; the Company does
not expect to exercise any of the call rights that it retained.
The Company had no ABB transactions for the year ended
December 31, 2009.
The following is a summary of outstanding ABB and related loans
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Backed Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Mortgage Loans
|
|
|
|
|
|
|
Average
|
|
|
Average Months
|
|
|
|
|
|
Weighted
|
|
|
|
Remaining
|
|
|
Interest
|
|
|
to Call or
|
|
|
Remaining
|
|
|
Average
|
|
|
|
Principal
|
|
|
Rate
|
|
|
Maturity
|
|
|
Principal
|
|
|
Coupon
|
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABB Secured by Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NHES
Series 2006-1
|
|
$
|
475,360
|
|
|
|
0.52
|
%
|
|
|
72
|
|
|
$
|
399,913
|
|
|
|
8.03
|
%
|
NHES
Series 2006-MTA1
|
|
|
602,068
|
|
|
|
0.48
|
|
|
|
51
|
|
|
|
532,696
|
|
|
|
3.84
|
|
NHES
Series 2007-1
|
|
|
1,201,517
|
|
|
|
0.50
|
|
|
|
106
|
|
|
|
1,052,873
|
|
|
|
6.99
|
|
Unamortized debt issuance costs, net
|
|
|
(8,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,270,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABB Secured by Mortgage Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NovaStar ABS CDO I
|
|
$
|
323,999
|
(A)
|
|
|
0.80
|
%
|
|
|
16
|
|
|
|
(B
|
)
|
|
|
(B
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABB Secured by Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NHES
Series 2006-1
|
|
$
|
553,669
|
|
|
|
0.33
|
%
|
|
|
84
|
|
|
$
|
528,766
|
|
|
|
8.95
|
%
|
NHES
Series 2006-MTA1
|
|
|
683,757
|
|
|
|
0.75
|
|
|
|
40
|
|
|
|
680,127
|
|
|
|
5.80
|
|
NHES
Series 2007-1
|
|
|
1,372,015
|
|
|
|
0.78
|
|
|
|
116
|
|
|
|
1,320,898
|
|
|
|
8.76
|
|
Unamortized debt issuance costs, net
|
|
|
(10,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,599,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABB Secured by Mortgage Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NovaStar ABS CDO I
|
|
$
|
325,930
|
(A)
|
|
|
3.08
|
%
|
|
|
26
|
|
|
|
(B
|
)
|
|
|
(B
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-55
|
|
|
(A) |
|
The NovaStar ABS CDO I ABB are carried at a fair value of
$1.0 million and $5.4 million on the Companys
Consolidated Balance Sheets at December 31, 2009 and 2008,
respectively. |
|
(B) |
|
Collateral for the NovaStar ABS CDO I are subordinated mortgage
securities. |
The following table summarizes the expected repayment
requirements relating to the securitization bond financing at
December 31, 2009 (dollars in thousands). Amounts listed as
bond payments are based on anticipated receipts of principal on
underlying mortgage loan and security collateral using expected
prepayment speeds. Principal repayments on these ABB are payable
only from the mortgage loans and securities collateralizing the
ABB. In the event that principal receipts from the underlying
collateral are adversely impacted by credit losses, there could
be insufficient principal receipts available to repay the ABB
principal.
|
|
|
|
|
|
|
Asset-Backed Bonds
|
|
|
2010
|
|
$
|
533,889
|
|
2011
|
|
|
351,622
|
|
2012
|
|
|
288,944
|
|
2013
|
|
|
207,891
|
|
2014
|
|
|
251,883
|
|
Thereafter
|
|
|
829,887
|
|
|
|
|
|
|
|
|
$
|
2,464,116
|
|
|
|
|
|
|
Short-term
Borrowings
On May 9, 2008, the Company fully repaid all outstanding
borrowings with Wachovia and all agreements were terminated
effective the same day.
|
|
Note 6.
|
Commitments
and Contingencies
|
Commitments. The Company leases office space
under various operating lease agreements. Rent expense for 2009
and 2008, under leases related to continuing operations,
aggregated $1.9 million and $4.8 million,
respectively. At December 31, 2009, future minimum lease
commitments under those leases are as follows (dollars in
thousands):
|
|
|
|
|
|
|
Lease
|
|
|
|
Obligations
|
|
|
2010
|
|
$
|
1,711
|
|
2011
|
|
|
1,287
|
|
2012
|
|
|
873
|
|
2013
|
|
|
624
|
|
2014
|
|
|
73
|
|
|
|
|
|
|
|
|
$
|
4,568
|
|
|
|
|
|
|
The Company had entered into various lease agreements pursuant
to which the lessor agreed to repay the Company for certain
existing lease obligations. The Company has recorded deferred
lease incentives related to these payments which will be
amortized into rent expense over the life of the respective
lease on a straight-line basis. There were no deferred lease
incentives related to continuing operations as of
December 31, 2009. The deferred lease incentives related to
continuing operations as of December 31, 2008 were
$0.9 million.
The Company has sublease agreements for office space formerly
occupied by the Company and received approximately
$0.7 million during 2009. There were no sublease agreements
included in continuing operations during 2008.
F-56
Contingencies
At this time, the Company does not believe that an adverse
ruling against the Company is probable for the following claims
and as such no amounts have been accrued in the consolidated
financial statements.
On January 10, 2008, the City of Cleveland, Ohio filed suit
against the Company and approximately 20 other mortgage,
commercial and investment bankers alleging a public nuisance had
been created in the City of Cleveland by the operation of the
subprime mortgage industry. The case was filed in state court
and promptly removed to the United States District Court for the
Northern District of Ohio. The plaintiff seeks damages for loss
of property values in the City of Cleveland and for increased
costs of providing services and infrastructure, as a result of
foreclosures of subprime mortgages. On October 8, 2008, the
City of Cleveland filed an amended complaint in federal court
which did not include claims against the Company but made
similar claims against NMI, a wholly-owned subsidiary of NFI. On
November 24, 2008, the Company filed a motion to dismiss
the claims against NMI, which motion the court granted on
May 15, 2009. The City of Cleveland has filed an appeal.
The Company believes that these claims are without merit and
will vigorously defend against them.
On January 31, 2008, two purported shareholders filed
separate derivative actions in the Circuit Court of Jackson
County, Missouri against various former and current officers and
directors and named the Company as a nominal defendant. The
essentially identical petitions seek monetary damages alleging
that the individual defendants breached fiduciary duties owed to
the Company, alleging insider selling and misappropriation of
information, abuse of control, gross mismanagement, waste of
corporate assets, and unjust enrichment between May 2006 and
December 2007. On June 24, 2008, a third, similar case was
filed in United States District Court for the Western District
of Missouri. On July 13, 2009 the Company filed a motion to
dismiss the plaintiffs claims. On November 24, 2009,
the Company reached a settlement with the plaintiffs which
provided for certain corporate governance changes and a payment
of $300,000 for attorney fees, the payment being covered by
insurance. A hearing for court approval of the settlement is set
for April 5, 2010.
On May 21, 2008, a purported class action case was filed in
the Supreme Court of the State of New York, New York County, by
the New Jersey Carpenters Health Fund, on behalf of itself
and all others similarly situated. Defendants in the case
include NovaStar Mortgage Funding Corporation and its individual
directors, several securitization trusts sponsored by the
Company, and several unaffiliated investment banks and credit
rating agencies. The case was removed to the United States
District Court for the Southern District of New York. On
June 16, 2009, the plaintiff filed an amended complaint.
Plaintiff seeks monetary damages, alleging that the defendants
violated sections 11, 12 and 15 of the Securities Act of
1933 by making allegedly false statements regarding mortgage
loans that served as collateral for securities purchased by
plaintiff and the purported class members. On August 31,
2009, the Company filed a motion to dismiss the plaintiffs
claims. The Company believes it has meritorious defenses to the
case and expects to defend the case vigorously.
On July 7, 2008, plaintiff Jennifer Jones filed a purported
class action case in the United States District Court for the
Western District of Missouri against the Company, certain former
and current officers of the Company, and unnamed members of the
Companys Retirement Committee. Plaintiff, a
former employee of the Company, seeks class action certification
on behalf of all persons who were participants in or
beneficiaries of the Companys 401(k) plan from May 4,
2006 until November 15, 2007 and whose accounts included
investments in the Companys common stock. Plaintiff seeks
monetary damages alleging that the Companys common stock
was an inappropriately risky investment option for retirement
savings, and that defendants breached their fiduciary duties by
allowing investment of some of the assets contained in the
401(k) plan to be made in the Companys common stock. On
November 12, 2008, the Company filed a motion to dismiss
which was denied by the Court on February 11, 2009. On
April 6, 2009, the Court granted the plaintiffs
motion for class certification. The Company sought permission
from the Eighth Circuit Court of Appeals to appeal the order
granting class certification. On May 11, 2009, the Court of
Appeals granted the Company permission to appeal the class
certification order. On November 9, 2009 the Company
reached a settlement with the plaintiffs. The settlement
provides for payment by the Companys insurer of $925,000.
A hearing for court approval of the settlement is set for
April 22, 2010.
F-57
On December 31, 2009, ITS Financial, LLC (ITS)
filed a complaint against Advent and the Company alleging breach
of contract by Advent for services related tax refund
anticipation loans and early season loans. ITS does business as
Instant Tax Service. The defendants removed the case to the
United States District Court for the Southern District of Ohio.
The complaint alleges that the Company worked in tandem and as
one entity with Advent in all material respects. The complaint
also alleges fraud in the inducement, tortious interference by
the Company with the contract, breach of good faith and fair
dealing, fraudulent and negligent misrepresentation, and
liability of the Company by piercing the corporate veil and
joint and several liability, The plaintiff references a
$3 million loan made by the Company to plaintiff and seeks
a judgment declaring that this loan be subject to an offset by
the plaintiffs damages. The litigation is currently stayed
pending resolution of the Companys motion to transfer the
case to the United States District Court for the Western
District of Missouri. The Company believes that the defendants
have meritorious defenses to this case and expects to defend the
case vigorously.
In addition to those matters listed above, the Company is
currently a party to various other legal proceedings and claims,
including, but not limited to, breach of contract claims, tort
claims, and claims for violations of federal and state consumer
protection laws. Furthermore, the Company has received
indemnification and loan repurchase demands with respect to
alleged violations of representations and warranties made in
loan sale and securitization agreements. These indemnification
and repurchase demands have been addressed without significant
loss to the Company, but such claims can be significant when
multiple loans are involved.
|
|
Note 7.
|
Shareholders
Equity
|
To preserve liquidity, the Companys Board of Directors has
suspended the payment of dividends on its 8.9% Series C
Cumulative Redeemable Preferred Stock (the Series C
Preferred Stock) and its Series D1 Mandatory
Convertible Preferred Stock (the Series D1 Preferred
Stock). As a result, dividends continue to accrue on the
Series C Preferred Stock and Series D1 Preferred
Stock. The Company has total accrued dividends payable related
to the Series C Preferred Stock and Series D1
Preferred Stock of $38.4 million as of March 30, 2010.
All accrued and unpaid dividends on the Companys preferred
stock must be paid prior to any payments of dividends or other
distributions on the Companys common stock. In addition,
since dividends on the Series C Preferred Stock were in
arrears for six or more quarterly periods (whether or not
consecutive), the holders of the Series C Preferred Stock,
voting as a single class, elected two additional directors to
the Companys Board of Directors, as described. The Company
does not expect to pay any dividends for the foreseeable future.
On March 17, 2009, the Company notified the holders of the
Series C Preferred Stock that the Company would not make
the dividend payment on the Series C Preferred Stock due on
March 31, 2009. Because dividends on the Series C
Preferred Stock are presently in arrears for six quarters, under
the terms of the Articles Supplementary to the
Companys Charter that established the Series C
Preferred Stock, the holders of the Series C Preferred
Stock had the right, as of March 31, 2009, to elect two
additional directors to the Companys board of directors.
At the Companys Annual Meeting of Shareholders on
June 25, 2009, the holders of the Series C Preferred
Stock elected two additional directors of the Company to serve
until such time that that all dividends accumulated and due on
the Series C Preferred Stock have been paid fully paid.
Dividends on the Series C Preferred Stock are payable in
cash and accrue at a rate of 8.90% annually. Accrued and unpaid
dividends payable related to the Series C Preferred Stock
were approximately $15.0 million and $8.3 million as
of December 31, 2009 and 2008, respectively and
$16.6 million as of March 30, 2010.
Dividends on the Series D1 Preferred Stock are payable in
cash and accrue at a rate of 9.00% per annum, or 13.00% per
annum if any such dividends are not declared and paid when due.
In addition, holders of the Series D1 Preferred Stock are
entitled to participate in any common stock dividends on an as
converted basis. The Companys board of directors has
suspended the payment of dividends on the Companys
Series D1 Preferred Stock. As a result, dividends continue
to accrue on the Series D1 Preferred Stock, and the
dividend rate on the Series D1 Preferred Stock increased
from 9.0% to 13.0%, compounded quarterly, effective
October 16, 2007 with respect to all unpaid dividends and
subsequently accruing dividends. Accrued and unpaid dividends
payable related to the Series D1 Preferred Stock were
approximately $19.4 million as of December 31, 2009
and $21.8 million as of March 30, 2010.
F-58
The Series D1 Preferred Stock is convertible into the
Companys 9.00% Series D2 Mandatory Convertible
Preferred Stock having a par value of $0.01 per share and an
initial liquidation preference of $25.00 per share
(Series D2 Preferred Stock) upon the later of
(a) July 16, 2009, or (b) the date on which the
stockholders of the Company approve certain anti-dilution
protection for the Series D1 Preferred Stock and
Series D2 Preferred Stock that, upon such shareholder
approval, would apply in the event the Company issues additional
common stock for a price below the price at which the
Series D1 Preferred Stock (or the Series D2 Preferred
Stock into which the Series D1 Preferred Stock has been
converted, if any) may be converted into common stock. The
rights, powers and privileges of the Series D2 Preferred
Stock are substantially similar to those of the Series D1
Preferred Stock, except that accrued and unpaid dividends on the
Series D2 Preferred Stock can be added to the common stock
conversion and liquidation value of the Series D2 Preferred
Stock in lieu of cash payment, and the dividend rate on the
Series D2 Preferred Stock is fixed in all circumstances at
9.00%.
The Series D1 Preferred Stock (or the Series D2
Preferred Stock into which the Series D1 Preferred stock
has been converted, if any) is convertible into the
Companys common stock at any time at the option of the
holders. The Series D1 Preferred Stock (or the
Series D2 Preferred Stock into which the Series D1
Preferred stock has been converted, if any) is currently
convertible into 1,875,000 shares of common stock based
upon an initial conversion price of $28.00 per share, subject to
adjustment as provided above or certain other extraordinary
events. On or prior to July 16, 2010, the Company may elect
to convert all of the Series D1 Preferred Stock (or the
Series D2 Preferred Stock into which the Series D1
Preferred stock has been converted, if any) into common stock,
if at such time the Companys common stock is publicly
traded and the common stock price is greater than 200% of the
then existing conversion price for 40 of 50 consecutive trading
days preceding delivery of the forced conversion notice. On
July 16, 2016, the Series D1 Preferred Stock (or the
Series D2 Preferred Stock into which the Series D1
Preferred stock has been converted, if any) will automatically
convert into shares of common stock.
During the years ended December 31, 2009 and 2008, there
were no shares of common stock issued under the Companys
stock-based compensation plan.
The Companys Board of Directors has approved the purchase
of up to $9 million of the Companys common stock. No
shares were repurchased during 2009 and 2008. Under Maryland
law, shares purchased under this plan are to be returned to the
Companys authorized but unissued shares of common stock.
Common stock purchased under this plan is charged against
additional paid-in capital.
|
|
Note 8.
|
Comprehensive
Income
|
Comprehensive income includes revenues, expenses, gains and
losses that are not included in net income. The following is a
roll-forward of accumulated other comprehensive income for the
years ended December 31, 2009 and 2008 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net loss
|
|
$
|
(183,156
|
)
|
|
$
|
(660,482
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Change in unrealized loss on mortgage securities
available-for-sale
|
|
|
(5,106
|
)
|
|
|
(14,152
|
)
|
Change in unrealized gain (loss) on derivative instruments used
in cash flow hedges
|
|
|
8
|
|
|
|
(1,364
|
)
|
Impairment on mortgage securities available-for-sale
reclassified to earnings
|
|
|
1,198
|
|
|
|
23,100
|
|
Net settlements of derivative instruments used in cash flow
hedges reclassified to earnings
|
|
|
85
|
|
|
|
2,459
|
|
|
|
|
|
|
|
|
|
|
F-59
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Other comprehensive income (loss)
|
|
|
(3,815
|
)
|
|
|
10,043
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
(186,971
|
)
|
|
|
(650,439
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to noncontrolling interests
|
|
|
2,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss attributable to NovaStar Financial,
Inc.
|
|
$
|
(184,917
|
)
|
|
$
|
(650,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Note 9.
|
Fair
Value Accounting
|
For financial reporting purposes, the Company follows a fair
value hierarchy that is used to measure the fair value of assets
and liabilities. This hierarchy prioritizes relevant market
inputs in order to determine an exit price, or the
price at which an asset could be sold or a liability could be
transferred in an orderly process that is not a forced
liquidation or distressed sale at the date of measurement.
Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Companys
market assumptions. These two types of inputs create the
following fair value hierarchy:
|
|
|
|
|
Level 1 Quoted prices for identical instruments
in active markets.
|
|
|
|
Level 2 Quoted prices for similar instruments
in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant
value drivers are observable.
|
|
|
|
Level 3 Instruments whose significant value
drivers are unobservable.
|
The Company determines fair value based upon quoted prices when
available or through the use of alternative approaches, such as
discounting the expected cash flows using market interest rates
commensurate with the credit quality and duration of the
investment. The methods the Company uses to determine fair value
on an instrument specific basis are detailed in the section
titled Valuation Methods, below.
The following tables present for each of the fair value
hierarchy levels, the Companys assets and liabilities
related to continuing operations which are measured at fair
value on a recurring basis as of December 31, 2009 and 2008
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable
|
|
Description
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
Inputs (Level 3)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage securities trading
|
|
$
|
1,087
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,087
|
|
Mortgage securities available-for-sale
|
|
|
6,903
|
|
|
|
|
|
|
|
|
|
|
|
6,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
7,990
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed bonds secured by mortgage securities(A)
|
|
$
|
968
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
968
|
|
Derivative instruments, net
|
|
|
157
|
|
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
1,125
|
|
|
$
|
|
|
|
$
|
157
|
|
|
$
|
968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Included in the Other current liabilities line item
on the Consolidated Balance Sheet. |
F-60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage securities trading
|
|
$
|
7,085
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,085
|
|
Mortgage securities available-for-sale
|
|
|
12,788
|
|
|
|
|
|
|
|
|
|
|
|
12,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
19,873
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed bonds secured by mortgage securities(A)
|
|
$
|
5,376
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,376
|
|
Derivative instruments, net
|
|
|
9,102
|
|
|
|
|
|
|
|
9,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
14,478
|
|
|
$
|
|
|
|
$
|
9,102
|
|
|
$
|
5,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Included in the Other current liabilities line item
on the Consolidated Balance Sheet. |
The following tables provides a reconciliation of the beginning
and ending balances for the Companys mortgage
securities trading which are measured at fair value
on a recurring basis using significant unobservable inputs
(Level 3) from December 31, 2007 to
December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
Unrealized
|
|
|
of Mortgage
|
|
|
|
Cost Basis
|
|
|
Loss
|
|
|
Securities
|
|
|
As of December 31, 2008
|
|
$
|
433,968
|
|
|
$
|
(426,883
|
)
|
|
$
|
7,085
|
|
Increases (decreases) to mortgage securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income
|
|
|
10,713
|
|
|
|
|
|
|
|
10,713
|
|
Proceeds from paydowns of securities
|
|
|
(4,885
|
)
|
|
|
|
|
|
|
(4,885
|
)
|
Other than temporary impairments
|
|
|
(335,783
|
)
|
|
|
335,783
|
|
|
|
|
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
(11,826
|
)
|
|
|
(11,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) to mortgage securities
|
|
|
(329,955
|
)
|
|
|
323,957
|
|
|
|
(5,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
$
|
104,013
|
|
|
$
|
(102,926
|
)
|
|
$
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
Unrealized
|
|
|
of Mortgage
|
|
|
|
Cost Basis
|
|
|
Loss
|
|
|
Securities
|
|
|
As of December 31, 2007
|
|
$
|
41,275
|
|
|
$
|
(16,534
|
)
|
|
$
|
24,741
|
|
Increases (decreases) to mortgage securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities transferred from level 2 to level 3
|
|
|
414,080
|
|
|
|
(395,359
|
)
|
|
|
18,721
|
|
Accretion of income
|
|
|
23,652
|
|
|
|
|
|
|
|
23,652
|
|
Proceeds from paydowns of securities
|
|
|
(45,039
|
)
|
|
|
|
|
|
|
(45,039
|
)
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
(14,990
|
)
|
|
|
(14,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) to mortgage securities
|
|
|
392,693
|
|
|
|
(410,349
|
)
|
|
|
(17,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
$
|
433,968
|
|
|
$
|
(426,883
|
)
|
|
$
|
7,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-61
The following tables provide a reconciliation of the beginning
and ending balances for the Companys mortgage
securities available-for-sale which are measured at
fair value on a recurring basis using significant unobservable
inputs (Level 3) from December 31, 2008 to
December 31, 2009 and December 31, 2007 to
December 31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
Unrealized
|
|
|
of Mortgage
|
|
|
|
Cost Basis
|
|
|
Gain
|
|
|
Securities
|
|
|
As of December 31, 2008
|
|
$
|
3,771
|
|
|
$
|
9,017
|
|
|
$
|
12,788
|
|
Increases (decreases) to mortgage securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income(A)
|
|
|
12,815
|
|
|
|
|
|
|
|
12,815
|
|
Proceeds from paydowns of securities(A)(B)
|
|
|
(13,594
|
)
|
|
|
|
|
|
|
(13,594
|
)
|
Impairment on mortgage securities available-for-sale
|
|
|
(1,198
|
)
|
|
|
|
|
|
|
(1,198
|
)
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
(3,908
|
)
|
|
|
(3,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease to mortgage securities
|
|
|
(1,977
|
)
|
|
|
(3,908
|
)
|
|
|
(5,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
$
|
1,794
|
|
|
$
|
5,109
|
|
|
$
|
6,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Cash received on mortgage securities with no cost basis was
$1.9 million for the year ended December 31, 2009. |
|
(B) |
|
For mortgage securities with a remaining cost basis, the Company
reduces the cost basis by the amount of cash that is
contractually due from the securitization trusts. In contrast,
for mortgage securities in which the cost basis has previously
reached zero, the Company records in interest income the amount
of cash that is contractually due from the securitization
trusts. In both cases, there are instances where the Company may
not receive a portion of this cash until after the Consolidated
Balance Sheets reporting date. Therefore, these amounts are
recorded as receivables from the securitization trusts, which
are included in the other assets line on the Companys
Consolidated Balance Sheets. As of December 31, 2009, the
Company had no receivables from securitization trusts related to
mortgage securities available-for-sale with a remaining or zero
cost basis. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
Unrealized
|
|
|
of Mortgage
|
|
|
|
Cost Basis
|
|
|
Gain
|
|
|
Securities
|
|
|
As of December 31, 2007
|
|
$
|
33,302
|
|
|
$
|
69
|
|
|
$
|
33,371
|
|
Increases (decreases) to mortgage securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income(A)
|
|
|
7,988
|
|
|
|
|
|
|
|
7,988
|
|
Proceeds from paydowns of securities(A)(B)
|
|
|
(14,419
|
)
|
|
|
|
|
|
|
(14,419
|
)
|
Impairment on mortgage securities available-for-sale
|
|
|
(23,100
|
)
|
|
|
|
|
|
|
(23,100
|
)
|
Mark-to-market value adjustment
|
|
|
|
|
|
|
8,948
|
|
|
|
8,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease to mortgage securities
|
|
|
(29,531
|
)
|
|
|
8,948
|
|
|
|
(20,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
$
|
3,771
|
|
|
$
|
9,017
|
|
|
$
|
12,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Cash received on mortgage securities with no cost basis was
$3.4 million for the year ended December 31, 2008. |
|
(B) |
|
For mortgage securities with a remaining cost basis, the Company
reduces the cost basis by the amount of cash that is
contractually due from the securitization trusts. In contrast,
for mortgage securities in which the cost basis has previously
reached zero, the Company records in interest income the amount
of cash that is contractually due from the securitization
trusts. In both cases, there are instances where the Company may
not receive a portion of this cash until after the Consolidated
Balance Sheets reporting date. Therefore, these amounts are
recorded as receivables from the securitization trusts, which
are |
F-62
|
|
|
|
|
included in the other assets line on the Companys
Consolidated Balance Sheets. As of December 31, 2008, the
Company had receivables from securitization trusts of
$12.5 million, related to mortgage securities
available-for-sale with a remaining cost basis. At
December 31, 2008, there were no receivables from
securitization trusts related to mortgage securities with a zero
cost basis. |
The following tables provides quantitative disclosures about the
fair value measurements for the Companys assets related to
continuing operations which are measured at fair value on a
nonrecurring basis as of December 31, 2009 and 2008
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
in Active Markets
|
|
Significant Other
|
|
Significant
|
|
|
Real Estate
|
|
for Identical Assets
|
|
Observable Inputs
|
|
Unobservable Inputs
|
Fair Value at
|
|
Owned
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
December 31, 2009
|
|
$
|
64,179
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
64,179
|
|
December 31, 2008
|
|
|
70,480
|
|
|
|
|
|
|
|
|
|
|
|
70,480
|
|
At the time a mortgage loan
held-in-portfolio
becomes real estate owned, the Company records the property at
the lower of its carrying amount or fair value. Upon foreclosure
and through liquidation, the Company evaluates the
propertys fair value as compared to its carrying amount
and records a valuation adjustment when the carrying amount
exceeds fair value. Any valuation adjustments at the time the
loan becomes real estate owned is charged to the allowance for
credit losses.
The following table provides a summary of the impact to earnings
for the year ended December 31, 2009 from the
Companys assets and liabilities which are measured at fair
value on a recurring and nonrecurring basis as of
December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Adjustments
|
|
|
|
|
|
Fair Value
|
|
for the Year Ended
|
|
|
|
|
|
Measurement
|
|
December 31,
|
|
|
Statement of Operation
|
Asset or Liability Measured at Fair Value
|
|
Frequency
|
|
2009
|
|
|
2008
|
|
|
Line Item Impacted
|
|
Mortgage securities trading
|
|
Recurring
|
|
$
|
(11,826
|
)
|
|
$
|
(88,715
|
)
|
|
Other expense
|
Mortgage securities available-for-sale
|
|
Recurring
|
|
|
(1,198
|
)
|
|
|
(23,100
|
)
|
|
Other expense
|
Real estate owned
|
|
Nonrecurring
|
|
|
(9,164
|
)
|
|
|
(7,831
|
)
|
|
Provision for credit losses
|
Derivative instruments, net
|
|
Recurring
|
|
|
(7,361
|
)
|
|
|
(2,627
|
)
|
|
Other expense
|
Asset-backed bonds secured by mortgage securities
|
|
Recurring
|
|
|
5,083
|
|
|
|
62,973
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value losses
|
|
|
|
$
|
(24,466
|
)
|
|
$
|
(59,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
Methods
Mortgage securities
trading. Trading securities are recorded at fair
value with gains and losses, realized and unrealized, included
in earnings. The Company uses the specific identification method
in computing realized gains or losses. Prior to
September 30, 2008, the Company estimated fair value for
its subordinated securities solely from quoted market prices.
Commencing September 30, 2008, the Company estimated fair
value for its subordinated securities based on quoted market
prices compared to estimates based on discounting the expected
future cash flows of the collateral and bonds. The Company
determined this change in valuation method caused a change from
Level 2 to Level 3 due to the unobservable inputs used
by the Company in determining the expected future cash flows.
In addition, upon the closing of its NMFT
Series 2007-2
securitization, the Company classified the residual security it
retained as trading. Management estimates the fair value of its
residual securities by discounting the expected future cash
flows of the collateral and bonds. Due to the unobservable
inputs used by the Company in determining the expected future
cash flows, the Company determined its valuation methodology for
residual securities qualify as Level 3.
F-63
Mortgage securities
available-for-sale. Mortgage
securities available-for-sale represent residual
securities the Company retained in securitization and
resecuritization transactions. Mortgage securities classified as
available-for-sale are reported at their estimated fair value
with unrealized gains and losses reported in accumulated other
comprehensive income. To the extent that the cost basis of
mortgage securities exceeds the fair value and the unrealized
loss is considered to be other than temporary, an impairment
charge is recognized and the amount recorded in accumulated
other comprehensive income or loss is reclassified to earnings
as a realized loss. The specific identification method is used
in computing realized gains or losses. The Company uses the
discount rate methodology for determining the fair value of its
residual securities. The fair value of the residual securities
is estimated based on the present value of future expected cash
flows to be received. Managements best estimate of key
assumptions, including credit losses, prepayment speeds, the
market discount rates and forward yield curves commensurate with
the risks involved, are used in estimating future cash flows.
Derivative instruments. The fair value of
derivative instruments is estimated by discounting the projected
future cash flows using appropriate market rates.
Asset-backed bonds secured by mortgage securities. See
discussion under Fair Value Option for Financial Assets
and Financial Liabilities.
Real estate owned. Real estate owned is
carried at the lower of cost or fair value less estimated
selling costs. The Company estimates fair value at the
assets liquidation value less selling costs using
managements assumptions which are based on historical loss
severities for similar assets.
Fair
Value Option for Financial Assets and Financial
Liabilities
Under the fair value option guidance, the Company may elect to
report most financial instruments and certain other items at
fair value on an
instrument-by-instrument
basis with changes in fair value reported in earnings. After the
initial adoption, the election is made at the acquisition of an
eligible financial asset, financial liability, or firm
commitment or when certain specified reconsideration events
occur. The fair value election may not be revoked once an
election is made.
The Company elected the fair value option for the asset-backed
bonds issued from the CDO, which the Company closed in the first
quarter of 2007. The Company elected the fair value option for
these liabilities to help reduce earnings volatility which
otherwise would arise if the accounting method for this debt was
not matched with the fair value accounting for the related
mortgage securities trading. The asset-backed bonds,
which are being carried at fair value, are included in the
Other current liabilities line item on the
Consolidated Balance Sheets. The change in the asset-backed
bonds balance is due to the fair value adjustments since
adoption of the guidance. The Company has not elected fair value
accounting for any other Consolidated Balance Sheets items as
allowed by the guidance from Fair Value Option for Financial
Assets and Financial Liabilities.
The following table shows the difference between the unpaid
principal balance and the fair value of the asset-backed bonds
secured by mortgage securities for which the Company has elected
fair value accounting as of December 31, 2009 and
December 31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal Balance
|
|
Balance at Fair Value
|
|
As of December 31, 2009
|
|
$
|
323,999
|
|
|
$
|
968
|
|
As of December 31, 2008
|
|
|
324,243
|
|
|
|
5,376
|
|
Substantially all of the $5.1 million and
$63.0 million change in fair value of the asset-backed bond
for the years ended December 31, 2009 and 2008,
respectively, are considered to be related to specific credit
risk as all of the bonds are floating rate. The change in credit
risk was caused by the severe decline in the value of the
trusts assets during the years ended December 31,
2009 and 2008.
F-64
|
|
Note 10.
|
Derivative
Instruments and Hedging Activities
|
The following tables present derivative instruments as of
December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
Days to
|
|
|
Notional Amount
|
|
Fair Value
|
|
Maturity
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge derivative instruments
|
|
$
|
40,000
|
|
|
$
|
(157
|
)
|
|
|
25
|
|
As of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge derivative instruments
|
|
$
|
461,500
|
|
|
$
|
(9,034
|
)
|
|
|
390
|
|
Cash flow hedge derivative instruments
|
|
|
40,000
|
|
|
|
(68
|
)
|
|
|
25
|
|
The Company recognized net expense of $0.1 million and
$2.5 million during the years ended December 31, 2009
and 2008, respectively, on derivative instruments qualifying as
cash flow hedges, which is recorded in the Other
expense line item of the Consolidated Statement of
Operations.
During the two years ended December 31, 2009, hedge
ineffectiveness was insignificant. There is no amount included
in other comprehensive income expected to be reclassified into
earnings within the next twelve months.
|
|
Note 11.
|
Segment
Reporting
|
The Company reviews, manages and operates its business in three
segments: securitization trusts, corporate and appraisal
management. Securitization trusts operating results are
driven from the income generated on the on-balance sheet
securitizations less associated costs. Corporate operating
results include income generated from mortgage securities
retained from securitizations, corporate general and
administrative expenses and Advent. Appraisal management
operations include the appraisal fee income and related expenses
from the Companys majority-owned subsidiary StreetLinks.
Following is a summary of the operating results of the
Companys segments for the years ended December 31,
2009 and 2008 (dollars in thousands):
For The
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization
|
|
|
|
|
|
Appraisal
|
|
|
|
|
|
|
|
|
|
Trusts
|
|
|
Corporate
|
|
|
Management
|
|
|
Eliminations
|
|
|
Total
|
|
|
Income and Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,106
|
|
|
$
|
|
|
|
$
|
31,106
|
|
Interest income mortgage loans
|
|
|
130,017
|
|
|
|
|
|
|
|
|
|
|
|
1,284
|
|
|
|
131,301
|
|
Interest income mortgage securities
|
|
|
7,234
|
|
|
|
16,940
|
|
|
|
|
|
|
|
(2,518
|
)
|
|
|
21,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
137,251
|
|
|
|
16,940
|
|
|
|
31,106
|
|
|
|
(1,234
|
)
|
|
|
184,063
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
|
|
|
|
|
|
|
|
32,221
|
|
|
|
|
|
|
|
32,221
|
|
Interest expense asset-backed bonds
|
|
|
21,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,290
|
|
Provision for credit losses
|
|
|
260,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,860
|
|
Servicing fees
|
|
|
10,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,639
|
|
Premiums for mortgage loan insurance
|
|
|
6,041
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
6,178
|
|
Selling, general and administrative expense
|
|
|
238
|
|
|
|
18,702
|
|
|
|
1,837
|
|
|
|
|
|
|
|
20,777
|
|
Other expenses
|
|
|
1,600
|
|
|
|
11,749
|
|
|
|
46
|
|
|
|
510
|
|
|
|
13,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
300,668
|
|
|
|
30,588
|
|
|
|
34,104
|
|
|
|
510
|
|
|
|
365,870
|
|
F-65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization
|
|
|
|
|
|
Appraisal
|
|
|
|
|
|
|
|
|
|
Trusts
|
|
|
Corporate
|
|
|
Management
|
|
|
Eliminations
|
|
|
Total
|
|
|
Other income
|
|
|
117
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
887
|
|
Interest expense on trust preferred securities
|
|
|
|
|
|
|
(1,128
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(163,300
|
)
|
|
|
(14,006
|
)
|
|
|
(2,998
|
)
|
|
|
(1,744
|
)
|
|
|
(182,048
|
)
|
Income tax expense
|
|
|
|
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(163,300
|
)
|
|
|
(15,114
|
)
|
|
|
(2,998
|
)
|
|
|
(1,744
|
)
|
|
|
(183,156
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
(1,225
|
)
|
|
|
(829
|
)
|
|
|
|
|
|
|
(2,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to NFI
|
|
$
|
(163,300
|
)
|
|
$
|
(13,889
|
)
|
|
$
|
(2,169
|
)
|
|
$
|
(1,744
|
)
|
|
$
|
(181,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,437,059
|
|
|
$
|
26,706
|
|
|
$
|
4,164
|
|
|
$
|
(8,438
|
)
|
|
$
|
1,459,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization
|
|
|
|
|
|
Appraisal
|
|
|
|
|
|
|
|
|
|
Trusts
|
|
|
Corporate
|
|
|
Management
|
|
|
Eliminations
|
|
|
Total
|
|
|
Income and Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,524
|
|
|
$
|
|
|
|
$
|
2,524
|
|
Interest income mortgage loans
|
|
|
182,010
|
|
|
|
|
|
|
|
|
|
|
|
4,591
|
|
|
|
186,601
|
|
Interest income mortgage securities
|
|
|
22,594
|
|
|
|
31,793
|
|
|
|
|
|
|
|
(7,390
|
)
|
|
|
46,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
204,604
|
|
|
|
31,793
|
|
|
|
2,524
|
|
|
|
(2,799
|
)
|
|
|
236,122
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
|
|
|
|
|
|
|
|
2,600
|
|
|
|
|
|
|
|
2,600
|
|
Interest expense asset-backed bonds
|
|
|
95,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,012
|
|
Provision for credit losses
|
|
|
707,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
707,364
|
|
Servicing fees
|
|
|
13,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,596
|
|
Premiums for mortgage loan insurance
|
|
|
15,818
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
15,847
|
|
Selling, general and administrative expense
|
|
|
898
|
|
|
|
22,355
|
|
|
|
257
|
|
|
|
|
|
|
|
23,510
|
|
Other expenses (income)
|
|
|
14,505
|
|
|
|
72,828
|
|
|
|
7
|
|
|
|
(13,525
|
)
|
|
|
73,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
847,193
|
|
|
|
95,212
|
|
|
|
2,864
|
|
|
|
(13,525
|
)
|
|
|
931,744
|
|
Other income
|
|
|
672
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
977
|
|
Interest expense on trust preferred securities
|
|
|
|
|
|
|
(6,261
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(641,917
|
)
|
|
|
(69,375
|
)
|
|
|
(340
|
)
|
|
|
10,726
|
|
|
|
(700,906
|
)
|
Income tax expense
|
|
|
|
|
|
|
(17,594
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( Net income (loss)
|
|
|
(641,917
|
)
|
|
|
(51,781
|
)
|
|
|
(340
|
)
|
|
|
10,726
|
|
|
|
(683,312
|
)
|
Income from discontinued operations, net of income tax
|
|
|
|
|
|
|
22,830
|
|
|
|
|
|
|
|
|
|
|
|
22,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to NFI
|
|
$
|
(641,917
|
)
|
|
$
|
(28,951
|
)
|
|
$
|
(340
|
)
|
|
$
|
10,726
|
|
|
$
|
(660,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,937,306
|
|
|
$
|
50,806
|
|
|
$
|
515
|
|
|
$
|
(10,163
|
)
|
|
$
|
1,978,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-66
|
|
Note 12.
|
Earnings
Per Share
|
The computations of basic and diluted earnings per share for the
years ended December 31, 2009 and 2008 are as follows
(dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(183,156
|
)
|
|
$
|
(683,312
|
)
|
Dividends on preferred shares
|
|
|
(15,312
|
)
|
|
|
(15,273
|
)
|
Less loss attributable to noncontrolling interests
|
|
|
(2,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to common shareholders
|
|
|
(196,414
|
)
|
|
|
(698,585
|
)
|
Income from discontinued operations, net of income tax
|
|
|
|
|
|
|
22,830
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(196,414
|
)
|
|
$
|
(675,755
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and
diluted
|
|
|
9,368,053
|
|
|
|
9,338,131
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(19.55
|
)
|
|
$
|
(73.17
|
)
|
Less loss attributable to noncontrolling interests
|
|
|
(0.22
|
)
|
|
|
|
|
Dividends on preferred shares
|
|
|
(1.64
|
)
|
|
|
(1.64
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to common shareholders
|
|
|
(20.97
|
)
|
|
|
(74.81
|
)
|
Income from discontinued operations, net of income tax
|
|
|
|
|
|
|
2.44
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(20.97
|
)
|
|
$
|
(72.37
|
)
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(19.55
|
)
|
|
$
|
(73.17
|
)
|
Less loss attributable to noncontrolling interests
|
|
|
(0.22
|
)
|
|
|
|
|
Dividends on preferred shares
|
|
|
(1.64
|
)
|
|
|
(1.64
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to common shareholders
|
|
|
(20.97
|
)
|
|
|
(74.81
|
)
|
Income from discontinued operations, net of income tax
|
|
|
|
|
|
|
2.44
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(20.97
|
)
|
|
$
|
(72.37
|
)
|
|
|
|
|
|
|
|
|
|
The following stock options to purchase shares of common stock
were outstanding during each period presented, but were not
included in the computation of diluted earnings per share
because the effect would be antidilutive (in thousands, except
exercise prices):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
Number of stock options (in thousands)
|
|
|
114
|
|
|
|
206
|
|
Weighted average exercise price of stock options
|
|
$
|
52.98
|
|
|
$
|
57.36
|
|
F-67
The components of income tax expense (benefit) attributable to
continuing operations for the years ended December 31, 2009
and 2008 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,192
|
|
|
$
|
(2,804
|
)
|
State and local
|
|
|
(84
|
)
|
|
|
(985
|
)
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
1,108
|
|
|
|
(3,789
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
(12,293
|
)
|
State and local
|
|
|
|
|
|
|
(1,512
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
|
|
|
|
(13,805
|
)
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
$
|
1,108
|
|
|
$
|
(17,594
|
)
|
|
|
|
|
|
|
|
|
|
A reconciliation of the expected federal income tax expense
(benefit) using the federal statutory tax rate of 35% to the
Companys actual income tax expense (benefit) and resulting
effective tax rate from continuing operations for the years
ended December 31, 2009 and 2008 were as follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Income tax at statutory rate
|
|
$
|
(62,998
|
)
|
|
$
|
(245,317
|
)
|
State income taxes, net of federal tax benefit
|
|
|
(3,201
|
)
|
|
|
(12,028
|
)
|
Valuation allowance
|
|
|
72,119
|
|
|
|
250,161
|
|
Interest and penalties
|
|
|
(218
|
)
|
|
|
1,581
|
|
Change in state tax rate
|
|
|
(7,768
|
)
|
|
|
|
|
Adjustment to net operating loss
|
|
|
2,079
|
|
|
|
|
|
Tax benefit of gain recorded in discontinued operations
|
|
|
|
|
|
|
(13,804
|
)
|
Other
|
|
|
1,095
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
$
|
1,108
|
|
|
$
|
(17,594
|
)
|
|
|
|
|
|
|
|
|
|
F-68
Significant components of the Companys deferred tax assets
and liabilities at December 31, 2009 and 2008 were as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Basis difference investments
|
|
$
|
389,027
|
|
|
$
|
377,129
|
|
Federal net operating loss carryforwards
|
|
|
163,280
|
|
|
|
93,783
|
|
Allowance for loan losses
|
|
|
93,715
|
|
|
|
106,073
|
|
State net operating loss carryforwards
|
|
|
18,719
|
|
|
|
13,922
|
|
Excess inclusion income
|
|
|
2,291
|
|
|
|
3,918
|
|
Other
|
|
|
9,801
|
|
|
|
10,091
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
676,833
|
|
|
|
604,916
|
|
Valuation allowance
|
|
|
(674,823
|
)
|
|
|
(601,110
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
2,010
|
|
|
|
3,806
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,010
|
|
|
|
3,806
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
2,010
|
|
|
|
3,806
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Based on the evidence available as of December 31, 2009,
including the significant pre-tax losses incurred by the Company
in 2009 and 2008 overall cumulative losses, the liquidity issues
facing the Company and the decision by the Company to close all
of its mortgage lending and loan servicing operations, the
Company believes that it is more likely than not that the
Company will not realize its deferred tax assets. Based on this
conclusion, the Company recorded a valuation allowance of
$674.8 million for deferred tax assets as of
December 31, 2009 compared to $601.1 million as of
December 31, 2008.
As of December 31, 2009, the Company had a federal net
operating loss of approximately $466.5 million. The federal
net operating loss may be carried forward to offset future
taxable income, subject to applicable provisions of the Internal
Revenue Code of 1986, as amended (the Code),
including substantial limitations in the event of an
ownership change as defined in Section 382 of
the Code. If not used, this net operating loss will expire in
years 2025 through 2029. The Company has state net operating
loss carryovers arising from both combined and separate filings
from as early as 2004. The loss carryovers may expire as early
as 2010 and as late as 2029.
The guidance for uncertain tax positions requires a company to
evaluate whether a tax position taken by the company will
more likely than not be sustained upon examination
by the appropriate taxing authority. It also provides guidance
on how a company should measure the amount of benefit that the
company is to recognize in its financial statements. The
activity in the accrued liability for unrecognized tax benefits
for the years ended December 31, 2009 and 2008 was as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance
|
|
$
|
480
|
|
|
$
|
6,329
|
|
Gross decreases tax positions in prior period
|
|
|
|
|
|
|
(5,367
|
)
|
Gross increases tax positions in current period
|
|
|
674
|
|
|
|
|
|
Lapse of statute of limitations
|
|
|
(248
|
)
|
|
|
(482
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
906
|
|
|
$
|
480
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 and 2008, the total gross amount of
unrecognized tax benefits was $0.9 million and
$0.5 million, respectively, which also represents the total
amount of unrecognized tax benefits that would impact the
effective tax rate. The Company anticipates a reduction of
unrecognized tax benefits in the amount
F-69
of $0.2 million due the lapse of statute of limitations in
the next twelve months. The Company does not expect any other
significant change in the liability for unrecognized tax
benefits in the next twelve months.
During 2008, the Company requested the Internal Revenue Service
to issue a closing agreement or determination letter with
respect to an uncertain tax position taken by the Company in
2007. The Company received a response from the Internal Revenue
Service and adjusted the uncertain tax position accordingly. As
of December 31, 2008, there was no unrecognized tax benefit
related to this uncertain tax position.
It is the Companys policy to recognize interest and
penalties related to income tax matters in income tax expense.
Interest and penalties recorded in income tax expense was
($0.2 million) and $1.6 million for the years ended
December 31, 2009 and 2008, respectively. Accrued interest
and penalties was $1.9 million and $2.0 million as of
December 31, 2009 and 2008, respectively.
The Company and its subsidiaries are subject to
U.S. federal income tax as well as income tax of multiple
state and local jurisdictions. Tax years 2006 to 2009 remain
open to examination for U.S. federal income tax. Tax years
2005 to 2009 remain open for major state tax jurisdictions.
Management believes it has adequately provided for potential tax
liabilities that may be assessed for years in which the statute
of limitations remains open. However, if there were an
assessment of any material liability it may adversely affect the
Companys financial condition and liquidity.
|
|
Note 14.
|
Employee
Benefit Plans
|
Eligible employees may save for retirement through pretax
contributions in defined contribution plans offered by the
Company. Employees of the Company may contribute up to the
statutory limit. The Company may elect to match a certain
percentage of participants contributions.
$0.1 million in contributions were made to the plans for
the year ended December 31, 2009. There were no
contributions made to the plans for the year ended
December 31, 2008. The Company may also elect to make a
discretionary contribution, which is allocated to participants
based on each participants compensation. During the year
ended December 31, 2009, $0.4 million was contributed
to the plans participants, all of which came from the
plans forfeitures account, there were no contributions
made during 2008.
|
|
Note 15.
|
Stock
Compensation Plans
|
The 2004 Incentive Stock Plan (the 2004 Plan)
provides for the grant of qualified incentive stock options
(ISOs), non-qualified stock options
(NQSOs), deferred stock, restricted stock,
restricted stock units, performance share awards, dividend
equivalent rights (DERs) and stock appreciation
awards (SARs). The Company has granted ISOs, NQSOs,
restricted stock, performance share awards and DERs. ISOs may be
granted to employees of the Company. NQSOs, DERs, SARs and stock
awards may be granted to the directors, officers, employees,
agents and consultants of the Company or any subsidiaries. The
Company registered 625,000 shares of common stock under the
2004 Plan, of which approximately 393,000 shares were
available for future issuances as of December 31, 2009. The
2004 Plan will remain in effect unless terminated by the Board
of Directors or no shares of stock remain available for awards
to be granted. The Companys policy is to issue new shares
upon option exercise.
The Company follows the provisions of the Share-Based Payment
guidance using the modified prospective method of adoption. The
Company recorded stock-based compensation expense of
$0.7 million and $0.1 million for the years ended
December 31, 2009 and 2008, respectively. There was no
income tax benefit recognized in the income statement for
stock-based compensation arrangements in 2009 and 2008. As of
December 31, 2009, there was $0.5 million of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements granted. The cost is expected to be
amortized over a weighted-average period of 1.54 years.
The Companys Equity Award Policy governs the grant of
equity awards. In general, equity awards may be granted only at
a meeting of the Compensation Committee or the entire Board
during the Trading Window, as defined in the
Companys Insider Trading and Disclosure Policy for
Designated Insiders. The Trading Window for a particular quarter
is open beginning on the second business day following an
earnings
F-70
release with respect to the prior quarter until the
15th day of the third month of the quarter. The exercise
price (if applicable) of all equity awards will be equal to the
price at which the Companys common stock was last sold on
the date of grant.
On June 26, 2009, the Company granted 10,000 stock options
to directors with an exercise price of $1.25, which was the
closing market price of the Companys common stock on the
date of grant. 5,000 of the options granted vested immediately
and 5,000 of the options are subject to a four-year vesting
period.
During the fourth quarter of 2009, the Company granted 150,000
stock options to an employee with an exercise price of $0.97,
which was the closing market price of the Companys common
stock on November 10, 2009, the date of grant. The options
granted are subject to a four-year vesting period.
On May 23, 2008, the Company granted 5,000 stock options to
directors with an exercise price of $1.65, which was the closing
market price on the NYSE of the Companys common stock on
the date of grant. The options granted vested immediately.
All options have been granted at exercise prices greater than or
equal to the estimated fair value of the underlying stock at the
date of grant. Outstanding options generally vest equally over
four years and expire ten years after the date of grant.
The following table summarizes the weighted average fair value
of options granted for the years ended December 31, 2009
and 2008, respectively, determined using the Black-Scholes
option pricing model and the assumptions used in their
determination. The expected life is a significant assumption as
it determines the period for which the risk free interest rate,
volatility and dividend yield must be applied. The expected life
is the period over which employees and directors are expected to
hold their options and is based on the Companys historical
experience with similar grants. The annual risk-free rate of
return is estimated using U.S. treasury rates commensurate
with the expected life. The volatility is calculated using the
fluctuations of the historical stock prices of the Company. The
Companys options have DERs and accordingly, the assumed
dividend yield was zero for these options.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Weighted average:
|
|
|
|
|
|
|
|
|
Fair value, at date of grant
|
|
$
|
0.89
|
|
|
$
|
1.40
|
|
Expected life in years
|
|
|
5
|
|
|
|
10
|
|
Annual risk-free interest rate
|
|
|
2.39
|
%
|
|
|
3.84
|
%
|
Volatility
|
|
|
145.43
|
%
|
|
|
84.3
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The following table summarizes activity, pricing and other
information for the Companys stock options activity for
the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Stock Options
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at the beginning of the year
|
|
|
160,397
|
|
|
$
|
55.63
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
160,000
|
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(42,910
|
)
|
|
|
44.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year
|
|
|
277,487
|
|
|
$
|
22.22
|
|
|
|
8.11
|
|
|
$
|
(5,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of the year
|
|
|
93,912
|
|
|
$
|
56.58
|
|
|
|
5.55
|
|
|
$
|
(5,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options expected to vest at the end of the year
|
|
|
183,575
|
|
|
$
|
4.64
|
|
|
|
9.43
|
|
|
$
|
(686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-71
The following table summarizes activity, pricing and other
information for the Companys stock options activity for
the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Stock Options
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at the beginning of the year
|
|
|
267,342
|
|
|
$
|
47.81
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,000
|
|
|
|
1.65
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(111,945
|
)
|
|
|
34.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year
|
|
|
160,397
|
|
|
$
|
55.63
|
|
|
|
5.01
|
|
|
$
|
(8,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of the year
|
|
|
114,612
|
|
|
$
|
65.32
|
|
|
|
3.80
|
|
|
$
|
(7,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options expected to vest at the end of the year
|
|
|
22,835
|
|
|
$
|
38.29
|
|
|
|
8.05
|
|
|
$
|
(1,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no options exercised during the years ended
December 31, 2009 or 2008. The total fair value of options
vested during the years ended December 31, 2009 and 2008
was $0.3 million and $1.0 million, respectively.
For options that vested prior to January 1, 2005, a
recipient is entitled to receive additional shares of stock upon
the exercise of options as a result of DERs associated with the
option. For employees, the DERs accrue at a rate equal to the
number of options outstanding times 60% of the dividends per
share amount at each dividend payment date. For directors, the
DERs accrue at a rate equal to the number of options outstanding
times the dividends per share amount at each dividend payment
date. The accrued DERs convert to shares based on the
stocks fair value on the dividend payment date. There were
no options exercised during 2008 or 2009.
For options granted after January 1, 2005, a recipient is
entitled to receive DERs paid in cash upon vesting of the
options. The DERs accrue at a rate equal to the number of
options outstanding times the dividends per share amount at each
dividend payment date. The DERs begin accruing immediately upon
grant, but are not paid until the options vest.
The Company did not grant and issue any shares of restricted
stock during 2009 or 2008.
The following tables present information on restricted stock
outstanding as of December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding at the beginning of year
|
|
|
34,246
|
|
|
$
|
38.38
|
|
|
|
107,211
|
|
|
$
|
36.50
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
(1,745
|
)
|
|
|
185.68
|
|
Forfeited
|
|
|
(2,775
|
)
|
|
|
38.38
|
|
|
|
(71,220
|
)
|
|
|
33.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of period
|
|
|
31,471
|
|
|
$
|
38.38
|
|
|
|
34,246
|
|
|
$
|
38.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16. Fair
Value of Financial Instruments
The following disclosure of the estimated fair value of
financial instruments presents amounts that have been determined
using available market information and appropriate valuation
methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that could be realized in a current
F-72
market exchange. The use of different market assumptions or
estimation methodologies could have a material impact on the
estimated fair value amounts.
The estimated fair values of the Companys financial
instruments related to continuing operations are as follows as
of December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,104
|
|
|
$
|
7,104
|
|
|
$
|
24,790
|
|
|
$
|
24,790
|
|
Restricted cash
|
|
|
5,342
|
|
|
|
5,206
|
|
|
|
6,046
|
|
|
|
5,595
|
|
Mortgage loans
held-in-portfolio
|
|
|
1,289,474
|
|
|
|
1,160,527
|
|
|
|
1,772,838
|
|
|
|
1,772,838
|
|
Mortgage securities trading
|
|
|
1,087
|
|
|
|
1,087
|
|
|
|
7,085
|
|
|
|
7,085
|
|
Mortgage securities available-for-sale
|
|
|
6,903
|
|
|
|
6,903
|
|
|
|
12,788
|
|
|
|
12,788
|
|
Accrued interest receivable
|
|
|
74,025
|
|
|
|
74,025
|
|
|
|
77,292
|
|
|
|
77,292
|
|
Notes receivable
|
|
|
4,920
|
|
|
|
4,920
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed bonds secured by mortgage loans
|
|
|
2,270,602
|
|
|
|
1,297,980
|
|
|
|
2,599,351
|
|
|
|
1,772,838
|
|
Asset-backed bonds secured by mortgage securities
|
|
|
968
|
|
|
|
968
|
|
|
|
5,376
|
|
|
|
5,376
|
|
Junior subordinated debentures
|
|
|
77,815
|
|
|
|
6,225
|
|
|
|
77,323
|
|
|
|
6,248
|
|
Accrued interest payable
|
|
|
751
|
|
|
|
751
|
|
|
|
10,242
|
|
|
|
10,242
|
|
Derivative instruments:
|
|
|
(157
|
)
|
|
|
(157
|
)
|
|
|
9,101
|
|
|
|
9,101
|
|
Cash and cash equivalents The fair value of
cash and cash equivalents approximates its carrying value.
Restricted Cash The fair value of restricted
cash was estimated by discounting estimated future release of
the cash from restriction.
Mortgage loans
held-in-portfolio
The fair value of mortgage loans
held-in-portfolio
was estimated using the carrying value less a market discount.
The internal rate of return is less than what an outside
investor would require due to the embedded credit risk,
therefore a market discount is required to get to the fair
value. The fair value of mortgage loans
held-in-portfolio
approximated its carrying value at December 31, 2008.
Mortgage securities trading See
Note 10 to the consolidated financial statements for fair
value method utilized.
Mortgage securities
available-for-sale See Note 10 to the
consolidated financial statements for fair value method utilized.
Accrued interest receivable The fair value of
accrued interest receivable approximates its carrying value.
Notes receivable The fair value of notes
receivable approximates its carrying value.
Asset-backed bonds secured by mortgage loans
The fair value of asset-backed bonds secured by mortgage loans
and the related accrued interest payable was estimated using the
fair value of mortgage loans
held-in-portfolio
as the trusts have no recourse to the Companys other,
unsecuritized assets.
F-73
Asset-backed bonds secured by mortgage
securities The fair value of asset-backed bonds
secured by mortgage securities and the related accrued interest
payable is approximated using quoted market prices.
Junior subordinated debentures The fair value
of junior subordinated debentures is estimated using the price
from the repurchase transaction that the Company completed
during 2008 as it is greater than an estimate of discounting
future projected cash flows using a discount rate commensurate
with the risks involved.
Accrued interest payable The fair value of
accrued interest payable approximates its carrying value.
Derivative instruments The fair value of
derivative instruments is estimated by discounting the projected
future cash flows using appropriate rates.
|
|
Note 17.
|
Subsequent
Events
|
During January 2010, the final derivative of the
2007-1
securitization trust expired. The expiration of this derivative
is a reconsideration event. Accordingly, the Company will
deconsolidate the assets and liabilities of the securitization
trust and will record a gain during the three month period
ending March 31, 2010.
Subsequent to December 31, 2009, certain events occurred
that required the Company to reconsider the accounting for three
consolidated loan trusts: NHEL
2006-1, NHEL
2006-MTA1 and NHEL
2007-1. Upon
reconsideration, the Company determined that all requirements
for derecognition were met under applicable accounting
guidelines at the time of the reconsideration event. As a
result, the Company derecognized the assets and liabilities of
the trusts on January 25, 2010.
Prior to the events discussed above, the Company prepared its
balance sheet on an unclassified basis because the operating
cycle of its nonconforming mortgage operations exceeded one
year. As a result of the derecognition and changes in the
Companys business, beginning with the first quarter of
2010, the assets and liabilities have been presented on a
classified basis, except for the assets and liabilities of the
securitization trusts which continue to be presented on an
unclassified basis. Certain line items on the consolidated
statement of operations have been reclassified to better present
the Companys current operating businesses. All applicable
data in these consolidated financial statements have been
retroactive restated to reflect the new financial statement
presentation.
F-74
APPENDIX A
NOVASTAR
FINANCIAL, INC.
ARTICLES OF
AMENDMENT AND RESTATEMENT
FIRST: NovaStar Financial, Inc., a
Maryland corporation desires to amend and restate its charter as
currently in effect and as hereinafter amended.
SECOND: The following provisions are
all the provisions of the charter currently in effect and as
hereinafter amended:
ARTICLE I
NAME
The name of the corporation (the Corporation) is:
NovaStar
Financial, Inc.
ARTICLE II
PURPOSES
The purpose for which the Corporation is formed is to transact
any or all lawful business, not required to be specifically
stated in the Charter, for which corporations may be
incorporated under the MGCL.
ARTICLE III
PRINCIPAL
OFFICE
The present address of the principal office of the Corporation
in this State is:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
ARTICLE IV
RESIDENT
AGENT
The name and address of the resident agent of the Corporation
are:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
Said resident agent is a Maryland corporation.
ARTICLE V
CAPITAL
STOCK
A. The total number of shares of Capital Stock of all
classes which the Corporation has authority to issue is
120,000,000 shares of Capital Stock, par value $0.01 per
share, amounting in aggregate par value to $1,200,000. All of
such shares are initially classified as Common
Stock. The Board of Directors may classify and reclassify
any unissued shares of Capital Stock, whether now or hereafter
authorized, by setting or changing in any one or more respects
the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or
terms or
A-1
conditions of redemption of such shares of Capital Stock. All
persons who acquire shares of Capital Stock or securities
exercisable for or convertible into shares of Capital Stock
shall acquire such shares subject to the provisions of the
Charter (including Article X) and Bylaws of the
Corporation. Immediately upon the effectiveness of these
Articles of Amended and Restatement (the Effective
Time), and without any further action on the part of the
Corporation or its stockholders, each share of 8.90%
Series C Cumulative Redeemable Preferred Stock, par value
$0.01 per share, issued and outstanding immediately prior to the
Effective Time (the Series C Preferred Stock)
shall be cancelled and changed into the right to receive
$ and shares
of Common Stock.
Each share of Common Stock issued to the prior holders of the
Series C Preferred Stock is fully paid and nonassessable.
B. The following is a description of the preferences,
conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and
conditions of redemption of the Common Stock of the Corporation:
(1) Each share of Common Stock shall have one vote, and,
except as otherwise provided in respect of any class of Capital
Stock hereafter classified or reclassified, the exclusive voting
power for all purposes shall be vested in the holders of the
Common Stock.
(2) Subject to the provisions of law and any preferences of
any class of Capital Stock hereafter classified or reclassified,
dividends, including dividends payable in shares of the
Corporations Capital Stock, may be paid on the Common
Stock of the Corporation at such time and in such amounts as the
Board of Directors may deem advisable.
(3) In the event of any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, the
holders of the Common Stock shall be entitled, after payment or
provision for payment of the debts and other liabilities of the
Corporation and the amount to which the holders of any class of
Capital Stock hereafter classified or reclassified having a
preference on distributions in the liquidation, dissolution or
winding up of the Corporation shall be entitled, together with
the holders of any other class of Capital Stock hereafter
classified or reclassified not having a preference on
distributions in the liquidation, dissolution or winding up of
the Corporation, to share ratably in the remaining net assets of
the Corporation.
C. Subject to the foregoing, the power of the Board of
Directors to classify and reclassify any of the shares of
Capital Stock shall include, without limitation, subject to the
provisions of the Charter, authority to classify or reclassify
any unissued shares of such Capital Stock into a class or
classes of preferred stock, preference stock, special stock, or
other stock, and to divide and classify shares of any class into
one or more series of such class, by determining, fixing or
altering one or more of the following:
(1) The distinctive designation of such class or series and
the number of shares to constitute such class or series;
provided that, unless otherwise prohibited by the terms of such
or any other class or series, the number of shares of any class
or series may be decreased by the Board of Directors in
connection with any classification or reclassification of
unissued shares and the number of shares of such class or series
may be increased by the Board of Directors in connection with
any such classification or reclassification, and any shares of
any class or series which have been redeemed, purchased,
otherwise acquired or converted into shares of Common Stock or
any other class or series shall become part of the authorized
Capital Stock and be subject to classification and
reclassification as provided in this subparagraph.
(2) Whether or not and, if so, the rates, amounts and times
at which, and the conditions under which, dividends shall be
payable on shares of such class or series, whether any such
dividends shall rank senior or junior to or on a parity with the
dividends payable on any other class or series of Capital Stock,
and the status of any such dividends as cumulative, cumulative
to a limited extent or noncumulative and as participating or
nonparticipating.
(3) Whether or not shares of such class or series shall
have voting rights in addition to any voting rights provided by
law and, if so, the terms of such voting rights.
(4) Whether or not shares of such class or series shall
have conversion or exchange privileges and, if so, the terms and
conditions thereof, including provision for adjustment of the
conversion or exchange rate in such events or at such times as
the Board of Directors shall determine.
A-2
(5) Whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of
such redemption, including the date or dates upon or after which
they shall be redeemable and the amount per share payable in
case of redemption, which amount may vary under different
conditions and at different redemption dates; and whether or not
there shall be any sinking fund or purchase account in respect
thereof, and if so, the terms thereof.
(6) The rights of the holders of shares of such class or
series upon the liquidation, dissolution or winding up of the
affairs of, or upon any distribution of the assets of, the
Corporation, which rights may vary depending upon whether such
liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates, and
whether such rights shall rank senior or junior to or on a
parity with such rights of any other class or series of Capital
Stock.
(7) Whether or not there shall be any limitations
applicable, while shares of such class or series are
outstanding, upon the payment of dividends or making of
distributions on, or the acquisition of, or the use of moneys
for purchase or redemption of, any Capital Stock of the
Corporation, or upon any other action of the Corporation,
including action under this subparagraph, and, if so, the terms
and conditions thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of
such class or series, not inconsistent with law and the Charter.
D. For the purposes hereof and of any
Articles Supplementary hereto providing for the
classification or reclassification of any shares of Capital
Stock or of any other Charter document of the Corporation
(unless otherwise provided in any such Articles or document),
any class or series of Capital Stock of the Corporation shall be
deemed to rank:
(1) prior to another class or series either as to dividends
or upon liquidation, if the holders of such class or series
shall be entitled to the receipt of dividends or of amounts
distributable on liquidation, dissolution or winding up, as the
case may be, in preference or priority to holders of such other
class or series;
(2) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend
rates, dividend payment dates or redemption or liquidation price
per share thereof be different from those of such others, if the
holders of such class or series of stock shall be entitled to
receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or redemption or liquidation
prices, without preference or priority over the holders of such
other class or series; and
(3) junior to another class or series either as to
dividends or upon liquidation, if the rights of the holders of
such class or series shall be subject or subordinate to the
rights of the holders of such other class or series in respect
of the receipt of dividends or the amounts distributable upon
liquidation, dissolution or winding up, as the case may be.
ARTICLE VI
DIRECTORS
A. The number of directors of the Corporation shall be
four, which number may be increased or decreased by the Board of
Directors pursuant to the Bylaws of the Corporation, but shall
never be less than the minimum number permitted by the MGCL.
B. The current directors who will serve for the remainder
of the terms for which they have been elected and until their
successors are elected and qualify are as follows:
W. Lance
Anderson
Gregory T. Barmore
Art N. Burtscher
Edward W. Mehrer
C. The directors (other than any director elected solely by
holders of one or more classes or series of preferred stock)
shall be classified, with respect to the terms for which they
severally hold office, into three classes, with the term
A-3
of office of the first class to expire the next succeeding
annual meeting of stockholders, the term of office of the second
class to expire at the second succeeding annual meeting of
stockholders, and the term of office of the third class to
expire at the third succeeding annual meeting of stockholders.
At each annual meeting of the stockholders, the successors to
the class of directors whose term expires at such meeting shall
be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the
year of their election and until their successors are duly
elected and qualify. The number of directors in each class shall
be determined by the Board of Directors.
D. Subject to the rights of the holders of any class of
preferred stock then outstanding, newly created directorships
resulting from any increase in the authorized number of
directors or any vacancies on the Board of Directors resulting
from death, resignation, retirement, disqualification, removal
from office, or other cause shall be filled by the required vote
of the stockholders or the directors then in office. A director
so chosen by the stockholders shall hold office for the balance
of the term then remaining. A director so chosen by the
remaining directors shall hold office until the next annual
meeting of stockholders, at which time the stockholders shall
elect a director to hold office for the balance of the term then
remaining. No decrease in the number of directors constituting
the Board of Directors shall affect the tenure of office of any
director.
E. Whenever the holders of any one or more series of
preferred stock of the Corporation shall have the right, voting
separately as a class, to elect one or more directors of the
Corporation, the Board of Directors shall consist of such
directors so elected in addition to the number of directors
fixed as provided in paragraph A of this Article VI or
in the Bylaws.
F. Subject to the rights of the holders of any class
separately entitled to elect one or more directors, any
director, or the entire Board of Directors, may be removed from
office at any time, but only for cause and then only by the
affirmative vote of the holders of at least a majority of the
combined voting power of all classes of shares of capital stock
entitled to vote in the election for directors voting together
as a single class.
ARTICLE VII
PREEMPTIVE
RIGHTS
No holder of any Capital Stock or any other securities of the
Corporation, whether now or hereafter authorized, shall have a
preemptive right to subscribe for or purchase any Capital Stock
or any other securities of the Corporation other than such, if
any, as the Board of Directors, in its sole discretion, may
determine and at such price or prices and upon such other terms
as the Board of Directors, in its sole discretion, may determine
and at such price or prices and upon such other terms as the
Board of Directors, in its sole discretion, may fix; and any
Capital Stock or other securities which the Board of Directors
may determine to offer for subscription may, as the Board of
Directors in its sole discretion shall determine, be offered to
the holders of any class, series or type of Capital Stock or
other securities at the time outstanding to the exclusion of the
holders of any or all other classes, series or types of Capital
Stock or other securities at the time outstanding.
ARTICLE VIII
INDEMNIFICATION
The Corporation shall indemnify (A) its present and former
directors and officers, whether serving the Corporation or at
its request any other entity, to the full extent required or
permitted by Maryland law in effect from time to time, including
the advance of expenses under the procedures and to the full
extent permitted by law and (B) other employees and agents
to such extent as shall be authorized by the Board of Directors
or the Corporations Bylaws and be permitted by law. The
foregoing rights of indemnification shall not be exclusive of
any other rights to which those seeking indemnification may be
entitled. The Board of Directors may take such action as is
necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to
time such Bylaws, resolutions or contracts implementing such
provisions or such further indemnification arrangements as may
be permitted by law. No amendment of the Charter of the
Corporation or repeal of any of its provisions shall limit or
eliminate the right to indemnification provided hereunder with
respect to acts or omissions occurring prior to such amendment
or repeal.
A-4
ARTICLE IX
PERSONAL
LIABILITY
To the fullest extent permitted by Maryland law in effect from
time to time, no present or former director or officer of this
Corporation shall be personally liable to the Corporation or its
stockholders for money damages. No amendment of the Charter of
the Corporation or repeal of any of its provisions shall limit
or eliminate the benefits provided to directors and officers
under this provision with respect to any act or omission which
occurred prior to such amendment or repeal.
ARTICLE X
FIVE
PERCENT OWNERSHIP
A. In order to preserve the Tax Benefits to which the
Corporation or any direct or indirect subsidiary thereof is
entitled pursuant to the Internal Revenue Code of 1986, as
amended, or any successor statute (the Code) and the
Treasury Regulations promulgated thereunder, the Corporation
Securities shall be subject to the following restrictions:
(1) Certain Definitions. For
purposes of this Article X, the following terms shall have
the meanings indicated (and any references to any portions of
Treasury Regulation § 1.382-2T shall include any
successor provisions):
(a) 5% Transaction means any Transfer or
purported Transfer of Corporation Securities described in
Section A(2) of this Article X, which Transfer is
prohibited
and/or void
under the provisions of such Section A(2) of this
Article X.
(b) Agent means any agent designated by
the Board of Directors of the Corporation pursuant to
Section B(2) of this Article X.
(c) Corporation Securities means
(I) shares of Common Stock, (II) shares of preferred
stock (other than preferred stock described in Section
1504(a)(4) of the Code), (III) warrants, rights, or options
(including options within the meaning of Treasury Regulation
§ 1.382-2T(h)(4)(v)) to purchase stock (other than
preferred stock described in Section 1504(a)(4) of the
Code) of the Corporation, and (IV) any other interest that
would be treated as stock of the Corporation
pursuant to Treasury Regulation § 1.382-2T(f)(18).
(d) Excess Securities has the meaning
set forth in Section B(1) of this Article X.
(e) Five-Percent Stockholder means a
Person or group of Persons that is a 5-percent
stockholder of the Corporation pursuant to Treasury
Regulation § 1.382-2T(g).
(f) Percentage Stock Ownership means the
percentage stock ownership interest as determined in accordance
with Treasury Regulation § 1.382-2T(g), (h),
(j) and (k).
(g) Permitted Transfer means a Transfer
of Corporation Securities (A) after the Restriction Release
Date, (B) pursuant to any (1) merger, consolidation or
similar transaction approved in advance by the Board of
Directors or (2) tender or exchange offer made pursuant to
the applicable rules and regulations of the Exchange Act, for
any or all outstanding Common Stock in which a majority of each
class of the outstanding Common Stock has been validly tendered
and not withdrawn and in which offer the offeror or an affiliate
thereof has committed to consummate a merger with the
Corporation in which all of the Common Stock not so acquired in
such offer is (subject to any applicable dissenters
rights) converted into the same type and amount of consideration
paid for Common Stock accepted in such tender or exchange offer,
(C) pursuant to the exercise of any option or warrant
outstanding on the effective date of these Articles of Amendment
and Restatement to purchase Corporation Securities from the
Corporation, or (D) any issuance of Corporation Securities
by the Corporation or any of its subsidiaries
(h) Person shall mean any individual,
firm, corporation, partnership, trust association, limited
liability company, limited liability partnership, or other
entity, or any group of Persons making a coordinated
acquisition of shares or otherwise treated as an entity
within the meaning of Treasury Regulation
§ 1.382-3(a)(1),
or otherwise and shall include any successor (by merger or
otherwise) of any such entity.
(i) Prohibited Distribution has the
meaning set forth in Section B(2) of this Article X.
A-5
(j) Purported Transferee has the meaning
set forth in Section B(1) of this Article X.
(k) Prohibited Transfer means any 5%
Transaction (other than a Permitted Transfer).
(l) Restriction Release Date means the
earlier of (x) date that is 36 months and one day from
the effective date of these Articles of Amendment and
Restatement, or (y) such other date as the Board of
Directors may determine in good faith that this Article X
is no longer in the best interests of the Corporation and its
stockholders.
(m) Section 382 means
Section 382 of the Code, or any comparable successor
provision.
(n) Tax Benefit means the net operating
loss carryovers, capital loss carryovers, general business
credit carryovers, alternative minimum tax credit carryovers and
foreign tax credit carryovers, as well as any loss or deduction
attributable to a net unrealized built-in loss
within the meaning of Section 382, of the Corporation or
any direct or indirect subsidiary thereof.
(o) Transfer means any direct or
indirect sale, transfer, assignment, exchange, issuance, grant,
redemption, repurchase, conveyance, pledge or other disposition,
whether voluntary or involuntary, and whether by operation of
law or otherwise, by any Person other than the Corporation. A
Transfer also shall include the creation or grant of an option,
warrant or right (including an option within the meaning of
Treasury Regulation Section 1.382-4(d)(9)) by any Person
other than the Corporation, but only if such option, warrant or
right would be deemed exercised pursuant to Treasury
Regulation Section 1.382-4(d)(2)(i).
(p) Treasury Regulations means the
income tax regulations, including temporary and proposed
regulations, promulgated under the Code by the United States
Treasury, as such regulations may be amended from time to time
(including corresponding provisions of succeeding regulations).
(2) Transfer Restrictions. Any
attempted Transfer of Corporation Securities prior to the
Restriction Release Date, or any attempted Transfer of
Corporation Securities pursuant to an agreement entered into
prior to the Restriction Release Date, that is not a Permitted
Transfer shall be prohibited and void ab initio insofar
as it purports to transfer ownership or rights in respect of
such Corporation Securities to the Purported Transferee to the
extent that, as a result of such Transfer (or any series of
Transfers of which such Transfer is a part), either (1) any
Person or group of Persons shall become a Five-Percent
Stockholder other than by reason of Treasury
Regulation Section 1.382-2T(j)(3)(i), or (2) the
Percentage Stock Ownership interest in the Corporation of any
Five-Percent Stockholder shall be increased.
(3) The restrictions set forth in Section A(2) of this
Article X shall not apply to an attempted Transfer that is
a 5% Transaction if the transferor or the transferee obtains the
prior written approval of the Board of Directors or a duly
authorized committee thereof. In considering whether to approve
any such transfer, the Board of Directors may take into account
both the proposed Transfer and potential future Transfers. The
Board of Directors may exercise the authority granted by this
Section A(3) of this Article X through duly authorized
officers or agents of the Corporation.
(4) Each certificate representing shares of Corporation
Securities issued prior to the Restriction Release Date shall
contain the legend set forth below, evidencing the restrictions
set forth in this Article X:
The transfer of securities represented by this certificate
is (and other securities of the Corporation may be) subject to
restriction pursuant to Article X of the Corporations
Articles of Amendment and Restatement. The Corporation will
furnish a copy of its Articles of Amendment and Restatement
setting forth the powers, designations, preferences and
relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences
and/or
rights to the holder of record of this Certificate without
charge upon written request addressed to the Corporation at its
principal place of business.
B. Treatment of Excess Securities.
(1) No employee or agent of the Corporation shall record
any Prohibited Transfer, and the purported transferee of such a
Prohibited Transfer (the Purported Transferee) shall
not be recognized as a stockholder of the Corporation for any
purpose whatsoever in respect of the Corporation Securities
which are the subject of the Prohibited Transfer (the
Excess Securities). Until the Excess Securities are
acquired by another Person in a Transfer that is not a
Prohibited
A-6
Transfer, such Purported Transferee shall not be entitled with
respect to such Excess Securities to any rights of stockholders
of the Corporation, including, without limitation, the right to
vote such Excess Securities or to receive dividends or
distributions, whether liquidating or otherwise, in respect
thereof, if any; provided, however, that the Transferor of such
Excess Securities shall not be required to disgorge, and shall
be permitted to retain for its own account, any proceeds of such
Transfer, and shall have no further rights, responsibilities,
obligations or liabilities with respect to such Excess
Securities, if such Transfer was a Prohibited Transfer. Once the
Excess Securities have been acquired in a Transfer that is not a
Prohibited Transfer, the Corporation Securities shall cease to
be Excess Securities. For this purpose, any transfer of Excess
Securities not in accordance with the provisions of this
Section B of this Article X shall also be a Prohibited
Transfer.
(2) If the Corporation determines that a Transfer of
Corporation Securities constitutes a Prohibited Transfer then,
upon written demand by the Corporation, the Purported Transferee
shall transfer or cause to be transferred any certificate or
other evidence of ownership of the Excess Securities within the
Purported Transferees possession or control, together with
any dividends or other distributions that were received by the
Purported Transferee from the Corporation with respect to the
Excess Securities (Prohibited Distributions), to the
Agent designated by the Board of Directors. The Agent shall
thereupon sell to a buyer or buyers, which may include the
Corporation, the Excess Securities transferred to it in one or
more arms length transactions; provided, however, that the
Agent shall effect such sale or sales in an orderly fashion and
shall not be required to effect any such sale within any
specific timeframe if, in the Agents discretion, such sale
or sales would disrupt the market for the Corporation Securities
or otherwise would adversely affect the value of the Corporation
Securities. If the Purported Transferee has resold the Excess
Securities before receiving the Corporations demand to
surrender Excess Securities to the Agent, the Purported
Transferee shall be deemed to have sold the Excess Securities
for the Agent, and shall be required to transfer to the Agent
any Prohibited Distributions and proceeds of such sale, except
to the extent that the Corporation grants written permission to
the Purported Transferee to retain a portion of such sales
proceeds not exceeding the amount that the Purported Transferee
would have received from the Agent pursuant to Section B(3)
of this Article X if the Agent rather than the Purported
Transferee had resold the Excess Securities. Disposition of
Excess Securities by the Agent pursuant to this
Section B(2) of this Article X shall be deemed to
occur simultaneously with the Prohibited Transfer to which the
Excess Securities relate.
(3) The Agent shall apply any proceeds of a sale by it of
Excess Securities and, if the Purported Transferee has
previously resold the Excess Securities, any amounts received by
it from a Purported Transferee, as follows: (x) first, such
amounts shall be paid to the Agent to the extent necessary to
cover its costs and expenses incurred in connection with its
duties hereunder; (y) second, any remaining amounts shall
be paid to the Purported Transferee, up to the amount paid by
the Purported Transferee for the Excess Securities (or the fair
market value of the Excess Securities (1) calculated on the
basis of the closing market price for the Corporation Securities
on such national securities exchange on which the Corporation
Securities are then listed or admitted to trading, on the day
before the Prohibited Transfer, (2) if the Corporation
Securities are not listed or admitted to trading on any national
securities exchange but are traded in the
over-the-counter
market, calculated based upon the difference between the highest
bid and lowest asked prices, as such prices are reported by
NASDAQ or any successor system on the day before the Prohibited
Transfer or, if none, on the last preceding day for which such
quotations exist, or (3) if the Corporation Securities are
neither listed nor admitted to trading on any stock exchange nor
traded in the
over-the-counter
market, then as determined in good faith by the Board of
Directors, at the time of the Prohibited Transfer to the
Purported Transferee), which amount (or fair market value) shall
be determined by the Board of Directors in its discretion; and
(z) third, any remaining amounts, subject to the
limitations imposed by the following proviso, shall be paid to
one or more organizations qualifying under
Section 501(c)(3) of the Code (or any comparable successor
provision) (Section 501(c)(3)) selected by the
Board of Directors; provided, however, that if the Excess
Securities (including any Excess Securities arising from a
previous Prohibited Transfer not sold by the Agent in a prior
sale or sales), represent a 5% or greater Percentage Stock
Ownership in any class of Corporation Securities, then any such
remaining amounts to the extent attributable to the disposition
of the portion of such Excess Securities exceeding a 5%
Percentage Stock Ownership interest in such class shall be paid
to two or more organizations qualifying under
Section 501(c)(3) selected by the Board of Directors. The
recourse of any Purported Transferee in respect of any
Prohibited Transfer shall be limited to the amount payable to
the Purported Transferee pursuant to clause (y) of the
preceding sentence. In no event shall the proceeds of any sale
of Excess Securities pursuant to this Section B of this
Article X inure to the benefit of the Corporation.
A-7
(4) If the Purported Transferee fails to surrender the
Excess Securities or the proceeds of a sale thereof to the Agent
within 30 days from the date on which the Corporation makes
a written demand pursuant to Section B(2) of this
Article X, then the Corporation shall use its best efforts
to enforce the provisions hereof, including the institution of
legal proceedings to compel such surrender.
(5) The Corporation shall make the written demand described
in Section B(2) of this Article X within 30 days
of the date on which the Board of Directors determines that the
attempted Transfer would result in Excess Securities; provided,
however, that if the Corporation makes such demand at a later
date, the provisions of Sections A and B of this
Article X shall apply nonetheless.
(6) Anything herein to the contrary notwithstanding, the
Agent shall not act or be treated as acting as an agent for or
on behalf of the Purported Transferee or for or on behalf of the
Corporation and shall have no right to bind any of them, in
contract or otherwise, but shall act only to carry out the
ministerial functions assigned to it in this Section B of
this Article X.
C. Board Authority. The Board of
Directors shall have the power to determine all matters
necessary for assessing compliance with Sections A and B of
this Article X, including, without limitation, (i) the
identification of any
Five-Percent
Stockholder, (ii) whether a Transfer is a 5% Transaction, a
Prohibited Transfer or a Permitted Transfer, (iii) the
Percentage Stock Ownership in the Corporation of any
Five-Percent Stockholder, (iv) whether an instrument
constitutes Corporation Securities, (v) the amount (or fair
market value) due to a Purported Transferee pursuant to
Section B(3) of this Article X, and (vi) any
other matters which the Board of Directors determines to be
relevant; and the good-faith determination of the Board of
Directors on such matters shall be conclusive and binding for
all the purposes of Sections A and B of this
Article X. Nothing contained herein shall limit the
authority of the Board of Directors to take such other action,
in its discretion, to the extent permitted by law as it deems
necessary or advisable to protect the Corporation, any direct or
indirect subsidiary thereof and the interests of the holders of
the Corporations securities in preserving the Tax Benefit.
Without limiting the generality of the foregoing, in the event
of a change in law or Treasury Regulations making one or more of
the following actions necessary or desirable, the Board of
Directors may (i) accelerate the Restriction Release Date,
(ii) modify the specific application of the Transfer
restrictions set forth in Section A(2) of this
Article X, or (iii) modify the definitions of any
terms set forth in this Article X; provided that the Board
of Directors shall determine in writing that such acceleration,
extension, change or modification is reasonably necessary or
advisable to preserve the Tax Benefit under the Code and the
regulations thereunder or that the continuation of these
restrictions is no longer reasonably necessary for the
preservation of the Tax Benefit.
D. Miscellaneous. Any provision in
this Article X which is judicially determined to be
prohibited, invalid or otherwise unenforceable (whether on its
face or as applied to a particular stockholder, transferee or
Transfer) under the laws of the State of Maryland shall be
ineffective to the extent of such prohibition, invalidity or
unenforceability without prohibiting, invalidating or rendering
unenforceable the remaining provisions of this Article X
and of these Articles of Amendment and Restatement, which shall
be thereafter interpreted as if the prohibited, invalid or
unenforceable part were not contained herein, and, to the
maximum extent possible, in a manner consistent with preserving
the Corporations use of the Tax Benefits without any
Section 382 limitation.
ARTICLE XI
DIRECTOR
DISCRETION
With respect to any proposed merger, acquisition, business
combination or other similar transaction or proposal, a director
of the Corporation, in determining what is in the best interests
of the Corporation, shall consider the interest of the
stockholders of the Corporation and, in his or her discretion,
may consider (i) the interests of the Corporations
employees, suppliers, creditors and customers, (ii) the
economy of the nation, (iii) community and societal
interests and (iv) the long-term as well as short-term
interests of the Corporation and its stockholders, including the
possibility that these interests may be best served by the
continued independence of the Corporation. Pursuant to this
provision, the Board of Directors may consider numerous
judgmental or subjective factors affecting a proposal, including
certain nonfinancial matters, and on the basis of these
considerations may oppose a business combination or other
transaction which, as an exclusively financial matter, might be
attractive to some, or a majority, of the Corporations
stockholders.
A-8
ARTICLE XII
MAJORITY
VOTE
Notwithstanding any provision of law requiring any action to be
taken or approved by the affirmative vote of the holders of
shares entitled to cast a greater number of votes, any such
action shall be effective and valid if declared advisable by the
Board of Directors and taken or approved by the affirmative vote
of holders of shares entitled to cast a majority of all the
votes entitled to be cast on the matter, except as otherwise
provided in the Charter.
ARTICLE XIII
SHARE
ISSUANCE
The Board of Directors is hereby empowered to authorize the
issuance from time to time of shares of its Capital Stock of any
class, whether now or hereafter authorized, or securities
exercisable or exchangeable for or convertible into shares of
its Capital Stock of any class or classes, whether now or
hereafter authorized, for such consideration as may be deemed
advisable by the Board of Directors and without any action by
the stockholders.
ARTICLE XIV
CHARTER
AMENDMENTS
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in the Charter, including any
amendments changing the terms or contract rights, as expressly
set forth in the Charter, of any of its outstanding stock by
classification, reclassification or otherwise, by a majority of
the directors adopting a resolution setting forth the
proposed change, declaring its advisability, and either calling
a special meeting of the stockholders entitled to vote on the
proposed change, or directing the proposed change to be
considered at the next annual stockholders meeting. Unless
otherwise provided herein, the proposed change will be effective
only if it is adopted upon the affirmative vote of the holders
of not less than a majority of the aggregate votes entitled to
be cast thereon (considered for this purpose as a single class);
provided, however, that any amendment to, repeal of or adoption
of any provision inconsistent with Article VI or this
Article XIV will be effective only if it is also advised by
at least two-thirds of the Board of Directors and adopted upon
the affirmative vote of the holders of not less than two-thirds
of the aggregate votes entitled to be cast thereon (considered
for this purpose as a single class).
ARTICLE XV
DIRECTORS
POWERS
The enumeration and definition of particular powers of the Board
of Directors included in the foregoing Articles shall in no way
be limited or restricted by reference to or inference from the
terms of any other Article of the Charter of the Corporation, or
construed as or deemed by inference or otherwise in any manner
to exclude or limit any powers conferred upon the Board of
Directors under the General Laws of the State of Maryland now or
hereafter in force.
The Board of Directors of the Corporation shall, consistent with
applicable law, have power in its sole discretion to determine
from time to time in accordance with sound accounting practice
or other reasonable valuation methods what constitutes annual or
other net profits, earnings, surplus, or net assets in excess of
capital; to fix and vary from time to time the amount to be
reserved as working capital, or determine that retained earnings
or surplus shall remain in the hands of the Corporation; to set
apart out of funds of the Corporation such reserve or reserves
in such amount or amounts and for such proper purpose or
purposes as it shall determine and to abolish any such reserve
or any part thereof; to distribute and pay distributions or
dividends in Capital Stock, cash or other securities or
property, out of surplus or any other funds or amounts legally
available therefor, at such times and to the stockholders of
record on such dates as it may, from time to time, determine;
and to determine whether and to what extent and at what times
and places and under what conditions and regulations the books,
accounts and documents of the Corporation, or any of them, shall
be open to the inspection of stockholders, except as otherwise
provided by statute or by the Bylaws, and, except as so
provided, no stockholder shall have any right to inspect any
book, account or document of the Corporation unless authorized
to do so by resolution of the Board of Directors.
A-9
For any stockholder proposal to be presented in connection with
an annual meeting of stockholders of the Corporation, including
any proposal relating to the nomination of a director to be
elected to the Board of Directors of the Corporation, the
stockholders must have given timely written notice thereof in
writing to the Secretary of the Corporation in the manner and
containing the information required by the Bylaws. Stockholder
proposals to be presented in connection with a special meeting
of stockholders will be presented by the Corporation only to the
extent required by
Section 2-502
of the MGCL and the Bylaws.
ARTICLE XVI
DURATION
The duration of the Corporation shall be perpetual.
ARTICLE XVII
DEFINITIONS
The following terms shall have the meanings provided below when
used in the Charter:
Board of Directors. The term
Board of Directors shall mean the board of directors
of the Corporation, as it may be constituted from time to time.
Bylaws. The term Bylaws
shall mean the Corporations bylaws adopted by the Board of
Directors, as they may be amended from time to time.
Capital Stock. The term Capital
Stock shall mean all classes or series of stock of the
Corporation, including, without limitation, Common Stock and
Preferred Stock.
Charter. The term Charter
shall mean the charter of the Corporation, as that term is
defined in the MGCL.
Corporation. The term
Corporation shall mean the corporation formed by
these Articles of Incorporation, as they may be amended from
time to time.
MGCL. The term MGCL shall
mean the Maryland General Corporation Law, as amended from time
to time.
THIRD: The amendment to and restatement
of the charter as hereinabove set forth have been duly advised
by the Board of Directors and approved by the stockholders of
the Corporation as required by law.
FOURTH: The current address of the
principal office of the Corporation is as set forth in
Article III of the foregoing amendment and restatement of
the charter.
FIFTH: The name and address of the
Corporations current resident agent is as set forth in
Article IV of the foregoing amendment and restatement of
the charter.
SIXTH: The number of directors of the
Corporation and the names of those currently in office are as
set forth in Article VI of the foregoing amendment and
restatement of the charter.
SEVENTH: The total number of shares of
stock which the Corporation had authority to issue immediately
prior to this amendment and restatement was
38,763,000 shares of Common Stock, par value $0.01 per
share, 2,990,000 shares of 8.90% Series C Cumulative
Redeemable Preferred Stock, par value $0.01 per share,
2,100,000 shares of 9.00% Series D1 Mandatory
Convertible Preferred Stock, par value $0.01 per share, and
6,147,000 shares of 9.00% Series D2 Mandatory
Convertible Preferred Stock, par value $0.01 per share. The
aggregate par value of all authorized shares of stock having par
value immediately prior to this amendment and restatement was
$500,000.
EIGHTH: The total number of shares of
stock which the Corporation has authority to issue pursuant to
the foregoing amendment and restatement of the charter is
120,000,000 shares of Common Stock, par value $0.01 per
share. The aggregate par value of all authorized shares of stock
having par value is $1,200,000.
NINTH: The undersigned Chairman of the
Board and Chief Executive Officer acknowledges these Articles of
Amendment and Restatement to be the corporate act of the
Corporation and as to all matters or facts required to be
A-10
verified under oath, the undersigned Chairman of the Board and
Chief Executive Officer acknowledges that, to the best of his
knowledge, information and belief, these matters and facts are
true in all material respects and that this statement is made
under the penalties for perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be executed in its name and on its
behalf by its Chairman of the Board and Chief Executive Officer
and attested to by its Chief Financial Officer on this
[ ] day of [ ], 2011.
|
|
|
ATTEST:
|
|
NOVASTAR FINANCIAL, INC.
|
|
|
|
By:
Name: Rodney
Schwatken
Title: Chief Financial Officer
|
|
By:
(SEAL)
Name: W. Lance Andersen
Title: Chairman of the Board and
Chief Executive Officer
|
A-11
NOVASTAR
FINANCIAL, INC.
OFFER TO
EXCHANGE
EACH OUTSTANDING SHARE OF
8.90% SERIES C CUMULATIVE REDEEMABLE PREFERRED
STOCK
FOR, AT
THE ELECTION OF THE HOLDER,
COMMON
STOCK ONLY
OR
COMMON STOCK AND CASH
AND
CONSENT SOLICITATION RELATING TO THE RECAPITALIZATION
PROXY
STATEMENT/CONSENT SOLICITATION/PROSPECTUS
Information
Agent and Proxy Solicitor
199 Water Street,
26th Floor
New York, NY
10038-3560
Banks and Brokers Call
(212) 440-9800
All Others Call Toll-Free
(866) 695-6074
December
[], 2010
PART II
INFORMATION
NOT REQUIRED IN PROXY STATEMENT/CONSENT
SOLICITATION/PROSPECTUS
|
|
Item 20.
|
Indemnification
of Directors and Officers.
|
The Maryland General Corporation Law (MGCL) permits
a Maryland corporation to include in its charter a provision
limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for
liability resulting from (a) actual receipt of an improper
benefit or profit in money, property or services or
(b) active and deliberate dishonesty established by a final
judgment as being material to the cause of action. The charter
of the Company contains such a provision which eliminates such
liability to the maximum extent permitted by Maryland law.
The charter of the Company requires it, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a
proceeding to our present and former directors and officers,
whether serving us or any other entity at our request, from and
against any claim or liability to which such person may become
subject or which such person may incur by reason of his or her
service in any such capacity. The bylaws of the Company
establish certain procedures for indemnification and advancement
of expenses pursuant to Maryland law and the Companys
charter.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Companys charter does not) to
indemnify a director or officer who has been successful, on the
merits or otherwise, in the defense of any proceeding to which
he or she is made, or threatened to be made, a party by reason
of his or her service in that capacity. The MGCL permits a
corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made, or
threatened to be made, a party by reason of their service in
those or other capacities unless it is established that
(a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and
(i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money,
property or services, or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. However, under
the MGCL, a Maryland corporation may not indemnify for an
adverse judgment in a suit by or in the right of the corporation
or for a judgment of liability on the basis that personal
benefit was improperly received, unless in either case a court
orders indemnification, and then only for expenses. In addition,
the MGCL permits a corporation to advance reasonable expenses to
a director or officer upon the corporations receipt of
(x) a written affirmation by the director or officer of his
or her good faith belief that he or she has met the standard of
conduct necessary for indemnification by the corporation and
(y) a written undertaking by him or her or on his or her
behalf to repay the amount paid or reimbursed by the corporation
if it shall ultimately be determined that the standard of
conduct was not met.
The Company has entered into indemnification agreements with
certain of its directors and officers. Under the indemnification
agreements, the Company will indemnify each indemnitee to the
maximum extent permitted by Maryland law for liabilities and
expenses arising out of the indemnitees service to the
Company or other entity for which such indemnitee is or was
serving at the request of the Company. The indemnification
agreements also provide (a) for the advancement of expenses
by the Company, subject to certain conditions, (b) a
procedure for determining an indemnitees entitlement to
indemnification and (c) for certain remedies for the
indemnitee. In addition, the indemnification agreements require
the Company to use its reasonable best efforts to obtain
directors and officers liability insurance on terms and
conditions deemed appropriate by the Companys board of
directors.
The Company maintains insurance for its directors and officers
against certain liabilities, including liabilities under the
Securities Act, under insurance policies, the premiums of which
are paid by the Company. The effect of these insurance policies
is to indemnify any directors or officers of the Company against
expenses, judgments, attorneys fees and other amounts paid
in settlements incurred by a director or officer upon a
determination that such person acted in accordance with the
requirements of such insurance policy.
II-1
|
|
Item 21.
|
Exhibits
and Financial Statement Schedules.
|
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
3
|
.11
|
|
Articles of Amendment and Restatement of NovaStar Financial,
Inc. (including all amendments and applicable
Articles Supplementary)
|
|
3
|
.1.12
|
|
Certificate of Amendment of the Registrant
|
|
3
|
.23
|
|
Amended and Restated Bylaws of the Registrant, adopted
July 27, 2005
|
|
3
|
.2.14
|
|
Amendment to the Amended and Restated Bylaws of the Registrant
|
|
4
|
.15
|
|
Specimen Common Stock Certificate
|
|
4
|
.26
|
|
Specimen Preferred Stock Certificate
|
|
5
|
.1
|
|
Legal Opinion of Bryan Cave LLP*
|
|
8
|
.1
|
|
Tax Opinion of Bryan Cave LLP*
|
|
10
|
.17
|
|
Employment Agreement, dated as of January 7, 2008, by and
between NovaStar Financial, Inc. and
Rodney E. Schwatken.
|
|
10
|
.28
|
|
Form of Indemnification Agreement for Officers and Directors of
NovaStar Financial, Inc. and its Subsidiaries
|
|
10
|
.49
|
|
NovaStar Financial Inc. 2004 Incentive Stock Plan
|
|
10
|
.510
|
|
Amendment One to the NovaStar Financial, Inc. 2004 Incentive
Stock Option Plan
|
|
10
|
.611
|
|
Stock Option Agreement under NovaStar Financial, Inc. 2004
Incentive Stock Plan
|
|
10
|
.712
|
|
Restricted Stock Agreement under NovaStar Financial, Inc. 2004
Incentive Stock Plan
|
|
10
|
.813
|
|
Performance Contingent Deferred Stock Award Agreement under
NovaStar Financial, Inc. 2004 Incentive Stock Plan
|
|
10
|
.914
|
|
NovaStar Financial, Inc. Executive Bonus Plan
|
|
10
|
.1015
|
|
2005 Compensation Plan for Independent Directors
|
|
10
|
.1116
|
|
NovaStar Financial, Inc. Long Term Incentive Plan
|
|
10
|
.1217
|
|
Securities Purchase Agreement, dated July 16, 2007, by and
among NovaStar Financial, Inc., Massachusetts Mutual Life
Insurance Company, Jefferies Capital Partners IV L.P.,
Jefferies Employee Partners IV LLC and JCP Partners IV
LLC
|
|
10
|
.1318
|
|
Standby Purchase Agreement, dated July 16, 2007, by and
among NovaStar Financial, Inc., Massachusetts Mutual Life
Insurance Company, Jefferies Capital Partners IV L.P.,
Jefferies Employee Partners IV LLC and JCP Partners IV
LLC
|
|
10
|
.1419
|
|
Registration Rights and Shareholders Agreement, dated
July 16, 2007, by and among NovaStar Financial, Inc.,
Massachusetts Mutual Life Insurance Company, Jefferies Capital
Partners IV L.P., Jefferies Employee Partners IV LLC
and JCP Partners IV LLC
|
|
10
|
.1520
|
|
Letter Agreement, dated July 16, 2007, by and among
NovaStar Financial, Inc., Massachusetts Mutual Life Insurance
Company, Jefferies Capital Partners IV L.P., Jefferies
Employee Partners IV LLC and JCP Partners IV LLC, and
Scott Hartman
|
|
10
|
.1621
|
|
Letter Agreement, dated July 16, 2007, by and among
NovaStar Financial, Inc., Massachusetts Mutual Life Insurance
Company, Jefferies Capital Partners IV L.P., Jefferies
Employee Partners IV LLC and JCP Partners IV LLC, and
Lance Anderson
|
|
10
|
.1722
|
|
Letter Agreement, dated July 16, 2007, by and among
NovaStar Financial, Inc., Massachusetts Mutual Life Insurance
Company, Jefferies Capital Partners IV L.P., Jefferies
Employee Partners IV LLC and JCP Partners IV LLC, and
Mike Bamburg
|
|
10
|
.1923
|
|
Confidential Settlement Term Sheet Agreement, dated
March 17, 2008, between American Interbanc Mortgage LLC,
NovaStar Financial, Inc., NovaStar Mortgage, Inc., NFI Holding
Corp., and NovaStar Home Mortgage, Inc. (Complete Agreement
Filed Due to Expiration of Confidential Treatment Request)
|
|
10
|
.2124
|
|
Settlement Agreement, dated as of February 18, 2009, among
NovaStar Mortgage, Inc., NovaStar Financial, Inc., Taberna
Preferred Funding I, Ltd., Taberna Preferred Funding II,
Ltd. and Kodiak CDI I, Ltd.
|
II-2
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
10
|
.2025
|
|
Escrow Agreement, dated as of February 18, 2009, by an
among NovaStar Mortgage, Inc., NovaStar Financial, Inc., Taberna
Preferred Funding I, Ltd., Taberna Preferred Funding II,
Ltd., Kodiak CDI I, Ltd. and WolfBlock LLP
|
|
10
|
.2226
|
|
Exchange Agreement, dated as of February 18, 2009, by and
among NovaStar Mortgage, Inc., NovaStar Financial, Inc.,
NovaStar Capital Trust I/B, NovaStar Capital
Trust II/B, Taberna Preferred Funding I, Ltd., Taberna
Preferred Funding II, Ltd. and Kodiak CDI I, Ltd.
|
|
10
|
.2327
|
|
Amended and Restated Trust Agreement, dated as of
February 18, 2009, by and among, NovaStar Mortgage, Inc.,
The Bank of New York Mellon Trust Company, National
Association, BNY Mellon Trust of Delaware and certain
administrative trustees (including the form of Preferred
Securities Certificate) (I/B)
|
|
10
|
.2428
|
|
Junior Subordinated Indenture, dated as of February 18,
2009, between NovaStar Mortgage, Inc. and The Bank of New York
Mellon Trust Company, National Association (I/B)
|
|
10
|
.2529
|
|
Parent Guarantee Agreement, dated as of February 18, 2009,
between NovaStar Financial, Inc. and The Bank of New York Mellon
Trust Company, National Association (I/B)
|
|
10
|
.2630
|
|
Amended and Restated Trust Agreement, dated as of
February 18, 2009, by and among, NovaStar Mortgage, Inc.,
The Bank of New York Mellon Trust Company, National
Association, BNY Mellon Trust of Delaware and certain
administrative trustees (including the form of Preferred
Securities Certificate) (II/B)
|
|
10
|
.2728
|
|
Junior Subordinated Indenture, dated as of February 18,
2009, between NovaStar Mortgage, Inc. and The Bank of New York
Mellon Trust Company, National Association (II/B)
|
|
10
|
.2829
|
|
Parent Guarantee Agreement, dated as of February 18, 2009,
between NovaStar Financial, Inc. and The Bank of New York Mellon
Trust Company, National Association (II/B)
|
|
10
|
.2931
|
|
Securities Purchase Agreement, dated as of April 26, 2009,
by and among NovaStar Financial, Inc., Advent Financial
Services, LLC and Mark A. Ernst.
|
|
10
|
.3032
|
|
Release and Settlement Agreement dated as of June 30, 2009
by and between NovaStar Financial, Inc. and EHMD, LLC, EHD
Holdings, LLC and EHD Properties, LLC.
|
|
11
|
.133
|
|
Statement Regarding Computation of Per Share Earnings
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP
|
|
|
|
* |
|
To be filed by amendment. |
|
1 |
|
Incorporated by reference to Exhibit 3.1 to
Form 10-Q
filed by the Registrant on August 9, 2007 (File
No. 001-13533). |
|
2 |
|
Incorporated by reference to Exhibit 3.1 to
Form 8-K
filed by the Registrant with the SEC on May 26, 2005 (File
No. 001-13533). |
|
3 |
|
Incorporated by reference to Exhibit 3.3.1 to
Form 10-Q
filed by the Registrant with the SEC on August 5, 2005
(File
No. 001-13533). |
|
4 |
|
Incorporated by reference to Exhibit 3.2.1 to
Form 8-K
filed by the Registrant with the SEC on March 16, 2009
(File
No. 001-13533). |
|
5 |
|
Incorporated by reference to Exhibit 4.1 to
Form 10-Q
filed by the Registrant with the SEC on August 5, 2005
(File
No. 001-13533). |
|
6 |
|
Incorporated by reference to Exhibit 4.3 to
Form 8-A/A
filed by the Registrant with the SEC on January 20, 2004
(File
No. 001-13533). |
|
7 |
|
Incorporated by reference to Exhibit 10.1 to
Form 8-K/A
filed by the Registrant with the SEC on January 10, 2008
(File
No. 001-13533). |
|
8 |
|
Incorporated by reference to Exhibit 10.10 to
Form 8-K
filed by the Registrant with the SEC on November 16, 2005
(File
No. 001-13533). |
|
9 |
|
Incorporated by reference to Exhibit 10.15 to
Form S-8
filed by the Registrant with the SEC on June 30, 2004 (File
No. 333-116998). |
II-3
|
|
|
10 |
|
Incorporated by reference to Exhibit 10.46 to
Form 10-Q
filed by the Registrant with the SEC on May 10, 2007 (File
No. 001-13533). |
|
11 |
|
Incorporated by reference to Exhibit 10.25.1 to
Form 8-K
filed by the Registrant with the SEC on February 4, 2005
(File
No. 001-13533). |
|
12 |
|
Incorporated by reference to Exhibit 10.25.2 to
Form 8-K
filed by the Registrant with the SEC on February 4, 2005
(File
No. 001-13533). |
|
13 |
|
Incorporated by reference to Exhibit 10.25.3 to
Form 8-K
filed by the Registrant with the SEC on February 4, 2005
(File
No. 001-13533). |
|
14 |
|
Incorporated by reference to Exhibit 10.26 to
Form 8-K
filed by the Registrant with the SEC on March 15, 2007
(File
No. 001-13533). |
|
15 |
|
Incorporated by reference to Exhibit 10.30 to
Form 8-K
filed by the Registrant with the SEC on February 11, 2005
(File
No. 001-13533). |
|
16 |
|
Incorporated by reference to Exhibit 10.34 to
Form 8-K
filed by the Registrant with the SEC on February 14, 2006
(File
No. 001-13533). |
|
17 |
|
Incorporated by reference to Exhibit 10.1 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
18 |
|
Incorporated by reference to Exhibit 10.2 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
19 |
|
Incorporated by reference to Exhibit 10.3 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
20 |
|
Incorporated by reference to Exhibit 10.4 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
21 |
|
Incorporated by reference to Exhibit 10.5 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
22 |
|
Incorporated by reference to Exhibit 10.6 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
23 |
|
Incorporated by reference to Exhibit 10.55 to
Form 10-Q
filed by the Registrant with the SEC on April 27, 2009
(File
No. 001-13533). |
|
24 |
|
Incorporated by reference to Exhibit 10.53 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
25 |
|
Incorporated by reference to Exhibit 10.54 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
26 |
|
Incorporated by reference to Exhibit 10.55 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
27 |
|
Incorporated by reference to Exhibit 10.56 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
28 |
|
Incorporated by reference to Exhibit 10.57 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
29 |
|
Incorporated by reference to Exhibit 10.58 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
30 |
|
Incorporated by reference to Exhibit 10.59 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
31 |
|
Incorporated by reference to Exhibit 10.62 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
32 |
|
Incorporated by reference to Exhibit 10.1 to
Form 8-K
filed by the Registrant with the SEC on July 1, 2009 (File
No. 001-13533). |
|
33 |
|
See Note 12 to the consolidated financial statements. |
II-4
|
|
(c)
|
Opinion
of the Financial Adviser
|
A copy of the opinion of Stifel, Nicolaus & Company,
Incorporated, the Companys financial advisor, addressing
the fairness to the Company, from a financial point of view, of
the financial terms of the Series C Offer and Series D
Exchange will be filed by amendment.
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in the
amount of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) under the Securities Act if, in the aggregate,
the changes in amount and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof; and
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(b)(1) The undersigned Company hereby undertakes as follows:
that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Company undertakes that every prospectus
(i) that is filed pursuant to paragraph (a)(1) immediately
preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to
Rule 415, will be filed as part of an amendment to the
registration statement and will not be used until such an
amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors,
officers, and controlling persons of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment of the Company of expenses incurred or
paid by a director, officer, or controlling person of the
Company in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such
II-5
indemnification by the Company is against public policy as
expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond
to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13
of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the
request.
(e) The undersigned Company hereby undertakes to supply by
means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration
statement when it became effective.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Company has duly caused this Registration Statement on
Form S-4
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Kansas City, Missouri, on
December 10, 2010.
NOVASTAR FINANCIAL, INC.
|
|
|
|
By:
|
/s/ W.
Lance Anderson
|
W. Lance Anderson
Chairman of the Board of Directors
and Chief Executive Officer
POWER OF
ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS W. LANCE ANDERSON AND
RODNEY E. SCHWATKEN, AND EACH OF THEM, HIS TRUE AND LAWFUL
ATTORNEYS-IN-FACT
AND AGENTS, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION,
FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS, INCLUDING
POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT AND ANY
SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO
RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER
DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION, GRANTING UNTO SAID
ATTORNEYS-IN-FACT
AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND
PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO
BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND
PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT SAID
ATTORNEYS-IN-FACT
AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS SUBSTITUTE OR
SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
Pursuant to the requirements of the Securities Exchange Act of
1933, this Registration Statement has been signed below by the
following persons on behalf of the Company and in the capacities
and on the dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ W.
Lance Anderson
W.
Lance Anderson
|
|
Chairman of the Board of Directors and Chief Executive Officer
(Principal Executive Officer)
|
|
December 10, 2010
|
|
|
|
|
|
/s/ Rodney
E. Schwatken
Rodney
E. Schwatken
|
|
Chief Financial Officer and
Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
December 10, 2010
|
|
|
|
|
|
/s/ Edward
W. Mehrer
Edward
W. Mehrer
|
|
Director
|
|
December 10, 2010
|
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Gregory
T. Barmore
Gregory
T. Barmore
|
|
Director
|
|
December 10, 2010
|
|
|
|
|
|
/s/ Art
N. Burtscher
Art
N. Burtscher
|
|
Director
|
|
December 10, 2010
|
|
|
|
|
|
/s/ Donald
M. Berman
Donald
M. Berman
|
|
Director
|
|
December 10, 2010
|
|
|
|
|
|
/s/ Howard
M. Amster
Howard
M. Amster
|
|
Director
|
|
December 10, 2010
|
|
|
|
|
|
/s/ Barry
A. Igdaloff
Barry
A. Igdaloff
|
|
Director
|
|
December 10, 2010
|
EXHIBIT INDEX
|
|
|
|
|
|
5
|
.1
|
|
Legal Opinion of Bryan Cave LLP*
|
|
8
|
.1
|
|
Tax Opinion of Bryan Cave LLP*
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Deloitte and Touche LLP
|
|
|
|
* |
|
To be filed by amendment. |