pre14a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
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Filed by the Registrant þ
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Filed by a Party other than the Registrant o |
Check the appropriate box: |
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Preliminary Proxy Statement |
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
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Definitive Proxy Statement |
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Definitive Additional Materials |
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Soliciting Material Pursuant to §240.14a-12 |
NovaStar Financial, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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No fee required. |
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Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. |
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Title of each class of securities to which transaction applies: |
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Aggregate number of securities to which transaction applies: |
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Per unit price or other underlying value of transaction computed pursuant to Exchange
Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was
determined): |
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Proposed maximum aggregate value of transaction: |
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Fee paid previously with preliminary materials. |
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and
identify the filing for which the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule and the date of its filing. |
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Amount Previously Paid: |
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Form, Schedule or Registration Statement No.: |
NOVASTAR
FINANCIAL, INC.
2114 Central Street,
Suite 600
Kansas City, MO 64108
(816) 237-7000
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
To the Holders of Our Common 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., Eastern Time,
([ ] 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 per share (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 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, the
amendment and restatement of the charter, 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 the Companys common stock, par value
$0.01 per share, you will be entitled to vote on all business
properly brought before the meeting, including proposals 1,
2, 3, 4 and 5 above. At the meeting, the holders of the
Series D Preferred Stock are also entitled to vote on all
business properly brought before the meeting, including
proposals 1, 2, 3, 4 and 5 above, and the holders of the
Series C Preferred Stock will be entitled to vote on
proposals 1, 4 and 5 above and may also be entitled to vote
on other business properly brought before the meeting, depending
on the subject matter of any additional proposals.
A proxy statement 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, in which the private holders
of the Series D Preferred Stock have agreed to exchange
their shares subject to certain closing 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 exchange of the
Series C Preferred Stock and the exchange of the
Series D Preferred Stock. Please see the attached proxy
statement for additional information related to these
transactions.
The Board of Directors has fixed the close of business on
April 7, 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
[ ], 2011
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. IF YOU ATTEND THE
SPECIAL MEETING, YOU MAY VOTE IN PERSON EVEN IF YOU RETURNED A
PROXY.
PRELIMINARY
PROXY STATEMENT
NovaStar Financial, Inc.
2114 Central Street
Suite 600
Kansas City, Missouri 64108
PROXY STATEMENT
Special Meeting of Stockholders
June 23, 2011
Important Notice Regarding the Availability of Proxy
Materials for the Special Meeting to Be Held on June 23,
2011:
This proxy statement and the proxy card are also available to
you at
http://www.novastarfinancial.com/[ ].
EXPLANATORY
NOTE
This proxy statement relates to the 2011 special meeting of
stockholders of NovaStar Financial, Inc. (NFI or the
Company) in connection with the Companys
proposed recapitalization of its Companys 8.90%
Series C Cumulative Redeemable Preferred Stock, par value
$0.01 per share (the Series C Preferred Stock)
and its 9.00% Series D1 Mandatory Convertible Preferred
Stock, par value $0.01 per share (the Series D
Preferred Stock), the offer to exchange each for cash and
common stock of the Company, par value $0.01 per share (the
Common Stock), being the Series C
Offer and Series D Exchange,
respectively. While you, as a holder of Common Stock, will
not be asked to approve the Series C Offer or the
Series D Exchange (collectively, the
Recapitalization), you will be asked to approve the
proposals presented at the 2011 special meeting of stockholders
(the Proposals), each of which is described in
detail in the proxy statement. The Proposals must be approved as
a condition to the closing of the Series C Offer and the
Series D Exchange. A non-vote will count as a
no vote, so your vote is very important.
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in the proxy statement 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.
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
auxiliary 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 has been generally prepared as of
[ ], 2011. 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 any such information unless
required by law.
HOW TO
OBTAIN ADDITIONAL INFORMATION
You may access information regarding the Company at the
Securities and Exchange Commission (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 certain Company documents, including all or any
portion of the registration statement on
Form S-4
under the Securities Act of 1933, as amended (the
Securities Act), declared effective
[ ], 2011 (the Registration
Statement), with respect to the Common Stock offered in
the Series C Offer may be obtained from the public
reference section of the SEC upon payment of the prescribed
fees. 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, D.C. 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.
If you would like additional copies of this proxy statement, or
if you have questions about the Series C Offer or Consent
Solicitation (defined in the proxy statement), 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 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 special meeting, 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 D Exchange,
Series C Offer or Consent Solicitation that is different
from, or in addition to, that contained in this proxy statement
or in any of the materials that we have incorporated into this
proxy statement or that is different from, or in addition to,
that contained in the proxy statement/consent
solicitation/prospectus that is part of the Registration
Statement or in any of the materials that we have incorporated
into the proxy statement/consent solicitation/prospectus that is
part of the Registration Statement. Therefore, if anyone gives
you information of this sort, you should not rely on it.
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TABLE OF
CONTENTS
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F-1
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A-1
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B-1
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C-1
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D-1
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iv
THE
RECAPITALIZATION SUMMARY
The board of directors of the Company (the Board of
Directors) has called a special meeting of its
stockholders for the purpose of approving certain matters
related to the proposed Recapitalization of the Series C
Preferred Stock and the Series D Preferred Stock.
This summary highlights the material information regarding the
Recapitalization, but may not include all of the information
that you, as a holder of Common Stock, would like to know. To
fully understand the Series D Exchange, the Series C
Offer and the solicitation of the consents from the holders of
Series C Preferred Stock (the Series C
Holders) to effect the Series C Offer and the
Series D Exchange (the Consent Solicitation),
and for a more complete description of the legal terms of the
Series D Exchange, the Series C Offer and the Consent
Solicitation, you should carefully read this entire document,
including The Series C Offer and Consent
Solicitation section and the Series D
Exchange section and the other documents we refer to in
this document.
As a holder of Common Stock, you will not have an opportunity
to participate in the Series C Offer, the Series D
Exchange or the Consent Solicitation except to the extent you
also hold Series C Preferred Stock or Series D
Preferred Stock. However, you will be asked to approve the
Proposals, all of which must be approved to effect the
Series C Offer, the Series D Exchange and the Consent
Solicitation.
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The Company |
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NovaStar Financial, Inc. |
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The Companys Address and Phone Number |
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2114 Central Street
Suite 600
Kansas City, Missouri 64108
(816) 237-7000 |
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The Companys Business |
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The Company operates two majority-owned subsidiaries:
StreetLinks LLC (formerly StreetLinks National Appraisal
Services LLC) (StreetLinks), a national residential
appraisal and real estate valuation management services company,
and Advent Financial Services LLC (Advent). Advent
provides financial settlement services, along with its
distribution partners, mainly through income tax preparation
businesses and also 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. |
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Common Stock |
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Common Stock, par value $0.01 per share (OTCQB: NOVS) |
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Series C Preferred Stock |
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8.90% Series C Cumulative Redeemable Preferred Stock, par
value $0.01 per share (OTCQB: NOVSP) |
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Series D Preferred Stock |
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9.00% Series D1 Mandatory Convertible Preferred Stock, par
value $0.01 per share (privately-held stock) |
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Recapitalization |
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The Series C Offer and the Series D Exchange, together
with the Amendments (defined below), are part of the
Companys plan of Recapitalization to improve the
Companys capital structure. |
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Reasons for the Recapitalization |
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The Series C Offer and Series D Exchange are being
conducted to eliminate the Companys large and growing
financial 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 stockholders in the future. |
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Consequences of Failure to Complete the Recapitalization |
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If the Proposals are not approved by the Companys
stockholders or the Company is not otherwise 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. |
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Common Stock Outstanding Before the Recapitalization |
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As of [ ], 2011, the Company had
9,368,053 shares of Common Stock outstanding. |
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Common Stock Outstanding After the Recapitalization |
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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 37,161,600 shares of Common Stock
would be issued in the Series D Exchange. Therefore,
90,353,253 shares of our Common Stock would be outstanding
after completion of the Series C Offer and the
Series D Exchange. |
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Series D Exchange |
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The Series D Exchange is the exchange of all issued and
outstanding shares of Series D Preferred Stock, for an
aggregate of 37,161,600 newly-issued shares of Common Stock and
$1,377,600 in cash. The Series D Exchange is completed,
subject only to certain closing conditions, including the
approval of the Proposals. |
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Series D Holders |
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The holders of the Series D Preferred Stock are Jefferies
Capital Partners IV L.P., Jefferies Employee
Partners IV LLC, JCP Partners IV LLC and Massachusetts
Mutual Life Insurance Company (the Series D
Holders). |
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Exchange Agreement |
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The agreement by and among the Series D Holders and the
Company, dated December 10, 2010, in which the
Series D Holders and the Company agreed to the terms of the
Series D Exchange (the Exchange Agreement). |
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Outstanding Shares of Series D Preferred Stock Prior to
the Series D Exchange |
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2,100,000 shares |
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Conditions Precedent to the Series D Exchange |
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Closing of the Series D Exchange is conditioned upon, among
other things: |
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the completion of the Series C Offer; and
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approval of the Proposals, which would approve the
Amendments to our charter.
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Series C Offer |
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An offer to exchange each share of Series C Preferred Stock
for, at the election of each holder, either: |
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3 shares of newly-issued Common Stock of the
Company and $2.00 in cash (the
Cash-and-Stock
Option); or
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19 shares of newly-issued Common Stock (the
Stock-Only Option).
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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 |
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shares) will be issued to Series C Holders (the Offer
Consideration). The
Cash-and-Stock
Option and the Stock-Only Option are herein referred to as the
Consideration Options. See The Series C
Offer and Consent Solicitation General and
Series C Offer Consideration Explanation
and Examples. |
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Outstanding Shares of Series C Preferred Stock Prior to
the Series C Offer |
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2,990,000 shares |
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Conditions Precedent to the Series C Offer |
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The Companys obligation to accept shares for exchange in
the Series C Offer is conditioned upon, among other things: |
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the completion of the Series D Exchange;
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consent to the Series C Offer and the
Series D Exchange by the holders of at least two-thirds of
the outstanding Series C Preferred Stock;
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approval of the Proposals, which would approve the
Amendments to our charter;
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participation by the holders of at least two-thirds
of the outstanding Series C Preferred Stock;
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the effectiveness of the Registration Statement on
Form S-4,
filed December 10, 2010 and as subsequently amended, to
register the Common Stock to be issued as part of the
Series C Offer (the Registration Statement was declared
effective on [ ], 2011).
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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. |
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Series C Offer and Consent Solicitation Expiration
Date |
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The Series C Offer and Consent Solicitation will expire at
12:00 midnight, Eastern Time, on [ ],
2011, unless we extend the period of time for which the Series C
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. We may extend the Series C Offer and Consent
Solicitation under certain circumstances. |
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Series C Offer Settlement Date |
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The settlement date in respect of Series C Preferred Stock
validly surrendered and accepted for exchange in the
Series C Offer will occur at the closing of the
Series C Offer. We expect the closing to be within three
business days after the Expiration Date. |
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Fractional Shares in the Series C Offer |
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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 Common
Stocks average closing price over the
10-day
period preceding the Expiration Date. |
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Partial Tenders in the Series C Offer |
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We will not accept partial tender of a Series C
Holders shares of Series C Preferred Stock. |
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Withdrawal Rights in the Series C Offer |
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The 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 Date, and after [ ], 2011 for
any tendered shares of Series C Preferred Stock not yet
accepted for payment by that date. |
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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. See The
Series C Offer and Consent Solicitation
Withdrawal Rights. |
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Effect of the Completed Series C Offer on Non-Tendered
Series C Preferred Stock |
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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, pro rata 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 Remainder
Consideration). Holders of these rights will be able to
receive their applicable share of the Remainder Consideration as
soon as reasonably practicable after, but no sooner than 11
business days after and no later than 180 calendar days after,
the closing of the Series C Offer. A 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. |
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Voting Agreement |
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Howard M. Amster and Barry A. Igdaloff and the Company have
entered into a voting agreement, dated December 10, 2010,
in which Messrs. Amster and Igdaloff have agreed to be
present, in person or by proxy, at each and every stockholder
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 Stock owned or controlled
directly or indirectly Messrs. Amster and Igdaloff in favor
of any proposal that receives the recommendation of the Board of
Directors (the Voting Agreement). |
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Interest of Certain Persons in the Series C Offer and Consent
Solicitation |
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Messrs. Amster and Igdaloff are directors of the Company
who were elected to serve on the Board of Directors 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 46,400 shares of Series C Preferred
Stock, collectively. Mr. Igdaloff owns |
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207,649 shares of Series C Preferred Stock, and as a
registered investment advisor, he controls an additional
100,125 shares. |
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Messrs. Amster and Igdaloff did not serve on the Special
Committee (defined below) of the Board of Directors which
considered the Recapitalization, including the Series C
Offer. |
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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 the Voting
Agreement, pursuant to which the Company agreed to include
Messrs. Amster and Igdaloff on the managements
proposed slate of directors presented to the Company
stockholders at the following annual stockholders meeting. |
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In accordance with the Voting Agreement, Messrs. Amster and
Igdaloff have agreed to vote for all the Proposals,
and will consent to the Series C Offer and the
Series D Exchange. Further, Messrs. Amster and
Igdaloff have both indicated that they will tender all of their
Series C Preferred Stock and will elect the Stock-Only
Option in exchange for their shares. The reason for the
aforementioned actions is that Messrs. Amster and Igdaloff
believe that the Series C Offer is in the best interest of
the Company because, if it closes, it will improve the
Companys capital structure and eliminate the accrued and
unpaid dividends on the Series C Preferred Stock, as
described in greater detail in the section titled
Background of the Recapitalization. Further,
Messrs. Amster and Igdaloff believe that their
participation in the Series C Offer is in the best interest
of each director because they have the opportunity to select
their Consideration Option and each such director wants to
receive as much of the Companys Common Stock in exchange
for their Series C Preferred Stock as they are eligible to
receive. |
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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 Stockholder Meeting. For more information
regarding the Board service of Messrs. Amster and Igdaloff,
see Directors, Executive Officers and Control
Persons Series C Directors. |
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Consent Solicitation |
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As part of the Series C Offer, the Company is soliciting
the consent of Series C Holders to the Series C Offer
and the Series D Exchange. Consent must be received from
holders of at least two-thirds of the outstanding Series C
Preferred Stock to effectuate 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. |
5
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Trading and Related Matters |
|
The Common Stock issuable pursuant to the Series C Offer is
being registered under the Securities Act, and will be freely
tradable, except by our affiliates. The Common Stock issuable
pursuant to the Series D Exchange will not be registered
under the Securities Act as part of the Series D Exchange,
but the Company and the Series D Holders will enter in a
registration rights agreement for the newly-issued Common Stock
after the Series D Exchange closes. |
|
Differences in Rights of Our Common Stock, Series C
Preferred Stock and Series D Preferred Stock |
|
The Common Stock, Series C Preferred Stock and
Series D Preferred 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 and
The Series D Exchange Differences in
Rights of Our Common Stock and Series D 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
[ ], 2011, was
$[ ]. The last reported sale price of
shares of Series C Preferred Stock as quoted by Pink OTC
Markets inter-dealer quotation service on
[ ], 2011, was
$[ ]. The Series D Preferred Stock
is privately held and no Series D Preferred Stock purchases
have occurred since 2007. |
|
Material U.S. Federal Income Tax Considerations |
|
As discussed below under Material United States Federal
Income Tax Considerations, there will be no tax
consequences to you because, as a holder of Common Stock, you
will not have an opportunity to participate in the Series C
Offer or Series D Exchange, except to the extent you also
hold Series C Preferred Stock or Series D Preferred
Stock. |
|
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, as
amended (the Exchange Act). |
|
Exchange Agent for the Series C Offer |
|
Computershare Trust Company, N.A. |
|
Transfer Agent for the Series C Offer |
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Computershare Trust Company, N.A. |
|
Information Agent for the Series C Offer |
|
Georgeson Inc. |
|
Regulatory Approvals |
|
We are not aware of any other material regulatory approvals
necessary to complete the Recapitalization, other than the
obligation to file a Schedule TO/13E-3 with the SEC, to
file a registration statement on
Form S-4
with the SEC, and to otherwise comply with applicable securities
laws to complete the Series C Offer. |
6
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Appraisal Rights and Right to Petition for Fair Value |
|
The holders of Common Stock, Series C Holders and the
Series D Holders will not have appraisal rights, or any
contract right to petition for fair value, with respect to any
matter to be acted upon at the special meeting. The Company will
not independently provide such a right. |
|
Further Information |
|
If you have questions regarding the 2011 special meeting of
stockholders, please contact: |
|
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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 |
7
QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETING, SERIES C OFFER,
SERIES D EXCHANGE AND CONSENT SOLICITATION
|
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Q: |
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WHY DOES THIS PROXY STATEMENT INCLUDE DETAILED INFORMATION
ABOUT THE SERIES C OFFER, SERIES D EXCHANGE AND
CONSENT SOLICITATION WHEN COMMON STOCK HOLDERS CANNOT
PARTICIPATE IN ANY OF THESE TRANSACTIONS? |
|
A: |
|
As a holder of Common Stock, you will not be asked to consent to
the Series C Offer or the Series D Exchange, nor will
you be able to participate in the Series C Offer or the
Series D Exchange, except to the extent that you also hold
Series C Preferred Stock or Series D Preferred Stock.
However, because the Series C Offer and the Series D
Exchange will involve the new issuance of 80,985,200 shares
of Common Stock if the transactions close, and because the
amount of capital stock authorized and unissued is not
sufficient to cover the number of shares to be issued as part of
the Series C Offer and the Series D Exchange, the
Company is seeking the approval to increase the authorized
shares of capital stock from 50,000,000 to 120,000,000 in
Proposal 3 (defined below). As a holder of Common Stock,
you are entitled to vote on the Proposals, including
Proposal 3. To ensure that you have the necessary
information to make an informed decision when voting on
Proposal 3 and the other Proposals, and because of relevant
rules of the SEC that entitled you to receive certain
information regarding the transactions, we are providing you
with the information contained in this proxy statement regarding
the Series C Offer, the Series D Exchange and the
Consent Solicitation. |
|
Q: |
|
WHY IS THE COMPANY PROPOSING TO RECAPITALIZE THE
SERIES C PREFERRED STOCK AND SERIES D PREFERRED
STOCK? |
|
A: |
|
The Series C Offer and 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 $55.9 million as of April 15, 2011.
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
April 15, 2011. Therefore, the aggregate obligation
relating to the preferred stock as of April 15, 2011 was
$183.2 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
$23.6 million in accrued and unpaid dividends on the
Series C Preferred Stock and $32.3 million of accrued
and unpaid dividends on the Series D Preferred Stock
(through April 15, 2011) 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: |
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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: |
|
WHEN DOES THE COMPANY EXPECT TO COMPLETE THE SERIES C
OFFER AND SERIES D EXCHANGE? |
|
A: |
|
The Company expects to complete the Series C Offer and
Series D Exchange during the second quarter of 2011. |
8
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Q: |
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WHAT IF ANY OR ALL OF THE PROPOSALS DO NOT PASS? |
|
A: |
|
If any or all of the Proposals do not pass, the Series C
Offer and the Series D Exchange will not close and the
Company charter will not be amended to reflect the Amendments.
Thus, the accrued and unpaid dividends on the Series C
Preferred Stock and the accrued and unpaid dividends on the
Series D Preferred Stock will remain owed to the
Series C Holders and Series D Holders, respectively.
Further, dividends on such preferred stock will continue to
accrue and our obligation to pay the aggregate liquidating
preference of the Series C Preferred Stock and the
Series D Preferred Stock would not be eliminated. See our
answer to Why is the Company proposing to recapitalize the
Series C Preferred Stock and Series D Preferred
Stock? above. |
|
Q: |
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WHAT IF YOU DO NOT VOTE? |
|
A: |
|
If you do not vote on the Proposals, your non-vote will be
treated like a vote against the Proposals. Each Proposal, in
addition to a separately required approval by the Series C
Holders or Series D Holders (or both), must be approved by
an affirmative vote of a majority of all shares entitled to vote
at the special meeting on each Proposal. |
|
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In order for the Proposals to pass, even if 100% of the
Series C Holders and Series D Holders vote to approve
the Proposals on which they are entitled to vote, the Proposals
will require support of some of the holders of Common Stock to
pass. In such case, the holders of 2,251,527 shares of
Common Stock (or 24.03% of the outstanding shares of Common
Stock) must vote to approve Proposal 1, Proposals 4
and Proposal 5 (each defined below) and the holders of
3,746,527 shares of Common Stock (or 39.99% of the
outstanding shares of Common Stock) must vote to approve
Proposal 2 and Proposal 3 (each defined below) for
each of the Proposals to pass, and thus, to effectuate the
Recapitalization. |
|
Q: |
|
HOW DOES THE BOARD OF DIRECTORS RECOMMEND THAT YOU VOTE? |
|
A: |
|
The Board of Directors recommends that the holders of Common
Stock vote for each of the Proposals. |
|
Q: |
|
DO I HAVE ANY APPRAISAL RIGHTS IN CONNECTION WITH THE MATTERS
TO BE VOTED ON AT THE SPECIAL MEETING? |
|
A: |
|
No. You will not have appraisal rights, or any contract
right to petition for fair value, with respect to any matter to
be acted upon at the special meeting. We will not independently
provide such a right. |
|
Q: |
|
WHICH PROPOSALS WILL I BE ENTITLED TO VOTE ON AS A
HOLDER OF COMMON STOCK? |
|
A: |
|
As a holder of Common Stock, you will be entitled to vote on all
business properly brought before the special meeting, including
Proposal 1 (to amend the charter of the Company to
eliminate the Series C Preferred Stock), Proposal 2
(to amend the charter of the Company to eliminate the
Series D Preferred Stock), Proposal 3 (to amend 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 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, to approve
the amendment and restatement of the charter and to remove
provisions previously required by our former status as a real
estate investment trust). |
9
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|
Q: |
|
WHO CAN I CONTACT TO REQUEST ANOTHER COPY OF THE PROXY
STATEMENT? |
|
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
10
THE
SPECIAL MEETING
To Be Held June 23, 2011
To Our Stockholders:
The Board of Directors is furnishing this proxy statement in
connection with its solicitation of proxies for use at the
special meeting of stockholders to be held on
[ ], [ ], 2011 at
10:00 a.m., Central Time, at the Hyatt Regency Crown Center
Hotel, 2345 McGee Street, Kansas City, MO 64108. This proxy
statement, the accompanying proxy card and the notice of special
meeting are being provided to holders of the Common Stock
beginning on or about [ ], 2011.
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:
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to approve an amendment to the charter of the Company to
eliminate the Series C Preferred Stock
(Proposal 1);
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to approve an amendment to the charter of the Company to
eliminate the Series D Preferred Stock
(Proposal 2);
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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);
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to approve an amendment to the charter of the Company to
preserve the Companys NOLs (Proposal 4);
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to approve certain technical amendments to the charter of the
Company in connection with the other Proposals, to approve the
amendment and restatement of the charter and to remove
provisions previously required by the Companys former
status as a real estate investment trust
(Proposal 5); and
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to transact such other business as may properly come before the
special meeting and any postponement or adjournment thereof.
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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 holder of Common Stock you will be entitled to vote
on all business properly brought before the special meeting,
including all of the Proposals.
Reasons
for the Special Meeting and Consideration of the
Proposals
As described below in the Background of the
Recapitalization subsection of this proxy statement, the
Companys offer to exchange all of the outstanding
Series C Preferred Stock for an aggregate of 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)
(the Series C Offer) and the Companys
agreement with the holders of the Series D Preferred Stock
to exchange all of the outstanding Series D Preferred Stock
for an aggregate of 37,161,600 newly-issued shares of Common
Stock and $1,377,000 in cash (the Series D
Exchange), are part of the Companys Recapitalization
to improve the Companys capital structure. If the
Series C Offer and Series D Exchange are consummated,
approximately $23.6 million in accrued and unpaid dividends
on the Series C Preferred Stock and $32.3 million of
accrued and unpaid dividends on the Series D Preferred
Stock (through April 15, 2011) 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
11
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 to Approve the Amendment and Restatement to the
Charter 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
Holders of Common Stock at the close of business on
April 7, 2011 (the Record Date) are entitled to
notice of, and to vote on any business properly brought before,
the special meeting, including Proposal 1, Proposal 2,
Proposal 3, Proposal 4 and Proposal 5. On the
Record Date, 9,368,053 shares of Common Stock were
outstanding. This proxy statement only solicits proxies from the
holders of Common Stock.
The Series D Holders at the close of business on the Record
Date, are entitled to notice of, and to vote on any business
properly brought before, the special meeting, including
Proposal 1, Proposal 2, Proposal 3,
Proposal 4 and Proposal 5. On the Record Date,
2,100,000 shares of Series D Preferred Stock were
outstanding.
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. The Series C
Holders at the close of business on the Record Date are entitled
to notice of, and to vote at, the special meeting on
Proposal 1, Proposal 4 and Proposal 5. As of the
Record Date, there were 2,990,000 shares of Series C
Preferred Stock outstanding.
Each holder of Common Stock is entitled to one vote for each
share of Common Stock held as of the Record Date. Each
Series C Holder is entitled to one vote for each share of
Series C Preferred Stock held as of the Record Date. Each
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, a separate approval by the
holders of 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:
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Series C Holder
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Series D Holder
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Separate Approval (2/3
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Separate Approval (2/3
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Aggregate Votes Entitled
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Affirmative Vote of all
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Affirmative Vote of all
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to be Cast (Majority
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Outstanding Series C
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Outstanding Series D
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Holder Threshold)
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Preferred Stock)
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Preferred Stock)
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Proposal 1
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14,233,053
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Yes
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No
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Proposal 2
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11,243,053
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No
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Yes
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Proposal 3
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11,243,053
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No
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Yes
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Proposal 4
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14,233,053
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Yes
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Yes
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Proposal 5
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14,233,053
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Yes
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Yes
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Voting of
Proxies
If you are not planning on attending the special meeting to vote
your shares in person, your shares of Common 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
Common Stock at the special meeting, the proxy card that
accompanies this proxy statement should be returned to the
Company in the enclosed return envelope. Specific instructions
for holders of record of Common Stock who wish to use the
Internet or telephone voting procedures are set forth on the
proxy card.
12
Shares of Common 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:
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Shares of Common Stock will be voted FOR the approval of
the amendment to the charter of the Company to eliminate the
Series C Preferred Stock;
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Shares of Common Stock will be voted FOR the approval of
the amendment to the charter of the Company to eliminate the
Series D Preferred Stock;
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Shares of Common Stock will be voted FOR the approval of
the amendment to the charter to increase the number of
authorized shares of capital stock of the Company from
50,000,000 to 120,000,000;
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Shares of Common Stock will be voted FOR the approval of
the amendment to the charter to preserve the Companys
NOLs; and
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Shares of Common Stock will be voted FOR the approval of
certain technical amendments to the charter in connection with
the other Proposals, to approve the amendment and restatement of
the charter and to remove provisions previously required by the
Companys former status as a real estate investment trust.
|
The Board of Directors recommends that the holders of Common
Stock vote for each of the Proposals. The management
and the Board 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.
Broker
Non-Votes
If the Common Stock 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 of Common Stock 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 on each at the special meeting, 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
13
Series C Holders and the Series D Holders, and the
affirmative vote of the holders of at least two-thirds of all
Series C Preferred Stock 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 the holders of at least
two-thirds of all Series D Preferred Stock 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 the holders of at least
two-thirds of all Series D Preferred Stock 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
the holders of at least two-thirds of all Series C
Preferred Stock entitled to vote, and the affirmative vote of
the holders of at least two-thirds of all Series D
Preferred Stock entitled to vote is required to approve the
amendment to the charter to preserve the Companys NOLs.
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 the holders of at least two-thirds of all Series C
Preferred Stock entitled to vote, and the affirmative vote of
the holders of at least two-thirds of all Series D
Preferred Stock 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
former 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 Company stockholder will have appraisal rights with respect
to any matter to be acted upon at the special meeting.
Further, no Company stockholder will have any contract right to
petition for fair value with respect to any matter to be acted
upon at the special meeting. The Company will not independently
provide such a right. Under
Section 3-202(a)(4)
of the Maryland General Corporation Law (the MGCL),
stockholders generally have the right to petition for fair value
when the charter is amended in a way that substantially affects
the stockholders rights and alters the contract rights as
expressly set forth in the charter. However,
Section 3-202(a)(4)
of the MGCL provides an exception from this general rule when
the charter reserves the power to amend the charter to alter
contract rights. Article XV of the Companys current
charter expressly reserves the power to amend the charter to
alter the contract rights of existing stockholders.
Voting by
Shares Held in the 401(k) Plan
If you participate in the NovaStar Financial, Inc. 401(k) plan
and your account has investments in shares of the Companys
Common Stock, you must provide voting instructions to the plan
trustee (either via the proxy card or by Internet or telephone)
no later than 11:59 p.m., Eastern Time, on
[ ], 2011 in order for your shares to be voted
as you instruct. If no voting instructions are received by the
plan trustee, your 401(k) shares will be voted by the plan
administrator for each of the Proposals. Your voting
instructions will be held in strict confidence.
14
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 of Directors.
Because dividends on the Series C Preferred Stock were in
arrears for six or more quarters as of the 2009 Annual
Stockholders Meeting, two directors, Howard Amster and
Barry Igdaloff, were elected at that meeting to serve on the
Board of Directors 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, 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 Board of Directors by two
positions and appoint Messrs. Amster and Igdaloff to fill
the newly-created positions. Moreover, at the next annual
meeting of stockholders 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 Board of
Directors and Messrs. Amster and Igdaloff will accept such
nominations. For more information regarding the structure of the
Board of Directors upon filing the revised charter and the
service of Messrs. Amster and Igdaloff on the Board of
Directors, 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 (defined below) of the Board of Directors 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
46,400 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 have agreed to vote
for all the Proposals, and will consent to the
Series C Offer and Series D Exchange.
Solicitation
of Proxies
The costs of this solicitation 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. The Company will, upon request,
reimburse those parties for their reasonable expenses in
forwarding proxy materials to the beneficial owners. The Company
has engaged Georgeson Inc. to solicit votes from all
stockholders entitled to vote at the special meeting. The
Company entered into an agreement with Georgeson Inc. for such
services on December 10, 2010. Under this agreement,
Georgeson Inc. will provide standard proxy solicitor and
information agent duties, including, but not limited to, the
solicitation of votes, communication with the Company as to vote
updates and communication with the vote tabulator, for a fee
payble to Georgeson Inc. of $15,000 and the reimbursement of any
proxy solicitation-related expenses.
Proxy
Solicitor
We have engaged 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
15
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 described
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.
Immediately following the completion of the Series C Offer,
upon the effectiveness of the Articles of Amendment and
Restatement, and without further action on the part of the
Company or its stockholders, all shares of Series C
Preferred Stock not tendered for exchange will be automatically
converted into the right to receive 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 whose holders elect 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 whose holders elect 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 converted into the right to
receive its pro rata share of the Remainder Consideration.
Holders of these rights will be able to receive their applicable
share of the Remainder Consideration as soon as reasonably
practicable after, but no sooner than 11 business days after and
no later than 180 calendar days after, the closing of the
Series C Offer.
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.
16
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,
and the Company will not independently provide stockholders with
such rights.
Vote
Required
The affirmative vote of the holders 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 the holders
of least two-thirds of all Series C Preferred Stock is
required to approve the amendment to the charter to modify the
terms of the Series C Preferred Stock.
Board of
Directors Recommendation
After careful consideration, the Board of Directors
determined that the 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 Board of Directors recommends that its
stockholders vote in favor of the articles amendment to the
Companys charter to eliminate the Series C Preferred
Stock.
YOUR
BOARD OF DIRECTORS 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 Exchange and the other transactions described
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 stockholders, 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.
17
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. The Series D Preferred Stock and Common
Stock have different rights. For more information about these
differences, see The Series D Exchange
Differences in Rights of Our Common Stock and Series D
Preferred 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,
and the Company will not independently provide stockholders with
such rights.
Vote
Required
The affirmative vote of the holders 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 the holders of at least two-thirds of all
Series D Preferred Stock is required to approve the
amendment to the charter to eliminate the terms of the
Series D Preferred Stock.
Board of
Directors Recommendation
After careful consideration, the Board of Directors
determined that the amendment to the Companys charter to
eliminate the Series D Preferred Stock is advisable and
directed that it be submitted to the Companys stockholders
for their approval. The Board of Directors recommends that
stockholders vote in favor of the articles amendment to the
Companys charter to eliminate the Series D Preferred
Stock.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU 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 A. Your attention is directed
to the Articles of Amendment and Restatement, generally, and
Article Five thereof, specifically.
The Series C Offer, the Series D Exchange and the
other transactions described 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 stock 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.
18
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,
and the Company will not independently provide stockholders with
such rights.
Vote
Required
The affirmative vote of the holders 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 the holders of at least two-thirds of all
Series D Preferred Stock is required to approve the
amendment to the charter to increase the number of authorized
shares of capital stock of the Company.
Board of
Directors Recommendation
After careful consideration, the Board of Directors
determined that the amendment to the Companys charter to
increase the number of authorized shares of capital stock of the
Company is advisable and directed that it be submitted to the
Companys stockholders for their approval. The Board of
Directors recommends that stockholders vote in favor of the
articles amendment to the Companys the charter to increase
the number of authorized shares of capital stock of the
Company.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR
THE 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
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 Series C Offer, the Series D Exchange and the
other transactions described herein will not occur if this
proposal to approve the acquisition restrictions is not approved
at the special meeting.
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 stockholders, 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 Internal Revenue
Code of 1986, as amended (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
stockholder of the Company, as determined under the Code and
applicable regulations; this would include, among other things,
an attempted acquisition of Company stock by an existing
5-percent stockholder. 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 Company stock to the extent, generally, that exercise of the
option would
19
result in a proscribed level of Company stock ownership. As
previously stated, the Board of Directors may waive the
acquisition restrictions, and acquisitions of Company 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 Company stock, or options with respect to
Company 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 Board of Directors. In deciding whether to
approve any proposed transfer, the 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.
The acquisition restrictions will not apply to the following:
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any transaction directly with the Company, including pursuant to
the exercise of outstanding options or warrants;
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any tender or exchange offers for all of the Companys
stock made pursuant to the applicable rules and regulations of
the Exchange Act, for any or all outstanding stock in which a
majority of each class of the outstanding 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
Company in which all of the 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 stock
accepted in such tender or exchange offer; or
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any transaction approved in advance by the Board of Directors.
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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 Board of Directors, unless and until such person
owns less than 5% (by value) of Company stock, at which point
such person may acquire Company stock only to the extent that,
after such acquisition, such person owns less than 5% (by value)
of the Company 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
stockholders 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 Board of Directors
does not intend to discourage offers to acquire substantial
blocks of Company stock that would clearly improve stockholder
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 Board of Directors determines to be in the
best interest of the Company and its stockholders, in light of
all factors deemed relevant, the Board of Directors 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
20
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 Company stock
purportedly transferred in contravention of the acquisition
restrictions. As a result, requested transfers of Company 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 Company
stock would not be entitled to any rights of stockholders 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 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 Company
stock or adversely affect the value of the Company stock.
Purpose
and Effects of the Acquisition Restrictions
Without the acquisition restrictions, it is possible that
certain transfers of Company 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 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:
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There can be no assurance that the acquisition restrictions will
be enforceable against all of the Companys
stockholders; and
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The acquisition restrictions may be subject to challenge on
equitable grounds.
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It is possible that the acquisition restrictions may not be
enforceable against the Companys stockholders who vote
against or abstain from voting on this Proposal 4.
However, the Company believes that the acquisition
restrictions are in the best interests of the Company and the
Companys stockholders and are reasonable, and the Company
will act vigorously to enforce them against all current and
future holders of Company stock regardless of how they vote on
this Proposal 4.
The Company believes that each of its stockholders who votes in
favor of this Proposal 4 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 stockholder would be estopped from challenging the
legality, validity or enforceability of the acquisition
restrictions. Consequently, all Company stockholders should
carefully consider this in determining whether to vote in favor
of this Proposal 4.
Reasons
for the Acquisition Restrictions
At December 31, 2010, the Company had associated NOLs of
approximately $367.4 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.
21
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 stockholders, each of whom
owns 5% or more (by value) of a companys stock, increases
their aggregate percentage ownership by more than
50 percentage points over the lowest percentage of stock
owned by such stockholders 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 stockholder, 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 stockholder. 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.
The acquisition restrictions are designed to restrict transfers
of Company 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 Special Committee and the Board of Directors recommend that
the acquisition restrictions in Article Ten 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
Company stock and the ability of persons, entities or groups now
owning 5% or more (by value) of the Company stock from acquiring
additional Company 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 stockholders 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 stockholders.
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 stockholders 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 stockholders 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 stockholder 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 stockholders, in
light of all factors deemed relevant, the Board of Directors
would grant approval for such acquisition to proceed.
22
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,
and the Company will not independently provide stockholders with
such rights.
Vote
Required
The affirmative vote of the holders 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 the holders of at
least two-thirds of all Series C Preferred Stock, and the
affirmative vote of the holders of at least two-thirds of all
Series D Preferred Stock is required to approve the
amendment to the charter to preserve the Companys NOLs.
Board of
Directors Recommendation
The Special Committee, and the Board of Directors, upon the
unanimous recommendation of the Special Committee, have approved
the actions contemplated by Proposal 4 and have determined
that the actions contemplated by Proposal 4 are advisable
and favorable to and, therefore, fair to and in the best
interests of the Company and the Companys stockholders.
The Special Committee and the Board of Directors recommend that
Companys stockholders vote FOR approval of the
acquisition restrictions proposal.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR
THE CHARTER AMENDMENT TO
PRESERVE THE COMPANYS NOLS
PROPOSAL 5
CERTAIN TECHNICAL CHARTER AMENDMENTS IN CONNECTION WITH THE
OTHER PROPOSALS, TO APPROVE THE AMENDMENT AND RESTATEMENT OF THE
CHARTER 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 hereto as Appendix A.
The Series C Offer, the Series D Exchange and the
other transactions described herein will not occur if the
Articles of Amendment and Restatement is not approved at the
special meeting.
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 5. 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 NOLs.
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
23
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 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 Eleven and include generally the following
restrictions:
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no person may beneficially own or constructively 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;
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no person may beneficially own or constructively own shares of
capital stock to the extent that such ownership would result in
the Company being closely held within the meaning of
Section 856(h) of the Code or otherwise failing to qualify
as a REIT; and
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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.
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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:
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the reference to the original incorporator of the Company,
previously found in Article One has been deleted;
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updating Article Six 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;
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removing references to directors appointed by outstanding
preferred stock as no preferred stock will be outstanding;
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deleting the Articles Supplementary for the unissued 9.00%
Series D2 Mandatory Convertible Preferred Stock (the
Series D2 Preferred Stock);
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updating the language in Articles Eight, Nine and Twelve
related to director indemnification, director and officer
personal liability, and majority voting to more closely track
the current MGCL statutes;
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internal cross-references within the charter have been updated
to reflect the proposed changes; and
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the exact amount of Common Stock and cash from the Remainder
Consideration that all non-tendered Series C Preferred
Stock will be converted into the right to receive, using the
calculation described in Proposal 1
Charter Amendment to Eliminate the Series C Preferred
Stock Elimination of Series C Preferred
Stock.
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Proposal 5 also would approve the filing of the Articles of
Amendment and Restatement on the terms as described in this
Proposal 5 and as described in the other Proposals. The
restatement of the charter is a separate legal act under
Maryland law.
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,
and the Company will not independently provide stockholders with
such rights.
Vote
Required
The affirmative vote of the holders 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 the holders of at least two-thirds of all
Series D Preferred Stock is required to approve certain
technical amendments in connection with the other Proposals and
to remove provisions previously required by the Companys
former status as a Real Estate Investment Trust.
24
Board of
Directors Recommendation
After careful consideration, the 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 are advisable and directed that consideration of these
amendments, and the related Articles of Amendment and
Restatement, be submitted to the Companys stockholders for
their approval. The 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 OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU
VOTE
FOR
CERTAIN TECHNICAL CHARTER AMENDMENTS IN CONNECTION WITH
THE OTHER PROPOSALS, TO APPROVE THE AMENDMENT AND RESTATEMENT OF
THE
CHARTER AND TO REMOVE PROVISIONS PREVIOUSLY REQUIRED
BY THE COMPANYS FORMER STATUS AS A REAL ESTATE INVESTMENT
TRUST
25
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 Offer 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 stockholders will approve:
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an amendment to the charter of the Company to eliminate the
Series C Preferred Stock;
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an amendment to the charter of the Company to eliminate the
Series D Preferred Stock; and
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an amendment to 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.
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The unaudited pro forma financial information as been adjusted
resulting from the foregoing assumptions to:
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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;
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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
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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.
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26
The unaudited pro forma financial information does not reflect
the impact of the transactions in which the Company cancelled
the existing $78.1 million aggregate principal amount of
trust preferred securities and issued the Senior Notes as
described in the Recent Developments section. The
Company does not believe these transactions will have a material
impact on the unaudited pro forma financial information.
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As of and for the Years Ended December 31,
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2010
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2009
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2008
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2007
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2006
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Summary Historical Financial Information:
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Weighted average common shares outstanding-basic
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9,337,207
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9,368,053
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9,338,131
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9,332,405
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8,552,911
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Weighted average common shares outstanding-dilutive
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9,337,207
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9,368,053
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9,338,131
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9,332,405
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8,617,904
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Book value per common share-basic
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$
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(25.01
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$
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(128.47
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)
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$
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(107.52
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$
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(36.30
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)
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$
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51.42
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Book value per common share-dilutive
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(25.01
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)
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(128.47
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)
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(107.52
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)
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(36.30
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)
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51.04
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Dividends declared per common share
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22.40
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Income (loss) from continuing operations available to common
shareholders per share-basic
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86.53
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(20.97
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)
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(74.81
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(51.04
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)
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5.70
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Income (loss) from continuing operations available to common
shareholders per share-dilutive
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86.53
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(20.97
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)
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(74.81
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(51.04
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)
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5.66
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Summary Unaudited Pro Forma Historical Financial
Information:
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Weighted average common shares outstanding-basic
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90,322,407
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90,353,253
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90,323,331
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70,188,405
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52,376,511
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Weighted average common shares outstanding-dilutive
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90,322,407
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90,353,253
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90,323,331
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70,188,405
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52,441,504
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Book value per common share-basic
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$
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(1.78
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)
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$
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(12.70
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)
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$
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(10.67
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$
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(4.46
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$
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8.74
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Book value per common share-dilutive
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(1.78
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)
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(12.70
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(10.67
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(4.46
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8.73
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Dividends declared per common share
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3.78
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Income (loss) from continuing operations per share-basic
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10.92
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(2.00
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)
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(7.57
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)
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(6.66
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1.06
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Income (loss) from continuing operations per share-dilutive
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10.92
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(2.00
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)
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(7.57
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(6.66
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1.06
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Summary
of Ratio of Earnings to Fixed Charges
The following table sets forth the Companys ratio of
earnings to fixed charges for each of the periods indicated.
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For the Years Ended December 31,
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2010
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2009
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2008
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2007
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2006
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Historical Ratio of Earnings to fixed charges
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46.7
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(A
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(A
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(A
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1.4
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Pro Forma Ratio of Earnings to fixed charges
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210.4
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(B
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(B
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(B
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(B
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(A) |
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Due to losses in the years ended December 31, 2009, 2008
and 2007, the ratio coverage was less than 1:1 for those
periods. We would have needed to generate additional earnings of
$196.4 million, $699.0 million and
$476.3 million, respectively, in order to cover the fixed
charges in those periods. |
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(B) |
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Item 503(d)(2)(B) of
Regulation S-K
only allows the pro forma ratio to be shown for the most recent
fiscal year and, if applicable, the latest interim period. |
27
RECENT
DEVELOPMENTS
On March 22, 2011, the Company, NovaStar Capital
Trust I/B (Trust I/B), NovaStar Capital
Trust II/B (Trust II/B), Kodiak
CDO I, Ltd. (Kodiak) and Taberna Preferred
Funding I, Ltd. (RAIT), entered into an
Exchange Agreement (the TruPS Exchange Agreement).
NovaStar Mortgage, Inc. (NMI), which is a
wholly-owned subsidiary of the Company, owned all the
outstanding common securities of Trust I/B and
Trust II/B.
Pursuant to the terms of the TruPS Exchange Agreement, the
Company purchased from Kodiak all the trust preferred securities
issued by Trust II/B having a total liquidation preference
of $28,125,000 (the Kodiak Securities) and in
consideration issued $30,937,500 worth of unsecured
series 3 senior notes of the Company to Kodiak (the
Series 3 Notes) pursuant to the Series 3
Senior Notes Indenture (the Series 3 Indenture)
between the Company and The Bank of New York Mellon
Trust Company, National Association (BNY). The
Company exchanged the Kodiak Securities with Trust II/B for
a like amount of unsecured junior subordinated notes issued by
NMI (the Kodiak Junior Subordinated Notes).
Following this exchange, the indenture governing the Kodiak
Junior Subordinated Notes was terminated, the parent guarantee
by the Company over the Kodiak Junior Subordinated Notes was
terminated, the existing Kodiak Junior Subordinated Notes were
cancelled by the Company and Trust II/B was dissolved.
Also pursuant to the terms of the TruPS Exchange Agreement, the
Company purchased from RAIT one-half of the trust preferred
securities issued by Trust I/B having a total liquidation
preference of $25,000,000 (the RAIT Securities) and
in consideration issued $27,500,000 worth of unsecured
series 1 senior notes of the Company to RAIT (the
Series 1 Notes) pursuant to the Series 1
Senior Notes Indenture (the Series 1
Indenture). The Company exchanged the RAIT Securities with
Trust I/B for a like amount of unsecured junior
subordinated notes issued by NMI (the RAIT Junior
Subordinated Notes). Following this exchange, the existing
RAIT Junior Subordinated Notes were cancelled by the Company.
On March 22, 2011, the Company, BNY, BNY Mellon Trust of
Delaware, the administrative trustees of Trust I/B and
Taberna Preferred Funding II, Ltd. (Fortress)
entered into the First Amendment to The Second Amended and
Restated Trust Agreement (the Amendment
Agreement). Pursuant to the terms of the Amendment
Agreement, the trust agreement governing Trust I/B was
amended to cause the trustee to receive $27,500,000 worth of
unsecured series 2 senior notes of the Company (the
Series 2 Notes) pursuant to the Series 2
Senior Notes Indenture (the Series 2 Indenture)
in exchange for the remaining unsecured junior subordinated
notes issued by NMI and held by Trust I/B (the
Fortress Junior Subordinated Notes and, together
with the RAIT Junior Subordinated Notes, the I/B Junior
Subordinated Notes). In exchange for the Series 2
Notes, the trustee simultaneously redeemed all trust preferred
securities issued by Trust I/B that remained outstanding,
which were held by Fortress and had a total liquidation
preference of $25,000,000 (the Fortress Securities).
Following the exchange and redemption, the indenture that
governed the I/B Junior Subordinated Notes was terminated, the
parent guarantee by the Company over the I/B Junior Subordinated
Notes was terminated, the existing I/B Junior Subordinated Notes
were cancelled by the Company and Trust I/B was dissolved.
As a result of the above transactions, all trust preferred
securities issued by Trust I/B and Trust II/B, which
had a total liquidation preference of $78,125,000, were
cancelled and Kodiak, RAIT and Fortress now hold, in aggregate,
$85,937,500 of unsecured senior notes issued by the Company,
which represent a 10% increase in principal over the prior trust
preferred securities.
This transaction provides the Company with an annual 1% rate of
interest on its debt obligations for the next five years, which
limits its exposure to an increase in interest rates over that
time period. Under the Junior Notes, the rate of interest on the
debt had the potential to significantly increase this year.
The Series 1 Notes, the Series 2 Notes and the
Series 3 Notes (collectively, the Senior Notes)
were issued pursuant to the Series 1 Indenture, the
Series 2 Indenture and the Series 3 Indenture (each an
Indenture and collectively, the
Indentures). The Senior Notes and the Indentures are
dated March 22, 2011. The terms of each Indenture are
substantially identical. Pursuant to the Indentures, the Senior
Notes will accrue interest at an annual rate of 1% until the
earlier to occur of (a) an Additional Equity Event (as
defined
28
below) or (b) January 1, 2016. Thereafter, the Senior
Notes will accrue interest at a rate of LIBOR plus 3.5% (the
Full Rate). The interest is payable quarterly
commencing on March 30, 2011 through March 30, 2033.
An Additional Equity Event occurs when the Company
and/or its
subsidiaries consummate one or more equity offerings on or
before January 1, 2016 with net aggregate proceeds of
$40 million or more.
In addition to the negative covenants in the Junior Subordinated
Notes, the Indentures contain certain restrictive covenants (the
Negative Covenants) (subject to certain exceptions
in the Indentures) that prohibit the Company, from among other
things, incurring debt, permitting any lien upon any of its
property or assets, making any cash dividend or distribution
payment, acquiring shares of the Company or its subsidiaries,
making payment on debt securities of the Company that rank
pari passu or junior to the Senior Notes, or disposing of
any equity interest in its subsidiaries or all or substantially
all of the assets of its subsidiaries.
At any time that the Senior Notes accrue interest at the Full
Rate, and the Company has satisfied certain financial covenants
(the Financial Covenants), the Negative Covenants
will not apply. Satisfaction of the Financial Covenants requires
the Company to demonstrate on a consolidated basis that
(1) its Tangible Net Worth is equal to or greater than
$40 million, and (2) either (a) the Interest
Coverage Ratio is equal to or greater than 1.35x, or
(b) the Leverage Ratio is not greater than 95%.
Tangible Net Worth, Interest Coverage
Ratio and Leverage Ratio have the meanings set
forth in the Indentures.
The Company does not believe that the above-described
transactions have a material effect on the Series C Offer
or the Series D Exchange, or the financial information
contained herein, except to the extent that the transaction
makes it less likely that the Company will be able to pay
dividends on the Series C Preferred Stock or Series D
Preferred Stock or that the Series C Holders or
Series D Holders would receive any distribution on
liquidation of the Company. While the transaction seeks to
improve the Companys liquidity position by fixing a low,
1% interest rate on the Senior Notes, it also increases the
amount of principal on such notes and obligates the Company to
negative covenants restricting payment of dividends, including
dividends on the Series C Preferred Stock and the
Series D Preferred Stock, as described above.
29
RISK
FACTORS
In deciding whether to approve the Proposals, which Proposals
must be approved to complete the proposed Recapitalization, you
should read carefully this proxy statement and the documents to
which we refer you. You should also carefully consider the
following factors.
Risks
Related to the Recapitalization
The
Series C Offer and Series D Exchange may not benefit
us or our stockholders and will significantly dilute our Common
Stock.
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 December 31, 2010,
there were 9,368,053 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 D Exchange, the
Series C Offer and the Consent Solicitation by the
investment community, may cause a decrease in the value of the
Common Stock and impair its liquidity and marketability. Prior
performance of Common Stock may not be indicative of the
performance of Common Stock after the Series C Offer and
the Series D Exchange. 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 D Exchange,
the Series C Offer and the Consent Solicitation,
particularly if the proposed Recapitalization is not viewed
favorably by the investment community.
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 $55.9 million as of April 15, 2011, 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.
If
tendering Series C Holders or Series D Holders are
required to return their consideration because a court
determines that the Series C Offer or the Series D
Exchange constituted a fraudulent transfer under federal or
state laws, the Recapitalization will not be
completed.
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.
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First, a transfer will be deemed fraudulent if it was made with
the actual intent to hinder, delay or defraud current or future
creditors.
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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.
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30
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 of the Series C offer or
the Series D Exchange. 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 and, thus, the
Recapitalization would not be completed.
Our
available cash and access to additional capital may be limited,
which could restrict our ability to grow our
businesses.
Following the successful completion of the Series C Offer
and the Series D Exchange, our available cash will be
reduced by approximately $3 million. Moreover, our ability
to issue significant amounts of additional equity securities
will be limited without risking loss of some or all of our NOLs.
Our restricted ability to obtain additional capital could have
important consequences, including:
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making us more vulnerable to a downturn in our businesses, our
industry or the economy in general as we may not have access to
additional capital needed to react to changes in our business
and in market or industry conditions;
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constraining our ability to obtain financing on satisfactory
terms or at all;
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making it more difficult for us to satisfy our financial
obligations;
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placing us at a competitive disadvantage as compared to
competitors that have better access to liquid assets
and/or
financing;
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limiting our flexibility in planning for, or reacting to,
changes in our business and the industry in which we
operate; and
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making us more vulnerable to increases in interest rates, which
we will be constrained in refinancing or paying off, since part
of our indebtedness is subject to variable interest rates.
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The
proposed acquisition restrictions, which are intended to help
preserve our NOLs and other tax attributes, may not be effective
or may have unintended negative effects.
We have recognized and may continue to recognize substantial net
operating losses for U.S. federal income tax purposes, and
under the Code, we may carry forward these NOLs, in
certain circumstances to offset any current and future taxable
income and thus reduce our federal income tax liability, subject
to certain requirements and restrictions. To the extent that the
NOLs do not otherwise become limited, we believe that it will be
able to carry forward a substantial amount of NOLs and,
therefore, these NOLs are a substantial asset to us. However, if
we experience an ownership change, as defined in
Section 382 of the Code and related U.S. Treasury
regulations, their ability to use the NOLs could be
substantially limited, and the timing of the usage of the NOLs
could be substantially delayed, which consequently could
significantly impair the value of that asset.
31
To reduce the likelihood of an ownership change, in light of the
Series C Offer and the Series D Exchange, we are
proposing acquisition restrictions in the Article Ten of
our proposed Articles of Amendment and Restatement, which are
intended to restrict certain acquisitions of our stock to help
preserve our ability to utilize our NOLs and other tax
attributes by avoiding the limitations imposed by
Section 382 of the Code and the related Treasury
regulations. The acquisition restrictions are generally designed
to restrict or deter direct and indirect acquisitions of our
stock if such acquisition would result in a shareholder of the
Company becoming a 5-percent stockholder or increase the
percentage ownership of our stock that is treated as owned by an
existing 5-percent stockholder.
Although the acquisition restrictions are intended to reduce the
likelihood of an ownership change that could adversely affect
the Company, we can give no assurance that such restrictions
would prevent all transfers that could result in such an
ownership change. There can be no assurance that the acquisition
restrictions will be enforceable against all of the our
stockholders, and they may be subject to challenge on equitable
grounds. In particular, it is possible that the acquisition
restrictions may not be enforceable against our stockholders who
vote against or abstain from voting on the acquisition
restrictions or who do not have notice of the restrictions at
the time when they subsequently acquire their shares.
The acquisition restrictions also will require any person
attempting to become a holder of 5% or more (by value) of our
stock, as determined under the Code, to seek the approval of the
Board of Directors. This may have an unintended
anti-takeover effect because the Board of Directors
may be able to prevent any future takeover. Similarly, any
limits on the amount of stock that a stockholder may own could
have the effect of making it more difficult for stockholders to
replace current management. Additionally, because the
acquisition restrictions will have the effect of restricting a
stockholders ability to dispose of or acquire Common
Stock, the liquidity and market value of the common stock might
suffer. The acquisition restrictions will remain in effect until
the earliest of (a) the date that is 36 months and one
day from the completion of the Series C offer, or
(b) such other date as the Board of Directors in good faith
determines that the acquisition restrictions are no longer in
the best interests of Company and its stockholders. The
acquisition restrictions may be waived by the Board of
Directors. Stockholders are advised to monitor carefully their
ownership of the Companys stock and consult their own
legal advisors
and/or the
Company to determine whether their ownership of the
Companys stock approaches the proscribed level.
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.
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.
32
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.
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 cash flows and will rely on distributions and other
payments from our operating subsidiaries 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.
Payment to the Company of dividends, distributions, loans or
advances by our subsidiaries are subject to legal restrictions
and may become restricted by future debt instruments of the
Company or our subsidiaries.
Our subsidiaries are separate and distinct legal entities. Any
right that we have to receive any assets of or distributions
from any of our subsidiaries is limited by applicable law
governing the bankruptcy, dissolution, liquidation or
reorganization of any such subsidiary, and our ability to
realize proceeds from the sale of their assets, will be junior
to the claims of that subsidiarys creditors, including
trade creditors and holders of debt issued by that subsidiary.
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.
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
33
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.
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.
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.
34
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 to 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.
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.
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.
35
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. We have issued approximately
$85.9 million in Senior Notes, which upon certain events,
will carry a coupon of variable
3-month
LIBOR plus 3.5%. See the Recent Developments
section. Interest rate changes could adversely affect our cash
flow, results of operations, financial condition, liquidity and
business prospects in the following ways:
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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;
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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;
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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
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changes in prepayment rates may harm our earnings and the value
of our mortgage securities.
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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. If the Series C Offer is successfully
consummated, the Series C
36
Preferred Stock will no longer exist and there can be no
assurance that an active trading market for our Common Stock
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 stockholder 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 D Preferred Stock. Dividends on our Series C
Preferred Stock and Series D Preferred Stock continue to
accrue and the dividend rate on our Series D 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 D
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. 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. The Indentures contain certain
Negative Covenants (subject to certain exceptions in the
Indentures) that prohibit the Company, from among other things,
making any cash dividend or distribution payment unless the
holders of the Senior Notes waive this restriction.
The
market price and trading volume of Common Stock may be volatile
following the Series C Offer and the Series D
Exchange, which could result in substantial losses for our
stockholders.
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:
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actual or perceived changes in our ability to continue as a
going concern;
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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;
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actual or anticipated changes in residential real estate values;
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actual or anticipated changes in market interest rates;
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actual or anticipated changes in our earnings and cash flow;
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general market and economic conditions, including the operations
and stock performance of other industry participants;
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developments in the subprime mortgage lending industry or the
financial services sector generally;
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the impact of new state or federal legislation or adverse court
decisions;
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the activities of investors who engage in short sales of Common
Stock;
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actual or anticipated changes in financial estimates by
securities analysts;
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sales, or the perception that sales could occur, of a
substantial number of shares of Common Stock by insiders;
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additions or departures of senior management and key
personnel; and
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actions by institutional shareholders.
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Our charter permits us to issue additional equity without
shareholder approval, which could materially adversely affect
our current stockholders.
Our charter permits our Board of Directors, without stockholder
approval, to:
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authorize the issuance of additional shares of Common Stock or
preferred stock without stockholder 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;
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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
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issue additional shares of Common Stock or preferred stock in
exchange for outstanding securities, with the consent of the
holders of those securities.
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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 the holders of Common Stock. 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 NOLs 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 likely than not that we will
not be able to utilize such losses in the future, the 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.
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). 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 stockholders
or acquisitions could result in an ownership change.
We have proposed the adoption of the acquisition restrictions
set forth in Article Ten of our proposed Articles of
Amendment and Restatement, as described in
Proposal 4 Charter Amendment To Preserve
The Companys Net Operating Loss Carryforwards
Description of the Acquisition Restrictions, in order to
reduce the likelihood that we will experience an ownership
change under Section 382 of the Code. There can be no
assurance, however, that this will prevent the Company from
experiencing an ownership change and the adverse consequences
that may arise therefrom.
38
Covenant
restrictions under our indebtedness may limit our ability to
operate our business.
Our Senior Notes and the Indentures governing the Senior Notes
contain, among other things, covenants that may restrict our and
our subsidiaries ability to finance future operations, capital
needs or to engage in other business activities. Without the
prior consent of the holders of our Senior Notes, the terms of
our Senior Notes and the Indentures restrict, among other
things, our ability and the ability of our subsidiaries to:
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incur indebtedness;
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create certain liens;
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restrict payments by our subsidiaries to us;
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restrict payments by us to our shareholders;
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acquire our outstanding shares, or the shares of our
subsidiaries;
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make payments on debt securities pari passu or junior to
the Senior Notes;
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dispose of any equity interest in our subsidiaries; and
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merge, consolidate, transfer
and/or sell
assets.
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There can be no assurance that we will be able to receive the
consent of the persons holding the Senior Notes should we have a
need to take one of the restricted actions, which such
limitation may hinder our ability to operate or grow our
business in the future.
Some
provisions of our charter, bylaws and Maryland law may deter
takeover attempts, which may limit the opportunity of our
stockholders 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 of Directors 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.
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 Dodd-Frank Act) was
signed into federal law. The Dodd-Frank Act will have a broad
impact on the financial services industry, including significant
regulatory and compliance changes. Regulatory agencies will
implement new
39
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 Dodd-Frank Act will be implemented by the various
regulatory agencies, the full extent of the impact the
Dodd-Frank Act will have on our operations is unclear.
Nonetheless, while it is difficult to predict at this time what
specific impact the Dodd-Frank 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.
Loss
of key members of our management could disrupt our
business.
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. We may
not be able to retain our existing senior management, fill new
positions or vacancies created by expansion or turnover or
attract additional qualified senior management personnel.
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.
BACKGROUND
OF THE RECAPITALIZATION
Background
of the Recapitalization
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 dividends 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
April 15, 2011, the Company had $55.9 million in
accrued preferred dividends, $23.6 million of which related
to the Series C Preferred Stock and $32.3 million of
which related to the Series D Preferred Stock. As of
April 15, 2011, 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 April 15, 2011
was $183.2 million.
The Company does not believe that it is likely to produce cash
flow before preferred dividends that satisfies or exceeds the
Companys growing dividend requirement, nor does the
Company believe it is likely to be able to satisfy payment of
its accumulated and unpaid preferred dividends, which will
continue to grow to approximately $68.7 million and
$88.1 million in 2011 and 2012, respectively, unless and
until the Company pays its preferred holders the full amount of
accumulated and unpaid preferred dividends. Moreover, the
40
Series D Preferred Stock mandatorily converts to Common
Stock in 2016, at which point the liquidating preference of
$52.5 million and accumulated and unpaid dividends, which
are projected to be $61.7 million at the conversion date,
become due. Based on the Companys financial outlook, the
Company does not believe it will be able to satisfy its
obligation to its Series D Holders at or before the
conversion date, nor does it believe it will have cash available
to redeem its Series C Preferred Stock in the future, which
is perpetual and does not have a maturity date, but which, if
redeemed, would require payment of the liquidating preference of
$74.8 million and accumulated and unpaid dividends related
to the Series C Preferred Stock.
Managements baseline financial projections call for net
income after non-controlling interests and before preferred
dividends for 2011 and 2012, respectively, of approximately
$9.1 million and $14.5 million, while the
Companys preferred dividend requirement for those years
will grow to approximately $17.8 million and
$19.4 million if no preferred dividends are paid. This
year-over-year
growth in the Companys preferred dividend requirement is
due to the compounding nature of the Series D Preferred
Stock. Even if the Company is able to meet its annual preferred
dividend requirements, the Company must pay all accumulated and
unpaid dividends on the Series C Preferred Stock and
Series D Preferred Stock before making distributions to the
holders of the Companys Common Stock.
Below are the projected financial results that have been
prepared to guide management, the Special Committee and the
Board of Directors in making decisions regarding the
Recapitalization of the Company. Primarily, these projected
financial results are intended for the purpose of evaluating the
Companys ability to meet its contractual obligations to
the Series C Holders and Series D Holders. The
projections are presented as of September 30, 2010 because
these are the projections that were considered by the Special
Committee and the Board of Directors before approving the
Series C Offer and the Series D Exchange. Certain
information regarding the projections, where specifically
indicated, is also presented as of December 31, 2010.
(Please see the Note at the end of this section regarding the
projected financial results.) The Companys operating
subsidiaries have limited operating history. Given the
uncertainty about how these subsidiaries will perform,
management prepares forecasts using a variety of scenarios.
Presented below are two scenarios a
baseline forecast and a low forecast. In
order for the Company to achieve the baseline results shown
below, the operating subsidiaries, particularly StreetLinks,
would need to produce significant growth during the years
presented. The low scenario provides a forecast if
lower growth is achieved. These two sets of forecasts are
intended to provide a reasonable range of expected financial
results for the Company. All references throughout this section
refer to the baseline forecast.
The most significant assumption used in developing the projected
financial results presented below is the number of orders to be
completed by StreetLinks. The assumptions for order volume are
based on recent trends and managements expectation for
StreetLinks share of the appraisal market, new product
development and estimates of mortgage lending trends.
Other critical assumptions include:
|
|
|
|
|
Gross and net margin for orders completed by StreetLinks;
|
|
|
|
Forecasted income and cash receipts on the Companys
mortgage securities;
|
|
|
|
Estimated costs of services, including cost of labor;
|
|
|
|
Interest rates; and
|
|
|
|
The cost of corporate overhead, most notably fees for
professionals services including audit, tax and legal.
|
41
Projected
Operating Results Baseline Scenario (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Service fee income
|
|
$
|
149,850
|
|
|
$
|
194,250
|
|
Interest and other income
|
|
|
7,146
|
|
|
|
7,240
|
|
Cost of services
|
|
|
(125,996
|
)
|
|
|
(161,833
|
)
|
Other expenses
|
|
|
(19,838
|
)
|
|
|
(22,192
|
)
|
Net income attributable to non-controlling interests
|
|
|
(2,088
|
)
|
|
|
(2,958
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,074
|
|
|
$
|
14,507
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
14,051
|
|
|
$
|
18,159
|
|
|
|
|
|
|
|
|
|
|
Projected
Operating Results Low Scenario (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Service fee income
|
|
$
|
111,000
|
|
|
$
|
111,000
|
|
Interest and other income
|
|
|
1,755
|
|
|
|
1,565
|
|
Cost of services
|
|
|
(93,625
|
)
|
|
|
(93,625
|
)
|
Other expenses
|
|
|
(15,514
|
)
|
|
|
(15,424
|
)
|
Net income attributable to non-controlling interests
|
|
|
(1,462
|
)
|
|
|
(1,462
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,254
|
|
|
$
|
2,054
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
6,130
|
|
|
$
|
5,485
|
|
|
|
|
|
|
|
|
|
|
The following provides the future dividends payable and accruing
based on the contractual obligations of the Series C
Preferred Stock and the Series D Preferred Stock and
assuming no payments are made.
Dividend
Requirements of Preferred Stock (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Balance, January 1
|
|
$
|
50,900
|
|
|
$
|
68,746
|
|
|
$
|
88,235
|
|
|
$
|
109,370
|
|
|
$
|
132,487
|
|
Unpaid dividends earned by stockholders
|
|
|
17,846
|
|
|
|
19,489
|
|
|
|
21,135
|
|
|
|
23,117
|
|
|
|
25,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
68,746
|
|
|
$
|
88,235
|
|
|
$
|
109,370
|
|
|
$
|
132,487
|
|
|
$
|
157,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also considered the following factors with respect
to its ability to meet its preferred dividend obligations:
|
|
|
|
|
While the Company consolidates its two majority-owned operating
subsidiaries, StreetLinks and Advent, cash and cash flow
available to the Companys operating subsidiaries may not
be available to satisfy the Companys holding company
preferred stock dividend obligations because subsidiary cash and
cash flow may be kept at the subsidiary level as working
capital, and because the Companys consolidated cash is
shown gross of the minority ownership interest in both
companies. Of the Companys $16.8 million consolidated
balance sheet cash and cash equivalents as of September 30,
2010, only $8.1 million was held at the holding company
level (and of the Companys $12.6 million consolidated
balance sheet cash and cash equivalents as of December 31,
2010, only $8.4 million was held at the holding company
level). Moreover, the Companys forecasted net increase in
holding company cash and cash equivalents for the years ended
December 31, 2011 and December 31, 2012 was projected
to be approximately $6.2 million and $5.5 million,
respectively, as of September 30, 2010 (and was projected
to be approximately $4.7 and $21.0, respectively, as of
December 31, 2010).
|
|
|
|
Both StreetLinks and Advent have a limited operating history.
The Company acquired StreetLinks in 2008 and Advent in 2009. As
of September 30, 2010, projected net income from the
Companys investment in StreetLinks comprises 168% and 150%
of the Companys projected net income in 2011
|
42
|
|
|
|
|
and 2012, respectively, and projected increase in holding
company cash and cash equivalents from the Companys
investment in StreetLinks comprises 104% and 116% of the
Companys projected increase in holding company cash and
cash equivalents in 2011 and 2012, respectively. (As of
December 31, 2010, projected net income from the
Companys investment in StreetLinks comprises 148% and 120%
of the Companys projected net income in 2011 and 2012,
respectively, and projected increase in holding company cash and
cash equivalents from the Companys investment in
StreetLinks comprises 135% and 89% of the Companys
projected increase in holding company cash and cash equivalents
in 2011 and 2012, respectively.) Other than the projected
increase in holding company cash and cash equivalents in 2012 as
of December 31, 2010, these percentages are greater than
100 because corporate expenses exceed corporate income,
primarily income from the Companys securities portfolio.
To achieve these projections, StreetLinks must achieve
significant growth in number of appraisal orders over historical
numbers of appraisal orders. While the Company believes that
these assumptions are achievable based on recent trends and
managements expectation of StreetLinks share of the
appraisal market, new product development and estimates of
mortgage industry trends, there is a high level of uncertainty
in the operating results of both StreetLinks and Advent. Factors
such as a larger than expected industry-wide downturn in
mortgage refinancing activity, regulatory changes, loss of key
customers, and inability to continue to build StreetLinks
customer base, among other factors, may have a material adverse
effect on managements financial projections for
StreetLinks.
|
|
|
|
|
|
The Companys legacy mortgage securities portfolio, which
has generated significant cash flow in recent years, will
continue to decline and ultimately will be reduced to zero.
Because of the structure and nature of the mortgage securities
in the Companys portfolio, there is a high degree of
uncertainty in their projected future cash flows.
|
|
|
|
Given the uncertainty in the Companys business and the
limited operating history of StreetLinks and Advent, management
did not prepare baseline financial projections beyond the year
ended December 31, 2012. However, if the Company remains in
arrears on its preferred dividends, its annual preferred
dividend requirement will increase in 2013, 2014 and 2015 to
$21.1 million, $23.1 million, and $25.4 million,
respectively, and the corresponding amount of accumulated and
unpaid preferred dividends will increase to $109.4 million,
$132.5 million, and $157.9 million, respectively. The
Series D Preferred Stock mandatorily converts in 2016, at
which point approximately $114.2 million of liquidating
preference and accumulated and unpaid dividends will become due.
Based on the growth prospects of the Companys business,
the Company believes that it is unlikely to produce cash flow
before preferred dividends that exceeds its annual preferred
dividend requirement. Likewise, the Company does not expect that
it will be able to pay all of its accumulated and unpaid
preferred dividends or pay amounts due to its Series D
Holders when the Series D Preferred Stock converts.
|
|
|
|
The Company believes that its access to new capital is currently
restricted due to its financial outlook. The Company believes it
is unlikely that it will be able to raise new capital to
increase cash available to satisfy its preferred stock
obligations.
|
The Company also believes that the value received from a
liquidation of its assets today would not be sufficient to cover
the liabilities related to the Senior Notes, and thus, the
Series C Holders would receive no benefit from a
liquidation. Management estimated that the liquidation value of
its liabilities in excess of its assets as of September 30,
2010 was $63.6 million (and as of December 31, 2010
was $65.3 million), which included all the trust preferred
securities issued by Trust I/B and Trust II/B, which
securities had an aggregate principal amount of
$78.1 million. As described in the Recent
Developments section, the trust preferred securities were
cancelled and the Company issued Senior Notes which have an
aggregate principal amount of $85.9 million. The trust
preferred securities ranked, and the Senior Notes now rank,
senior to both classes of the Companys preferred stock and
the Companys Common Stock in liquidation preference.
Accumulated and unpaid dividends on the Companys
Series C Preferred Stock totaled $20.0 million as of
September 30, 2010 (and $21.6 as of December 31,
2010) and the liquidating preference of the Companys
Series C Preferred Stock is $74.8 million. The
Series C Preferred Stock is pari passu in
liquidating preference and order of payment to the Series D
Preferred Stock, which had accumulated and unpaid dividends of
43
$26.7 million as of September 30, 2010 (and
$29.3 million as of December 31, 2010) and has a
liquidating preference of $52.5 million. As of
September 30, 2010, the aggregate liquidation value of the
preferred equity interests is $174.0 million and therefore
the negative value to the holders of the Common Stock was
$239.3 million. As of December 31, 2010, the aggregate
liquidation value of the preferred equity interests is
$178.2 million and therefore the negative value to the
holders of the Common Stock was $243.5 million.
Given the uncertainty inherent in the operating results and
projected growth of its operating subsidiaries, StreetLinks and
Advent, the Company has not calculated an estimated liquidation
value for its investment in operating subsidiaries; however, the
Company believes that the liquidation value of its investment in
its operating subsidiaries is unlikely to exceed the
$238.5 million premium to their current combined book value
of $1.0 million as of September 30, 2010 (or the
$243.7 million premium to their current combined book value
of $(0.2) million as of December 31, 2010) that
would be required for the liquidation preference of the
Companys assets to exceed its liabilities and the
liquidating preference of its preferred stock.
Information available to the Company regarding a potential
liquidation is summarized below as of September 30, 2010.
The significant assumptions upon liquidation are as follows:
|
|
|
|
|
The recorded value of cash, mortgage securities, current assets,
accounts payable, accrued expenses and other current liabilities
is the value that would be realized or paid;
|
|
|
|
Notes receivable and fixed assets would be realized at the rate
of 25% of their recorded value;
|
|
|
|
Goodwill has no value;
|
|
|
|
75% of the recorded value of non-current assets and liabilities
would be realized or paid; and
|
|
|
|
The Company has not conducted a valuation of its operating
subsidiaries and therefore, the analysis assumes that the
recorded value of those subsidiaries would be realized upon
liquidation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Recorded
|
|
|
Liquidation
|
|
|
|
Value
|
|
|
Value
|
|
|
Assets
|
|
$
|
41,138
|
|
|
$
|
33,069
|
|
Liabilities
|
|
|
(97,147
|
)
|
|
|
(96,674
|
)
|
|
|
|
|
|
|
|
|
|
Net liabilities
|
|
|
(56,009
|
)
|
|
|
(63,605
|
)
|
Preferred equity interests:
|
|
|
|
|
|
|
|
|
Dividends payable
|
|
|
(46,636
|
)
|
|
|
(46,636
|
)
|
Liquidation value of preferred stockholders
|
|
|
(127,250
|
)
|
|
|
(127,250
|
)
|
|
|
|
|
|
|
|
|
|
Total preferred equity interests
|
|
|
(173,886
|
)
|
|
|
(173,886
|
)
|
|
|
|
|
|
|
|
|
|
Amount available to common stockholders
|
|
$
|
(229,895
|
)
|
|
$
|
(237,491
|
)
|
|
|
|
|
|
|
|
|
|
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
stockholders to pursue a recapitalization of the Company.
On May 11, 2010, the Companys Board of Directors
appointed a special committee of disinterested directors (the
Special Committee) to explore a potential
recapitalization of the Company. The Special Committee is
comprised entirely of directors who own neither Series C
Preferred Stock nor Series D Preferred Stock, and who were
not elected by holders of Series C Preferred Stock or
Series D Preferred Stock as a class. Serving on the Special
Committee is Messrs. Barmore, Burtscher and Mehrer. The
Special Committee met four times in 2010 and met once in 2011.
In September 2010, the Board of Directors engaged Stifel,
Nicolaus & Company, Incorporated (Stifel)
at the recommendation of the Special Committee to assist it in
evaluating a potential recapitalization, to act as the Board of
Directors independent financial advisor and assist the
Special Committee in negotiating with the holders of the
Series D Preferred Stock. Also in September 2010, the
Special Committee began to formulate a transaction structure
that would achieve the recapitalization of the Company.
Generally, the Special Committee
44
considered during the negotiations with the Series D
Holders and while formulating the terms of the Series C
Offer the following factors:
|
|
|
|
|
the significant accumulated and unpaid dividends due to the
Series C Preferred Stock and Series D Preferred Stock
were a significant impediment to future growth of the Company;
|
|
|
|
until resolution was made with the outstanding dividends, it was
unlikely that the market price of the Common Stock would
experience any meaningful appreciation;
|
|
|
|
holders of Series C Preferred Stock and Series D
Preferred Stock had a priority over the holders of Common Stock
as to dividends (and as to any distribution or liquidation), and
if this priority were eliminated through a recapitalization
transaction, holders of Series C Preferred Stock and
Series D Preferred Stock would need to receive some
compensation;
|
|
|
|
the Companys NOLs represented significant value to
stockholders and that an ownership change under
Section 382 of the Code, which would limit the value of the
Companys NOLs, should be avoided.
|
Beginning in September 2010, and continuing through October and
November, the Special Committee regularly consulted with outside
legal and accounting advisors regarding the proposed terms,
structure and timing of such a proposed transaction. The outside
legal advisors, Bryan Cave LLP and Venable LLP, and the outside
accounting advisor, Deloitte and Touche LLP, were engaged by the
Board of Directors to assist with matters related to the
Series C Offer, though the Special Committee would also
consult with these advisors as needed. During this time the
Special Committee negotiated with employee-representatives of
Jefferies Capital Partners IV L.P., Jefferies Employee
Partners IV LLC, JCP Partners IV LLC, and
Massachusetts Mutual Life Insurance Company on the terms of a
potential recapitalization that would eventually result in what
is now the Series D Exchange.
The Special Committee considered that the book value of the
Company would improve because dividends payable, which were
$46.7 million as of September 30, 2010 (and were
$50.9 million as of December 31, 2010), would be
removed from the balance sheet. The pro forma impact of the
transaction is provided in detail under the heading
Capitalization.
The Special Committee also considered the impact of the
Recapitalization on the Companys earnings per share.
Dividends accumulating on the preferred stock must be subtracted
from income in calculating earnings per share. Therefore,
eliminating the preferred stockholder dividends would increase
earnings per share. However, the Recapitalization would also
increase the aggregate number of shares outstanding. The Company
has not conducted an analysis to calculate the impact of the
Recapitalization on expected future earnings per share. The
impact of the Recapitalization on historical earnings per share,
on a pro forma basis, is provided under the heading
Summary Historical and Unaudited Pro Forma Financial
Information. The Special Committee concluded that any
negative impact to the earnings per share that may occur from
the Recapitalization is outweighed by the elimination of the
outstanding and future dividend obligation as discussed earlier
in this Background of the Recapitalization section.
The Special Committee considered the impact on the
Companys liquidity. The Company has experienced
constrained and reduced liquidity in recent years. However, the
Special Committee deemed it appropriate to use a limited amount
of cash and concluded to offer up to $3 million to
effectuate the Recapitalization. The Special Committee concluded
that using that amount of cash would not present a severe
liquidity risk to the Company.
The Special Committee considered the impact of the
Recapitalization on the potential value of the Companys
NOLs. The Company has approximately $324.4 million of NOLs
available. In the event of an ownership change, as
defined in Section 382 of the Code, the use of the NOLs
would be severely limited. Generally, an ownership
change defined in the Code occurs if one or more
stockholders, 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 stockholders over the
preceding three-year period. The shares issued in the
Recapitalization have been limited to prevent an ownership
change. The Company has received a private letter ruling
from the Internal Revenue Service (the IRS)
45
regarding the proposed Recapitalization, which provides guidance
with respect to the treatment of the Series D Holders and
significantly reduces the risk that the NOLs will not be
preserved. The applicability of the private letter ruling would
need to be reevaluated if there are significant changes to the
actual transactions completed by the Company. However because
the total number of shares of Common Stock that may be issued
pursuant to the Recapitalization is approaching the maximum
number of shares that the Company can issue and preserve its
NOLs, additional transactions involving sales of Company stock
by 5-percent stockholders and stock issuances and redemptions in
the near term is restricted. Therefore, there is a risk that the
NOLs may not be preserved in the future. See
Proposal 4 Charter Amendment to Preserve
the Companys Net Operating Loss Carryforwards.
The following items were the material points negotiated between
the Special Committee and the Series D Holders:
|
|
|
|
|
the proper amount of cash per share of Series D Preferred
Stock;
|
|
|
|
the proper number of shares of Common Stock to be issued for
each share of Series D Preferred Stock;
|
|
|
|
whether the mix of exchange consideration (cash and Common
Stock) would be fixed or variable;
|
|
|
|
whether to lock up the voting rights held by the Series D
Holders that each would have after the Series D Exchange;
|
|
|
|
the elimination of the accumulated and unpaid dividends owed to
the outstanding Series D Preferred Stock;
|
|
|
|
consideration for preserving the Companys existing NOLs;
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consideration of each factor above in light of a potential
transaction with the Series C Holders;
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whether the Common Stock issued to the Series D Holders in
a private placement would be granted the right to demand
registration at a later time and the terms of such registration
rights; and
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the conditions upon which the Series D Exchange would be
completed.
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Simultaneous with the negotiations with the Series D
Holders, the Special Committee formulated the terms of the
Series C Offer. The Special Committee did not negotiate the
terms of the Series C Offer. The Special Committee
formulated the terms of the Series C Offer with the aid of
the Stifel and the Companys legal advisors, and through
consultation with members of the Board of Directors elected by
the Series C Holders. The following items were the material
points considered by the Special Committee in formulating the
terms of the Series C Offer:
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the proper amount of cash per share of Series C Preferred
Stock;
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the proper number of shares of Common Stock to be issued for
each share of Series C Preferred Stock;
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whether the mix of exchange consideration (cash and Common
Stock) would be fixed or variable;
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whether to preserve continuity of the Board of Directors
following the Recapitalization;
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the elimination of the accumulated and unpaid dividends owed to
the outstanding Series D Preferred Stock;
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consideration for preserving the Companys existing
NOLs; and
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the likelihood of obtaining the required percentage to
consummate the contemplated Recapitalization.
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On December 10, 2010 the Special Committee and the Board of
Directors of the Company approved the Exchange Agreement
establishing the terms of the Series D Exchange, the Voting
Agreement and the terms of the Series C Offer, as more
fully described below in the Findings and
Conclusions of the Special Committee and
Findings and Conclusions of the Board of
Directors subsections in both the Background of the
Recapitalization and the Fairness of the
Recapitalization to the Series C Holders sections.
Also on December 10, 2010, the Company issued a press
release announcing the Recapitalization and the future filing of
the special meeting proxy statement with the SEC. The Board of
Directors has discussed the possibility of
46
enacting a shareholder rights plan in the future as an
additional measure of protection for the Companys NOLs.
On April 14, 2011, the Special Committee and the Board of
Directors each reconfirmed their approval of the Series D
Exchange and the terms of the Series C Offer upon review of
the same factors as reviewed by the Special Committee and the
Board of Directors, respectively, on December 10, 2010, and
in the case of the Board of Directors, upon recommendation of
the Special Committee to reconfirm its approval. On
April [ ], 2011, the Company mailed
the proxy statement/consent solicitation/prospectus that is part
of the Registration Statement and the Letter of Transmittal and
other Series C Offer documents to the Series C Holders.
Note: Managements financial projections and
liquidation value estimates presented in this section and
throughout the proxy statement are subject to a number of risks
and uncertainties, and are inherently uncertain and
unpredictable. While the Companys financial projections
and liquidation value estimates are based on assumptions that
management believes to be reasonable, these were not prepared
with a view toward public disclosure or with a view toward
complying with the guidelines established by the American
Institute of Certified Public Accountants with respect to
prospective financial information. The assumptions may be
incomplete, incorrect or adversely affected by unanticipated
events. Actual results and liquidation values will vary from
these projections and estimates and the variations may be
material and adverse. The projected results and liquidation
value estimates were intended to be used by management, the
Special Committee and the Board of Directors solely for the
purpose of evaluating the proposed Recapitalization.
Stockholders should not place undue reliance on the prospective
financial information or use these results for any other purpose
than to evaluate the Recapitalization and the proposals
presented herein. These projections should be viewed as part of
this proxy statement and should be considered alongside other
disclosures herein, including Risk Factors, Capitalization,
Managements Discussion and Analysis of Financial Condition
and Results of Operations and Description of Business.
Stockholders should not expect the Company to update these
forecasts beyond the date of the proxy statement. Neither the
Companys independent auditors, nor any other independent
accountants, have compiled, examined, or performed any
procedures with respect to the prospective financial information
contained herein, nor have they expressed any opinion or any
other form of assurance on such information or its
achievability, and assume no responsibility for, and disclaim
any association with, the prospective financial information.
Considerations
by the Special Committee and the Board of Directors of the
Company
On December 10, 2010, the Special Committee met 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 draft
Schedule TO-I/13E-3,
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. At the same
meeting and at the meeting of the Board of Directors that
immediately followed, the Special Committee and the Board of
Directors also reviewed a detailed presentation by
representatives of Stifel regarding the financial and
comparative analyses on which Stifels opinion was based
and considered the opinion of Stifel, dated as of
December 10, 2010, that, subject to the factors,
assumptions, qualifications and limitations set forth in the
opinion, as of the date of the opinion, the Series C Offer
and the Series D Exchange were fair, from a financial point
of view, to the holders of Common Stock. A summary of the
presentations and opinion delivered by Stifel and additional
information regarding Stifels selection and qualifications
are set forth in the subsection Opinion of NovaStars
Financial Advisor in this Background of the
Recapitalization section. A copy of the presentation of
Stifel to the Board of Directors, dated December 10, 2010,
was filed as Exhibit (c)(2) to Amendment No. 3 to
Schedule TO-I/13E-3
filed by the Company on April 15, 2011, and is incorporated
herein by reference.
On April 14, 2011, the Special Committee met to again
review the terms of the Series C Offer, the Consent
Solicitation and the Series D Exchange as of that date. The
Special Committee received a report from management as to the
status of the Series C Offer, the Consent Solicitation and
the Series D Exchange as of the meeting date. At the same
meeting, and at the meeting of the Board of Directors that
immediately
47
followed, the Special Committee and the Board of Directors also
reviewed a detailed presentation by representatives of Stifel
regarding the financial and comparative analyses on which
Stifels bring-down opinion was based and considered the
bring-down opinion of Stifel, dated as of April 14, 2011,
that, subject to the factors, assumptions, qualifications and
limitations set forth in the bring-down opinion, as of the date
of the bring-down opinion, the Series C Offer and the
Series D Exchange were fair, from a financial point of
view, to the holders of Common Stock. A summary of the
presentation and bring-down opinion delivered by Stifel is set
forth in the subsection Bring-Down Opinion of
NovaStars Financial Advisor in the Background
of the Recapitalization section. A copy of the
presentation of Stifel to the Board of Directors, dated
April 14, 2011, was filed as Exhibit (c)(4) to Amendment
No. 3 to
Schedule TO-I/13E-3
filed by the Company on April 15, 2011, and is incorporated
herein by reference.
Though the Company will not seek consent from the holders of the
Companys Common Stock to approve the Series C Offer
and Series D Exchange, the Company will seek approval of
the holders of the Common Stock for the Proposals to be
considered at the special meeting. The Proposals must be
approved to effectuate the Series C Offer and Series D
Exchange. Furthermore, the Board of Directors recognizes that it
owes important fiduciary duties to all of the Companys
stockholders and would not have approved the Recapitalization if
it were not fair to the holders of Common Stock.
At the December 10, 2010 meeting and the April 14,
2011 meeting, the Special Committee considered and discussed
certain factors that affect the fairness of the transaction to
the Companys stockholders, including:
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whether the contemplated Recapitalization would threaten the
Companys ability to utilize its NOLs; and
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the short-term and long-term effects on the Companys
ability to access capital markets as a result of the
Recapitalization.
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At both the December 10, 2010 meetings and the
April 14, 2011 meetings, the Special Committee and Board of
Directors each considered as factors that positively affected
the fairness of the Recapitalization to the holders of the
Companys Common Stock the following:
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the elimination of the accumulated but unpaid dividends, now and
in the future, by eliminating the preferred stock;
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the elimination of the liquidation preference associated with
the preferred stock; and
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the improvement to the Companys adjusted book value per
share of Common Stock on an adjusted pro forma basis.
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At both the December 10, 2010 meetings and the
April 14, 2011 meetings, the Special Committee and Board of
Directors each considered as factors that negatively affected
the fairness of the Recapitalization to the holders of the
Companys Common Stock the following:
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the risk that if the IRS 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 of approximately
$324.4 million to offset future income may be limited;
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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
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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.
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The Special Committee also considered several factors at the
December 10, 2010 meeting and the April 14, 2011
meeting that specifically affected the fairness of the
transaction to the holders of the Companys Series C
Preferred Stock. These factors are discussed below in the
subsection titled Considerations by the Special Committee
and the Board of Directors of the Company in the
Fairness of the Series C
48
Offer to the Series C Holders section. Because the
Series D Exchange was a negotiated transaction between the
Company and the Series D Holders, the Board of Directors
did not perform an analysis to determine whether the
Series D Exchange was fair to the Series D Holders
before approving that transaction.
Immediately following both the Special Committee meeting on
December 10, 2010 and the Special Committee meeting on
April 14, 2011, the Board of Directors met to review the
terms of the Series C Offer and Series D Exchange as
of each date. At the December 10, 2010 meeting and the
April 14, 2011 meeting, the Board of Directors reviewed and
conducted the same analysis as to fairness issues and as to
positive and negative factors as the Special Committee.
Opinion
of NovaStars Financial Advisor
Stifel acted as financial advisor to the Companys Board of
Directors in connection with the Recapitalization and related
matters. Stifel is a nationally recognized investment banking
and securities firm with membership on all the principal United
States securities exchanges and expertise in transactions
similar to the Recapitalization. As part of its investment
banking activities, Stifel is regularly engaged in the
independent valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other
purposes.
The Company received bids from six investment banks seeking to
act as the financial advisor in connection with the
Recapitalization, one of such investment banks was Stifel.
Stifel had advised the Board of Directors in the original
issuance of the Series D Preferred Stock and it has been
involved with certain other Company capital transactions. The
Companys management and the Board of Directors considered
that Stifel had strong experience in the capital markets and
believed that Stifel had the relevant experience to assist with
the Recapitalization. Stifel demonstrated a high desire to work
with the Company again and presented a very reasonable fee
proposal. For the aforementioned reasons, the Companys
management recommended that the Board of Directors hire Stifel
for advice with the Recapitalization and for the fairness
opinion.
On December 10, 2010, Stifel gave a detailed presentation
during which Stifel rendered its oral opinion, which was later
confirmed in writing, to the Board of Directors that, as of the
date of Stifels written opinion, the financial terms of
the potential Recapitalization were fair to the holders of the
Companys Common Stock, from a financial point of view.
Stifels opinion will be made available for inspection and
copying at the principal executive offices of the Company at
2114 Central Street, Suite 600, Kansas City, Missouri
64108, during its regular business hours by any interested
equity security holder of the subject company or representative
who has been so designated in writing.
This Opinion of NovaStars Financial Advisor
subsection provides a summary of Stifels opinion as well
as the December 10, 2010 presentation delivered by
representatives of Stifel to the Board of Directors. The full
text of Stifels written opinion, dated December 10,
2010, which sets forth the assumptions made, matters considered
and limitations of the review undertaken, is attached as
Appendix B to this proxy statement and is
incorporated herein by reference. Stifel has provided its
consent to using such opinion in this proxy statement. Holders
of the Companys Common Stock are urged to, and should,
read Stifels opinion carefully and in its entirety in
connection with this proxy statement. The summary of the opinion
of Stifel set forth in this proxy statement is qualified in its
entirety by reference to the full text of such opinion. The
opinion of Stifel will not reflect any developments that may
occur or may have occurred after the date of its opinion and
prior to the completion of the Recapitalization.
No limitations were imposed by the Board of Directors or the
Special Committee on the scope of Stifels investigation or
the procedures to be followed by Stifel in rendering its
opinion. In arriving at its opinion, Stifel did not ascribe a
specific range of values to the Company or any class of its
securities. Stifels opinion is based on the financial and
comparative analyses described below. Stifels opinion was
for the information of, and directed to, the Special Committee
and the Board of Directors for their information and assistance
in connection with the consideration of the financial terms of
the Recapitalization. Stifels opinion was not intended to
be, and does not constitute, a recommendation to the Special
Committee, the Board of Directors or
49
any stockholder of the Company as to how the Special Committee,
the Board of Directors or any of the Companys stockholders
should vote on the Recapitalization terms or any aspect thereof,
or whether or not any of the Companys stockholders should
elect the
Cash-and-Stock
Option or the Stock-Only Option in connection with the
Series C Offer, or whether or not any of the Companys
stockholders should enter into the Exchange Agreement or any
voting, stockholders or affiliate agreement with respect
to the Recapitalization or any aspect thereof, or exercise any
dissenters or appraisal rights that may be available to
such stockholder or member. In addition, Stifels opinion
does not compare the relative merits of the Recapitalization (or
any aspect thereof) with any other alternative transaction or
business strategy which may have been available to the Special
Committee, the Board of Directors or the Company to proceed with
or effect the Recapitalization (or any aspect thereof). Stifel
was not requested to, and Stifel did not, explore alternatives
to the Recapitalization or solicit the interest of any other
parties in pursuing transactions with the Company.
In connection with its opinion, Stifel, among other things:
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reviewed and analyzed a draft copy of the proxy
statement/consent solicitation/prospectus that is part of the
Registration Statement as of December 4, 2010;
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reviewed and analyzed a draft copy of the Exchange Agreement as
of November 15, 2010;
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reviewed the audited consolidated financial statements of the
Company as of December 31, 2009, 2008 and 2007 and the
related audited consolidated statements of income,
stockholders equity and cash flows for each of such fiscal
years contained in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2009; together with the
Companys Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2010;
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reviewed and analyzed certain other publicly available
information concerning the Company, including the terms of the
Series C Preferred Stock and Series D Preferred Stock;
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reviewed certain non-publicly available information regarding
the Companys business plan and other internal financial
statements and analyses relating to the Companys business;
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participated in certain discussions and negotiations among
representatives of the Company, the Series C Preferred
Stock and the Series D Preferred Stock regarding the terms
of the Recapitalization and the Exchange Agreement and other
matters;
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reviewed the reported prices and trading activity of the equity
securities of the Company;
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discussed the past and current operations, financial condition
and future prospects of the Company with senior executives of
the Company;
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analyzed certain publicly-available information concerning the
terms of selected merger and acquisition transactions that it
considered relevant to its analysis;
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reviewed and analyzed certain publicly-available financial and
stock market data relating to selected public companies that it
deemed relevant to its analysis;
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conducted such other financial studies, analyses and
investigations and considered such other information as it
deemed necessary or appropriate for purposes of Stifels
opinion; and
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took into account Stifels assessment of general economic,
market and financial conditions and Stifels experience in
other transactions, as well as Stifels experience in
securities valuations and Stifels knowledge of the
financial services industry generally.
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In rendering its opinion, Stifel relied upon and assumed,
without independent verification, the accuracy and completeness
of all of the financial and other information that was provided
to Stifel by or on behalf of the Company or StreetLinks, or that
was otherwise reviewed by Stifel, and did not assume any
responsibility for independently verifying any of such
information.
With respect to the financial forecasts supplied to Stifel by
the Company, Stifel has assumed that they were reasonably
prepared on the basis reflecting the best currently available
estimates and judgments of
50
Companys management as to the future operating and
financial performance of the Company and StreetLinks, as
applicable, and that they provided a reasonable basis upon which
Stifel could form its opinion. Such forecasts and projections
were not prepared with the expectation of public disclosure. All
such projected financial information is based on numerous
variables and assumptions that are inherently uncertain,
including, without limitation, factors related to general
economic and competitive conditions. Accordingly, actual results
could vary significantly from those set forth in such projected
financial information. Stifel has relied on this projected
information without independent verification or analysis and
does not in any respect assume any responsibility for the
accuracy or completeness thereof.
Stifel also assumed, without independent verification and with
the Companys consent, that there were no material changes
in the assets, liabilities, financial condition, results of
operations, business or prospects of the Company or StreetLinks
since the date of the last financial statements made available
to Stifel prior to rendering its opinion. Stifel did not make or
obtain any independent evaluation, appraisal or physical
inspection of the Companys or StreetLinks respective
assets or liabilities, the collateral securing any of such
assets or liabilities, or the collectability of any such assets.
Estimates of values of companies and assets do not purport to be
appraisals or necessarily reflect the prices at which companies
or assets may actually be sold. Because such estimates are
inherently subject to uncertainty, Stifel assumes no
responsibility for their accuracy. Stifel relied on advice of
the Companys counsel as to certain legal and tax matters
with respect to the Company, the proxy statement/consent
solicitation/prospectus that is part of the Registration
Statement, the Exchange Agreement and the Recapitalization and
other transactions and other matters contained or contemplated
therein. Stifel has assumed, with the Companys consent,
that there are no factors that would delay or subject to any
adverse conditions any necessary regulatory or governmental
approvals and that all conditions to the Recapitalization will
be satisfied and not waived. In addition, Stifel has assumed
that the definitive proxy statement/consent
solicitation/prospectus that is part of the Registration
Statement and the Exchange Agreement will not differ materially
from the draft Stifel reviewed. Stifel has also assumed that the
Recapitalization will be consummated substantially on the terms
and conditions described in the proxy statement/consent
solicitation/prospectus that is part of the Registration
Statement and the Exchange Agreement, each without any waiver of
material terms or conditions by the Company or any other party
to any transaction contemplated therein, and that obtaining any
necessary regulatory approvals or satisfying any other
conditions for consummation of the Recapitalization or any other
related transaction will not have an adverse effect on the
Company.
Stifels opinion is necessarily based on economic, market,
financial and other conditions as they exist on, and on the
information made available to Stifel as of, the date of the
letter. It is understood that subsequent developments may affect
the conclusions reached in the opinion and that Stifel does not
have any obligation to update, revise or reaffirm Stifels
opinion, except as otherwise set forth in Stifels
engagement letter agreement with the Company. Stifel also did
not perform or rely upon certain analyses that Stifel would
customarily prepare for the Company in connection with a
fairness opinion because such analyses were deemed not to be
meaningful for various reasons.
Stifels opinion is limited to whether the financial terms
of the Recapitalization are fair to the Companys holders
of Common Stock, from a financial point of view. Stifels
opinion does not consider, include or address: (i) any
other strategic alternatives currently (or which have been or
may be) contemplated by the Board of Directors, the Special
Committee or the Company; (ii) the legal, tax or accounting
consequences of the Recapitalization (or any aspect thereof) on
the Company or its stockholders including, without limitation,
whether or not the Recapitalization will trigger an
ownership change pursuant to Section 382 of the
Code or otherwise affect the tax status of the Companys
NOLs; (iii) the fairness of the amount or nature of any
compensation to any of the Companys officers, directors or
employees, or class of such persons, relative to the
compensation to the holders of the Companys securities;
(iv) the effect of the Recapitalization (or any aspect
thereof) on, or the fairness of the consideration to be received
by, holders of any class of securities of the Company other than
the Common Stock, or any class of securities of any other party
to any transaction contemplated by the proxy statement/consent
solicitation/prospectus that is part of the Registration
Statement or the Exchange Agreement; (v) any advice or
opinions provided by any other advisor to the Company or any
other party to the Recapitalization; (vi) any other
transaction contemplated by the proxy statement/consent
51
solicitation/prospectus that is part of the Registration
Statement or the Exchange Agreement other than the
Recapitalization; (vii) any potential transaction by any
party to the proxy statement/consent solicitation/prospectus
that is part of the Registration Statement or the Exchange
Agreement which is not contemplated by the proxy
statement/consent solicitation/prospectus that is part of the
Registration Statement or the Exchange Agreement;
(viii) the effect of any pending or threatened litigation
involving any party to the proxy statement/consent
solicitation/prospectus that is part of the Registration
Statement or the Exchange Agreement on the Recapitalization (or
any aspect thereof) or any other transaction contemplated by the
proxy statement/consent solicitation/prospectus that is part of
the Registration Statement or the Exchange Agreement; or
(ix) the fairness of the Series C Offer, the
Series D Exchange or any other individual aspect of the
Recapitalization without taking into account the other aspects
of the Recapitalization. Furthermore, Stifels opinion does
not express any opinion as to the prices, trading range or
volume at which the securities of the Company will trade
following public announcement or consummation of the
Recapitalization or any aspect thereof.
Stifel is not a legal, tax, regulatory or bankruptcy advisor.
Stifel has not considered any legislative or regulatory changes
recently adopted or currently being considered by the United
States Congress, the various federal banking agencies, the SEC,
or any other regulatory bodies, or any changes in accounting
methods or generally accepted accounting principles that may be
adopted by the SEC or the Financial Accounting Standards Board,
or any changes in regulatory accounting principles that may be
adopted by any or all of the federal banking agencies.
Stifels opinion is not a solvency opinion and does not in
any way address the solvency or financial condition of the
Company.
In connection with rendering its opinion, Stifel performed a
variety of financial analyses that are summarized below. Such
summary does not purport to be a complete description of such
analyses. Stifel believes that its analyses and the summary set
forth herein must be considered as a whole and that selecting
portions of such analyses and the factors considered therein,
without considering all factors and analyses, could create an
incomplete view of the analyses and processes underlying its
opinion. The preparation of a fairness opinion is a complex
process involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. In
arriving at its opinion, Stifel considered the results of all of
its analyses as a whole and did not attribute any particular
weight to any analyses or factors considered by it. The range of
valuations resulting from any particular analysis described
below should not be taken to be Stifels view of the actual
value of the Company. In its analyses, Stifel made numerous
assumptions with respect to industry performance, business and
economic conditions, and other matters, many of which are beyond
the control of the Company. Any estimates contained in
Stifels analyses are not necessarily indicative of actual
future values or results, which may be significantly more or
less favorable than suggested by such estimates. Estimates of
values of companies do not purport to be appraisals or
necessarily reflect the actual prices at which companies or
their securities actually may be sold. No company or transaction
utilized in Stifels analyses was identical to the Company
or the Recapitalization. Accordingly, an analysis of the results
described below is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial
and operating characteristics of the companies and other facts
that could affect the public trading value of the companies to
which they are being compared. None of the analyses performed by
Stifel was assigned a greater significance by Stifel than any
other, nor does the order of analyses described represent
relative importance or weight given to those analyses by Stifel.
The analyses described below do not purport to be indicative of
actual future results, or to reflect the prices at which the
Companys securities may trade in the public markets, which
may vary depending upon various factors, including changes in
interest rates, dividend rates, market conditions, economic
conditions and other factors that influence the price of
securities.
In accordance with customary investment banking practice, Stifel
employed generally accepted valuation methods in reaching its
opinion. The following is a summary of the material financial
analyses that Stifel used in providing its opinion. Some of the
summaries of financial analyses are presented in tabular format.
In order to understand the financial analyses used by Stifel
more fully, you should read the tables together with the text of
each summary. The tables alone do not constitute a complete
description of Stifels financial analyses, including the
methodologies and assumptions underlying the analyses, and if
viewed in isolation could create a misleading or incomplete view
of the financial analyses performed by Stifel. The summary data
set forth
52
below do not represent and should not be viewed by anyone as
constituting conclusions reached by Stifel with respect to any
of the analyses performed by it in connection with its opinion.
Rather, Stifel made its determination as to the fairness to
holders of the Common Stock of the financial terms of the
Recapitalization, from a financial point of view, on the basis
of its experience and professional judgment after considering
the results of all of the analyses performed. Accordingly, the
data included in the summary tables and the corresponding
imputed ranges of value for the Company should be considered as
a whole and in the context of the full narrative description of
all of the financial analyses set forth in the following pages,
including the assumptions underlying these analyses. Considering
the data included in the summary table without considering the
full narrative description of all of the financial analyses,
including the assumptions underlying these analyses, could
create a misleading or incomplete view of the financial analyses
performed by Stifel.
Context for the Decision to Pursue an Exchange of the
Preferred Stock. Stifel considered a number of
situational factors relevant to its analysis, including, but not
limited to the following:
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The Series C Preferred Stock and the Series D
Preferred Stock rank senior to all classes or series of the
Companys Common Stock with respect to dividend rights and
the distribution of assets upon the Companys liquidation.
As of September 30, 2010, the Company had
$46.7 million in accrued and unpaid preferred dividends
which must be paid before making any distributions to the
Companys Common Shares. This obligation is expected to
grow to $68.7 million, $88.1 million and
$109.2 million in 2011, 2012 and 2013, respectively, which
may impede the growth of any strategic options available to the
Company, and which, if not impeded, could increase cash flow
available to all stockholders in the future. Furthermore, the
mandatory conversion of the Series D Preferred Stock in
2016 does not alleviate the requirement of the Company to pay
the accrued and unpaid dividends on the Series D Preferred
Stock in cash;
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Most sale transactions would trigger an ownership
change under Section 382 of the Code, which would
substantially limit the use of the Companys tax loss
carryforwards, which totaled approximately $324.4 million
at September 30, 2010;
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In order to achieve meaningful growth, the Company may need
access to capital in the future, which may be restricted until
the Company resolves its capital structure such that there is
positive common equity; and
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Negotiation of the terms of any potential exchange would be
influenced by the impact of an ownership change
under Section 382 of the Code, and the preference of the
preferred stockholders to receive some cash, balanced with
managements view of the Companys liquidity needs,
and the various stockholder approvals required to complete the
Recapitalization.
|
Financial Impact of the
Recapitalization. Stifel reviewed certain
estimated future operating and financial information based on
two cases of projected financial results developed by the
Company for the
12-month
periods ending December 31, 2011 and December 31, 2012
and the potential incremental financial impact of the
Recapitalization which estimates are shown in the table below.
Based on this analysis, on a pro forma basis, the
Recapitalization is forecasted to be accretive to the
Companys earnings per share for each of the
12-month
periods ending December 31, 2011 and December 31,
2012. The relevant estimates reviewed were as follows:
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|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Middle Case Adjusted Per Share Estimates
|
|
|
|
|
|
|
|
|
Pro Forma Earnings (Loss) Per Share
|
|
$
|
0.12
|
|
|
$
|
0.18
|
|
Status Quo Earnings (Loss) Per Share
|
|
|
(0.94
|
)
|
|
|
(0.52
|
)
|
Stressed Case Adjusted Per Share Estimates
|
|
|
|
|
|
|
|
|
Pro Forma Earnings (Loss) Per Share
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Status Quo Earnings (Loss) Per Share
|
|
|
(1.66
|
)
|
|
|
(1.85
|
)
|
Additionally, Stifel reviewed the Companys book value per
share, a range of estimated adjusted common equity per share (as
defined below), and gross estimated deferred tax asset per share
as of September 30, 2010
53
and the potential incremental financial impact of the
Recapitalization on these figures, which estimates are shown in
the table below. These estimates were made for the purposes of
Stifels evaluation process only. These figures are not
determined in accordance with GAAP.
For purposes of Stifels analysis:
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|
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Book Value Per Share is defined as total
equity less the aggregate liquidating preference of the
Companys preferred stock, divided by shares outstanding;
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|
|
|
Adjusted Book Value Per Share is defined as
total equity, less the aggregate liquidating preference of the
Companys preferred stock, plus an estimated range of
value, in excess of carrying value, attributable to the
Companys investment in StreetLinks, plus an estimated
range of the present value of the tax benefits attributable to
the Companys deferred tax asset, divided by shares
outstanding. Stifel arrived at a range of value for the
StreetLinks investment through an examination of the trading
multiples of certain publicly traded reference companies, the
multiples of certain reference transactions, and a discounted
cash flow analysis based on the financial projections supplied
for StreetLinks by the Company. Stifels range of value for
the deferred tax asset was based on the financial projections
supplied by the Company, as well as the Companys estimates
of realizable tax benefits and a range of discount
rates; and
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Gross Deferred Tax Asset Per Share is defined
as the estimated nominal future tax benefits available to the
Company based on the Companys projections and
managements estimates, divided by shares outstanding. This
figure is not adjusted for the valuation allowance held against
the Companys deferred tax asset. Under GAAP, the Company
has provided a 100% valuation allowance against the deferred tax
asset.
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Low
|
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|
High
|
|
|
Book Value Per Share
|
|
|
|
|
|
|
|
|
Pro Forma Book Value Per Share
|
|
$
|
(0.66
|
)
|
|
$
|
(0.66
|
)
|
Status Quo Book Value Per Share
|
|
|
(24.54
|
)
|
|
|
(24.54
|
)
|
Adjusted Book Value Per Share
|
|
|
|
|
|
|
|
|
Pro Forma Adjusted Book Value Per Share
|
|
$
|
(0.15
|
)
|
|
$
|
1.17
|
|
Status Quo Adjusted Book Value Per Share
|
|
|
(19.69
|
)
|
|
|
(6.90
|
)
|
Gross Deferred Tax Asset Per Share
|
|
|
|
|
|
|
|
|
Pro Forma Gross Deferred Tax Asset Per Share
|
|
$
|
1.16
|
|
|
$
|
1.16
|
|
Status Quo Gross Deferred Tax Asset Per Share
|
|
|
11.21
|
|
|
|
11.21
|
|
Based on this analysis, the Recapitalization is expected to be
accretive to the Companys earnings per share in 2011 and
2012; accretive to the Companys September 30, 2010
book value per share and adjusted book value per share; and
dilutive to the Companys gross deferred tax asset per
share. The estimates of future operating and financial
information for the Company were based on the estimated balance
sheet of the Company as of the date of the Exchange Agreement,
but also give effect to several events which, at the date of the
Exchange Agreement had not yet occurred but were assumed to
occur in the future.
Liquidation Analysis. Stifel estimated the
value of the common equity of the Company assuming the
liquidation of all of the assets and liabilities of the Company
at their estimated realizable values. For purposes
54
only of Stifels evaluation process, management provided
Stifel with low and high estimates of fair market values. Stifel
utilized this information to establish the estimates shown in
the table below.
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
High
|
|
|
Value of the Companys Common Equity (in 000s)
|
|
|
|
|
|
|
|
|
Pro Forma Liquidation Value of Common Equity*
|
|
$
|
(21,801
|
)
|
|
$
|
71,179
|
|
Status Quo Liquidation Value of Common Equity*
|
|
|
(195,687
|
)
|
|
|
(102,707
|
)
|
Value of the Companys Common Equity Per Share:
|
|
|
|
|
|
|
|
|
Pro Forma Liquidation Value Per Share of Common Equity*
|
|
$
|
(0.24
|
)
|
|
$
|
0.79
|
|
Status Quo Liquidation Value Per Share of Common Equity*
|
|
|
(20.89
|
)
|
|
|
(10.96
|
)
|
|
|
|
* |
|
It should be noted that holders of Common Stock would receive $0
in the instance that the value to holders of Common Stock based
on this analysis is less than $0. |
Based on this analysis the Recapitalization is expected to be
accretive or neutral to the Companys liquidation value per
common share.
Omitted Analyses. Stifel considered including
several analyses traditionally employed in fairness opinions but
determined that these analyses would not be appropriate because
of several complicating factors, including:
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|
|
The impact of the underlying financial condition of the Company
and the impact of the terms of the Companys preferred
stock on the financial terms of the Recapitalization, which
prevents a meaningful comparison to other Recapitalization
transactions;
|
|
|
|
The Companys multiple and unique businesses, which,
coupled with the Companys liquidity, capital structure and
profitability characteristics, prevent a meaningful comparison
to other public companies;
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|
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|
Although the Company projects positive net income in 2011 and
2012, cash will not be available to holders of Common Stock
unless and until the Company is able to pay approximately
$46.7 million in accrued and unpaid preferred dividends and
meets an annual dividend service requirement on the preferred
stock which is approximately $17 million annually, a
portion of which continues to compound at a rate of 13%;
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The Common Stock holders deficit per share; and
|
|
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The illiquidity and volatility in the Common Stock.
|
Based upon Stifels consideration of the context for the
decision to pursue an exchange of the preferred stock, the
financial impact of the Recapitalization, being accretive to the
Companys earnings per share, book value per share and
adjusted book value per share, and the impact of the
Recapitalization being accretive or neutral to the liquidation
value of the Common Stock, and the other factors and analyses
described herein, Stifel determined that the financial terms of
the potential Recapitalization were fair to the holders of the
Companys Common Stock, from a financial point of view.
Stifels opinion was among the many factors taken into
consideration by the Companys Special Committee and the
Board of Directors in making their determination to approve the
Recapitalization on December 10, 2010. The amount of Offer
Consideration was determined by the Board of Directors and was
not recommended by Stifel.
Stifel, which is unaffiliated with the Company, entered into an
engagement letter with the Companys Board of Directors and
the Company, dated September 8, 2010, under which Stifel
has received retainer fees of $50,000 for each of the months
September 2010 through April 2011, an opinion fee of $200,000,
and a bring-down opinion fee of $100,000. Stifel will not
receive any significant payment or compensation contingent upon
successful consummation of the Recapitalization or any aspect
thereof. In addition, the Company has agreed to indemnify Stifel
for certain liabilities arising out of Stifels engagement.
In the past, Stifel has performed investment banking services
for the Company from time to time for which Stifel received
customary compensation. Stifel may seek to provide investment
banking services to the Company or its
55
respective affiliates in the future, for which Stifel would seek
customary compensation. In the ordinary course of business,
Stifel and its clients trade in the securities of the Company
and, accordingly, may at any time hold a long or short position
in such securities. No material relationship existed during the
past two years or is mutually understood to be contemplated, nor
was any compensation received or to be received as a result of
the relationship between (i) Stifel, its affiliates or
unaffiliated representatives and (ii) the Company or its
affiliates.
Bring-Down
Opinion of Novastars Financial Advisor
On April 14, 2011, Stifel gave a detailed presentation
during which Stifel rendered its oral bring-down opinion, which
was later confirmed in writing, to the Board of Directors that,
as of the date of Stifels written bring-down opinion, the
financial terms of the potential Recapitalization were still
fair to the holders of the Companys Common Stock, from a
financial point of view because the original opinion was
delivered on December 10, 2010. Stifels bring-down
opinion will be made available for inspection and copying at the
principal executive offices of the Company at 2114 Central
Street, Suite 600, Kansas City, Missouri 64108, during its
regular business hours by any interested equity security holder
of the subject company or representative who has been so
designated in writing.
This Bring-Down Opinion of NovaStars Financial
Advisor subsection provides a summary of Stifels
bring-down opinion as well as the April 14, 2011
presentation delivered by representatives of Stifel to the Board
of Directors. The full text of Stifels written bring-down
opinion, dated April 14, 2011, which sets forth the
assumptions made, matters considered and limitations of the
review undertaken, is attached as Appendix C to this
proxy statement and is incorporated herein by reference. Stifel
has provided its consent to using such bring-down opinion in
this proxy statement. Holders of the Companys Common Stock
are urged to, and should, read Stifels bring-down opinion
carefully and in its entirety in connection with this proxy
statement. The summary of the bring-down opinion of Stifel set
forth in this proxy statement is qualified in its entirety by
reference to the full text of such bring-down opinion. The
bring-down opinion of Stifel will not reflect any developments
that may occur or may have occurred after the date of its
opinion and prior to the completion of the Recapitalization.
No limitations were imposed by the Board of Directors or the
Special Committee on the scope of Stifels investigation or
the procedures to be followed by Stifel in rendering its
bring-down opinion. In arriving at its bring-down opinion,
Stifel did not ascribe a specific range of values to the Company
or any class of its securities. Stifels bring-down opinion
is based on the financial and comparative analyses described
below. Stifels bring-down opinion was for the information
of, and directed to, the Special Committee and the Board of
Directors for their information and assistance in connection
with the consideration of the financial terms of the
Recapitalization. Stifels bring-down opinion was not
intended to be, and does not constitute, a recommendation to the
Special Committee, the Board of Directors or any stockholder of
the Company as to how the Special Committee, the Board of
Directors or any the Companys stockholders should vote on
the Recapitalization terms or any aspect thereof, or whether or
not any of the Companys stockholders should elect the
Cash-and-Stock
Option or the Stock-Only Option in connection with the
Series C Offer, or whether or not any of the Companys
stockholders should enter into the Exchange Agreement or any
voting, stockholders or affiliate agreement with respect
to the Recapitalization or any aspect thereof, or exercise any
dissenters or appraisal rights that may be available to
such stockholder or member. In addition, Stifels
bring-down opinion does not compare the relative merits of the
Recapitalization (or any aspect thereof) with any other
alternative transaction or business strategy which may have been
available to the Special Committee, the Board of Directors or
the Company to proceed with or effect the Recapitalization (or
any aspect thereof). Stifel was not requested to, and Stifel did
not, explore alternatives to the Recapitalization or solicit the
interest of any other parties in pursuing transactions with the
Company.
In connection with its bring-down opinion, Stifel, among other
things:
|
|
|
|
|
reviewed and analyzed a draft copy of the proxy
statement/consent solicitation/prospectus that is part of the
Registration Statement as of March 24, 2011;
|
|
|
|
reviewed and analyzed the Exchange Agreement dated
December 10, 2010;
|
56
|
|
|
|
|
reviewed the audited consolidated financial statements of the
Company as of December 31, 2010, 2009, 2008 and 2007 and
the related audited consolidated statements of income,
shareholders equity and cash flows for each of such fiscal
years contained in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2010;
|
|
|
|
reviewed and analyzed certain other publicly available
information concerning the Company, including the terms of the
Series C Preferred Stock and Series D Preferred Stock;
|
|
|
|
reviewed certain non-publicly available information regarding
the Companys business plan and other internal financial
statements and analyses relating to the Companys business;
|
|
|
|
participated in certain discussions and negotiations among
representatives of the Company, the Series C Preferred
Stock and the Series D Preferred Stock regarding the terms
of the Recapitalization and the Exchange Agreement and other
matters;
|
|
|
|
reviewed the reported prices and trading activity of the equity
securities of the Company;
|
|
|
|
discussed the past and current operations, financial condition
and future prospects of the Company with senior executives of
the Company;
|
|
|
|
analyzed certain publicly available information concerning the
terms of selected merger and acquisition transactions that it
considered relevant to its analysis;
|
|
|
|
reviewed and analyzed certain publicly available financial and
stock market data relating to selected public companies that it
deemed relevant to its analysis;
|
|
|
|
conducted such other financial studies, analyses and
investigations and considered such other information as it
deemed necessary or appropriate for purposes of Stifels
bring-down opinion; and
|
|
|
|
took into account Stifels assessment of general economic,
market and financial conditions and Stifels experience in
other transactions, as well as Stifels experience in
securities valuations and Stifels knowledge of the
financial services industry generally.
|
In rendering its bring-down opinion, Stifel relied upon and
assumed, without independent verification, the accuracy and
completeness of all of the financial and other information that
was provided to Stifel by or on behalf of the Company, Advent or
StreetLinks, or that was otherwise reviewed by Stifel, and did
not assume any responsibility for independently verifying any of
such information.
With respect to the financial forecasts supplied to Stifel by
the Company, Stifel has assumed that they were reasonably
prepared on the basis reflecting the best currently available
estimates and judgments of Companys management as to the
future operating and financial performance of the Company,
Advent and StreetLinks, as applicable, and that they provided a
reasonable basis upon which Stifel could form its bring-down
opinion. Such forecasts and projections were not prepared with
the expectation of public disclosure. All such projected
financial information is based on numerous variables and
assumptions that are inherently uncertain, including, without
limitation, factors related to general economic and competitive
conditions. Accordingly, actual results could vary significantly
from those set forth in such projected financial information.
Stifel has relied on this projected information without
independent verification or analysis and does not in any respect
assume any responsibility for the accuracy or completeness
thereof.
Stifel also assumed, without independent verification and with
the Companys consent, that there were no material changes
in the assets, liabilities, financial condition, results of
operations, business or prospects of the Company, Advent or
StreetLinks since the date of the last financial statements made
available to Stifel prior to rendering its bring-down opinion.
Stifel did not make or obtain any independent evaluation,
appraisal or physical inspection of the Companys,
Advents or StreetLinks respective assets or
liabilities, the collateral securing any of such assets or
liabilities, or the collectability of any such assets. Estimates
of values of companies and assets do not purport to be
appraisals or necessarily reflect the prices at which companies
or assets may actually be sold. Because such estimates are
inherently subject to uncertainty, Stifel assumes no
responsibility for their accuracy. Stifel relied on advice of
the Companys counsel as to certain legal and tax matters
with respect to the Company, the proxy statement/consent
solicitation/prospectus that is part of the
57
Registration Statement, the Exchange Agreement and the
Recapitalization and other transactions and other matters
contained or contemplated therein. Stifel has assumed, with the
Companys consent, that there are no factors that would
delay or subject to any adverse conditions any necessary
regulatory or governmental approvals and that all conditions to
the Recapitalization will be satisfied and not waived. In
addition, Stifel has assumed that the definitive proxy
statement/consent solicitation/prospectus that is part of the
Registration Statement and the Exchange Agreement will not
differ materially from the draft Stifel reviewed. Stifel has
also assumed that the Recapitalization will be consummated
substantially on the terms and conditions described in the proxy
statement/consent solicitation/prospectus that is part of the
Registration Statement and the Exchange Agreement each without
any waiver of material terms or conditions by the Company or any
other party to any transaction contemplated therein, and that
obtaining any necessary regulatory approvals or satisfying any
other conditions for consummation of the Recapitalization or any
other related transaction will not have an adverse effect on the
Company.
Stifels bring-down opinion is necessarily based on
economic, market, financial and other conditions as they exist
on, and on the information made available to Stifel as of, the
date of the bring-down opinion. It is understood that subsequent
developments may affect the conclusions reached in the
bring-down opinion and that Stifel does not have any obligation
to update, revise or reaffirm Stifels bring-down opinion,
except as otherwise set forth in Stifels engagement letter
agreement with the Company. Stifel also did not perform or rely
upon certain analyses that Stifel would customarily prepare for
the Company in connection with a fairness opinion because such
analyses were deemed not to be meaningful for various reasons.
Stifels bring-down opinion is limited to whether the
financial terms of the Recapitalization are fair to the
Companys holders of Common Stock, from a financial point
of view. Stifels bring-down opinion does not consider,
include or address: (i) any other strategic alternatives
currently (or which have been or may be) contemplated by the
Board of Directors, the Special Committee, or the Company;
(ii) the legal, tax or accounting consequences of the
Recapitalization (or any aspect thereof) on the Company or its
stockholders including, without limitation, whether or not the
Recapitalization will trigger an ownership change
pursuant to Section 382 of the Code or otherwise affect the
tax status of the Companys NOLs; (iii) the fairness
of the amount or nature of any compensation to any of the
Companys officers, directors or employees, or class of
such persons, relative to the compensation to the holders of the
Companys securities; (iv) the effect of the
Recapitalization (or any aspect thereof) on, or the fairness of
the consideration to be received by, holders of any class of
securities of the Company other than the Common Stock, or any
class of securities of any other party to any transaction
contemplated by the proxy statement/consent
solicitation/prospectus that is part of the Registration
Statement or the Exchange Agreement; (v) any advice or
opinions provided by any other advisor to the Company or any
other party to the Recapitalization; (vi) any other
transaction contemplated by the proxy statement/consent
solicitation/prospectus that is part of the Registration
Statement or the Exchange Agreement other than the
Recapitalization; (vii) any potential transaction by any
party to the proxy statement/consent solicitation/prospectus
that is part of the Registration Statement or the Exchange
Agreement which is not contemplated by the proxy
statement/consent solicitation/prospectus that is part of the
Registration Statement or the Exchange Agreement;
(viii) the effect of any pending or threatened litigation
involving any party to the proxy statement/consent
solicitation/prospectus that is part of the Registration
Statement or the Exchange Agreement on the Recapitalization (or
any aspect thereof) or any other transaction contemplated by the
proxy statement/consent solicitation/prospectus that is part of
the Registration Statement or the Exchange Agreement; or
(ix) the fairness of the Series C Offer, the
Series D Exchange or any other individual aspect of the
Recapitalization without taking into account the other aspects
of the Recapitalization. Furthermore, Stifels bring-down
opinion does not express any opinion as to the prices, trading
range or volume at which the securities of the Company will
trade following public announcement or consummation of the
Recapitalization or any aspect thereof.
Stifel is not a legal, tax, regulatory or bankruptcy advisor.
Stifel has not considered any legislative or regulatory changes
recently adopted or currently being considered by the United
States Congress, the various federal banking agencies, the SEC,
or any other regulatory bodies, or any changes in accounting
methods or generally accepted accounting principles that may be
adopted by the SEC or the Financial Accounting Standards Board,
or any changes in regulatory accounting principles that may be
adopted by any or all of the
58
federal banking agencies. Stifels bring-down opinion is
not a solvency opinion and does not in any way address the
solvency or financial condition of the Company.
In connection with rendering its bring-down opinion, Stifel
performed a variety of financial analyses that are summarized
below. Such summary does not purport to be a complete
description of such analyses. Stifel believes that its analyses
and the summary set forth herein must be considered as a whole
and that selecting portions of such analyses and the factors
considered therein, without considering all factors and
analyses, could create an incomplete view of the analyses and
processes underlying its bring-down opinion. The preparation of
a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to partial analysis
or summary description. In arriving at its bring-down opinion,
Stifel considered the results of all of its analyses as a whole
and did not attribute any particular weight to any analyses or
factors considered by it. The range of valuations resulting from
any particular analysis described below should not be taken to
be Stifels view of the actual value of the Company. In its
analyses, Stifel made numerous assumptions with respect to
industry performance, business and economic conditions, and
other matters, many of which are beyond the control of the
Company. Any estimates contained in Stifels analyses are
not necessarily indicative of actual future values or results,
which may be significantly more or less favorable than suggested
by such estimates. Estimates of values of companies do not
purport to be appraisals or necessarily reflect the actual
prices at which companies or their securities actually may be
sold. No company or transaction utilized in Stifels
analyses was identical to the Company or the Recapitalization.
Accordingly, an analysis of the results described below is not
mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating
characteristics of the companies and other facts that could
affect the public trading value of the companies to which they
are being compared. None of the analyses performed by Stifel was
assigned a greater significance by Stifel than any other, nor
does the order of analyses described represent relative
importance or weight given to those analyses by Stifel. The
analyses described below do not purport to be indicative of
actual future results, or to reflect the prices at which the
Companys securities may trade in the public markets, which
may vary depending upon various factors, including changes in
interest rates, dividend rates, market conditions, economic
conditions and other factors that influence the price of
securities.
In accordance with customary investment banking practice, Stifel
employed generally accepted valuation methods in reaching its
bring-down opinion. The following is a summary of the material
financial analyses that Stifel used in providing its bring-down
opinion. Some of the summaries of financial analyses are
presented in tabular format. In order to understand the
financial analyses used by Stifel more fully, you should read
the tables together with the text of each summary. The tables
alone do not constitute a complete description of Stifels
financial analyses, including the methodologies and assumptions
underlying the analyses, and if viewed in isolation could create
a misleading or incomplete view of the financial analyses
performed by Stifel. The summary data set forth below do not
represent and should not be viewed by anyone as constituting
conclusions reached by Stifel with respect to any of the
analyses performed by it in connection with its bring-down
opinion. Rather, Stifel made its determination as to the
fairness to holders of the Common Stock of the financial terms
of the Recapitalization, from a financial point of view, on the
basis of its experience and professional judgment after
considering the results of all of the analyses performed.
Accordingly, the data included in the summary tables and the
corresponding imputed ranges of value for the Company should be
considered as a whole and in the context of the full narrative
description of all of the financial analyses set forth in the
following pages, including the assumptions underlying these
analyses. Considering the data included in the summary table
without considering the full narrative description of all of the
financial analyses, including the assumptions underlying these
analyses, could create a misleading or incomplete view of the
financial analyses performed by Stifel.
Context for the Decision to Pursue an Exchange of the
Preferred Stock. Stifel considered a number of
situational factors relevant to its analysis, including, but not
limited to the following:
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|
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|
|
The Series C Preferred Stock and the Series D
Preferred Stock rank senior to all classes or series of the
Companys Common Stock with respect to dividend rights and
the distribution of assets upon the Companys liquidation.
As of December 31, 2010, the Company had $50.9 million
in accrued and unpaid preferred dividends which must be paid
before making any distributions to the Companys
|
59
|
|
|
|
|
Common Shares. This obligation is expected to grow to
$68.7 million, $88.1 million and $109.2 million
in 2011, 2012 and 2013, respectively, which may impede the
growth of any strategic options available to the Company, and
which, if not impeded, could increase cash flow available to all
stockholders in the future. Furthermore, the mandatory
conversion of the Series D Preferred Stock in 2016 does not
alleviate the requirement of the Company to pay the accrued and
unpaid dividends on the Series D Preferred Stock in cash;
|
|
|
|
|
|
Most sale transactions would trigger an ownership
change under Section 382 of the Code, which would
substantially limit the use of the Companys tax loss
carryforwards, which totaled approximately $324.4 million
at December 31, 2010;
|
|
|
|
In order to achieve meaningful growth, the Company may need
access to capital in the future, which may be restricted until
the Company resolves its capital structure such that there is
positive common equity; and
|
|
|
|
Negotiation of the terms of any potential exchange would be
influenced by the impact of an ownership change
under Section 382 of the Code, and the preference of the
preferred stockholders to receive some cash, balanced with
managements view of the Companys liquidity needs,
and the various stockholder approvals required to complete the
Recapitalization.
|
Financial Impact of the
Recapitalization. Stifel reviewed certain
estimated future operating and financial information based on
Managements Expected Case developed by the Company for the
12-month
periods ending December 31, 2011, December 31, 2012
and December 31, 2013 and the potential incremental
financial impact of the Recapitalization which estimates are
shown in the table below. Based on this analysis, on a pro forma
basis, the Recapitalization is forecasted to be accretive to the
Companys earnings per share for each of the
12-month
periods. The relevant estimates reviewed were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Expected Case Adjusted Per Share Estimates
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Earnings (Loss) Per Share
|
|
$
|
0.08
|
|
|
$
|
0.15
|
|
|
$
|
0.22
|
|
Status Quo Earnings (Loss) Per Share
|
|
|
(1.14
|
)
|
|
|
(0.58
|
)
|
|
|
(0.13
|
)
|
Additionally, Stifel reviewed the Companys book value per
share, a range of estimated adjusted common equity per share (as
defined below), and gross estimated deferred tax asset per share
as of December 31, 2010 and the potential incremental
financial impact of the Recapitalization on these figures, which
estimates are shown in the table below. These estimates were
made for the purposes of Stifels evaluation process only.
These figures are not determined in accordance with GAAP.
For purposes of Stifels analysis:
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|
|
|
|
Book Value Per Share is defined as total
equity less the aggregate liquidating preference of the
Companys preferred stock, divided by shares outstanding;
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|
|
|
Adjusted Book Value Per Share is defined as
total equity, less the aggregate liquidating preference of the
Companys preferred stock, plus an estimated range of
value, in excess of carrying value, attributable to the
Companys investment in Advent and StreetLinks, plus an
estimated range of the present value of the tax benefits
attributable to the Companys deferred tax asset, divided
by shares outstanding. Stifel arrived at a range of value for
the Advent and StreetLinks investment through an examination of
the trading multiples of certain publicly traded reference
companies, the multiples of certain reference transactions, and
a discounted cash flow analysis based on the financial
projections supplied for each of Advent and StreetLinks by the
Company. Stifels range of value for the deferred tax asset
was based on the financial projections supplied by the Company,
as well as the Companys estimates of realizable tax
benefits and a range of discount rates; and
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|
Gross Deferred Tax Asset Per Share is defined
as the estimated nominal future tax benefits available to the
Company based on the Companys projections and
managements estimates, divided by shares outstanding. This
figure is not adjusted for the valuation allowance held against
the Companys deferred
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60
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|
|
tax asset. Under GAAP, the Company has provided a 100% valuation
allowance against the deferred tax asset.
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|
Low
|
|
|
High
|
|
|
Book Value Per Share
|
|
|
|
|
|
|
|
|
Pro Forma Book Value Per Share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.65
|
)
|
Status Quo Book Value Per Share
|
|
|
(24.96
|
)
|
|
|
(24.96
|
)
|
Adjusted Book Value Per Share
|
|
|
|
|
|
|
|
|
Pro Forma Adjusted Book Value Per Share
|
|
$
|
0.11
|
|
|
$
|
1.34
|
|
Status Quo Adjusted Book Value Per Share
|
|
|
(17.63
|
)
|
|
|
(5.73
|
)
|
Gross Deferred Tax Asset Per Share
|
|
|
|
|
|
|
|
|
Pro Forma Gross Deferred Tax Asset Per Share
|
|
$
|
1.26
|
|
|
$
|
1.26
|
|
Status Quo Gross Deferred Tax Asset Per Share
|
|
|
12.12
|
|
|
|
12.12
|
|
Based on this analysis, the Recapitalization is expected to be
accretive to the Companys earnings per share in 2011, 2012
and 2013; accretive to the Companys December 31, 2010
book value per share and adjusted book value per share; and
dilutive to the Companys gross deferred tax asset per
share. The estimates of future operating and financial
information for the Company were based on the estimated balance
sheet of the Company as of the date of the Exchange Agreement,
but also give effect to several events which, at the date of the
Exchange Agreement had not yet occurred but were assumed to
occur in the future.
Liquidation Analysis. Stifel estimated the
value of the common equity of the Company assuming the
liquidation of all of the assets and liabilities of the Company
at their estimated realizable values. For purposes only of
Stifels evaluation process, management provided Stifel
with low and high estimates of fair market values. Stifel
utilized this information to establish the estimates shown in
the table below.
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|
|
|
|
|
|
|
|
|
|
Low
|
|
|
High
|
|
|
Value of the Companys Common Equity (in 000s)
|
|
|
|
|
|
|
|
|
Pro Forma Liquidation Value of Common Equity*
|
|
$
|
(24,491
|
)
|
|
$
|
78,989
|
|
Status Quo Liquidation Value of Common Equity*
|
|
|
(194,828
|
)
|
|
|
(91,348
|
)
|
Value of the Companys Common Equity Per Share:
|
|
|
|
|
|
|
|
|
Pro Forma Liquidation Value Per Share of Common Equity*
|
|
$
|
(0.27
|
)
|
|
$
|
0.87
|
|
Status Quo Liquidation Value Per Share of Common Equity*
|
|
|
(20.80
|
)
|
|
|
(9.75
|
)
|
|
|
|
* |
|
It should be noted that holders of Common Stock would receive $0
in the instance that the value to holders of Common Stock based
on this analysis is less than $0. |
Based on this analysis the Recapitalization is expected to be
accretive or neutral to the Companys liquidation value per
common share.
Market Performance Summary. Stifel reviewed
the trading levels of the Common Stock and Series C
Preferred Stock during the period since the announcement of the
Series C Offer, as well as the implied aggregate value of
the equity securities of the Company.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Announcement (12/10/10)
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|
|
Per Share
|
|
Market Cap ($M)
|
|
|
|
|
Exchange Offer
|
|
|
|
|
|
Market Value of
|
|
|
|
|
Consideration
|
|
|
|
|
|
Exchange
|
Security
|
|
Price
|
|
Value(1)
|
|
Premium(2)
|
|
Actual
|
|
Consideration(1)
|
|
Series C Preferred Stock (Aggregate)
|
|
$
|
1.75
|
|
|
$
|
10.36
|
|
|
|
492
|
%
|
|
$
|
5.2
|
|
|
$
|
31.0
|
|
Series D Preferred Stock(3)
|
|
|
2.11
|
|
|
|
12.52
|
|
|
|
N/A
|
|
|
|
4.4
|
|
|
|
26.3
|
|
Common Stock
|
|
|
0.67
|
|
|
|
0.67
|
|
|
|
|
|
|
|
6.3
|
|
|
|
6.3
|
|
61
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/11/11
|
|
|
Per Share
|
|
Market Cap ($M)
|
|
|
|
|
Exchange Offer
|
|
|
|
|
|
Market Value of
|
|
|
|
|
Consideration
|
|
|
|
|
|
Exchange
|
Security
|
|
Price
|
|
Value(1)
|
|
Premium(2)
|
|
Actual
|
|
Consideration(1)
|
|
Series C Preferred Stock (Aggregate)
|
|
$
|
5.15
|
|
|
$
|
6.70
|
|
|
|
30
|
%
|
|
$
|
15.4
|
|
|
$
|
20.0
|
|
Series D Preferred Stock(3)
|
|
|
6.32
|
|
|
|
8.09
|
|
|
|
N/A
|
|
|
|
13.3
|
|
|
|
17.0
|
|
Common Stock
|
|
|
0.42
|
|
|
|
0.42
|
|
|
|
|
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
|
(1) |
|
Market value of exchange consideration includes cash, which
totals $3 million between the two series of preferred stock
and Common Stock shares issued at the current market price.
Series C Offer aggregate consideration value per share is
the aggregate value to each class of stock divided by shares
outstanding. |
|
(2) |
|
Premium defined as the premium of the implied consideration to
the current trading price of the security. |
|
(3) |
|
Series D Preferred Stock price estimated based on relative
liquidation preference and accrued dividends to the
Series C Preferred Stock since Series D Preferred
Stock is not a publicly-traded security. 12/10/10 and 12/13/10
amounts are based on the liquidation preference as of 12/31/10,
and 4/11/11 amounts are based on the estimated liquidation
preference as of 3/31/11. |
Omitted Analyses. Stifel considered including
several analyses traditionally employed in fairness opinions but
determined that these analyses would not be appropriate because
of several complicating factors, including:
|
|
|
|
|
The impact of the underlying financial condition of the Company
and the impact of the terms of the Companys preferred
stock on the financial terms of the Recapitalization, which
prevents a meaningful comparison to other Recapitalization
transactions;
|
|
|
|
The Companys multiple and unique businesses, which,
coupled with the Companys liquidity, capital structure and
profitability characteristics, prevent a meaningful comparison
to other public companies;
|
|
|
|
Although the Company projects positive net income in 2011 and
2012, cash will not be available to holders of Common Stock
unless and until the Company is able to pay approximately
$50.9 million in accrued and unpaid preferred dividends and
meets an annual dividend service requirement on the preferred
stock which is approximately $17.8 million annually, a
portion of which continues to compound at a rate of 13%;
|
|
|
|
The Companys Common Stock holders deficit per
share; and
|
|
|
|
The illiquidity and volatility in the Common Stock.
|
Based upon Stifels consideration of the context for the
decision to pursue an exchange of the preferred stock, the
financial impact of the Recapitalization, being accretive to the
Companys earnings per share, book value per share and
adjusted book value per share, and the impact of the
Recapitalization being accretive or neutral to the liquidation
value of the Companys common stock, and the other factors
and analyses described herein, Stifel determined that the
financial terms of the potential Recapitalization were still
fair to the holders of the Companys Common Stock, from a
financial point of view as of the date of the bring-down opinion.
As described above, Stifels bring-down opinion was among
the many factors taken into consideration by the Companys
Special Committee and the Board of Directors in making their
determination to reconfirm their approval of the
Recapitalization on April 14, 2011.
Findings
and Conclusions of the Special Committee
After a thorough review of the above circumstances and factors
related to the Recapitalization with management, and with advice
from its financial advisor and legal counsel, the Special
Committee concluded that the potential advantages and gains of
conducting the Series D Exchange and Series C Offer
outweigh the possible disadvantages and costs. The Special
Committee also concluded that the terms of the Series C
Offer are advisable, fair to the Companys Common Stock
holders, from substantive and procedural points of view,
62
and in the best interest of the Company and its stockholders. In
reaching this conclusion, the Special Committee considered, and
conducted an independent review of, the following factors
related to the fairness of the Series C Offer to the
holders of the Common Stock:
Factors
Indicating Substantive Fairness to the Common Stock
Holders
|
|
|
|
|
The Series C Offer, and the Recapitalization as a whole,
will be accretive to book value per Common Stock share, as well
as liquidation value per Common Stock share, which will be
beneficial to the holders of Common Stock.
|
|
|
|
If the Recapitalization is consummated, the Series C Offer,
and the Recapitalization as a whole, will be accretive to
earnings per share, which will be beneficial to the holders of
Common Stock.
|
|
|
|
The Company has a large and growing obligation to its preferred
stockholders, and the Companys cash flow is unlikely to
exceed the Companys preferred dividend requirement and
allow the Company to pay accrued and unpaid dividends to the
preferred holders in the foreseeable future. This overhang
impedes the Companys ability to pursue strategic
opportunities, and, if not resolved, will likely prevent the
Company from raising additional capital in the future. If the
Series C Offer and Series D Exchange are not
successful, the Company may not be able to meet its financial
obligations, and that could result in a material adverse effect
to the Company, which could include bankruptcy.
|
Factors
Indicating Substantive Non-Fairness to the Common Stock
Holders
|
|
|
|
|
The ownership interest of the current holders of the Common
Stock will be diluted significantly. However, the Special
Committee determined that this is nonetheless fair to the Common
Stock holders because dilution is offset by accretion to
earnings, book value, and liquidation value, as well as the
overall improvement of the Companys financial condition.
|
Factors
Indicating Procedural Fairness to the Common Stock
Holders
|
|
|
|
|
While the holders of the Common Stock will not have the
opportunity to consent to the Series C Offer itself, the
holders of Common Stock will have the opportunity to vote on the
Proposals. Approval of the Proposals is a condition to the
closing of the Series C Offer. Assuming 100% of the classes
eligible to vote are present at the meeting (whether in person
or by proxy), there will be 14,233,053 aggregate votes entitled
to vote on Proposal 1, Proposal 4 and Proposal 5,
and there will be 11,243,053 aggregate votes entitled to vote on
Proposal 2 and Proposal 3. Because there were
9,368,053 shares of Common Stock outstanding on the record
date, the holders of Common Stock will control 65.8% of the vote
on Proposal 1, Proposal 4 and Proposal 5, and the
holders of Common Stock will control 83.3% of the vote on
Proposal 2 and Proposal 3. Assuming 100% of the
classes eligible to vote are present at the meeting (whether in
person or by proxy) and assuming 100% of the Series C
Holders and 100% of the Series D Holders vote to approve
the Proposals to the extent they are entitled to vote on each
Proposal, 24.0% of the shares of Common Stock outstanding on the
record date must be voted for approval of Proposal 1,
Proposal 4 and Proposal 5 for those proposals to be
approved and 40.0% of the shares of Common Stock outstanding on
the record date must be voted for approval of Proposal 2
and Proposal 3 for those proposals to be approved.
|
|
|
|
The Series C Offer was approved unanimously by all of the
non-employee directors of the Company.
|
Factors
Indicating Procedural Non-Fairness to the Common Stock
Holders
|
|
|
|
|
An unaffiliated representative was not engaged by the
non-employee directors to act solely on behalf of the holders of
the Common Stock for purposes of negotiating the terms of the
Series C Offer.
|
The Special Committees conclusion that the
Recapitalization was advisable and fair to the Companys
Common Stock holders was further bolstered by the analysis and
opinion that the Board of Directors received from Stifel.
63
For the foregoing reasons and the reasons described in the
Fairness of the Recapitalization to the Series C
Holders section, the Special Committee recommended to the
Board of Directors that it approve the Series C Offer at
the December 10, 2010 Special Committee meeting and
recommended to the Board of Directors that it reconfirm its
approval of the Series C Offer at the April 14, 2011
Special Committee meeting. The foregoing review by the Special
Committee is not intended to be exhaustive but, rather, includes
material factors considered by the Special Committee related to
the fairness of the Recapitalization to the holders of Common
Stock. In reaching its decision to recommend to the Board of
Directors that it approve the Recapitalization, the Special
Committee 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 Special
Committee 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.
Findings
and Conclusions of the Board of Directors
After a thorough review of the circumstances and factors related
to the Recapitalization with management, and with advice from
its financial advisor and legal counsel and upon recommendation
of the Special Committee, the Board of Directors as a whole also
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 of Directors also
concluded that the terms of the Series C Offer, and the
Recapitalization as a whole, are advisable, fair to the
Companys Common Stock holders, from substantive and
procedural points of view, and in the best interest of the
Company and its stockholders. In reaching this conclusion, the
Board of Directors considered, and conducted an independent
review of, the following factors related to the fairness of the
Recapitalization to the holders of the Common Stock:
Factors
Indicating Substantive Fairness to the Common Stock
Holders
|
|
|
|
|
The Series C Offer, and the Recapitalization as a whole,
will be accretive to book value per Common Stock share, as well
as liquidation value per Common Stock share, which will be
beneficial to the holders of Common Stock.
|
|
|
|
If the Recapitalization is consummated, the Series C Offer,
and the Recapitalization as a whole, will be accretive to
earnings per share, which will be beneficial to the holders of
Common Stock.
|
|
|
|
The Company has a large and growing obligation to its preferred
stockholders, and the Companys cash flow is unlikely to
exceed the Companys preferred dividend requirement and
allow the Company to pay accrued and unpaid dividends to the
preferred holders in the foreseeable future. This overhang
impedes the Companys ability to pursue strategic
opportunities, and, if not resolved, will likely prevent the
Company from raising additional capital in the future. If the
Series C Offer and Series D Exchange are not
successful, the Company may not be able to meet its financial
obligations, and that could result in a material adverse effect
to the Company, which could include bankruptcy.
|
Factors
Indicating Substantive Non-Fairness to the Common Stock
Holders
|
|
|
|
|
The ownership interest of the current holders of the Common
Stock will be diluted significantly. However, the Board of
Directors determined that this is nonetheless fair to the Common
Stock holders because dilution is offset by accretion to
earnings, book value, and liquidation value, as well as the
overall improvement of the Companys financial condition.
|
Factors
Indicating Procedural Fairness to the Common Stock
Holders
|
|
|
|
|
While the holders of the Common Stock will not have the
opportunity to consent to the Series C Offer itself, the
holders of Common Stock will have the opportunity to vote on the
Proposals. Approval of the Proposals is a condition to the
closing of the Series C Offer. Assuming 100% of the classes
eligible to vote are present at the meeting (whether in person
or by proxy), there will be 14,233,053 aggregate votes entitled
to vote on Proposal 1, Proposal 4 and Proposal 5,
and there will be 11,243,053 aggregate votes entitled to vote on
Proposal 2 and Proposal 3. Because there were
9,368,053 shares of Common
|
64
|
|
|
|
|
Stock outstanding on the record date, the holders of Common
Stock will control 65.8% of the vote on Proposal 1,
Proposal 4 and Proposal 5, and the holders of Common
Stock will control 83.3% of the vote on Proposal 2 and
Proposal 3. Assuming 100% of the classes eligible to vote
are present at the meeting (whether in person or by proxy) and
assuming 100% of the Series C Holders and 100% of the
Series D Holders vote to approve the Proposals to the
extent they are entitled to vote on each Proposal, 24.0% of the
shares of Common Stock outstanding on the record date must be
voted for approval of Proposal 1, Proposal 4 and
Proposal 5 for those proposals to be approved and 40.0% of
the shares of Common Stock outstanding on the record date must
be voted for approval of Proposal 2 and Proposal 3 for
those proposals to be approved.
|
|
|
|
|
|
The Series C Offer was approved unanimously by all of the
non-employee directors of the Company.
|
Factors
Indicating Procedural Non-Fairness to the Common Stock
Holders
|
|
|
|
|
An unaffiliated representative was not engaged by the
non-employee directors to act solely on behalf of the holders of
the Common Stock for purposes of negotiating the terms of the
Series C Offer.
|
The Board of Directors conclusion that the
Recapitalization was advisable and fair to the Companys
Common Stock holders was further bolstered by the analysis and
opinion that the Board of Directors received from Stifel.
For the foregoing reasons and the reasons described in the
Fairness of the Recapitalization to the Series C
Holders section, the Board of Directors approved the
Series C Offer at the December 10, 2010 Board of
Directors and reconfirmed its approval of the Series C
Offer at the April 14, 2011 Board of Directors meeting. The
foregoing review by the Board of Directors is not intended to be
exhaustive but, rather, includes material factors considered by
the Board of Directors related to the fairness of the
Recapitalization to the holders of the Common Stock. In reaching
its decision to approve the Recapitalization, the Board of
Directors 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 of
Directors 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.
FAIRNESS
OF THE RECAPITALIZATION TO THE SERIES C HOLDERS
The fairness of the Series C Offer, and the
Recapitalization as a whole, to the unaffiliated holders of
Series C Preferred Stock was also an important
consideration of the Special Committee and the Board of
Directors, particularly in light of the fact that the
Series C Preferred Stock will be eligible for termination
of registration under Section 12(g)(4) of the Exchange Act
if the Series C Offer closes. Prior to the Special
Committees recommendation to the Board of Directors that
the Board of Directors approve the Series C Offer, and
prior to the Board of Directors approval of the
Series C Offer, the Special Committee and the Board of
Directors each concluded that the Series C Offer is fair to
the Series C Holders from both substantive and a procedural
points of view. The Company believes it is important to present
all material considerations by the Special Committee and the
Board of Directors to the holders of Common Stock to allow the
holders of Common Stock to make an informed decision before
voting on the Proposals. Thus, the factors considered by the
Special Committee and the Board of Directors that relate to the
fairness of the Recapitalization to the unaffiliated
Series C Holders are set forth below. Because the
Series D Exchange was a negotiated transaction between the
Company and the Series D Holders, the Board of Directors
did not perform an analysis to determine whether the
Recapitalization was fair to the Series D Holders before
approving that transaction, and therefore, no disclosure
regarding the fairness to the Series D Holders is presented
below.
The fairness of the Recapitalization to the Series C
Holders is of limited relevance to the holders of Common Stock.
While the Special Committee and the Board of Directors each
concluded that the terms of the Series C Offer, and the
Recapitalization as a whole, are fair to the Companys
unaffiliated Series C Holders and to the holders of the
Companys Common Stock, the interests of the Series C
Holders may, in fact, be adverse to the interests of the holders
of Common Stock. The following section is presented to
65
provide the holders of Common Stock with a complete
understanding of the information and the factors considered by
the Special Committee and the Board of Directors before the
Special Committee recommended approval of the Recapitalization
to the Board of Directors and before the Board of Directors
approved the Recapitalization.
Considerations
by the Special Committee and the Board of Directors of the
Company
On December 10, 2010, the Special Committee and the Board
of Directors each to review the terms of the proposed
Recapitalization. At these meetings, the Special Committee and
the Board of Directors discussed certain factors that
specifically affected the fairness of Recapitalization to the
unaffiliated Series C Holders.
On April 14, 2011, the Special Committee and the Board of
Directors each met again to again review the terms of the
Series C Offer, the Consent Solicitation and the
Series D Exchange. At these meetings, the Special Committee
and the Board of Directors discussed the same factors that
specifically affected the fairness of the Recapitalization to
the unaffiliated Series C Holders that were discussed at
the December 10, 2010 meetings.
At the December 10, 2010 meeting and the April 14,
2011 meeting, the Special Committee considered and discussed
certain factors that affect the fairness of the transaction to
the Companys unaffiliated Series C Holders, 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 Recapitalization would threaten 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
Recapitalization; and
|
|
|
|
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.
|
At the December 10, 2010 meeting and the April 14,
2011 meeting, the Special Committee considered that the
Series C Holders will be giving up all rights to accrued
and unpaid dividends and the liquidation preference currently
associated with their Series C Preferred Stock, but it
determined that the elimination of the accrued and unpaid
dividends and the associated liquidation preference is in the
best interest of the Company.
Findings
and Conclusions of the Special Committee
The Special Committee concluded that the terms of the
Series C Offer, and the Recapitalization as a whole, are
advisable, fair to the Companys unaffiliated Series C
Holders, including both those who participate in the
Series C Offer and those who do not, from substantive and
procedural points of view, and in the best interest of the
Company and its stockholders, including the Series C
Holders. In reaching this conclusion, the Special Committee
considered, and conducted an independent review of, the
following factors related to the fairness of the Series C
Offer to the unaffiliated Series C Holders:
Factors
Indicating Substantive Fairness to the Unaffiliated
Series C Holders
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Based on information provided to the Special Committee by
Management and Stifel, the Special Committee believed the
liquidation value of the consideration offered to the Series C
Holders would initially be less than the liquidating preference
per share and accrued dividends associated with the
Series C Preferred Stock, which together were $31.67 as of
September 30, 2010. However, the value of the consideration
offered to the Series C Holders before the announcement of
the Recapitalization under each of the
Cash-and-Stock
Option and the Stock-Only Option, which was $4.25 and $14.25 per
share, respectively (based on the methodology below), was a
premium to the market price of the Series C Preferred
Stock, which was $1.79 as of December 3, 2010. For this
purpose, the value of the consideration offered to the
Series C Holders was calculated based on the market price
of the
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Companys Common Stock prior to the announcement of the
proposed Recapitalization. At the December 10, 2010
meeting, the Special Committee considered that there was no
guarantee as to where the Common Stock would trade after the
announcement of the reorganization.
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The book value (on a GAAP basis) of each share of Series C
Preferred Stock is $0.01, which is significantly less than the
Series C Holders are entitled to receive per share in the
Series C Offer.
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The Special Committee reviewed current and historical market
prices, but given the volatility and lack of liquidity in the
Common Stock and Series C Preferred Stock, the Special
Committee determined that it would be difficult to determine the
relative market value of what the Series C Holders would
receive from the Series C Offer and Series D Exchange.
The Special Committee instead focused on the overall financial
condition of the Company and the impact of the Series C
Offer and Series D Exchange, which transactions should
increase the value to all stockholders, including those who were
Series C Holders at the launch of the Series C Offer,
over time. As stated above, the Special Committee did discuss
that the consideration Series C Holders are entitled to
receive under the Series C Offer represented a premium to
the Series C Preferred Stock market price prior to the
announcement of the Recapitalization, a calculation which was
based on the then-current market price of the Common Stock and
the Series C Preferred Stock.
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The Company has a large and growing financial obligation to its
preferred stockholders, and the Companys cash flow is
unlikely to exceed the Companys preferred dividend
requirement and allow the Company to pay accrued and unpaid
dividends to the preferred stock holders in the foreseeable
future. This overhang impedes the Companys ability to
pursue strategic opportunities, and, if not resolved, will
likely prevent the Company from raising additional capital in
the future. If the Series C Offer and Series D
Exchange are not successful, the Company may not be able to meet
its financial obligations, and that could result in a material
adverse effect to the Company, which could include bankruptcy.
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Factors
Indicating Substantive Non-Fairness to the Unaffiliated
Series C Holders
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The Series C Holders will forfeit all rights to receive the
accrued and unpaid dividends and the liquidation preference on
the Series C Preferred Stock, though the Special Committee
discussed that it is unlikely that these amounts will be paid
regardless of whether the Company consummates the Series C
Offer.
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Factors
Indicating Procedural Fairness to the Unaffiliated Series C
Holders
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The holders of at least two-thirds of the outstanding shares of
Series C Preferred Stock, or holders of at least
1,993,334 shares, must consent to the Series C Offer
for it to close. Neither the Company nor the Board of Directors
has made any recommendations to the Series C Holders to
tender their Series C Preferred Stock shares or to consent
to the Series C Offer. Each Series C Holder must make
an independent investment decision if that holder wants to
participate in the Series C Offer. Messrs. Amster and
Igdaloff, the only affiliated Series C Holders,
collectively own 17.61% of the outstanding Series C
Preferred Stock. Though the unaffiliated holders of a majority
of all outstanding Series C Preferred Stock is not required
because the affiliated Series C Holders hold 17.61% of the
outstanding Series C Preferred Stock, the unaffiliated
holders of at least 49.06% of the outstanding Series C
Preferred Stock, or at least 977,935 shares, must consent
to the Series C Offer and make an independent investment
decision to participate in the Series C Offer.
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The Company, the Board of Directors, the Special Committee and
Stifel had dialogue with and support from the independent
directors elected by the Series C Holders (who themselves
hold Series C Preferred Stock).
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The Series C Offer was approved unanimously by all of the
non-employee directors of the Company.
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67
Factors
Indicating Procedural Non-Fairness to the Unaffiliated
Series C Holders
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An unaffiliated representative was not engaged by the
non-employee directors to act solely on behalf of the
unaffiliated Series C Holders for purposes of negotiating
the terms of the Series C Offer.
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Before recommending the Series C Offer to the Board of
Directors, the Special Committee also considered that the
consideration offered to the Series C Holders and the
Series D Holders in the Recapitalization is approaching the
maximum value that the Company could offer without jeopardizing
the Companys needed liquidity or the Companys
important deferred tax asset. The Special Committee deemed it
appropriate to use a limited amount of cash to effectuate the
Recapitalization. The Special Committee concluded to offer up to
$3 million total cash and that using that amount of cash
would not present a severe liquidity risk to the Company.
Further, the Company has NOLs of approximately
$324.4 million. 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
stockholders, 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 stockholders 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 stockholder, subject
to certain exceptions. Because the NOLs are important Company
assets, the Special Committee concluded that the
Recapitalization must be structured in a manner that would not
result in an ownership change that could jeopardize the use of
these deferred tax assets. Thus, the amount of new Common Stock
issuable by the Company in the Recapitalization, and thus to the
Series C Holders, is limited to that which it could issue
without effecting an ownership change. If the Series C
Offer and Series D Exchange close, the Company will issue
over 90% of this amount of Common Stock in the Recapitalization.
The Special Committee did not consider purchase prices paid by
the Company for any Series C Preferred Stock within the
last two years because no such purchases were made. Further, the
Special Committee did not consider any firm offers during the
prior two years for the merger or consolidation of the Company
into or with another company, the sale or transfer of a
substantial part of the Companys assets, or the purchase
of the Companys securities that would enable the purchaser
to exercise control of the Company because no such firm offers
were made. Before recommending to the Board of Directors that it
approve the Series C Offer, the Special Committee also
concluded that the Series C Offer is advisable and fair to
the Common Stock holders. See the Findings and Conclusions
of the Special Committee subsection of the
Background of the Recapitalization section.
For the foregoing reasons and the reasons described in the
Background of the Recapitalization section, the
Special Committee recommended to the Board of Directors that it
approve the Series C Offer at the December 10, 2010
Special Committee meeting and recommended to the Board of
Directors that it reconfirm its approval of the Series C
Offer at the April 14, 2011 Special Committee meeting. The
foregoing review by the Special Committee is not intended to be
exhaustive but, rather, includes material factors considered by
the Special Committee. In reaching its decision to recommend to
the Board of Directors that it approve the Series C Offer,
the Special Committee 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 Special Committee 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 Special Committee 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.
Findings
and Conclusions of the Board of Directors
The Board of Directors concluded that the terms of the
Series C Offer, and the Recapitalization as a whole, are
advisable, fair to the Companys Series C Holders,
including both those who participate in the Series C Offer
and those who do not, from substantive and procedural points of
view, and in the best interest of the Company and its
stockholders, including the Series C Holders. In reaching
this conclusion, the Board of
68
Directors considered, and conducted an independent review of,
the following factors related to the fairness of the
Series C Offer to the unaffiliated Series C Holders:
Factors
Indicating Substantive Fairness to the Unaffiliated
Series C Holders
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Based on information provided to the Board of Directors by
Management and Stifel, the Board of Directors believed the
liquidation value of the consideration offered to the Series C
Holders would initially be less than the liquidating preference
and accrued dividends associated with the Series C
Preferred Stock, which together were $31.67 as of
September 30, 2010. However, the value of the consideration
offered to the Series C Holders before the announcement of
the Recapitalization under each of the
Cash-and-Stock
Option and the Stock-Only Option, which was $4.25 and $14.25,
respectively (based on the methodology below), was a premium to
the market price of the Series C Preferred Stock, which was
$1.79 as of December 3, 2010. For this purpose, the value
of the consideration offered to the Series C Holders was
calculated based on the market price of the Companys
Common Stock prior to the announcement of the Recapitalization.
At the December 10, 2010 meeting, the Board of Directors
considered that there was no guarantee as to where the Common
Stock would trade after the announcement of the reorganization.
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The book value (on a GAAP basis) of each share of Series C
Preferred Stock is $0.01, which is significantly less than the
Series C Holders are entitled to receive per share in the
Series C Offer.
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The Board of Directors reviewed current and historical market
prices, but given the volatility and lack of liquidity in the
Common Stock and Series C Preferred Stock, the Board of
Directors determined that it would be difficult to determine the
relative market value of what the Series C Holders would
receive from the Series C Offer and Series D Exchange.
The Board of Directors instead focused on the overall financial
condition of the Company and the impact of the Series C
Offer and Series D Exchange, which transactions should
increase the value to all stockholders, including those who were
Series C Holders at the time of the Series C Offer,
over time. As stated above, the Board of Directors did discuss
that the consideration Series C Holders are entitled to
receive under the Series C Offer represented a premium to
the Series C Preferred Stock market price prior to the
announcement of the Recapitalization, a calculation which was
based on the then-current market price of the Common Stock and
the Series C Preferred Stock.
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The Company has a large and growing obligation to its preferred
stockholders, and the Companys cash flow is unlikely to
exceed the Companys preferred dividend requirement and
allow the Company to pay accrued and unpaid dividends to the
preferred holders in the foreseeable future. This overhang
impedes the Companys ability to pursue strategic
opportunities, and, if not resolved, will likely prevent the
Company from raising additional capital in the future. If the
Series C Offer and Series D Exchange are not
successful, the Company may not be able to meet its financial
obligations, and that could result in a material adverse effect
to the Company, which could include bankruptcy.
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Factors
Indicating Substantive Non-Fairness to the Unaffiliated
Series C Holders
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The Series C Holders will forfeit all rights to receive the
accrued and unpaid dividends and the liquidation preference on
the Series C Preferred Stock, though the Board of Directors
discussed that it is unlikely that these amounts will be paid
regardless of whether the Company consummates the Series C
Offer.
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Factors
Indicating Procedural Fairness to the Unaffiliated Series C
Holders
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The holders of at least two-thirds of the outstanding shares of
Series C Preferred Stock, or holders of at least
1,993,334 shares, must consent to the Series C Offer
for it to close. Neither the Company nor the Board of Directors
has made any recommendations to the Series C Holders to
tender their Series C Preferred Stock shares or to consent
to the Series C Offer. Each Series C Holder must make
an independent investment decision if that holder wants to
participate in the Series C Offer. Messrs. Amster and
Igdaloff, the only affiliated Series C Holders,
collectively own 17.61% of the outstanding Series C
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Preferred Stock. Though the unaffiliated holders of a majority
of all outstanding Series C Preferred Stock is not required
because the affiliated Series C Holders hold 17.61% of the
outstanding Series C Preferred Stock, the unaffiliated
holders of at least 49.06% of the outstanding Series C
Preferred Stock, or at least 977,935 shares, must consent
to the Series C Offer and make an independent investment
decision to participate in the Series C Offer.
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The Company, the Board of Directors, the Special Committee and
Stifel had dialogue with and support from the independent
directors elected by the Series C Holders (who themselves
hold Series C Preferred Stock).
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The Series C Offer was approved unanimously by all of the
non-employee directors of the Company.
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Factors
Indicating Procedural Non-Fairness to the Unaffiliated
Series C Holders
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An unaffiliated representative was not engaged by the
non-employee directors to act solely on behalf of the
unaffiliated Series C Holders for purposes of negotiating
the terms of the Series C Offer.
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Before approving the Series C Offer, the Board of Directors
also considered that the consideration offered to the
Series C Holders and the Series D Holders in the
Recapitalization is approaching the maximum value that the
Company could offer without jeopardizing the Companys
needed liquidity or the Companys important deferred tax
asset. The Board of Directors agreed with the Special
Committees conclusion that it was appropriate to use a
limited amount of cash to effectuate the Recapitalization. The
Board of Directors also concurred with the Special
Committees conclusion that it was appropriate to offer up
to $3 million total cash and that using that amount of cash
would not present a severe liquidity risk to the Company.
Further, the Company has NOLs of approximately
$324.4 million. 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
stockholders, 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 stockholders 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 stockholder, subject
to certain exceptions. Because the NOLs are important Company
assets, the Board of Directors concluded that the
Recapitalization must be structured in a manner that would not
result in an ownership change that could jeopardize the use of
these deferred tax assets. Thus, the amount of new Common Stock
issuable by the Company in the Recapitalization, and thus to the
Series C Holders, is limited to that which it could issue
without effecting an ownership change. If the Series C
Offer and Series D Exchange close, the Company will issue
over 90% of this amount of Common Stock in the Recapitalization.
The Board of Directors did not consider purchase prices paid by
the Company for any Series C Preferred Stock within the
last two years because no such purchases were made. Further, the
Board of Directors did not consider any firm offers during the
prior two years for the merger or consolidation of the Company
into or with another company, the sale or transfer of a
substantial part of the Companys assets, or the purchase
of the Companys securities that would enable the purchaser
to exercise control of the Company because no such firm offers
were made. Before approving the Series C Offer, the Board
of Directors also concluded that the Series C Offer is
advisable and fair to the Common Stock holders. See the
Findings and Conclusions of the Board of Directors
subsection of the Background of the Recapitalization
section.
For the foregoing reasons and the reasons described in the
Background of the Recapitalization section, the
Board of Directors approved the Series C Offer at the
December 10, 2010 Board of Directors meeting and
reconfirmed its approval of the Series C Offer at the
April 14, 2011 Board of Directors meeting. The foregoing
review by the Board of Directors is not intended to be
exhaustive but, rather, includes material factors considered by
the Board of Directors. In reaching its decision to approve the
Series C Offer, the Board of Directors 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 of Directors 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 of Directors does not make any recommendation
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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. Holders of Common Stock
will not have the opportunity to participate in the
Series C Offer or to consent to the Series C Offer and
Series D Exchange. To ensure that the holders of Common
Stock have the necessary information to make an informed
decision when voting on the Proposals, and in particular
Proposal 3, and because of relevant rules of the SEC that
entitled you to receive certain information regarding the
Series C Offer and the Consent Solicitation, we are
providing you with the information contained in this section.
General
In the proxy statement/consent solicitation/prospectus that was
filed as part of the Registration Statement, Company is offering
to exchange each share of its Series C Preferred Stock
validly tendered on or prior to the Expiration Date and not
withdrawn, for, at each Series C Holders 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
Option and the Stock-Only Option are the Consideration
Options.
The total aggregate consideration offered under the
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 in the
Series C Offer, other than any cash needed to cash out
fractional shares which total includes the remaining Offer
Consideration distributed to non-tendering Series C
Holders, if any. If a Series C Holder participates in the
Series C Offer, the Series C Holder must elect to
receive either the
Cash-and-Stock
Option or the Stock-Only Option and may not elect to tender some
Series C Preferred Stock for one option and some
Series C Preferred Stock for the other. If a Series C
Holder otherwise properly submits a Letter of Transmittal, but
does not elect either the
Cash-and-Stock
Option or the Stock-Only Option, the
Series C Holder will be deemed to have elected the
Cash-and-Stock
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, 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.
The Common Stock offered as part of the Series C Offer when
issued will be quoted by Pink OTC Markets inter-dealer
quotation service as a OCTQB security under the symbol
NOVS.
As of [ ], 2011, 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 exchanged 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 of 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
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tendered for the Stock-Only Option, all of 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
consent of the Series C Holders 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. See The Series C
Offer and Consent Solicitation Consent Solicitation
Provisions for a list of the provisions requiring the
consent. Consent can be given by the Series C Holders to
the Series C Offer and the Series D Exchange by
completing the proxy card accompanying the proxy
statement/consent solicitation/prospectus to the Series C
Holders, marking Consent where indicated, and
returning it in the provided 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,
Eastern 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 The
Series C Offer and Consent Solicitation
Extension, Termination and Amendment and
Conditions of the Series C Offer and
Consent Solicitation. As soon as practicable after tender,
but no later than two business days after the Expiration Date,
the holders of any tendered Series C Preferred Stock that
the Company deems not accepted for payment, whether for improper
tender procedure or otherwise, will be notified. All
Series C Preferred Stock for which such notification is not
provided within two business days after the Expiration Date will
be deemed accepted for payment, subject only to the closing
conditions of the Series C Offer, including stockholder
approval of the Proposals.
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
the Company.
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.
If by 12:00 midnight, Eastern Time, on
[ ], 2011, or any later time to which
the Expiration Date of 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), 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
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Consent Solicitation Effective Registration
Statement. We expect to hold the special meeting at which
the Proposals will be considered within two business days of the
Expiration Date. We also expect that the Series C Offer and
Consent Solicitation will close within one business day after
all of these conditions have been satisfied and after approval
of the Proposals at the special meeting, assuming such approval
is received. Thus, we expect to pay the Offer Consideration for
the tendered Series C Preferred Stock accepted for payment
by the Company at the closing of the Series C Offer, which
will occur within three business days of the Expiration Date,
assuming that the Proposals are approved at the special meeting
and the other conditions to closing are met.
If the Series C Offer closes, any shares of Series C
Preferred Stock not tendered and accepted for exchange will be
automatically converted into the right to receive their pro rata
shares of the Remainder Consideration. Holders of these rights
will be able to receive their applicable share of the Remainder
Consideration as soon as reasonably practicable after, but no
sooner than 11 business days after and no later than 180
calendar days after, the closing of the Series C Offer.
Consent
Solicitation Provisions
As part of the Series C Offer, the Company is 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 consent from the
Series C Holders to complete the Series C Offer
regardless of the conversion or exchange restrictions described
below. Consent must be received from holders of at least
two-thirds of the outstanding Series C Preferred Stock to
effect the Series C Offer and the Series D Exchange.
Consent can be given by the Series C Holders to the
Series C Offer and the Series D Exchange by marking
the box labeled Consent on the proxy card
accompanying the proxy statement/consent solicitation/prospectus
to the Series C Holders and mailing it to the Company in
the provided return envelope. A Series C Holder can
withhold his, her or its consent to the transactions by marking
the box labeled Consent Withheld on the proxy card
for the Series C Holders, or he, she or it may abstain from
voting by indicating Abstain on the proxy card for
the Series C Holders. An abstention will be treated like a
vote against the Series C Offer and Series D Exchange
and will have the same effect as marking Consent
Withheld on the proxy card for the Series C Holders.
Series C Holders who indicate Consent Withheld
to or Abstain from consenting to the Series C
Offer and the Series D Exchange may not participate in the
Series C Offer.
The following are the provisions of the Companys charter
that prohibit the Series C Offer and the Series D
Exchange that the Series C Holders waive by consenting to
the Series C Offer and Series D Exchange:
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The Company is not paying cumulative preferential cash dividends
as part of the Series C Offer (which such dividends accrue
regardless of whether the Company declares such dividends) to
the Series C Holders. Sections 3(a) and 3(b) of the
Series C Preferred Stock Articles Supplementary (the
C Articles) provide that dividends shall accrue and
cumulate at the rate of 8.9%. As of April 15, 2011, the
Series C Preferred Stock had accumulated dividends of
$23.6 million or $7.89 per share. By consenting to the
Series C Offer and the Series D Exchange,
Series C Holders waive their rights to current and future
accumulated preferential cash dividends.
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The Series C Preferred Stock includes certain preferential
liquidation rights, set forth in Section 6 of the C
Articles, in the event of a voluntary or involuntary
liquidation, dissolution or winding up of the Company. As of
April 15, 2011 the liquidation value of the Series C
Preferred Stock is $74.8 million or $25.02 per share. By
consenting to the Series C Offer and the Series D
Exchange, Series C Holders waive their rights to any
liquidation preference.
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The Company is distributing cash to holders of Series C
Preferred Stock and Series D Preferred Stock. This feature
violates Section 3(c) of the C Articles, which prohibits
the Company from paying a dividend to any holders of the
Companys equity securities unless full cumulative
dividends on the Series C Preferred Stock are paid.
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73
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The Company is exchanging Series D Preferred Stock for
Common Stock and cash in the Series D Exchange. This
feature violates Section 3(d) of the C Articles, which
prohibits the purchase of equity securities that do not rank
senior to the Series C Preferred Stock for any
consideration other than Common Stock.
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The Company is exchanging Series C Preferred Stock for cash
and Common Stock. Upon the approval of the Amendments and
consummation of the transaction, each remaining share of
Series C Preferred Stock that remains outstanding converts
into the right to receive a pro rata share of the Remainder
Consideration (which includes Common Stock) after the
Series C Offer closes. This feature violates Section 7
of the C Articles, which prohibits exchange or conversion of the
Series C Preferred Stock into any other property or
securities of the Company.
|
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 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 filed a Joint
Schedule 13E-3/TO
on December 10, 2010, which has been subsequently amended.
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.
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Voting Rights: |
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Common Stock: One vote per share on all
matters submitted to stockholders. |
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Series C: No voting rights other than: |
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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 Company upon which like voting rights have
been conferred and are exercisable) shall be entitled to elect a
total of two additional directors to the Company 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;
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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
Company or to reclassify any authorized equity securities of the
Company into any such senior equity securities, or create,
authorize or issue any obligation or security convertible into
or evidencing the right to purchase any such senior equity
securities; and
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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.
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Dividend Rights: |
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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 |
74
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that any dividends will be declared or paid on shares of Common
Stock in the foreseeable future. |
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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. |
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Optional Redemption: |
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Common Stock: We do not have right to redeem
Common Stock. |
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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 |
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Mandatory Redemption: |
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Common Stock: Holders have no right to require
redemption. |
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Series C: Holders have no right to
require redemption. |
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Optional Conversion: |
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Common Stock: Not convertible. |
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Series C: Not convertible. |
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Forced Conversion: |
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Common Stock: We have no right to force
conversion of Common Stock into another security. |
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Series C: We have no right to force a
conversion of Series C Preferred Stock into another
security. |
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Liquidation: |
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Common Stock: Distributions only made to
holders of Common Stock if liquidation preferences of preferred
stock are satisfied. |
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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. |
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 exchanged 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 of 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.
75
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 of 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 of the shares of
Series C Preferred Stock are exchanged in the Series C
Offer and Consent Solicitation:
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|
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|
|
|
|
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% of Series C Preferred
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What a Series C Holder would Receive
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Stock
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if He, She or
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% Series C Holders Electing
|
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Shares Electing
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Receiving Elected Option
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it Owns 100 Series C Shares
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Cash-and-
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Cash-and-
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Cash-and-
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If Cash-and-Stock
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If Stock-Only
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Stock
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Stock-Only
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Stock
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Stock-Only
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Stock
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Stock-Only
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is Elected
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is Elected
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Consideration
|
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Consideration
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Consideration
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Consideration
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Consideration
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Consideration
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Common
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Common
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Option
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Option
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Option
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Option
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Option
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Option
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Cash
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Shares
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Cash
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Shares
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0
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%
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|
100
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%
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|
|
0
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|
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2,990,000
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|
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N/A
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73
|
%
|
|
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N/A
|
|
|
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N/A
|
|
|
$
|
54.29
|
|
|
|
1,466
|
|
|
25
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%
|
|
|
75
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%
|
|
|
747,500
|
|
|
|
2,242,500
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|
|
|
100
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%
|
|
|
97
|
%
|
|
$
|
200.00
|
|
|
|
300
|
|
|
$
|
5.72
|
|
|
|
1,854
|
|
|
50
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%
|
|
|
50
|
%
|
|
|
1,495,000
|
|
|
|
1,495,000
|
|
|
|
54
|
%
|
|
|
100
|
%
|
|
$
|
108.58
|
|
|
|
1,031
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|
|
$
|
|
|
|
|
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 the Series C Offer and Consent
Solicitation. If we amend the Series C Offer and Consent
Solicitation, we will extend the Expiration Date and 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. 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., Eastern 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
76
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., Eastern Time.
Exchange
of Shares; Offer Consideration
As soon as practicable after tender, but no later than two
business days after the Expiration Date, the holders of any
tendered Series C Preferred Stock that the Company deems
not accepted for payment, whether for improper tender procedure
or otherwise, will be notified. All Series C Preferred
Stock for which such notification is not provided within two
business days after the Expiration Date will be deemed accepted
for payment, subject only to the closing conditions of the
Series C Offer, including stockholder approval of the
Proposals.
If any tendered shares of Series C Preferred Stock are not
accepted for exchange pursuant to the terms and conditions of
the Series C Offer and Consent Solicitation for any reason
and the Series C Holder, certificates for such unexchanged
Series C Preferred Stock will be returned to the tendering
stockholder promptly following the Expiration Date.
Upon the terms and subject to the conditions of the
Series C Offer, the exchange of the outstanding shares of
Series C Preferred Stock validly tendered, accepted for
payment and not withdrawn will be made at the closing of the
Series C Offer. The special meeting is expected to occur
within two business days of the Expiration Date and the closing
of the Series C Offer is expected to occur within three
business days of the Expiration Date. 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 at the closing of the Series C Offer.
Under no circumstances will interest be paid by us by reason of
any delay in making such exchange.
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, pro rata per share of Series C
Preferred Stock that remain outstanding after the closing, the
Remainder Consideration. The Remainder Consideration will be
distributed pro rata per share to the non-tendering former
Series C Holders as soon as reasonably practicable after,
but no sooner than 11 business days after and no later than 180
calendar days after, the closing of the Series C Offer. 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.
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 listed on the Letter of Transmittal. Because a
Series C Holder must consent to the Series C Offer and
the Series D Exchange to participate in the Series C
offer, he, she or it must complete the proxy card that
accompanies the proxy statement to the Series C Holders,
marking Consent where indicated, and return it in
the envelope provided therewith. If a Series C Holder
returns a proxy card and indicates
77
Consent Withheld or Abstain, he, she or
it may not participate in the Series C Offer unless such
Series C Holder submits a new, later-dated proxy card
indicating Consent. The method of delivery of all
required documents is at the option and risk of the tendering
stockholder. If delivery is by mail, registered mail with return
receipt requested, properly insured, is recommended.
A Series C Holder who has already properly tendered his,
her or its Series C Preferred Stock for the Stock-Only
Option or
Cash-and-Stock
Option does not need to take any further action to receive his,
her or its portion of the Offer Consideration (unless the
Series C Holder has indicated Consent Withheld
on a proxy card). If a Series C Holder wishes to revoke a
prior tender, the Series C Holder may do so by following
the instructions set forth above under Withdrawal
Rights. Any Series C Holder who withdraws a prior
tender may tender for different Offer Consideration by
submitting a new Letter of Transmittal to the Exchange Agent
prior to the Expiration Date.
Signatures on all Letters of Transmittal must be guaranteed by a
firm that is a member of a registered national securities
exchange 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 Exchange Act (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 of 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 two business days after the Expiration
Date.
The Notice of Guaranteed Delivery may be delivered by mail to
the Exchange Agent or transmitted by facsimile transmission 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 the
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. The Companys determination
as to validity, form, eligibility and acceptance of any tender
will be final and binding, subject to each Series C
Holders right to challenge such determination in a court
of competent jurisdiction.
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 subject to backup federal
income tax withholding by completing the Substitute
Form W-9
included in the Letter of Transmittal.
78
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 us 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, which is
[ ], 2011, unless extended, and after
[ ], 2011, if tendered Series C Preferred
Stock shares have not yet been accepted for payment by the
Company. Once accepted for payment, a tendered share may not be
withdrawn.
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 and Notice of
Guaranteed Delivery 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 may write to or telephone Computershare
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 Securities
79
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 becoming effective. This is a non-waivable condition
of the Series C Offer and Consent Solicitation. The
Registration Statement became effective on
[ ], 2011.
Consent of Series C Holders. The
Series C Offer is conditioned upon the consent to the
Series C Offer and the Series D Exchange by the
holders of at least 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
stockholders entitled to vote on each Proposal presented at the
special meeting of each Amendment.
Participation by the Series C
Holders. The Series C Offer is conditioned
upon the participation of the holders of at least two-thirds of
the outstanding Series C Preferred Stock. Thus, for the
Series C Offer to close, the holders of at least two-thirds
of the outstanding Series C Preferred Stock must validly
tender their Series C Preferred Stock.
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 the proxy statement/consent
solicitation/ prospectus that is part of the Registration
Statement, 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:
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:
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any general suspension of, or limitation on prices for, trading
in securities in the United States securities or financial
markets,
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any material adverse change in the price of the Series C
Preferred Stock in the United States or financial markets,
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a material impairment in the trading market for securities,
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a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States,
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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,
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a commencement of a war or armed hostilities or other national
or international calamity directly or indirectly involving the
United States,
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any imposition of a general suspension or limitation of prices
quoted by Pink OTC Markets inter-dealer quotation
service, or
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in the case of any of the foregoing that exist on the date of
this document, a material acceleration or worsening of such
event.
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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:
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terminate the Series C Offer and Consent Solicitation and
return all shares of Series C Preferred Stock to tendering
holders;
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extend the Series C Offer and Consent Solicitation and
retain all tendered Series C Preferred Stock until the
extended Expiration Date;
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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
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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.
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Source of
Funds
We intend to fund all cash payments to Series C Holders
pursuant to the Series C Offer, including any payments for
fractional shares of Common Stock, with cash on hand.
81
Fees and
Expenses
The Company will pay all expenses of the Series C Offer
including, but not limited to, the following estimated fees
incurred or to be incurred in the transaction:
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Filing Fees
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$
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500
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Legal Fees
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$
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360,000
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Accounting and Appraisal Fees
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$
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115,000
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Soliciting Expenses
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$
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15,000
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Financial Advisor Expenses (including fairness opinion
preparation)
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$
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655,000
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Printing Costs
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$
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100,000
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Estimated Fees Total
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$
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1,245,500
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The Company has not made any provision to grant unaffiliated
security holders of the Company access to the corporate files of
the Company or to obtain counsel or appraisal services at the
expense of the Company.
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 of Directors.
Because dividends on the Series C Preferred Stock were in
arrears for six or more quarters as of the 2009 Annual
Stockholders Meeting, two directors, Howard Amster and
Barry Igdaloff, were elected at that meeting to serve on the
Board of Directors 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 of Directors 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 Board of Directors by two positions and
appoint Messrs. Amster and Igdaloff to fill the
newly-created positions. Moreover, at the next annual meeting of
stockholders 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 Board of Directors, 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 of Directors
upon filing the revised charter and the service on the Board of
Directors 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 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
46,400 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.
In accordance with a Voting Agreement with the Company,
Messrs. Amster and Igdaloff have agreed to vote
for all the Proposals, and will consent to the
Series C Offer and the Series D Exchange. Further,
Messrs. Amster and Igdaloff have both indicated that they
will tender all of their Series C Preferred Stock and will
elect the Stock-Only Option in exchange for their shares. The
reason for the aforementioned actions is that
Messrs. Amster and Igdaloff believe that the Series C
Offer is in the best interest of the Company
82
because, if it closes, it will improve the Companys
capital structure and eliminate the accrued and unpaid dividends
on the Series C Preferred Stock, as described in greater
detail in Background of the Recapitalization.
Further, Messrs. Amster and Igdaloff believe that their
participation in the Series C Offer is in the best interest
of each director because they have the opportunity to select
their Consideration Option and each such director wants to
receive as much of the Companys Common Stock in exchange
for their Series C Preferred Stock as they are eligible to
receive.
Recommendations
of the Directors, Executive Officers and Affiliates
None of the directors, executive officers or affiliates of the
Company have made any recommendations in support of or opposed
to participation in the Series C Offer.
Exchange
Agent
We have engaged Computershare Trust Company, N.A. to act as
the Exchange Agent for the Series C Offer and Consent
Solicitation.
Holders of Common Stock will not have the opportunity to
participate in the Series C Offer or to consent to the
Series C Offer and Series D Exchange. To ensure that
the holders of Common Stock have the necessary information to
make an informed decision when voting on the Proposals, and in
particular Proposal 3, and because of relevant rules of the
SEC that entitled you to receive certain information regarding
the Series C Offer and the Consent Solicitation, we are
providing you with the information above.
THE
SERIES D EXCHANGE
The following description contains a summary of the
Series D Exchange. Holders of Common Stock will not have
the opportunity to participate in the Series D Exchange or
to consent to the Series C Offer and Series D
Exchange. To ensure that the holders of Common Stock have
the necessary information to make an informed decision when
voting on the Proposals, and in particular Proposal 3, and
because of relevant rules of the SEC that entitled you to
receive certain information regarding the Series D
Exchange, we are providing you with the information contained in
this section.
General
Under the Exchange Agreement, between the Company and the
Series D Holders, entered into on December 10, 2010,
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
discussion of the Series D Exchange is qualified by
reference to the Exchange Agreement attached to this proxy
statement as Exhibit D.
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 Board of
Directors resulting in the loss of the Companys existing
NOLs, or (d) a determination by the Board of Directors that
the Companys NOLs 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, each Series D Holder has the right to appoint
either an observer (without voting rights) or a director (with
voting rights) (each, a Board Director) to the Board
of Directors. In the event a Series D Holder elects to
appoint a representative to the Board of Directors, the Company
will be required to expand the size of its Board of Directors
pursuant to the companys bylaws and appoint such Board
Director to the Board of Directors. 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.
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. Upon completion of the
Series C Offer and consummation of the Series D
Exchange, the Series D Holders and the
83
Company will execute a registration rights agreement in the form
as attached to the Exchange Agreement (the 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.
Agreement
to Vote on the Proposals and the Companys Slate
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. The Series D Holders 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 stockholders.
Differences
in Rights of Our Common Stock and Series D Preferred
Stock
Differences in the rights represented by our Common Stock and
Series D Preferred Stock are summarized below.
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Voting Rights: |
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Common Stock: One vote per share on all
matters submitted to stockholders. |
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Series D: One vote for each share of
Common Stock into which the Series D Preferred Stock held
as of the record date is convertible on all matters submitted to
stockholders. Additionally, the affirmative vote of the holders
of two-thirds of the outstanding shares of Series D
Preferred Stock, voting separately as a class is required: |
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to (except under certain circumstances) create,
issue, authorize 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, (a) any Series D Preferred Stock,
(b) any class or series of shares of the Company, the terms
of which expressly provide that such class or series ranks
pari passu with the Series D Preferred Stock
(Parity Shares) as to payment of dividends and
distribution of assets in the event of any voluntary or
involuntary liquidation (in bankruptcy or otherwise),
dissolution or
winding-up
of the Company (each, a Liquidation Event), or
(c) any class or series of shares of the Company, the terms
of which expressly provide that such class or series ranks
senior to the Series D Preferred Stock (Senior
Shares) as to payment of dividends and distribution of
assets upon a Liquidation Event;
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to approve or make any amendment to the terms of the
Series D Preferred Stock or the Series D
Articles Supplementary;
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to amend, alter, change, repeal or waive any
provision of our charter or Bylaws, if such amendment,
alteration, change, repeal or waiver adversely affects the
rights of the Series D Preferred Stock;
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to reclassify any of the Companys authorized
shares into any Series D Preferred Stock, Parity Shares,
Senior Shares, or any obligation or security convertible into
or, exercisable or exchangeable for, or evidencing a right to
purchase any, Series D Preferred Stock, Parity Shares or
Senior Shares;
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to consummate any transaction that could, or could
reasonably be expected to, individually or in the aggregate,
adversely affect or impair the rights, privileges or preferences
of the Series D Holders in such capacity; or
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to enter into any contract, agreement, commitment or
understanding with respect to any of the foregoing.
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Dividend Rights: |
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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. |
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Series D: Dividends on the Series D
Preferred Stock are payable bi-annually and upon conversion of
the Series D Preferred Stock into Common Stock or
Series D2 Preferred Stock. Moreover, any dividend issued to
holders of common stock must be made concurrently to holders of
Series D Preferred Stock on an as-converted basis. The
Company has not paid dividends on the Series D Preferred
Stock since October 2007. We do not anticipate that any
dividends will be declared or paid on shares of Series D
Preferred Stock in the foreseeable future. |
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Optional Redemption: |
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Common Stock: We do not have right to redeem
Common Stock. |
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Series D: We do not have a right to
redeem the Series D Preferred Stock |
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Mandatory Redemption: |
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Common Stock: Holders have no right to require
redemption. |
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Series D: Holders have no right to
require redemption. |
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Optional Conversion: |
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Common Stock: Not convertible. |
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Series D: Holders have the right at any time to
covert each share of Series D Preferred Stock into a the
number of shares of Common Stock as is determined by dividing
the initial value of the Series D Preferred Stock, as
adjusted from time to time for certain extraordinary stock
events (the Adjusted Stated Value) by $7.00, as
adjusted from time to time pursuant to the terms of the
Articles Supplementary (the Conversion Price).
Subject to certain conditions. The Company has the right to
convert each share of Series D Preferred Stock into a
certain number of shares of Common Stock. |
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Forced Conversion: |
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Common Stock: The Company has no right to
force conversion of Common Stock into another security. |
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Series D: Each share of Series D
Preferred Stock shall automatically be converted into the number
of shares of Common Stock as is determined by dividing the
Adjusted Stated Value by the Conversion Price on the ninth
anniversary of the first date on which shares of Series D
Preferred Stock are first issued, which will occur in 2016 if
the Series D Preferred Stock is outstanding at that time. |
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Liquidation: |
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Common Stock: Distributions are only made to
holders of Common Stock if liquidation preferences of preferred
stock are satisfied. |
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Series D: Series D Holders are
entitled to receive out of the assets of the Company available
for distribution to stockholders an amount equal to the greater
of (a) the aggregate amount of the Adjusted Stated Value of
the Series D Preferred Stock plus all accumulated and
unpaid dividends on the Series D Preferred Stock as of the
date of such Liquidation Event held by such holder or
(b) the amount such holder would have been entitled to
receive if such holder had exercised his, her or its right to
convert all of its Series D Preferred Stock into shares of
Common Stock immediately prior to such Liquidation Event. |
Exchange
of Shares
Upon the terms and subject to the conditions of the
Series D Exchange, the exchange of the outstanding shares
of Series D Preferred Stock will be exchange for cash and
Common Stock will occur at the closing of the Series D
Exchange.
Conditions
of the Series D Exchange
The Series D Exchange is complete subject to certain
conditions beyond the control of the Company or the
Series D Holders, which are described below:
Approval of the Amendments to our Charter. The
Series D Exchange is conditioned upon the approval by the
stockholders entitled to vote on each Proposal presented at the
special meeting of each Amendment.
Completion of the Series C Offer. The
Series D Exchange is conditioned upon the closing of the
Companys offer to exchange of all issued and outstanding
shares of the Companys Series C Preferred Stock for
an aggregate of 43,823,600 newly-issued shares of Common Stock
and $1,623,000 in cash
No IRS Ruling. The Series D Exchange is
conditioned upon there being no change in, revocation of, or
amendment to the IRS Ruling, any Supplemental IRS Ruling or
applicable law that could reasonably be expected to cause any
party to incur any taxes (other than any de minimis
taxes), and there being no change in, revocation of, or
amendment to the IRS Ruling, any Supplemental IRS Ruling or the
applicable law that could reasonably be expected to impose a
limitation on the ability of the Company to utilize its NOLs as
a result of the Series C Offer or the Series D
Exchange, and there being no other change in, revocation of, or
amendment to such ruling or the applicable law that could
reasonably be expected to adversely affect the Company.
SEC Filings. The Series D Exchange is
conditioned upon declaration of effectiveness of the
Registration Statement by the SEC and no stop order or
proceeding seeking a stop order, and the SEC staff having no
further comments on either the Schedule TO/13E-3 filed as
part of the Series C Offer or this proxy statement.
No Illegality or Injunctions. The
Series D Exchange is conditioned upon there being no
temporary, preliminary or permanent restraints in effect
preventing or prohibiting the Series D Exchange.
Governmental Action. The Series D
Exchange is conditioned upon there being no instituted or
pending material Action by any governmental authority seeking to
restrain or prohibit the Series C Offer or Series D
Exchange.
Five Percent Shareholder under Section 382 of the
Code. The Series D Exchange is conditioned
upon no person or group having qualified as or otherwise
becoming a 5-percent shareholder under Section 382
of the Code and/or
Section 1.382-2T(g)
of the U.S. Treasury Regulations.
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No Material Adverse Effect to the Company. The
Series D Exchange is conditioned upon there not having been
a any change, effect, event, occurrence or development that,
individually or in the aggregate, is resulting, has resulted, or
would reasonably be expected to result in a material adverse
effect on the business, financial condition, equity reserves,
surplus or results of operations of the Company and its
subsidiaries, taken as a whole, or on the ability of Company to
perform its obligations under the Exchange Agreement or to
consummate the Series D Exchange.
The Series D Exchange is subject to standard
representations, warranties and covenants, and failure to comply
by any party is waivable by the other parties.
Source of
Funds
We intend to fund all cash payments to holders pursuant to the
Series D Exchange with cash on hand.
Holders of Common Stock will not have the opportunity to
participate in the Series D Exchange or to consent to the
Series C Offer and Series D Exchange. To ensure that
the holders of Common Stock have the necessary information to
make an informed decision when voting on the Proposals, and in
particular Proposal 3, and because of relevant rules of the
SEC that entitled you to receive certain information regarding
the Series D Exchange, we are providing you with the
information above.
EFFECT OF
THE RECAPITALIZATION ON THE COMMON STOCK
AND THE HOLDERS OF COMMON STOCK
The proposed issuances of our Common Stock as part of the
Recapitalization would result in immediate and substantial
dilution to the existing holders of our Common Stock. As of
[ ], 2011, the Company had
9,368,053 shares of Common Stock outstanding. Upon
completion of the Series C Offer, 43,823,600 shares of
Common Stock would be issued in the Series C Offer to those
Series C Holders who participate and as part of the
Remainder Consideration to those who do not. Upon completion of
the Series D Exchange, 37,161,600 shares of Common
Stock would be issued and, therefore, 90,353,253 shares of
our Common Stock would be outstanding after completion of the
Recapitalization. See the Capitalization section of
this proxy statement. While the holdings of the holders of
Common Stock would be significantly diluted, the Special
Committee and Board of Directors determined that the
Recapitalization is nonetheless fair to the Common Stock holders
because dilution is offset by accretion to earnings, book value
and liquidation value, as well as the overall improvement of the
Companys financial condition.
The Special Committee and the Board of Directors considered
various other factors that are likely to positively impact and
negatively impact the holders of the Common Stock and impact
whether the Recapitalization is fair to the holders of Common
Stock. Please see Background of the
Recapitalization Considerations by the Special
Committee and the Board of Directors of the Company,
Findings and Conclusions of the Special
Committee Findings and Findings and
Conclusions of the Board of Directors. As part of the
consideration by the Special Committee and the Board of
Directors, the Special Committee and the Board of Directors
reviewed and considered an opinion from Stifel, dated
December 10, 2010 and a subsequent bring-down opinion from
Stifel, dated April 14, 2011, each of which concluded that
the proposed Recapitalization is fair to the holders of Common
Stock. See Background of the Recapitalization
Opinion of NovaStars Financial
Advisor and Bring-Down Opinion of
NovaStars Financial Advisor.
87
CAPITALIZATION
The following table sets forth our capitalization as of
December 31, 2010 (in thousands):
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on an actual basis;
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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
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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
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the Common Stock value on April 15, 2011 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.
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You should read this information together with our financial
statements and the notes to those statements appearing elsewhere
in this proxy statement. The following does not reflect the
impact of the transactions in which the Company cancelled the
existing $78.1 million aggregate principal amount of trust
preferred securities and issued the Senior Notes as described in
the Recent Developments section. The Company does
not believe these transactions will have a material impact on
its capitalization.
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Pro Forma Series C
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Pro Forma Series C
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Offer and Series D
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Actual
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Offer Only
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Exchange
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Series C Preferred Stock (redeemable preferred stock, $25
liquidating preference per share, 2,990,000, 0, 0 shares,
issued and outstanding)
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|
$
|
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
|
|
|
787,363
|
|
|
|
732,997
|
|
|
|
747,467
|
|
Accumulated deficit
|
|
|
(898,195
|
)
|
|
|
(824,239
|
)
|
|
|
(811,158
|
)
|
Accumulated other comprehensive income
|
|
|
4,411
|
|
|
|
4,411
|
|
|
|
4,411
|
|
Total NFI shareholders deficit
|
|
|
(106,276
|
)
|
|
|
(86,278
|
)
|
|
|
(58,376
|
)
|
Noncontrolling interests
|
|
|
(267
|
)
|
|
|
(267
|
)
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
$
|
(106,543
|
)
|
|
$
|
(86,545
|
)
|
|
$
|
(58,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
88
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
|
|
|
|
|
Proforma Series C
|
|
Offer and Series D
|
|
|
Actual
|
|
Offer Only
|
|
Exchange
|
|
Accrued and unpaid dividends on the Series C Preferred Stock
|
|
$
|
21,621
|
|
|
|
|
|
|
|
|
|
Accrued and unpaid dividends on the Series D Preferred Stock
|
|
$
|
29,279
|
|
|
$
|
29,279
|
|
|
|
|
|
Series C Preferred Stock Aggregate Liquidating Preference
|
|
$
|
74,750
|
|
|
|
|
|
|
|
|
|
Series D Preferred Stock Aggregate Liquidating Preference
|
|
$
|
52,500
|
|
|
$
|
52,500
|
|
|
|
|
|
89
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 [ ], 2011.
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
|
|
|
0.91
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
0.51
|
|
|
$
|
0.35
|
|
Second Quarter (through April 15, 2011)
|
|
$
|
0.48
|
|
|
$
|
0.39
|
|
On April [ ], 2011, the closing price of our
Common Stock as quoted by Pink OTC Markets inter-dealer
quotation service was $[ ] per share.
MARKET
FOR SERIES C PREFERRED STOCK
In January 2004, our registration statement for our initial
public offering of the 8.90% Series C Cumulative Redeemable
Preferred Stock, par value $0.01 per share (the
Series C Preferred Stock), became effective,
and the Series C Preferred Stock commenced trading on the
NYSE. In January 2008, the Series C Preferred 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 NOVSP. There were
approximately [ ] holders of record of
Series C Preferred Stock as of [ ], 2011.
90
Sales
Prices
The table below sets forth, for the periods indicated, the high
and low sales prices of our Series C Preferred Stock as
reported by the NYSE and as quoted by Pink OTC Markets
inter-dealer quotation service.
|
|
|
|
|
|
|
|
|
2008
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
4.75
|
|
|
$
|
1.16
|
|
Second Quarter
|
|
|
4.90
|
|
|
|
2.01
|
|
Third Quarter
|
|
|
3.25
|
|
|
|
0.81
|
|
Fourth Quarter
|
|
|
2.70
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
2.00
|
|
|
$
|
0.66
|
|
Second Quarter
|
|
|
3.25
|
|
|
|
1.50
|
|
Third Quarter
|
|
|
3.22
|
|
|
|
1.62
|
|
Fourth Quarter
|
|
|
2.80
|
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
2.05
|
|
|
$
|
1.55
|
|
Second Quarter
|
|
|
3.75
|
|
|
|
1.55
|
|
Third Quarter
|
|
|
1.90
|
|
|
|
1.10
|
|
Fourth Quarter
|
|
|
5.95
|
|
|
|
1.51
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
5.50
|
|
|
$
|
5.10
|
|
Second Quarter (through April 15, 2011)
|
|
$
|
5.39
|
|
|
$
|
5.00
|
|
On April [ ], 2011, the closing price of our
Series C Preferred Stock as quoted by Pink OTC
Markets inter-dealer quotation service was
$[ ] per share.
MARKET
FOR SERIES D PREFERRED STOCK
The Series D Preferred Stock is privately held by Jefferies
Capital Partners IV L.P., Jefferies Employee
Partners IV LLC, JCP Partners IV LLC and Massachusetts
Mutual Life Insurance Company. There is no established public
trading market for the Series D Preferred Stock. The
Series D Holders purchased the outstanding Series D
Preferred Stock in 2007 and there have been no subsequent
purchases of Series D Preferred Stock.
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, 2009 or
2010, nor have we paid dividends on our Common Stock in 2011.
91
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 proxy
statement. 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 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 independent residential appraisers. Most of the fee
is passed through to independent residential appraisers 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 74% of Advent Financial Services LLC
(Advent). Advent provides financial settlement
services, along with its distribution partners, mainly through
income tax preparation businesses and also 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 is not a bank, but acts as an
intermediary for these products on behalf of other banking
institutions. A primary distribution channel of Advents
bank products is by way of settlement services to electronic
income tax return originators. Advent provides a process for the
originators to collect refunds from the IRS, distribute fees to
various service providers and deliver the net refund to
individuals. Individuals may elect to have the net refund
dollars deposited into a bank account offered through Advent.
Individuals also have the option to have the net refund dollars
paid by check or to an existing bank account. Regardless of the
settlement method, Advent receives a fee from the originator for
providing the settlement service. Advent also distributes its
banking products via other methods, including through employers
and employer service organizations. Advent receives fees from
banking institutions and from the bank account owner for
services related to the use of the funds deposited to
Advent-offered bank accounts.
StreetLinks purchased 51% of the equity of Corvisa in 2010.
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
the 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 significant source of our cash flow.
Significant Recent Events Beginning in
January 2011 through April 15, 2011, Advents business
executed approximately 300,000 settlement products on behalf of
its distribution partners, principally independent income tax
preparation businesses. Advent received approximately
$6.7 million in gross fees relating to these products
through April 15, 2011, which are not net of variable or
general and administrative expenses. While Advent will continue
receiving new applications for refund settlement products, as
well as continue
92
receiving deposits throughout the year, the majority of new
applications for the current tax season have been received.
During 2010, Advent originated a nominal number of settlement
products.
Refinancing
of Trust Preferred Securities
In an effort to improve the Companys liquidity position,
on March 22, 2011, the Company entered into agreements that
cancel the existing $78,125,000 aggregate principal amount of
Trust Preferred Securities (TruPS) issued in
2009 by certain statutory trusts formed by a wholly-owned
subsidiary, NovaStar Mortgage, Inc. (NMI). NMI
issued unsecured junior subordinated notes (Junior
Subordinated Notes), to support the payment obligations
under the TruPS. The Junior Subordinated Notes were guaranteed
by the Company. As a result of the transaction, the Junior
Subordinated Notes were cancelled. In place of the TruPS and
associated Junior Subordinated Notes, the Company issued to the
holders of the TruPS unsecured senior notes pursuant to three
indentures (collectively, the Senior Notes). The
aggregate principal amount of the Senior Notes is $85,937,500,
which is a 10% increase in principal over the liquidation value
of the TruPS. The new Senior Notes will accrue interest at a
rate of 1% until the earlier to occur of (a) a completed
equity offering by the Company or its subsidiaries that results
in proceeds of $40 million or more or
(b) January 1, 2016. Thereafter, the Senior Notes will
accrue interest at a rate of three-month LIBOR plus 3.5% (the
Full Rate). The Senior Notes mature on
March 30, 2033.
The indentures governing the Senior Notes contain negative
covenants that, among other things, restrict the Companys
use of cash (including cash payments for distributions to
shareholders). At any time that the Senior Notes accrue interest
at the Full Rate and the Company satisfies certain financial
covenants, certain negative covenants and restrictions on cash
will not apply. The terms of the Senior Notes and associated
agreements are more fully described in the Companys
current report on
Form 8-K
filed with the SEC on March 22, 2011.
Strategy Management is focused on building
the operations of StreetLinks and Advent. With StreetLinks
acquisition of Corvisa during November 2010, the Company plans
to expand its customer base and the real estate valuation
management services that it currently provides to customers
during fiscal year 2011. See Note 3 to the consolidated
financial statements 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 as noted above.
The key performance measures for executive management are:
|
|
|
|
|
maintaining
and/or
generating adequate liquidity to allow us to take advantage of
investment opportunities, and
|
|
|
|
generating income for our shareholders.
|
The following key performance metrics are derived from our
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)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
Cash and cash equivalents
|
|
$
|
12,582
|
|
|
$
|
7,104
|
|
Net income (loss) available to common shareholders, per diluted
share
|
|
|
86.53
|
|
|
|
(20.97
|
)
|
Liquidity During 2010, we continued to
develop StreetLinks and significantly increased its appraisal
volume. StreetLinks had revenues of $75.2 million during
2010 as compared to $31.1 million in 2009. StreetLinks has
produced net positive cash flow and earnings in 2010 and is
expected to continue producing
93
net positive cash flow and earnings for the foreseeable future.
During 2010, we received $12.9 million in cash on our
mortgage securities portfolio, compared to $18.5 million in
2009. During 2010, we used cash to pay for corporate and
administrative costs, the contingent consideration payments
related to the StreetLinks acquisition and the investment in
Corvisa of $1.5 million. As of December 31, 2010, we
had $12.6 million in unrestricted cash and cash equivalents
and $1.4 million of restricted cash which is included in
the other noncurrent assets line item of the consolidated
balance sheets.
StreetLinks and our portfolio of mortgage securities have been
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 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
unrestricted cash availability is sufficient for the Company to
discharge its liabilities and meet its commitments in the normal
course of business, other than dividend payments to the
Series C Holders and Series D Holders. See
Liquidity and Capital Resources for further
discussion of our liquidity position and steps we have taken to
preserve liquidity levels.
As of December 31, 2010, we had a working capital
deficiency of $35.9 million. This was mainly attributable
to preferred dividends payable of $50.9 million being
classified as a current liability, although the Company does not
expect to pay the dividends due to managements effort to
conserve cash. If such transactions close, the accrued and
unpaid preferred dividends would be eliminated through the
Series C Offer and the Series D Exchange described
under the heading Significant Recent Events.
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 in January 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
consolidated financial statements. A gain of $993.1 million
was recognized upon derecognition, representing the net
accumulated deficits in these trusts.
94
The following is a summary of 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-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTA1
|
|
|
NHEL 2006-1
|
|
|
NHEL 2007-1
|
|
|
Eliminations(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Eliminations relate to intercompany accounts at the consolidated
financial statement level; there are no intercompany balances
between the securitization trusts. |
Financial
Condition as of December 31, 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
December 31, 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 December 31, 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 Loans
|
|
|
|
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
95
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 material 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
consolidated balance sheet.
The mortgage securities classified as available for sale
primarily include 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 year
ended December 31, 2010. Following is a summary of our
mortgage securities that are classified as
available-for-sale.
Table
3 Values of Individual Mortgage
Securities
Available-for-Sale
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
$
|
1,359
|
|
|
|
25
|
%
|
|
|
17
|
%
|
|
|
1.0
|
%
|
|
$
|
1,997
|
|
|
|
25
|
%
|
|
|
15
|
%
|
|
|
1.0
|
%
|
2003-1
|
|
|
2,355
|
|
|
|
25
|
|
|
|
17
|
|
|
|
2.2
|
|
|
|
3,469
|
|
|
|
25
|
|
|
|
13
|
|
|
|
2.1
|
|
2003-3
|
|
|
553
|
|
|
|
25
|
|
|
|
12
|
|
|
|
2.5
|
|
|
|
1,437
|
|
|
|
25
|
|
|
|
10
|
|
|
|
2.7
|
|
2003-4
|
|
|
313
|
|
|
|
25
|
|
|
|
15
|
|
|
|
2.6
|
|
|
|
|
|
|
|
25
|
|
|
|
12
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
We established the trust upon securitization of the underlying
loans, which generally were originated by us. |
Property and equipment, net Property and
equipment consists of furniture and fixtures, office equipment,
hardware and computer equipment, software and leasehold
improvements. The main increase as of December 31, 2010
compared to December 31, 2009 was mainly due to the
property and equipment obtained as part of the Corvisa
acquisition.
Notes Receivable In order to maximize the use
of our excess cash flow, we have made loans to independent
entities during 2009 and 2010. The borrowing entities used the
proceeds to finance on-going and current operations. The balance
decreased due to reserves for bad debts in excess of additions
to the notes. Management evaluates for uncollectability based on
the likelihood of repayments based upon discussions with the
borrowers and financial information.
Other Current Assets Other current assets
include prepaid expenses, the current portion of restricted
cash, CDO receivables and other miscellaneous receivables. The
balance decreased in 2010 as compared to 2009 due to a large
portion of the restricted cash being released from restriction.
Goodwill Pursuant to the terms of our
purchase agreement for StreetLinks, we were obligated to make
earn out payments to StreetLinks minority owners
upon StreetLinks achieving certain earnings targets. The targets
were achieved and payments made during the year ended
December 31, 2010. These amounts have been recorded as
Goodwill.
Dividends Payable Dividends on preferred
stock have not been paid since 2007. These dividends are
cumulative and therefore we continue to accrue these dividends.
Dividends on the Series C Preferred Stock are payable in
cash and accrue at a rate of 8.9% annually. Dividends on the
Series D Preferred Stock are payable in cash and accrue at
a rate of 13.0% per annum. If such transactions close, the
accrued and unpaid dividends would be eliminated through the
Series C Offer and the Series D Exchange described
under the heading Significant Recent Events.
96
Total Shareholders Deficit As of
December 31, 2010, our total liabilities exceeded our total
assets by $106.5 million as compared to $1.1 billion
as of December 31, 2009. The significant decrease in our
shareholders deficit during the year ended
December 31, 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.
Results
of Operations Consolidated Earnings
Comparisons
Year
ended December 31, 2010 as Compared to the Year Ended
December 31, 2009
Securitization
Trusts
Gain on Derecognition of Mortgage Assets
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 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 only through the date of derecognition in January
2010. As a result, there was a significant variation in these
balances when comparing the years ended December 31, 2010
and 2009. The following table presents the items affected by the
derecognition and their balances.
Table
4 Income (Expense) of Consolidated Loan
Securitization; Gain on Derecognition of Mortgage Assets
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
Ended December 31,
|
|
|
2010
|
|
2009
|
|
Gain on derecognition of securitization trusts
|
|
$
|
993,131
|
|
|
$
|
|
|
Interest income mortgage loans
|
|
|
10,681
|
|
|
|
130,017
|
|
Interest expense asset-backed bonds
|
|
|
(1,416
|
)
|
|
|
(21,290
|
)
|
Provision for credit losses
|
|
|
(17,433
|
)
|
|
|
(260,860
|
)
|
Servicing fees
|
|
|
(731
|
)
|
|
|
(10,639
|
)
|
Premiums for mortgage loan insurance
|
|
|
(308
|
)
|
|
|
(6,041
|
)
|
Other expense
|
|
|
(560
|
)
|
|
|
(1,600
|
)
|
In addition, the securitization trusts segment includes the
Companys CDO which was the main driver of the following
consolidated statements of operations line items during the
years ended December 31, 2010 and 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.
Appraisal
Management
Service Fee Income and Cost of Services We
earn fees on the residential appraisals and other valuation
services 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 of certain employees, 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.
97
Table
5 Appraisal and Real Estate Valuation Management
Services Operations (dollars in thousands, except unit
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Total
|
|
|
Per Unit
|
|
|
Total
|
|
|
Per Unit
|
|
|
Completed orders (units)
|
|
|
204,786
|
|
|
|
|
|
|
|
84,174
|
|
|
|
|
|
Service fee income
|
|
$
|
75,168
|
|
|
$
|
367
|
|
|
$
|
31,106
|
|
|
$
|
370
|
|
Cost of services
|
|
|
66,475
|
|
|
|
324
|
|
|
|
32,221
|
|
|
|
383
|
|
Selling, general and administrative expense
|
|
|
4,940
|
|
|
|
24
|
|
|
|
1,837
|
|
|
|
22
|
|
Other expense
|
|
|
(65
|
)
|
|
|
|
|
|
|
46
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3,833
|
|
|
|
19
|
|
|
|
(2,998
|
)
|
|
|
(36
|
)
|
Less: Net income (loss) attributable to noncontrolling interests
|
|
|
321
|
|
|
|
2
|
|
|
|
(829
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to NFI
|
|
$
|
3,512
|
|
|
$
|
17
|
|
|
$
|
(2,169
|
)
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. On July 21, 2010, the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the Dodd-Frank
Act) was signed into federal law. Various government
agencies are charged with implementing new regulations under the
Dodd-Frank Act. When fully implemented, the Dodd-Frank 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 April 1, 2011, as required by the Dodd-Frank Act,
compliance with an interim final rule issued by the Federal
Reserve Board, which amended Regulation Z under the Truth
in Lending Act (the Appraisal Rule), became
mandatory. The Dodd-Frank Act and the Appraisal Rule specific to
residential real estate appraisals will include, but are not
limited to, requirements that appraisers must be paid
customary and reasonable compensation and that no
person preparing a valuation for the purpose of extending
consumer credit that will be secured by a principal dwelling may
have an interest in the property or transaction for which the
valuation is performed.
It is managements opinion that the Appraisal Rule and
other rules and regulations promulgated under the Dodd-Frank 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.
The Company also expects cash flows to increase in the future
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 from
$16.9 million to $9.8 million in the corporate segment
when comparing the year ended December 31, 2010 as compared
to 2009 since the securities have declined in value as their
expected future
98
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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses have decreased from
$18.7 million to $14.3 million for the years ended
December 31, 2010 as compared to 2009, respectively due to
a concerted effort by management to reduce corporate general and
administrative expenses.
Interest Expense on Trust Preferred
Securities Interest expense on trust preferred
securities decreased from the year ended December 31, 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 year.
Contractual
Obligations
We have entered into certain long-term debt, lease agreements,
which obligate us to make future payments to satisfy the related
contractual obligations.
The following table summarizes our contractual obligations, as
of December 31, 2010.
Table
6 Contractual Obligations (dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Junior subordinated debentures(A)
|
|
$
|
97,411
|
|
|
$
|
781
|
|
|
$
|
1,563
|
|
|
$
|
1,563
|
|
|
$
|
93,504
|
|
Operating leases(B)
|
|
|
3,171
|
|
|
|
1,406
|
|
|
|
1,692
|
|
|
|
73
|
|
|
|
|
|
Contingent consideration payments related to Corvisa acquisition
|
|
|
450
|
|
|
|
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
|
101,032
|
|
|
|
2,187
|
|
|
|
3,705
|
|
|
|
1,636
|
|
|
|
93,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
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 December 31, 2010 for
each respective obligation. The junior subordinated debentures
are described in detail in Note 7 to our consolidated
financial statements. |
|
(B) |
|
The operating lease obligations do not include rental income of
$0.6 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 noncurrent liabilities
section of the consolidated balance sheets as of
December 31, 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 December 31, 2010, we had approximately
$12.6 million in unrestricted cash and cash equivalents.
Cash on hand and receipts from StreetLinks operations and our
mortgage securities are significant sources of liquidity.
Service fee income was a substantial source of our cash flows
for the year ended December 31, 2010. We have had
significant growth during 2010 compared to 2009 and are
currently projecting an increase in service fee income 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 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 on a per unit basis will drive
positive earnings and cash flow from StreetLinks during 2011.
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
99
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 cash flows from
StreetLinks will offset any reduction in our mortgage securities
cash flows. As discussed under the heading Legal
Proceedings in the Description of Business
section, 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 Year ended December 31, 2010
Following are the primary and simplified sources of cash
receipts and disbursements, excluding the impact of the
securitization trusts.
Table
7 Primary Sources of Cash Receipts and Disbursements
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
Primary sources:
|
|
|
|
|
|
|
|
|
Fees received for appraisal and real estate valuation management
services
|
|
$
|
74,551
|
|
|
$
|
30,607
|
|
Cash flows received from mortgage securities
|
|
|
12,858
|
|
|
|
18,479
|
|
Primary uses:
|
|
|
|
|
|
|
|
|
Payments for appraisals and real estate valuation management
services and related administrative expenses
|
|
|
73,071
|
|
|
|
25,739
|
|
Payments of selling, general and administrative expenses
|
|
|
17,157
|
|
|
|
30,140
|
|
Disbursements to StreetLinks noncontrolling interests
|
|
|
2,804
|
|
|
|
|
|
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, 2010
and 2009.
Table
8 Summary of Operating, Investing and Financing Cash
Flows (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
Cash (used in) provided by operating activities
|
|
$
|
6,615
|
|
|
$
|
67,218
|
|
Cash flows provided by investing activities
|
|
|
34,638
|
|
|
|
246,616
|
|
Cash flows used in financing activities
|
|
|
(35,775
|
)
|
|
|
(331,520
|
)
|
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 in
Note 4 to the consolidated financial statements. The
Company is now focusing on its appraisal and real estate
valuation management services business. During 2010, StreetLinks
had positive operating cash flows in 2010 as compared to 2009
when StreetLinks had negative operating cash flows. Although the
Company continues to fund the development of the Advent
business, which used approximately $2.5 million
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in 2010 to pay for operating expenses, the Company anticipates
that Advent will have sufficient revenues to cover its expenses
in 2011.
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. These amounts decreased in 2010 as compared to 2009 as
they were deconsolidated during the first quarter of 2010.
Additionally, in 2009 and the beginning 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. The Company paid out
$2.8 million in 2010 related to contingent consideration
earnings targets being achieved from the 2008 acquisition of
StreetLinks along with the purchase of Corvisa for
$1.4 million, net of cash received.
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.
Future
Sources and Uses of Cash
Primary
Sources of Cash
Cash Received from Appraisal and Real Estate Valuation
Management Services As shown in Table 7 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 year ended December 31,
2010, we received $12.9 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:
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As short-term interest rates declined and continue to remain
low, the net spread to us has increased and remains high;
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Higher credit losses have decreased cash available to distribute
with respect to our securities; and
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We have lower than average balances of our mortgage
securities
available-for-sale
portfolio as the securities have paid down and we have not
acquired new bonds.
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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.
Contingent Consideration Payment to StreetLinks
Noncontrolling Interests During 2010, we
distributed $2.8 million to the noncontrolling interests of
StreetLinks upon it achieving certain earnings targets.
Critical
Accounting Estimates
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.
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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.
Notes Receivable and Allowance for Doubtful
Accounts. The Company determines the required
allowance for doubtful accounts using information such as the
status of the note, borrowers financial condition and
economic trends and conditions. The Company has a note
receivable due from an entity with which we are currently in
litigation. The balance of this note receivable was
$4.4 million and $3.9 million as of December 31,
2010 and 2009, respectively. This note receivable could become
completely impaired dependent upon the outcome of the litigation
and the financial means of the entity to repay the note.
Mortgage Securities Residual
Interests. Our residual interests represent
beneficial interests we retained in securitization and
resecuritization transactions. The residual securities include
interest-only mortgage securities, prepayment penalty bonds and
over-collateralization bonds.
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:
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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;
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Prepayment penalties received from borrowers who pay off their
loans early in their life; and
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Overcollateralization which is designed to protect the primary
bondholder from credit loss on the underlying loans.
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We believe the accounting estimates related to the valuation of
our residual securities and establishing the rate of income
recognition 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.
At each reporting date, 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 5 to the consolidated financial
statements for the residual security sensitivity analysis and
Note 6 to the consolidated financial statements for the
current fair value of our residual securities.
Goodwill. 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
of reporting unit is more than its estimated fair value.
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
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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. The impairment test in 2010
indicated that there was a significant excess of fair value over
the carrying amount and no impairment was incurred.
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 relevance 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.
During January 2010, prior to the derecognition of
securitization trusts, the Allowance for Credit Losses and Real
Estate Owned policies were considered to be critical accounting
estimates. Subsequent to the derecognition of securitization
trusts, we no longer hold any mortgage loans that require an
allowance for
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credit losses or a significant amount of real estate owned,
therefore estimates related to these items are no longer
considered critical following the derecognition.
Allowance for Credit Losses. An allowance for
credit losses was maintained for mortgage loans
held-in-portfolio.
The amount of the allowance was based on the assessment by
management of probable losses incurred based on various factors
that affected 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 purchased and
other relevant factors. The allowance was maintained through
ongoing adjustments to operating income. The assumptions used by
management in estimating the amount of the allowance for credit
losses were highly uncertain and involved a great deal of
judgment.
An internally developed migration analysis was the primary tool
used in analyzing our allowance for credit losses. This tool
considered historical information regarding foreclosure and loss
severity experience and applied that information to the
portfolio at the reporting date. We also considered our use of
mortgage insurance as a method of managing credit risk and
current economic conditions, experience and trends. We paid
mortgage insurance premiums on a portion of the loans maintained
on our consolidated balance sheets and included the cost of
mortgage insurance in our statement of operations.
Real Estate Owned. Real estate owned, which
consisted of residential real estate acquired in satisfaction of
loans, was carried at the lower of cost or estimated fair value
less estimated selling costs. We estimated fair value at the
assets liquidation value less selling costs using
managements assumptions which were based on historical
loss severities for similar assets. Adjustments to the loan
carrying value required at time of foreclosure were charged
against the allowance for credit losses. Costs related to the
development of real estate were capitalized and those related to
holding the property were expensed. Losses or gains from the
ultimate disposition of real estate owned were charged or
credited to earnings.
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 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 guidance resulted in the Company
reflecting as sales of financial assets and extinguishment of
liabilities the assets and liabilities of the securitization
trusts at that date. 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 year ended
December 31, 2010. See Note 4 to the consolidated
financial statements for further details.
104
In July 2010, the FASB issued Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit
Losses. The guidance significantly expands 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 became 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 did not have a significant effect on the
Companys financial statements. See Note 2 to the
consolidated financial statements for the required disclosures.
Inflation
Our mortgage securities, notes receivable, and CDO debt 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.
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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
LLC
We own 88% of StreetLinks LLC (formerly 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.
Advent
Financial Services LLC
We own 74% of Advent Financial Services LLC
(Advent). Advent provides financial settlement
services, along with its distribution partners, mainly through
income tax preparation businesses and also 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 is not a bank, but acts as an
intermediary for these products on behalf of other banking
institutions. A primary distribution channel of Advents
bank products is by way of settlement services to electronic
income tax return originators. Advent provides a process for the
originators to collect refunds from the Internal Revenue
Service, distribute fees to various service providers and
deliver the net refund to individuals. Individuals may elect to
have the net refund dollars deposited into a bank account
offered through Advent. Individuals also have the option to have
the net refund dollars paid by check or to an existing bank
account. Regardless of the settlement method, Advent receives a
fee from the originator for providing the settlement service.
Advent also distributes its banking products via other methods,
including through employers and employer service organizations.
Advent receives fees from banking institutions and from the bank
account owner for services related to the use of the funds
deposited to Advent-offered bank accounts.
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
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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 April 15, 2011, we employed 295 total employees. Of
that amount, 286 were classified as full-time employees.
Property
The executive and administrative offices for the Company are
located in Kansas City, Missouri, and consist of approximately
12,142 square feet of leased office space. As of
December 31, 2010, the Company leases approximately 90,000
total square feet of office space throughout the United States
for our business, the majority of which is located in
Indianapolis, Indiana, where StreetLinks, our appraisal
management subsidiary, is headquartered.
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, 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 not resulted in
significant losses 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 and due to the Companys belief that an adverse
ruling is not probable for the below-described claims, the
Company has not accrued a loss contingency related to the
following matters in its 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 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, which the Court granted,
with leave to amend, on March 31, 2011. The Company cannot
provide an estimate of the range of any loss. The Company
believes it has meritorious defenses to the case and expects to
defend the case vigorously if plaintiff elects to file an
amended complaint.
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 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
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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. On
February 21, 2011, the Company amended its counterclaim,
asserting additional claims against the plaintiff. The Company
cannot provide an estimate of the range of any loss. The Company
believes that the defendants have meritorious defenses to this
case and expects to vigorously defend the case and pursue its
counterclaims.
On July 9, 2010 and on February 11, 2011, Cambridge
Place Investment Management, Inc. filed complaints 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 complaints allege untrue
statements and omissions of material facts relating to loan
underwriting and credit enhancement. The complaints also allege
a violation of Section 410 of the Massachusetts Uniform
Securities Act, (Chapter 110A of the Massachusetts General
Laws). Defendants have removed the first 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. This litigation is in its early stage, and the Company
cannot provide an estimate of the range of any loss. The Company
believes that it has meritorious defenses to these claims and
expects that the cases 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, and no legal action to enforce the
claim has been filed The Company will assess its defense to the
claim if and when the factual basis and additional information
supporting the claim is provided.
DIRECTORS,
EXECUTIVE OFFICERS AND CONTROL PERSONS
The executive officers and directors of NovaStar Financial and
their positions are as follows:
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Name
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Position with NovaStar Financial
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Age
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W. Lance Anderson
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Chairman of the Board and Chief Executive Officer
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Rodney E. Schwatken
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Senior Vice President and Chief Financial Officer
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47
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Gregory T. Barmore
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Director
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69
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Donald M. Berman
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Director
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59
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Art N. Burtscher
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Director
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60
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Edward W. Mehrer
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Director
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72
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Howard M. Amster
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Director
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63
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Barry A. Igdaloff
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Director
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56
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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
of Directors 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
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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 of Directors believes Mr. Andersons
qualifications to sit on the Board of Directors 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 term on the Board of Directors 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, if approved, the Company
will have four classified directors and Mr. Berman will no
longer serve on the Board of Directors. 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
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 of Directors believes that Mr. Barmores
qualifications to serve on the Board of Directors 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 (CardWorks). 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 of Directors believes Mr. Bermans
qualifications to serve on the Board of Directors 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.
109
McCarthy Group Advisors, L.L.C. was acquired by Westwood
Holdings Group, Inc. (Westwood) 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 of Directors believes that Mr. Burtschers
qualifications to serve on the Board of Directors 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 of Directors believes that Mr. Mehrers
qualifications to serve on the Board of Directors 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.
Series C
Directors
In addition to the five classified directors described above,
two directors are elected to the Board of Directors 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 of
Directors. 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 Stockholder 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 of Directors beyond
the 2011 Annual Stockholder Meeting. Upon the filing of the
Articles of Amendment and Restatement, if approved, the Company
will be comprised four classified directors
(Messrs. Anderson, Barmore, Burtscher and Mehrer) and
110
Messrs. Amster and Igdaloff will no longer serve on the
Board of Directors. Immediately following the filing of the
Articles of Amendment and Restatement, however, the Board of
Directors anticipates increasing the classified Board of
Directors 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 stockholders at the
2011 Annual Stockholder Meeting. If elected at the 2011 Annual
Stockholder 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 to the Board of
Directors by the holders of the Companys Series C
Preferred Stock, the Board of Directors believes
Mr. Amsters qualifications to serve on the Board of
Directors 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
of Directors by the holders of the Companys Series C
Preferred Stock, the Board of Directors believes
Mr. Igdaloffs qualifications to serve on the Board of
Directors include his financial expertise, his years of
experience as an investment advisor, attorney, and CPA and his
service on multiple boards of directors.
None of the executive officers or directors of the Company were
convicted in a criminal proceeding during the past five years
(excluding traffic violations or similar misdemeanors), nor has
any such person been a party to a judicial or administrative
proceeding during the past five years (except for matters that
were dismissed without sanction or settlement) that resulted in
a judgment, decree or final order enjoining the person from
future violations of, or prohibiting activities subject to,
federal or state securities laws, or a finding of any violation
of federal or state securities laws. All the executive officers
and directors of the Company are U.S. citizens.
BENEFICIAL
OWNERSHIP
Beneficial
Ownership of Common Stock, Series C Preferred Stock and
Series D Preferred Stock by Directors, Management and Large
Stockholders
The following table sets forth sets forth certain information
with respect to the Companys Common Stock, Series C
Preferred 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
111
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
March 22, 2011 (unless otherwise noted).
|
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Beneficial
|
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Beneficial
|
|
|
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Beneficial
|
|
Ownership of
|
|
Ownership of
|
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|
|
|
Ownership of
|
|
Series C
|
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Series D
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|
|
Name and Address of
|
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Common Stock
|
|
Preferred Stock(2)
|
|
Preferred Stock
|
|
Voting Power(3)(4)
|
Beneficial Owner(1)
|
|
Shares
|
|
Percent
|
|
Shares
|
|
Percent
|
|
Shares
|
|
Percent
|
|
Votes
|
|
Percent
|
|
W. Lance Anderson(5)
|
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|
272,904
|
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2.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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272,904
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2.91
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%
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Rodney E. Schwatken(6)
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49,438
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*
|
|
|
|
|
|
|
|
|
|
|
|
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|
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49,438
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*
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Edward W. Mehrer(7)
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40,288
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*
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|
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|
|
|
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|
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|
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40,288
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|
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*
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Gregory T. Barmore(8)
|
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26,270
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|
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*
|
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|
|
|
|
|
|
|
|
|
|
|
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26,270
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*
|
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Art N. Burtscher(9)
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23,440
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|
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*
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|
|
|
|
|
|
|
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|
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23,440
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*
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Donald M. Berman(10)
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8,216
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|
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*
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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8,216
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|
|
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*
|
|
Howard M. Amster(11)
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1,875
|
|
|
|
*
|
|
|
|
218,766
|
|
|
|
7.32
|
%
|
|
|
|
|
|
|
|
|
|
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1,875
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|
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*
|
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Barry A. Igdaloff(12)
|
|
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1,875
|
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|
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*
|
|
|
|
307,774
|
|
|
|
10.29
|
%
|
|
|
|
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|
|
|
|
|
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1,875
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|
|
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*
|
|
All current directors and executive officers as a group
(8 persons)(13)
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424,306
|
|
|
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4.53
|
%
|
|
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526,540
|
|
|
|
17.61
|
%
|
|
|
|
|
|
|
|
|
|
|
424,306
|
|
|
|
4.53
|
%
|
Massachusetts Mutual Life Insurance Company(14)
|
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|
192,950
|
|
|
|
2.03
|
%
|
|
|
|
|
|
|
|
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|
1,050,000
|
|
|
|
50.00
|
%
|
|
|
1,130,450
|
|
|
|
9.92
|
%
|
1295 State Street Springfield, MA 01111
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Jefferies Capital Partners IV LLC(15)
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1,050,000
|
|
|
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50.00
|
%
|
|
|
937,500
|
|
|
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8.22
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%
|
520 Madison Avenue, 12th Floor New York, NY 10022
|
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* |
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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) |
|
Given the very limited circumstances in which the Series C
Holders are entitled to vote, the Company and the Series C
Holders deem the Series C Preferred Stock to be a
non-voting security. Because non-voting securities are not
required to be reported on reports required by Section 13
of the Exchange Act, the Company does not have the means to
confirm whether any
non-directors
or non-executive officers hold more than 5% of the outstanding
Series C Preferred Stock. |
|
(3) |
|
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. |
|
(4) |
|
The voting power calculation does not include the Series C
Preferred Stock because the Series C Preferred Stock
generally does not have voting power. |
|
(5) |
|
Consists of 42,877 shares of Common Stock held directly;
115,849 shares of stock owned jointly with his spouse;
35,729 shares held by Mr. Andersons son which
are deemed indirectly held by Mr. Anderson;
2,748 shares of Common Stock held in the NovaStar Financial
401(k) Plan; 51,868 shares of Common Stock issuable
pursuant to options exercisable within 60 days of
March 22, 2011; 3,512 shares of Common Stock
represented by dividend equivalent rights on options exercisable
within 60 days of March 22, 2011; and
20,321 shares of restricted stock. |
|
(6) |
|
Consists of 2,287 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; 38,502 shares of Common Stock
issuable pursuant to options exercisable within 60 days of
March 22, 2011; and 420 shares of restricted stock. |
112
|
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|
(7) |
|
Consists of 17,018 shares of Common Stock held directly;
1,000 shares of Common Stock owned by his spouse;
14,687 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 22, 2011; and
7,583 shares of Common Stock represented by dividend
equivalent rights on options exercisable within 60 days of
March 22, 2011. |
|
(8) |
|
Consists of 12,673 shares of Common Stock held directly;
12,500 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 22, 2011; and
1,097 shares of Common Stock represented by dividend
equivalent rights. |
|
(9) |
|
Consists of 1,125 shares of Common Stock held directly;
16,250 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 22, 2011; and
6,065 shares of Common Stock represented by dividend
equivalent rights on options exercisable within 60 days of
March 22, 2011. |
|
(10) |
|
Consists of 8,216 shares of Common Stock issuable pursuant
to options exercisable within 60 days of March 22,
2011. |
|
(11) |
|
Consists of 1,875 shares of Common Stock issuable pursuant
to options exercisable within 60 days of March 22,
2011; 172,366 shares of Series C Preferred Stock held
directly; and 46,400 shares of Series C Preferred
Stock held in two trusts for which Mr. Amster is the
trustee. |
|
(12) |
|
Consists of 1,875 shares of Common Stock issuable pursuant
to options exercisable within 60 days of March 22,
2011; 207,649 shares of Series C Preferred Stock held
directly; and 100,125 shares of Series C Preferred
Stock controlled by Mr. Igdaloff as a registered investment
advisor. |
|
(13) |
|
Includes 145,773 shares of Common Stock issuable pursuant
to options exercisable within 60 days of March 22,
2011 and 18,257 shares of Common Stock represented by
dividend equivalent rights on options exercisable within
60 days of March 22, 2011. |
|
(14) |
|
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. |
|
(15) |
|
Based on a Schedule 13D filed on December 20, 2010.
The 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 D Preferred Stock currently convertible into
813,981 shares of Common Stock (7.2%)), Jefferies Employee
Partners IV LLC (holds 105,002 shares of Series D
Preferred Stock currently convertible into 93,752 shares of
Common Stock (0.8%)), and JCP Partners IV LLC (holds
33,339 shares of Series D 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 D
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. |
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 2010 (collectively our
Named Executive Officers). Our Named Executive
Officers for 2010, and the positions they held during 2010, were
as follows:
|
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|
Name
|
|
Title
|
|
W. Lance Anderson
|
|
Chairman of the Board and Chief Executive Officer
|
Rodney E. Schwatken
|
|
Chief Financial Officer
|
113
Summary
Compensation Table
The following table sets forth the compensation of our Named
Executive Officers during the fiscal year ended
December 31, 2010 and 2009.
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
Stock
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)(3)
|
|
($)(3)
|
|
($)(4)
|
|
($)
|
|
W. Lance Anderson,
|
|
|
2010
|
|
|
|
665,784
|
|
|
|
|
|
|
|
86,752
|
|
|
|
88,388
|
|
|
|
50,791
|
|
|
|
891,715
|
|
Chief Executive Officer
|
|
|
2009
|
|
|
|
665,784
|
|
|
|
|
|
|
|
164,687
|
|
|
|
149,719
|
|
|
|
97,241
|
|
|
|
1,090,326
|
|
Rodney E. Schwatken,
|
|
|
2010
|
|
|
|
225,000
|
|
|
|
100,000
|
(1)
|
|
|
34,784
|
|
|
|
2,205
|
|
|
|
|
|
|
|
361,989
|
|
Chief Financial Officer
|
|
|
2009
|
|
|
|
165,000
|
|
|
|
100,000
|
(2)
|
|
|
10,276
|
|
|
|
4,552
|
|
|
|
|
|
|
|
283,001
|
|
|
|
|
(1) |
|
Represents the annual bonus awarded under
Mr. Schwatkens bonus plan. |
|
(2) |
|
Represents quarterly retention bonuses of $25,000. |
|
(3) |
|
Represents the dollar amount recognized for financial reporting
purposes for the fiscal years ended December 31, 2010 and
2009, in accordance with FASB ASC Topic 718 (disregarding
estimates of forfeitures). The stock awards column includes
amounts for restricted stock granted in 2005, 2006 and 2007. The
option awards column includes amounts for stock option awards
granted in 2005, 2006, 2007 and 2009. See Note 18 to the
consolidated financial statements for the fiscal year ended
December 31, 2009 for a discussion of the assumptions used
in calculating these amounts. Substantially all of
Mr. Andersons options awards were granted when the
Companys stock was trading at substantially higher prices
and as a result, his option awards are underwater or
out of the money (meaning the exercise price exceeds
the market price of the Companys stock). |
|
(4) |
|
All Other Compensation for the named executives is set forth in
the following table. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of
|
|
Tax
|
|
Total All Other
|
|
|
|
|
Founders Notes
|
|
Gross-Ups
|
|
Compensation
|
Name
|
|
Year
|
|
($)(A)
|
|
($)(B)
|
|
($)(C)
|
|
W. Lance Anderson
|
|
|
2010
|
|
|
|
31,033
|
|
|
|
19,758
|
|
|
|
50,791
|
|
|
|
|
2009
|
|
|
|
31,331
|
|
|
|
65,910
|
|
|
|
97,241
|
|
|
|
|
(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 2010, Mr. Anderson was paid for the tax
gross-up on
the forgiveness of the note received for 2010. 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. |
114
Outstanding
Equity Awards at Fiscal Year-End 2010
The following table sets forth the outstanding stock options and
stock awards for each of our Named Executive Officers as of
December 31, 2010.
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Stock Awards
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Option Awards
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Number of
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Market
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|
Number of
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|
Number of
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Shares or
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Value of
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|
|
Securities
|
|
Securities
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Units of
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Shares or
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Underlying
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Underlying
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Stock That
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Units of
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Unexercised
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Unexercised
|
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Option
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Option
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Have Not
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Stock That
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|
Options (#)
|
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Options (#)
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Exercise
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Expiration
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Vested
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Have Not
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Name
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Exercisable
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Unexercisable
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Price ($)
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Date
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(#)(3)
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Vested ($)(3)(4)
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W. Lance Anderson
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9,375
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(1)
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48.88
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12/18/2012
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3,465
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168.52
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2/7/2015
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6,101
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124.84
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2/8/2016
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32,927
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16.72
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3/14/2017
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22,999
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9,660
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Rodney E. Schwatken
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125
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168.52
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2/7/2015
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234
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124.84
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2/8/2016
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643
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16.72
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3/14/2017
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37,500
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112,500
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(2)
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0.97
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11/10/2019
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523
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220
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(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 the options with an expiration date of December 18, 2012. |
|
(2) |
|
Options will vest in 1/3 increments on November 10 of the years
2011 2013. |
|
(3) |
|
The vesting dates of the shares of restricted stock held at
fiscal year end 2010 are as follows: |
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Grant
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Shares
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Name
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Date
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Outstanding
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Vesting Schedule
|
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W. Lance Anderson
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2/7/2005
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1,100
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100% on 2/7/2015
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3/14/2007
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19,221
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100% on 3/14/2012
|
Rodney E. Schwatken
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2/7/2005
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44
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100% on 2/7/2015
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3/14/2007
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376
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|
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100% on 3/14/2012
|
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|
(4) |
|
The closing market price of the Companys Common Stock on
December 31, 2010 (the last trading day of 2010) was
$0.42. |
Employment
Agreements
W.
Lance Anderson
On March 15, 2011, the Compensation Committee approved a
compensation arrangement with Mr. Anderson for the 2011
calendar year. The compensation arrangement consists of three
parts: salary, bonus and equity incentive. For 2011,
Mr. Andersons salary is $665,874 and he is entitled
to receive a bonus equivalent to five percent (5%) of the
Companys Cash Earnings for 2011, up to a
maximum bonus payment of $2,500,000.
115
For purposes of the bonus, Cash Earnings means
consolidated cash and cash equivalents as of end of year, on an
unrestricted basis, minus
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consolidated cash and cash equivalents as of beginning of year,
on an unrestricted basis,
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any cash transferred during the year from restricted to
unrestricted (such as cash serving as collateral for surety
bonds),
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cash received on legacy mortgage securities, and
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any extraordinary, unusual or non-operating cash gains or
receipts, such as capital transactions and proceeds from sales
of subsidiaries,
|
plus extraordinary, unusual or non-operating cash losses
or payments (such as non-cash equivalent investments (i.e.
long-term investments) and investments in operating businesses).
On March 15, 2011, the Board of Directors granted an option
(the Option) to Mr. Anderson to purchase
439,000 shares (the Option Shares) of Common
Stock at a price of $0.51 per share (the Option
Price), which was the closing price of the Common Stock as
quoted by Pink OTC Markets inter-dealer quotation service
on March 15, 2011. The Option was granted pursuant to a
Stock Option Agreement between the Company and Mr. Anderson
(the Optionee) on March 15, 2011 (the
Option Agreement).
The Option vests and becomes exercisable in four equal
installments on December 31 of 2012, 2013, 2014 and
2015 and terminates on March 15, 2021. The
Option was granted directly by the Board of Directors and was
not granted under the Companys existing 2004 Incentive
Stock Plan, as amended.
The Option is subject to certain anti-dilution protections,
including with respect to the Series C Offer and the
Series D Exchange. If the Company does not complete the
proposed Recapitalization of its preferred stock by
December 31, 2011, the number of Option Shares will be
reduced by 198,297, and the number of shares vesting over time
shall be adjusted accordingly on a pro-rata basis. Until
December 31, 2014 or the satisfaction of certain conditions
relating to the inapplicability of the Companys net
operating loss carryforwards, Mr. Anderson is not permitted
to exercise the Option if, after such exercise,
Mr. Anderson would be deemed to own more than 4.9% of the
outstanding stock of the Company.
Upon Mr. Andersons termination from employment with
the Company for Good Reason or without Cause, or upon a Change
in Control (each as defined in below), the vesting of the Option
will be accelerated and the full number of then-unexercised
Option Shares will become exercisable in full. Upon the
occurrence of the aforementioned events, the Company may, at its
election, pay Mr. Anderson an immediate cash lump sum equal
to the excess of the value of shares of Common Stock for which
the Option has not yet been exercised over the applicable
exercise price payable for such shares, whereupon such payment
shall fully satisfy the Companys obligations under the
Option Agreement.
Upon Mr. Andersons death or Disability, defined in
the Option Agreement as permanent and total disability as
determined under the Companys disability program or
policy, the Option may be exercised, to the extent the Option
Shares are then vested, for a period of twelve months after
death or Disability or until the expiration of the stated term
of such Option, whichever period is shorter. Upon
Mr. Andersons termination from employment with the
Company for Cause, the Option shall terminate.
For purposes of the Option Agreement:
Cause means the existence of, or a good faith
belief by the Company (as evidenced by the minutes or
resolutions of the Board of Directors) in the existence of,
facts which constitute a basis for termination of
Optionees employment due to Optionees:
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failure, in any material respect, to perform his primary duties
as Chief Executive Officer in accordance with reasonable
standards established by the Company;
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|
gross insubordination of a legitimate, material and explicit
direction of the Board of Directors or willful breach of
important policies and procedures of the Company, in any
material respect, that irrevocably impugn the Optionees
authority or integrity as an officer of the Company;
|
116
|
|
|
|
|
breach of fiduciary duties in any material respect; or
|
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|
|
conviction or plea of guilty or nolo contendere to a
felony or crime involving moral turpitude, misappropriation,
embezzlement or fraud.
|
A Change in Control shall be deemed to have
taken place if: (A) a third person, including a
group as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, purchases or otherwise acquires
shares of the Company after the date hereof and as a result
thereof becomes the beneficial owner of shares of the Company
having 50% or more of the total number of votes that may be cast
for election of directors of the Company, (B) as the result
of, or in connection with any cash tender or exchange offer,
merger or other business combination, or contested election, or
any combination of the foregoing transactions, the directors
then serving on the Board of Directors shall cease to constitute
a majority of the Board of the Company or any successor to
Directors, or (C) the Company sells all or substantially
all the assets of the Company.
Good Reason means the occurrence, without the
Optionees written consent, of any one or more of the
following events:
|
|
|
|
|
except in connection with the Companys termination of
Optionees employment for Cause or as a result of
Optionees death or disability: (i) a material (25% or
more) reduction in Optionees salary compensation; or
(ii) a decrease in the responsibilities or title of
Optionee to a level that, on the whole, is materially
inconsistent with the Chief Executive Officer position; or
|
|
|
|
the Company requires that Optionee relocate more than fifty
(50) miles from Kansas City, Missouri, and the Optionee
objects to such relocation in writing promptly (within
30 days) after being notified in writing thereof; or
|
|
|
|
the Companys material breach of any of the provisions of
this Agreement or of any other material agreement between the
Company and Optionee concerning compensation.
|
In conjunction with the Option Agreement, the Company and
Mr. Anderson also entered into a Registration Rights
Agreement on March 15, 2011 (the Anderson
Registration Rights Agreement). Under the Anderson
Registration Rights Agreement, the Company will, under certain
circumstances described in the Anderson Registration Rights
Agreement and subject to customary restrictions, use its
reasonable best efforts to register all or any part of
Mr. Andersons Registrable Securities (as defined in
the Anderson Registration Rights Agreement) on a
Form S-3
with the SEC so that his shares may be more easily resold.
Mr. Anderson does not have an employment agreement with the
Company.
Though Mr. Anderson was eligible to receive a bonus for
2010 at the sole discretion of the Compensation Committee, the
Compensation Committee decided not to grant Mr. Anderson a
bonus.
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 received 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 of Directors (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) discretion of the Board of Directors with particular
focus on capital restructuring, stockholder communications and
other areas to be identified by the Compensation Committee and
Mr. Anderson. In March 2011, Mr. Schwatken was awarded
the maximum bonus payout of $100,000 for 2010 performance.
117
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
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:
|
|
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|
|
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 or 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;
|
|
|
|
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
|
|
|
|
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 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;
|
118
|
|
|
|
|
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 the 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 two-thirds (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, ceases 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
|
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|
|
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.
|
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 of
Directors 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
$5,000, respectively.
All directors receive reimbursement of reasonable
out-of-pocket
expenses incurred in connection with meetings of the Board of
Directors. No director who is an employee of NovaStar Financial
will receive separate compensation for services rendered as a
director.
The following table sets forth the compensation for each of our
non-employee directors for the fiscal year ended
December 31, 2010.
|
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|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
Option
|
|
|
|
|
Paid in Cash
|
|
Awards
|
|
Total
|
Name
|
|
($)
|
|
($)(1)
|
|
($)
|
|
Gregory T. Barmore
|
|
$
|
55,000
|
|
|
$
|
1,018
|
(2)
|
|
$
|
56,018
|
|
Art N. Burtscher
|
|
|
55,000
|
|
|
|
1,018
|
(3)
|
|
|
56,018
|
|
Edward W. Mehrer
|
|
|
60,000
|
|
|
|
1,018
|
(4)
|
|
|
61,018
|
|
Donald M. Berman
|
|
|
42,500
|
|
|
|
1,018
|
(5)
|
|
|
43,518
|
|
Howard M. Amster
|
|
|
45,500
|
|
|
|
2,389
|
(6)
|
|
|
47,889
|
|
Barry A. Igdaloff
|
|
|
45,500
|
|
|
|
2,389
|
(7)
|
|
|
47,889
|
|
119
|
|
|
(1) |
|
Represents the dollar amount recognized for financial reporting
purposes for the fiscal year ended December 31, 2010, in
accordance with FASB ASC Topic 718 (disregarding estimates of
forfeitures), and includes amounts from stock option awards
granted in 2009 through 2010. See Note 18 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 2010. The grant date fair value of
Mr. Barmores option award was $1,018. The aggregate
number of option awards outstanding at December 31, 2010
for Mr. Barmore was 12,267. |
|
(3) |
|
Mr. Burtscher received an Annual Grant of 1,250
fully-vested options in 2010. The grant date fair value of
Mr. Burtschers option award was $1,018. The aggregate
number of option awards outstanding at December 31, 2010
for Mr. Burtscher was 16,250. |
|
(4) |
|
Mr. Mehrer received an Annual Grant of 1,250 fully-vested
options in 2010. The grant date fair value of
Mr. Mehrers option award was $1,018. The aggregate
number of option awards outstanding at December 31, 2010
for Mr. Mehrer was 14,687. |
|
(5) |
|
Mr. Berman received an Annual Grant of 1,250 fully-vested
options in 2010. The grant date fair value of
Mr. Bermans option award was $1,018. The aggregate
number of option awards outstanding at December 31, 2010
for Mr. Mehrer was 8,216. |
|
(6) |
|
Represents the amortization of the vesting of
Mr. Amsters New Director Grant of 2,500 options upon
his election to the Board of Directors in June 2009 and the
$1,018 grant date fair value of Mr. Amsters Annual
Grant of 1,250 fully-vested options in 2010. The aggregate
number of option awards outstanding at December 31, 2010
for Mr. Amster was 3,750. |
|
(7) |
|
Represents the amortization of the vesting of
Mr. Igdaloffs New Director Grant of 2,500 options
upon his election to the Board of Directors in June 2009 and the
$1,018 grant date fair value of Mr. Igdaloffs Annual
Grant of 1,250 fully-vested options in 2010. The aggregate
number of option awards outstanding at December 31, 2010
for Mr. Igdaloff was 3,750. |
CORPORATE
GOVERNANCE AND RELATED MATTERS
Director
Independence
A majority of the directors of the Board of Directors must meet
the criteria for independence as established by the Board of
Directors. The Companys criteria provide that a director
will not qualify as independent unless the Board of Directors
affirmatively determines that the director has no material
relationship with the Company. The Board of Directors has
adopted, upon recommendation from the Nominating and Corporate
Governance Committee, a set of categorical standards to form the
basis for the Board of Directors 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 of
Directors Leadership Structure
W. Lance Anderson, the Companys Chief Executive
Officer, serves as the Chairman of the Board. The Board of
Directors 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
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business strategy and allows Mr. Anderson to more
effectively represent the Company with its various constituents.
Additionally, Mr. Andersons in-depth knowledge of the
Company and its business provides the Board of Directors with
the leadership needed to set the strategic focus and direction
for the Company. At the same time, the Board of Directors
Lead Independent Director role provides an 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:
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Approve an appropriate schedule of the Board of Directors
meetings, seeking to ensure the independent directors can
perform their duties responsibly while not interfering with the
flow of the Companys operations;
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Review agendas for the Board of Directors and committee meetings;
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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 of Directors, the Lead
Independent Director may specifically request the inclusion of
certain material;
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Whenever appropriate, direct the retention of consultants who
report directly to the Board of Directors;
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Assist the Board of Directors 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;
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Coordinate an agenda for the Board of Directors
independent directors;
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Evaluate, along with the members of the Compensation Committee
and the full Board of Directors, the Chief Executive
Officers performance and meet with the Chief Executive
Officer to discuss the Board of Directors
evaluation; and
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Review the membership and performance of the various committees
of the Board of Directors and committee chairs.
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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 of Directors and
where the Lead Independent Director is not sufficiently active
or successful in providing meaningful leadership for the Board
of Directors, the Lead Independent Director will be replaced.
Board of
Directors Attendance and Annual Meeting Policy
During 2010, there were ten meetings of the Board of Directors.
Each director participated in at least 75% of the meetings of
the Board of Directors 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 stockholders meetings. Two directors attended the 2010
annual meeting of stockholders.
Membership
and Meetings of Committees of the Board of Directors
The Board of Directors has three standing committees: Audit,
Nominating and Corporate Governance and Compensation. For
information regarding the Special Committee and the meetings
thereof, please see Background of the
Recapitalization. The Nominating and Corporate Governance
Committee makes recommendations to the Board of Directors
concerning committee memberships and appointment of chairpersons
for each committee, and the Board of Directors 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.
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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 2010, the Audit Committee met four
times.
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The purpose of the Audit Committee is to assist the Board of
Directors 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.
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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 met
two times during 2010.
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The purpose of the Nominating & Corporate Governance
Committee is to: (i) identify individuals qualified to
become members of the Board of Directors consistent with the
criteria established by the Board of Directors,
(ii) recommend to the Board of Directors the director
nominees for the next annual stockholders meeting,
(iii) lead the Board of Directors in the annual review of
the Board of Directors 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 of Directors.
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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 2010, the Compensation Committee
met two times.
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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 of Directors any new
incentive-compensation and equity-based plans that are subject
to 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.
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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 of Directors
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
stockholder 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 Board of Directors 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 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 of
Directors 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 of Directors believes its leadership structure
enhances overall risk oversight. While the Board of Directors
requires risk assessments from management, the combination of
director 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, stockholders 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. Stockholder nominations
should be addressed to: NovaStar Financial, Inc., 2114 Central
Street, Suite 600, Kansas City, MO 64108, attention
Corporate
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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 of Directors to fulfill its responsibilities. 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:
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Any executive officer, or any director or nominee for election
as a director;
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Any person who owns more than 5% of the Companys voting
securities;
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Any immediate family member of any of the foregoing; or
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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.
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Under the policy, the Board of Directors 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 of Directors will either ratify the 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 of Directors 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.
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No director may engage in any discussion or approval by the
Board of Directors of any related party transaction in which he
or she is a related party, but that director is required to
provide the Board of Directors with all material information
reasonably requested concerning the transaction.
In conjunction with adopting this policy, the Board of Directors
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 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 last
installment (which constituted the remaining balance) of the
promissory note was forgiven by the Company as scheduled.
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 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 D 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
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the Investors. In lieu of designating members of the Board of
Directors, the Investors have the right to designate Board
Observers who receive, subject to certain exceptions, all
materials that are provided to members of the Board of Directors
and who are entitled to attend, but not vote at, all meetings of
the Board of Directors. 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 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 D 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 of Directors 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.
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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 and
Transactions 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 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 Holders
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 stockholders. 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 Board of Directors
resulting in the loss of the Companys existing net
operating losses, or (d) a determination by the Board of
Directors 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, each Series D Holder has the right to appoint
either an observer (without voting rights) or a director (with
voting rights) (a Board Director) to the Board of
Directors. In the event a Series D Holder elects to appoint
a representative to the Board of Directors, the Company will be
required to expand the size of its Board of Directors pursuant
to the companys bylaws and appoint such Board Director to
the Board of Directors. 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. 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 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 46,400 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.
On December 10, 2010, Messrs. Amster and Igdaloff (the
Committed Directors) entered into the Voting
Agreement with the Company. Under the terms of the Voting
Agreement, the Committed Directors have agreed to be present, in
person or by proxy, at each and every stockholder 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 Stock owned or controlled directly or
indirectly by the Committed Directors in favor of any proposal
that receives the recommendation of the 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
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expand the Board of Directors by two positions and appoint the
Committed Directors to fill the newly-created positions.
Moreover, at the next annual meeting of stockholders 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 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. 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.
128
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 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 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 [ ], 2011 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
129
Preferred Stock since October 2007. Accrued and unpaid dividends
payable related to the Series C Preferred Stock were
approximately $23.6 million as of April 15, 2011.
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:
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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;
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reclassify any authorized equity securities into any such senior
equity securities;
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create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase any such
senior equity securities; or
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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.
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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 $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.
If the Series C Offer closes, each share of the
Series C Preferred Stock not tendered in the Series C
Offer will be converted by Article V of the Articles of
Amendment and Restatement into the right to receive its pro rata
share of the Remainder Consideration. See The
Series C Offer and Consent Solicitation
General.
Series D
Preferred Stock
As of [ ], 2011, 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 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 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.
130
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
[ ], 2011, 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 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
131
and unpaid dividends payable related to the Series D
Preferred Stock were approximately $32.3 million as of
April 15, 2011.
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:
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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;
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approve or make any amendment to the terms of the Series D
Preferred Stock or the corresponding Articles Supplementary;
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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;
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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;
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consummate any transaction that could or could, reasonably be
expected to, individually or in the aggregate, adversely affect
or impair the rights, privileges or preferences of the
Series D Holders in such capacity; or
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enter into any contract, agreement, commitment or understanding
with respect to any of the foregoing.
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MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
There should be no material United States federal income tax
consequences to holders of our Common Stock related to the
Series C Offer or the Series D Exchange because
holders of Common Stock cannot participate in the Series C
Offer or Series D Exchange.
LEGAL
MATTERS
The legality of the securities offered in the Series C
Offer will be passed upon for us by Bryan Cave LLP, Kansas City,
Missouri.
EXPERTS
The financial statements as of December 31, 2010 and 2009,
and for each of the two years in the period ended
December 31, 2010, included in this proxy statement have
been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report
appearing herein. Such financial statements are included in
reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
Representatives of Deloitte & Touche LLP are not
expected to attend the special meeting, and are thus, not
expected to be available to respond to appropriate questions
raised at the special meeting. Representatives of
Deloitte & Touche LLP will not have an opportunity to
make a statement at the special meeting.
132
OTHER
BUSINESS
The Board of Directors knows of no other matters which may be
presented for shareholder 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 2012 ANNUAL
MEETING
Any stockholder proposal, including the nomination of a
director, intended to be presented at the 2012 annual meeting of
stockholders and included in the proxy statement and form proxy
relating to such meeting, must have been received at the
Companys offices on or before January 6, 2012.
In addition, the Companys bylaws provide that any
stockholder wishing to bring any matter, including the
nomination of a director, before an annual meeting must have
delivered notice to the Corporate Secretary of the
Companys principal executive offices on or before
February 7, 2012.
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 be named in the proxy statement as a nominee
and to serve 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 at the Companys principal
executive offices regarding the requirements for making
stockholder proposals and nominating director candidates in the
future.
ADDITIONAL
INFORMATION
Householding
of Proxy Materials
In December 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 on
Form 10-K
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 on
Form 10-K
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 or the Company at the address provided above.
133
Annual
Report on
Form 10-K
A copy of the Companys Annual Report on
Form 10-K
for the year ended December 31, 2010, which contains
audited financial statements and financial statement schedules,
may be obtained without charge by visiting the Companys
website at www.novastarfinancial.com or upon written request to
NovaStar Financial, Inc., Investor Relations, 2114 Central
Street, Suite 600, Kansas City, Missouri 64108.
The Annual Report on
Form 10-K
includes a list of all exhibits thereto. The Company will
furnish written copies of such exhibits upon written request
therefor and payment of the Companys reasonable expenses
in furnishing such exhibits.
The Company filed the certifications of its chief executive
officer and chief financial officer required under
Section 302 of the Sarbanes-Oxley Act of 2002 to be filed
with the SEC as exhibits to the Annual Report on
Form 10-K
for the years ended December 31, 2010 and 2009.
BY ORDER OF THE BOARD OF DIRECTORS
W. Lance Anderson
Chairman of the Board
Kansas City, Missouri
[ ], 2010
134
NOVASTAR
FINANCIAL, INC.
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F-2
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Audited Consolidated Financial Statements
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F-3
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F-4
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F-5
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F-6
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F-8
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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, 2010 and 2009, 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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, 2010 and 2009, and the results
of its operations and its cash flows for each of the years then
ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE &
TOUCHE LLP
Kansas City, Missouri
March 22, 2011
F-2
NOVASTAR
FINANCIAL, INC.
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December 31,
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December 31,
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2010
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2009
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(Dollars in thousands, except share amounts)
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ASSETS
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Current Assets
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Cash and cash equivalents
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$
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12,582
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$
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7,104
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Mortgage securities (includes CDO securities of $1,198 and $959,
respectively)
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5,778
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7,990
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Notes receivable, net of allowance of $1,047 and $300,
respectively
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3,965
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4,920
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Service fee receivable, net of allowance of $42 and $22,
respectively
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1,924
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868
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Other current assets (includes CDO other assets of $299 and
$428, respectively)
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3,291
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6,633
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Total current assets
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27,540
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27,515
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Securitization Trust Assets
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Mortgage loans
held-in-portfolio,
net of allowance of $0 and $712,614, respectively
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1,289,474
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Accrued interest receivable
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74,025
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Real estate owned
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64,179
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Total securitization trust assets
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1,427,678
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Non-Current Assets
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Property and equipment, net of depreciation
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4,821
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1,803
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Goodwill
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3,170
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Other assets
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2,330
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2,495
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Total non-current assets
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10,321
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4,298
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Total assets
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$
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37,861
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$
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1,459,491
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LIABILITIES AND SHAREHOLDERS DEFICIT
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Liabilities:
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Current Liabilities
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Accounts payable
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$
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4,590
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$
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1,949
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Accrued expenses
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5,883
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6,801
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Dividends payable
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50,900
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34,402
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Other current liabilities (includes CDO debt and other
liabilities of $1,497 and $1,396, respectively)
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2,103
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2,962
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Total current liabilities
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|
63,476
|
|
|
|
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
|
|
|
78,086
|
|
|
|
77,815
|
|
Other liabilities
|
|
|
2,842
|
|
|
|
928
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
80,928
|
|
|
|
78,743
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
144,404
|
|
|
|
2,536,043
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Shareholders deficit:
|
|
|
|
|
|
|
|
|
Capital stock, $0.01 par value, 50,000,000 shares
authorized:
|
|
|
|
|
|
|
|
|
Redeemable preferred stock, $25 liquidating preference per share
($74,750 in total); 2,990,000 shares, issued and outstanding
|
|
|
30
|
|
|
|
30
|
|
Convertible participating preferred stock, $25 liquidating
preference per share $(52,500 in total); 2,100,000 shares,
issued and outstanding
|
|
|
21
|
|
|
|
21
|
|
Common stock, 9,368,053, shares issued and outstanding
|
|
|
94
|
|
|
|
94
|
|
Additional paid-in capital
|
|
|
787,363
|
|
|
|
786,989
|
|
Accumulated deficit
|
|
|
(898,195
|
)
|
|
|
(1,868,398
|
)
|
Accumulated other comprehensive income
|
|
|
4,411
|
|
|
|
5,111
|
|
Other
|
|
|
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Total NovaStar Financial, Inc. (NFI)
shareholders deficit
|
|
|
(106,276
|
)
|
|
|
(1,076,223
|
)
|
Noncontrolling interests
|
|
|
(267
|
)
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
|
(106,543
|
)
|
|
|
(1,076,552
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders deficit
|
|
$
|
37,861
|
|
|
$
|
1,459,491
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
NOVASTAR
FINANCIAL, INC.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands, except share amounts)
|
|
|
Income and Revenues:
|
|
|
|
|
|
|
|
|
Service fee income
|
|
$
|
75,168
|
|
|
$
|
31,106
|
|
Interest income mortgage loans on securitization
trusts
|
|
|
10,848
|
|
|
|
131,301
|
|
Interest income mortgage securities
|
|
|
11,504
|
|
|
|
21,656
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
97,520
|
|
|
|
184,063
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
66,475
|
|
|
|
32,221
|
|
Interest expense asset-backed bonds
|
|
|
1,416
|
|
|
|
21,290
|
|
Provision for credit losses on securitization trusts
|
|
|
17,433
|
|
|
|
260,860
|
|
Servicing fees on securitization trusts
|
|
|
731
|
|
|
|
10,639
|
|
Premiums for mortgage loan insurance on securitization trusts
|
|
|
308
|
|
|
|
6,178
|
|
Selling, general and administrative expense
|
|
|
19,314
|
|
|
|
20,777
|
|
Gain on derecognition of securitization trusts
|
|
|
(993,131
|
)
|
|
|
|
|
Other expense
|
|
|
390
|
|
|
|
13,905
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(887,064
|
)
|
|
|
365,870
|
|
Other income
|
|
|
787
|
|
|
|
887
|
|
Interest expense on trust preferred securities
|
|
|
(1,073
|
)
|
|
|
(1,128
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
984,298
|
|
|
|
(182,048
|
)
|
Income tax (benefit) expense
|
|
|
(1,356
|
)
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
985,654
|
|
|
|
(183,156
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
(1,048
|
)
|
|
|
(2,054
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to NFI
|
|
$
|
986,702
|
|
|
$
|
(181,102
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share attributable to NFI:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
86.53
|
|
|
$
|
(20.97
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
86.53
|
|
|
$
|
(20.97
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
NOVASTAR
FINANCIAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Noncontrolling interests from acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2010
|
|
$
|
30
|
|
|
$
|
21
|
|
|
$
|
94
|
|
|
$
|
786,989
|
|
|
$
|
(1,868,398
|
)
|
|
$
|
5,111
|
|
|
$
|
(70
|
)
|
|
$
|
(329
|
)
|
|
$
|
(1,076,552
|
)
|
Forgiveness of founders notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
70
|
|
Compensation recognized under stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374
|
|
Accumulating dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,499
|
)
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(388
|
)
|
|
|
(388
|
)
|
Noncontrolling interests from acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,498
|
|
|
|
1,498
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
986,702
|
|
|
|
|
|
|
|
|
|
|
|
(1,048
|
)
|
|
|
985,654
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
984,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
30
|
|
|
$
|
21
|
|
|
$
|
94
|
|
|
$
|
787,363
|
|
|
$
|
(898,195
|
)
|
|
$
|
4,411
|
|
|
$
|
|
|
|
$
|
(267
|
)
|
|
$
|
(106,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
NOVASTAR
FINANCIAL, INC.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
985,654
|
|
|
$
|
(183,156
|
)
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Impairment on mortgage securities
available-for-sale
|
|
|
|
|
|
|
1,198
|
|
(Gain) Loss on derivative instruments
|
|
|
(26
|
)
|
|
|
4,665
|
|
Depreciation expense
|
|
|
937
|
|
|
|
869
|
|
Amortization of deferred debt issuance costs
|
|
|
597
|
|
|
|
2,239
|
|
Compensation recognized under stock compensation plans
|
|
|
374
|
|
|
|
710
|
|
Provision for credit losses
|
|
|
17,433
|
|
|
|
260,860
|
|
Amortization of premiums on mortgage loans
|
|
|
430
|
|
|
|
2,443
|
|
Interest capitalized on loans
held-in-portfolio
|
|
|
|
|
|
|
(1,550
|
)
|
Gain on derecognition of securitization trusts
|
|
|
(993,131
|
)
|
|
|
|
|
Forgiveness of founders promissory notes
|
|
|
70
|
|
|
|
69
|
|
Provision for bad debt on notes receivable
|
|
|
746
|
|
|
|
|
|
Fair value adjustments of trading securities and CDO debt
|
|
|
(1,068
|
)
|
|
|
6,743
|
|
Accretion of mortgage securities
|
|
|
(4,001
|
)
|
|
|
(23,528
|
)
|
Other
|
|
|
6
|
|
|
|
|
|
Changes, net of impact of business acquisitions, in:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
1,300
|
|
|
|
3,267
|
|
Service fee receivable
|
|
|
(1,056
|
)
|
|
|
(749
|
)
|
Other assets and other liabilities
|
|
|
1,827
|
|
|
|
(3,421
|
)
|
Due to servicer
|
|
|
(5,080
|
)
|
|
|
19,220
|
|
Accounts payable and accrued expenses
|
|
|
1,603
|
|
|
|
(21,566
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities from
continuing operations
|
|
|
6,615
|
|
|
|
68,313
|
|
Net cash used in operating activities from discontinued
operations
|
|
|
|
|
|
|
(1,095
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
6,615
|
|
|
|
67,218
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from paydowns of mortgage securities
|
|
|
5,355
|
|
|
|
18,479
|
|
Proceeds from mortgage loans
held-in-portfolio
|
|
|
15,040
|
|
|
|
98,933
|
|
Proceeds from sales of assets acquired through foreclosure
|
|
|
15,154
|
|
|
|
129,815
|
|
Restricted cash proceeds, net
|
|
|
3,940
|
|
|
|
705
|
|
Issuance of notes receivable
|
|
|
(657
|
)
|
|
|
|
|
Proceeds from notes receivable
|
|
|
500
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(496
|
)
|
|
|
(1,324
|
)
|
Proceeds from disposal of property and equipment
|
|
|
|
|
|
|
6
|
|
Acquisition of businesses, including contingent consideration
paid, net of cash acquired
|
|
|
(4,198
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities from continuing
operations
|
|
|
34,638
|
|
|
|
246,616
|
|
|
|
|
|
|
|
|
|
|
F-6
NOVASTAR
FINANCIAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on asset-backed bonds
|
|
|
(35,341
|
)
|
|
|
(331,670
|
)
|
(Distributions to) Contributions from noncontrolling interest
|
|
|
(388
|
)
|
|
|
150
|
|
Other
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities from continuing operations
|
|
|
(35,775
|
)
|
|
|
(331,520
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
5,478
|
|
|
|
(17,686
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
7,104
|
|
|
|
24,790
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
12,582
|
|
|
$
|
7,104
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Cash paid for interest
|
|
$
|
4,272
|
|
|
$
|
33,726
|
|
Cash refunded for income taxes
|
|
|
170
|
|
|
|
38
|
|
Cash received on mortgage securities
available-for-sale
with no cost basis
|
|
|
7,503
|
|
|
|
1,872
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Assets acquired through foreclosure
|
|
|
6,283
|
|
|
|
123,190
|
|
Exchange of noncontrolling interests notes receivable for
contingent earnings payout
|
|
|
366
|
|
|
|
|
|
Preferred stock dividends accrued, not yet paid
|
|
|
16,499
|
|
|
|
15,312
|
|
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 consolidated financial statements.
F-7
NOVASTAR
FINANCIAL, INC.
|
|
Note 1.
|
Basis of
Presentation, Business Plan and Liquidity
|
Description of Operations NovaStar Financial,
Inc. and its subsidiaries (NFI or the
Company) own 88% of StreetLinks 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 independent
residential appraisers. 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 owns 74% of Advent Financial Services LLC
(Advent). The Company originally purchased 70% of
Advent, the additional 4% was acquired upon termination of
employees who held noncontrolling interests during 2010. Advent
provides financial settlement services, along with its
distribution partners, mainly through income tax preparation
businesses and also 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 is not a bank, but acts as an intermediary for these
products on behalf of other banking institutions.
A primary distribution channel of Advents bank products is
by way of settlement services to electronic income tax return
originators. Advent provides a process for the originators to
collect refunds from the Internal Revenue Service, distribute
fees to various service providers and deliver the net refund to
individuals. Individuals may elect to have the net refund
dollars deposited to a bank account offered through Advent.
Individuals also have the option to have the net refund dollars
paid by check or to an existing bank account. Regardless of the
settlement method, Advent receives a fee from the originator for
providing the settlement service. Advent also distributes its
banking products via other methods, including through employers
and employer service organizations. Advent receives fees from
banking institutions and from the bank account owner for
services related to the use of the funds deposited to
Advent-offered bank accounts.
During 2010, StreetLinks 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 the lender
to manage their mortgage origination business.
Prior to 2009, 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 year ended December 31, 2010 of $993.1 million.
These transactions are discussed in greater detail in
Note 4 to the consolidated financial statements. The
Companys collateralized debt obligation (CDO)
is the only trust that is consolidated in the financial
statements as of December 31, 2010.
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). 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
F-8
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
to recognize interest income. 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.
The 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.
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.
In November 2010, StreetLinks acquired 51% of Corvisa, a
technology company that develops and markets its software
products to mortgage lenders. 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.
Liquidity The Company had $12.6 million
in cash and cash equivalents as of December 31, 2010, which
was an increase of $5.5 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 year ended December 31, 2010, StreetLinks had
revenues of $75.2 million as compared to $31.1 million
for the year ended December 31, 2009. StreetLinks had
significant growth during 2010 compared to 2009 as new customers
were rapidly added. Infrastructure changes and added
efficiencies gained through automation have decreased selling,
general and administrative expenses relative to the increased
production.
During 2010, the Company received $12.9 million in cash on
our mortgage securities portfolio, compared to
$18.5 million in 2009. During 2010, the Company used cash
to pay for corporate and administrative costs, the contingent
consideration payments related to the StreetLinks acquisition
and the investment in Corvisa of $1.5 million.
As of December 31, 2010, the Company had a working capital
deficiency of $35.9 million. This was mainly attributable
to dividends payable of $50.9 million being classified as a
current liability, although the Company does not expect to pay
the dividends due to managements effort to conserve cash.
The accrued and unpaid dividends would be eliminated through the
recapitalization of the 8.90% Series C Cumulative
Redeemable Preferred Stock, par value $0.01 per share (the
Series C Preferred Stock) and the 9.00%
Series D1 Mandatory Convertible Preferred Stock, par value
$0.01 (the Series D Preferred Stock).
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
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.
|
Summary
of Significant Accounting and Reporting Policies
|
Cash and Cash Equivalents and Restricted
Cash. The Company considers investments with
original maturities of three months or less at the date of
purchase to be cash equivalents. 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
F-9
indemnification of losses incurred by the counterparties.
Current restricted cash is included in the other current assets
line item of the consolidated balance sheets, noncurrent
restricted cash is included in the other assets, noncurrent line
item of the consolidated balance sheets.
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,
2010 and 2009, 86% and 41% 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 and restricted cash
aggregated $12.9 million and $11.3 million as of
December 31, 2010 and 2009, respectively.
Revenue Recognition. Service fee revenues
consist primarily of fees for real estate valuation management
services provided by StreetLinks. Fees are recognized in the
period in which the product is delivered to the customer.
Deferred revenue is recorded when payments are received in
advance of performing our service obligations and is recognized
in accordance with the above criteria.
Cost of Services. 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 of certain employees, occupancy costs,
depreciation of equipment used in the production process, and
other expenses necessary to the production process.
Notes Receivable and Allowance for Doubtful
Accounts. To maximize the use of our excess cash,
we have made loans to independent entities. The borrowing entity
used the proceeds to finance on-going and current operations.
Notes receivable are considered delinquent, based on current
information and events, if it is probable that we will be unable
to collect all amounts due that are contractually obligated. The
Company determines the required allowance for doubtful accounts
using information such as the borrowers financial
condition and economic trends and conditions. Recognition of
income is suspended and the loan is placed on non-accrual status
when management determines that collection of future income is
not probable. Accrual is resumed, and previously suspended
income is recognized, when the loan becomes contractually
current
and/or
collection doubts are removed. Cash receipts on impaired loans
or finance leases are recorded against the receivable and then
to any unrecognized income.
The Company determines the required allowance for doubtful
accounts using information such as the status of the note,
borrowers financial condition and economic trends and
conditions. The Company charges off uncollectible notes
receivable when repayment of contractually-obligated amounts is
not deemed to be probable. There were no amounts charged off
during the years ended December 31, 2010 or 2009. Due to
the low number of notes receivable, the Company evaluates each
note individually for collectability. As a result of this
review, there were additional provisions made for credit losses
of $0.7 million and $0.3 million during the years
ended December 31, 2010 and 2009, respectively. As the
Company only has a minimal number of notes receivable and the
notes are due from companies, the Company does not analyze its
notes receivable by class or by credit quality indicator.
The Company has a note receivable due from an entity with which
we are currently in litigation. The balance of this note
receivable was $4.4 million and $3.0 million as of
December 31, 2010 and 2009, respectively. This note
receivable could become completely impaired dependent upon the
outcome of the litigation and the financial means of the entity
to repay the note.
As of December 31, 2010, the remaining $0.6 million of
notes receivable was 90 days or more past due and still
accruing.
F-10
Activity in the allowance for credit losses on notes receivable
is as follows for the year ended December 31, 2010 and
2009, respectively (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning of period
|
|
$
|
300
|
|
|
$
|
|
|
Provision for credit losses
|
|
|
747
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
1,047
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
The Company had no modifications of notes receivable agreements
for the years ended December 31, 2010 or 2009.
Mortgage Securities
Available-for-Sale. 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 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.
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
carrying 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. 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 four
residual securities along with subordinated securities as of
December 31, 2010 and one residual security at
December 31, 2009 and 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.
Goodwill. Goodwill represents cost in excess
of fair values assigned to the underlying net assets of acquired
businesses. The goodwill is currently allocated to the
Companys appraisal management reporting unit and is tested
for impairment at least annually or more frequently, when a
triggering event occurs. 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
F-11
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 and recorded in other
expense in the statement of operations. The impairment test in
2010 indicated that there was a significant excess of fair value
over the carrying amount and no impairment was incurred.
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 credit 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 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
and performance based awards on the Companys common stock
have been exercised, unless the exercise would be antidilutive.
F-12
As a result of the convertible participating preferred stock
being considered participating securities, earnings per share 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 year ended December 31, 2010,
the two-class method calculation was more dilutive; therefore,
earnings per share 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 year ended December 31, 2009, as the convertible
participating preferred stockholders do not have an obligation
to participate in losses, no allocation of undistributed losses
was necessary.
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.
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.
F-13
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.
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(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 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 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 at that date. 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 year ended
December 31, 2010. See Note 4 to the consolidated
financial statements for further details.
In July 2010, the FASB issued Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit
Losses. The guidance significantly expands 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 became 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
F-14
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 did not have a significant effect on the
Companys financial statements. See Notes Receivable
and Allowance for Doubtful Accounts section above for the
required disclosures.
|
|
Note 3.
|
Business
Combinations
|
On November 4, 2010, StreetLinks 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
the 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, with the understanding that
the targets must be achieved by December 31, 2012. The
purchase price for the Corvisa acquisition has been allocated
based on the assessment of the fair value of the assets acquired
and liabilities assumed, determined based on the Companys
internal operational assessments and other analyses which are
Level 3 measurements. Pro forma disclosure requirements
have not been included as they are not considered significant.
The Companys financial statements include the results of
operation of Corvisa from the date of acquisition. All legal and
other related acquisition costs were expensed as incurred and
recorded in the selling, general and administrative expense line
item of the consolidated statements of operation, and were not
material.
A summary of the aggregate amounts of the assets acquired and
liabilities assumed and the aggregate consideration paid for the
year ended December 31, 2010 follows (dollars in thousands):
|
|
|
|
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
Cash
|
|
$
|
107
|
|
Other current assets
|
|
|
50
|
|
Property and equipment, net
|
|
|
3,465
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
(131
|
)
|
Accrued expenses
|
|
|
(34
|
)
|
Other noncurrent liabilities
|
|
|
(459
|
)
|
Noncontrolling interests
|
|
|
(1,498
|
)
|
|
|
|
|
|
Total cash consideration
|
|
$
|
1,500
|
|
|
|
|
|
|
See Note 13 to the consolidated financial statements
regarding contingent consideration payment on a prior year
acquisition.
|
|
Note 4.
|
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 as of January 25, 2010.
F-15
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 as of January 25, 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 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
|
|
|
|
|
|
|
|
|
Note 5.
|
Mortgage
Loans
Held-in-Portfolio
and Securitization Transactions
|
Mortgage loans
held-in-portfolio,
all of which are 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 December 31, 2010 due to the derecognition of the
securitization trusts, see Note 4 to the 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
F-16
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.
Mortgage loans
held-in-portfolio
are serviced by a third party entity. There was not a
significant number or amount of servicer modified loans during
the year ended December 31, 2010 due to the derecognition
of securitization trusts, see Note 4 to the consolidated
financial statements for further details. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
|
Total Principal
|
|
|
Principal Amount of
|
|
|
|
|
|
|
Amount of
|
|
|
Loans 60 Days or
|
|
|
Net Credit
|
|
|
|
Loans(A)
|
|
|
More Past Due
|
|
|
Losses(B)
|
|
|
Loans securitized
|
|
$
|
6,570,308
|
|
|
$
|
3,296,863
|
|
|
$
|
735,892
|
|
Loans
held-in-portfolio
|
|
|
2,138,500
|
|
|
|
1,243,731
|
|
|
|
321,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans securitized or
held-in-portfolio
|
|
$
|
8,708,808
|
|
|
$
|
4,540,594
|
|
|
$
|
1,056,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. Interest-only loan
products made up 10% of the loans classified as
held-in-portfolio
as of December 31, 2009. In addition, as of
December 31, 2009, moving treasury average
(MTA) loan products made up 26% of the loans
classified as
held-in-portfolio.
These MTA loans had $1.6 million in negative amortization
during 2009. 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 at December 31, 2009. 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. These loans carried mortgage insurance and the accrual
will be discontinued when in managements opinion the
interest is not collectible.
F-17
Activity in the allowance for credit losses on mortgage
loans
held-in-portfolio
is as follows for the year ended December 31, 2010 and
2009, respectively (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning of period
|
|
$
|
712,614
|
|
|
$
|
776,001
|
|
Provision for credit losses
|
|
|
17,433
|
|
|
|
260,860
|
|
Charge-offs, net of recoveries
|
|
|
(27,146
|
)
|
|
|
(324,247
|
)
|
Derecognition of the securitization trusts
|
|
|
(702,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
|
|
|
$
|
712,614
|
|
|
|
|
|
|
|
|
|
|
Certain tables below present the assets and liabilities of
consolidated and unconsolidated VIEs in which 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
December 31, 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
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 4 to the 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 4
to the consolidated financial statements for further details.
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.
F-18
Collateralized Debt Obligations. The
collateral for the Companys CDO 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
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 reassess 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 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities After
|
|
|
|
|
|
|
Assets After Intercompany Eliminations
|
|
Intercompany
|
|
Recourse to the
|
Consolidated VIEs
|
|
Total Assets
|
|
Unrestricted
|
|
Restricted(A)
|
|
Eliminations
|
|
Company(B)
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDO(C)
|
|
$
|
1,499
|
|
|
$
|
|
|
|
$
|
1,497
|
|
|
$
|
1,497
|
|
|
$
|
|
|
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. |
|
(C) |
|
For the CDO, assets are primarily recorded in Mortgage
securities and Other current assets 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
|
|
December 31, 2010
|
|
$
|
7,189,121
|
(D)
|
|
$
|
4,580
|
|
|
$
|
|
|
|
$
|
4,580
|
|
|
$
|
|
|
|
$
|
11,362
|
|
December 31, 2009
|
|
|
6,570,308
|
|
|
|
7,031
|
|
|
$
|
|
|
|
|
7,031
|
|
|
$
|
|
|
|
|
15,867
|
|
|
|
|
(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 year
ended December 31, 2010, size/principal outstanding
includes NHEL
2006-1, NHEL
2006-MTA1 and NHEL
2007-1 as of
December 31, 2010. |
F-19
Retained interests are recorded in the 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 consolidated statements of
operations, or as
available-for-sale
securities, with changes in fair value included in accumulated
other comprehensive income.
The following table presents information on retained interests
held by the Company as of December 31, 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
|
|
$
|
4,580
|
|
Weighted average life (in years)
|
|
|
2.73
|
|
Weighted average prepayment speed assumption (CPR) (percent)
|
|
|
13.6
|
|
Fair value after a 10% increase in prepayment speed
|
|
$
|
4,249
|
|
Fair value after a 25% increase in prepayment speed
|
|
$
|
3,820
|
|
Weighted average expected annual credit losses (percent of
current collateral balance)
|
|
|
25.7
|
|
Fair value after a 10% increase in annual credit losses
|
|
$
|
4,379
|
|
Fair value after a 25% increase in annual credit losses
|
|
$
|
4,100
|
|
Weighted average residual cash flows discount rate (percent)
|
|
|
25.0
|
%
|
Fair value after a 500 basis point increase in discount rate
|
|
$
|
4,461
|
|
Fair value after a 1000 basis point increase in discount
rate
|
|
$
|
4,347
|
|
Market interest rates:
|
|
|
|
|
Fair value after a 100 basis point increase in market rates
|
|
$
|
3,401
|
|
Fair value after a 200 basis point increase in market rates
|
|
$
|
2,053
|
|
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.
|
|
Note 6.
|
Mortgage
Securities
|
Mortgage securities consist of securities classified as
available-for-sale
and trading as of December 31, 2010 and December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Mortgage securities
available-for-sale
|
|
$
|
4,580
|
|
|
$
|
6,903
|
|
Mortgage securities trading
|
|
|
1,198
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
Total mortgage securities
|
|
$
|
5,778
|
|
|
$
|
7,990
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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
F-20
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, 2010 and December 31, 2009 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Estimated Fair
|
|
Average
|
|
|
Cost Basis
|
|
Gain
|
|
Value
|
|
Yield(A)
|
|
As of December 31, 2010
|
|
$
|
169
|
|
|
$
|
4,411
|
|
|
$
|
4,580
|
|
|
|
483.2
|
%
|
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 year ended December 31, 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 during the year ended December 31,
2009. There were no impairments for the year ended
December 31, 2010.
Maturities of mortgage securities owned by the Company depend on
repayment characteristics and experience of the underlying
financial instruments.
As of December 31, 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 which are compared to
internal discounted cash flows. Refer to Note 11 for a
description of the valuation methods as of December 31,
2010 and December 31, 2009.
The following table summarizes the Companys mortgage
securities trading as of December 31, 2010 and
December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
Average
|
|
|
|
Original Face
|
|
|
Cost Basis
|
|
|
Fair Value
|
|
|
Yield(A)
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated securities pledged to CDO
|
|
$
|
369,507
|
|
|
$
|
73,900
|
|
|
$
|
1,198
|
|
|
|
|
|
Other subordinated securities
|
|
|
215,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
584,787
|
|
|
$
|
73,900
|
|
|
$
|
1,198
|
|
|
|
1.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Calculated from the ending fair value of the securities. |
The Company recognized net trading losses of $0.2 million
for the year ended December 31, 2010, as compared to net
trading losses of $11.8 million for the year ended
December 31, 2009. These net trading losses are included in
the other expense line on the Companys consolidated
statements of operations.
F-21
Junior
Subordinated Debentures
NFIs wholly-owned subsidiary NovaStar Mortgage, Inc.
(NMI) had 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 secured trust preferred securities
issued by the Trusts. NFI 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 Notes
mature in 2035 and 2036 at which time the total principal amount
is due.
The new preferred obligations required 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 occurred when the
ratio of EBITDA for any quarter ending on or after
December 31, 2008 to the product as of the last day of such
quarter, of the stated liquidation value of all outstanding
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 bore 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 during the year
ended December 31, 2010. See Note 19 for discussion of the
Trust Preferred Securities transaction in which the Notes were
cancelled.
Collateralized
Debt Obligation Issuance (CDO)
The collateral for the Companys CDO consists 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 of $1.2
and $5.1 million for the years ended December 31, 2010
and 2009, 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 18,
2011. 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 trading 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 trading, as collateral, are
recorded as assets of the Company and the ABB are recorded
F-22
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 its mortgage servicing
rights. The Company did retain separate independent rights to
require the buyer of its mortgage servicing rights to repurchase
loans from the trusts and subsequently sell them to the Company.
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, 2010.
The following is a summary of outstanding ABB and related loans
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Backed Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Mortgage Loans
|
|
|
|
|
|
|
Average
|
|
|
Months to
|
|
|
|
|
|
Weighted
|
|
|
|
Remaining
|
|
|
Interest
|
|
|
Call or
|
|
|
Remaining
|
|
|
Average
|
|
|
|
Principal
|
|
|
Rate
|
|
|
Maturity
|
|
|
Principal
|
|
|
Coupon
|
|
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABB Secured by Mortgage Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NovaStar ABS CDO I
|
|
$
|
324,662
|
(A)
|
|
|
0.81
|
%
|
|
|
12
|
|
|
|
|
(B)
|
|
|
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
The NovaStar ABS CDO I ABB are carried at a fair value of
$1.2 million and $1.0 million at December 31,
2010 and 2009, respectively, and are included in the other
current liabilities line item of the consolidated balance sheets. |
|
(B) |
|
Collateral for the NovaStar ABS CDO I are subordinated mortgage
securities. |
The expected repayment requirements relating to the CDO at
December 31, 2010 are difficult to estimate as they are
based on anticipated receipts from underlying mortgage security
collateral. In the event that receipts from the underlying
collateral are adversely impacted by credit losses, there could
be insufficient receipts available to repay the CDO principal.
As there is no recourse to the Company, it only expects to pay
out the amounts that it receives from the collateral.
F-23
|
|
Note 8.
|
Commitments
and Contingencies
|
Commitments. The Company leases office space
under various operating lease agreements. Rent expense for 2010
and 2009 aggregated $1.3 million and $1.9 million,
respectively. At December 31, 2010, future minimum lease
commitments under those leases are as follows (dollars in
thousands):
|
|
|
|
|
|
|
Lease
|
|
|
|
Obligations
|
|
|
2011
|
|
$
|
1,406
|
|
2012
|
|
|
969
|
|
2013
|
|
|
723
|
|
2014
|
|
|
73
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,171
|
|
|
|
|
|
|
The Company has sublease agreements for office space formerly
occupied by the Company and received approximately
$0.6 million and $0.7 million during the years ended
December 31, 2010 and 2009, respectively.
Contingencies
The Company has a contingent obligation related to a Corvisa
earn-out agreement based on future net income of up to
$0.6 million, which could be due to the former owners of
Corvisa. A liability of $0.5 million, based on
managements estimate of Corvisa achieving its earnings
targets, is included in the other liabilities line item of the
consolidated balance sheets as of December 31, 2010.
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, 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 not resulted in
significant losses 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 and due to the Companys belief that an adverse
ruling is not probable for the below-described claims, the
Company has not accrued a loss contingency related to the
following matters in its 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 Court
has not ruled on this motion and discovery regarding the
plaintiffs claims has not commenced. The
F-24
Company cannot provide an estimate of the range of any loss. 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. On February 21, 2011, the Company amended its
counterclaim, asserting additional claims against the plaintiff.
The Company cannot provide an estimate of the range of any loss.
The Company believes that the defendants have meritorious
defenses to this case and expects to vigorously defend the case
and pursue its counterclaims.
On July 9, 2010 and on February 11, 2011, Cambridge
Place Investment Management, Inc. filed complaints 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 complaints allege untrue
statements and omissions of material facts relating to loan
underwriting and credit enhancement. The complaints also allege
a violation of Section 410 of the Massachusetts Uniform
Securities Act (Chapter 110A of the Massachusetts General
Laws). Defendants have removed the first 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. This litigation is in its early stage, and the Company
cannot provide an estimate of the range of any loss. The Company
believes that it has meritorious defenses to these claims and
expects that the cases 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, and no legal action to enforce the
claim has been filed. The Company will assess its defense to the
claim if and when the factual basis and additional information
supporting the claim is provided.
|
|
Note 9.
|
Shareholders
Equity
|
To preserve liquidity, the Companys Board of Directors has
suspended the payment of dividends on its Series C
Preferred Stock and its Series D Preferred Stock. As a
result, dividends continue to accrue on the Series C
Preferred Stock and Series D Preferred Stock. Total accrued
dividends payable related to the Series C Preferred Stock
and Series D Preferred Stock were $50.9 million and
$34.4 million as of December 31, 2010 and 2009,
respectively. 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 below. The Company does not expect to
pay the dividends due to managements intent to restructure
its capital.
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
F-25
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 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 8.9% annually. Accrued and unpaid
dividends payable related to the Series C Preferred Stock
were approximately $21.6 million and $15.0 million as
of December 31, 2010 and 2009, respectively.
Dividends on the Series D1 Preferred Stock are payable in
cash and accrue at a rate of 13.0% per annum. 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
$29.3 million and $19.4 million as of
December 31, 2010 and 2009, respectively.
The Series D1 Preferred Stock is convertible into the
Companys 9.0% 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
shareholders 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
9.0%.
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 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, 2010 and 2009, there
were no shares of common stock issued under the Companys
stock-based compensation plan.
The Companys Board of Directors has approved the
repurchase of up to $9 million of the Companys common
stock. No shares were repurchased during 2010 and 2009. The
Company has repurchased $8.0 million prior to 2009, leaving
approximately $1.0 million of shares that may yet be
purchased under the repurchase plan. Under Maryland law, shares
repurchased under the repurchase plan are to be returned to the
Companys authorized but unissued shares of common stock.
Common stock purchased under the repurchase plan is charged
against additional paid-in capital.
F-26
|
|
Note 10.
|
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, 2010 and 2009 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net income (loss)
|
|
$
|
985,654
|
|
|
$
|
(183,156
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Change in unrealized loss on mortgage securities
available-for-sale
|
|
|
(700
|
)
|
|
|
(5,106
|
)
|
Change in unrealized gain (loss) on derivative instruments used
in cash flow hedges
|
|
|
|
|
|
|
8
|
|
Impairment on mortgage securities
available-for-sale
reclassified to earnings
|
|
|
|
|
|
|
1,198
|
|
Net settlements of derivative instruments used in cash flow
hedges reclassified to earnings
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(700
|
)
|
|
|
(3,815
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
984,954
|
|
|
|
(186,971
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to noncontrolling interests
|
|
|
1,048
|
|
|
|
2,054
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) attributable to NovaStar
Financial, Inc.
|
|
$
|
983,906
|
|
|
$
|
(184,917
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income was comprised of
unrealized gains relating to the mortgage securities
available-for-sale
as of December 31, 2010 and 2009.
|
|
Note 11.
|
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.
F-27
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, 2010 and 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
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage securities trading
|
|
$
|
1,198
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,198
|
|
Mortgage securities
available-for-sale
|
|
|
4,580
|
|
|
|
|
|
|
|
|
|
|
|
4,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,778
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed bonds secured by mortgage securities
|
|
$
|
1,198
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,198
|
|
Contingent consideration(A)
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
1,648
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
The contingent consideration represents the estimated fair value
of the additional potential earn-out opportunity payable in
connection with our acquisition of Corvisa that is contingent
based upon certain future earnings targets. The company
estimated the fair value using projected revenue over the
earn-out period, and applied a discount rate to the projected
earn-out payments that approximated the weighted average cost of
capital. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-28
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) from December 31, 2009 to
December 31, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,766
|
|
|
|
|
|
|
|
1,766
|
|
Proceeds from paydowns of securities
|
|
|
(1,497
|
)
|
|
|
|
|
|
|
(1,497
|
)
|
Other than temporary impairments
|
|
|
(30,382
|
)
|
|
|
30,382
|
|
|
|
|
|
Mark-to-market
value adjustment
|
|
|
|
|
|
|
(158
|
)
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) to mortgage securities
|
|
|
(30,113
|
)
|
|
|
30,224
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
$
|
73,900
|
|
|
|
(72,702
|
)
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2009 to December 31, 2010 and
December 31, 2008 to December 31, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of income(A)
|
|
|
2,235
|
|
|
|
|
|
|
|
2,235
|
|
Proceeds from paydowns of securities(A)(B)
|
|
|
(3,858
|
)
|
|
|
|
|
|
|
(3,858
|
)
|
Other
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
|
|
Mark-to-market
value adjustment
|
|
|
|
|
|
|
(700
|
)
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease to mortgage securities
|
|
|
(1,625
|
)
|
|
|
(698
|
)
|
|
|
(2,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
$
|
169
|
|
|
|
4,411
|
|
|
|
4,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Cash received on mortgage securities with no cost basis was
$7.5 million for the year ended December 31, 2010. |
F-29
|
|
|
(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, 2010, 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 of
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
Cost Basis
|
|
|
Unrealized 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 receivables from securitization trusts of
$12.5 million, related to mortgage securities
available-for-sale
with a remaining cost basis. At December 31, 2009, there
were no receivables from securitization trusts related to
mortgage securities with a zero cost basis. |
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
December 31, 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-30
The following table provides a summary of the impact to earnings
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
|
|
|
|
|
|
Measurement
|
|
Year Ended December 31,
|
|
|
Statement of Operation
|
Asset or Liability Measured at Fair Value
|
|
Frequency
|
|
2010
|
|
|
2009
|
|
|
Line Item Impacted
|
|
Mortgage securities trading
|
|
Recurring
|
|
$
|
(158
|
)
|
|
$
|
(11,826
|
)
|
|
Other expense
|
Mortgage securities
available-for-sale
|
|
Recurring
|
|
|
|
|
|
|
(1,198
|
)
|
|
Other expense
|
Real estate owned
|
|
Nonrecurring
|
|
|
(178
|
)
|
|
|
(9,164
|
)
|
|
Provision for credit losses
|
Derivative instruments, net
|
|
Recurring
|
|
|
157
|
|
|
|
(7,361
|
)
|
|
Other expense
|
Asset-backed bonds secured by mortgage securities
|
|
Recurring
|
|
|
1,226
|
|
|
|
5,083
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value losses
|
|
|
|
$
|
1,047
|
|
|
$
|
(24,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 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.
F-31
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, 2010 and
December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal
|
|
Year to Date Gain
|
|
|
Unpaid Principal Balance as of
|
|
Balance
|
|
Recognized
|
|
Fair Value
|
|
December 31, 2010
|
|
$
|
324,662
|
|
|
$
|
1,226
|
|
|
$
|
1,198
|
|
December 31, 2009
|
|
|
323,999
|
|
|
|
5,083
|
|
|
|
968
|
|
Substantially all of the change in fair value of the
asset-backed bonds during the year ended December 31, 2010
is considered to be related to specific credit risk as all of
the bonds are floating rate.
|
|
Note 12.
|
Property
and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Furniture, fixtures and office equipment
|
|
$
|
803
|
|
|
$
|
709
|
|
Hardware and computer equipment
|
|
|
2,148
|
|
|
|
1,773
|
|
Software
|
|
|
5,794
|
|
|
|
2,301
|
|
Leasehold improvements
|
|
|
258
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,003
|
|
|
|
5,041
|
|
Less: Accumulated depreciation and amortization
|
|
|
(4,182
|
)
|
|
|
(3,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,821
|
|
|
$
|
1,803
|
|
|
|
|
|
|
|
|
|
|
All of the Companys property and equipment are stated at
cost less accumulated depreciation and amortization.
Depreciation and amortization are 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, office and
computer equipment, 3 to 5 years and software, 3 years.
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 and amortization expense relating to property and
equipment was $0.9 million for each of the years ended
December 31, 2010 and 2009, respectively.
F-32
As of December 31, 2010, goodwill totaled $3.2 million
and was included in the Appraisal management reporting unit.
There was no goodwill as of December 31, 2009.
Goodwill activity is as follows for the year ended
December 31, 2010 and 2009, respectively (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning of period
|
|
$
|
|
|
|
$
|
|
|
Advent acquisition
|
|
|
|
|
|
|
1,190
|
|
StreetLinks contingent consideration payment(A)
|
|
|
3,170
|
|
|
|
|
|
Impairments
|
|
|
|
|
|
|
(1,190
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
3,170
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
There are no remaining contingent consideration payments that
could be required for the StreetLinks acquisition. |
During the year ended December 31, 2010, payments of
approximately $3.2 million were made to the former majority
owners of StreetLinks upon certain earnings targets being
achieved. 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 year ended December 31, 2010. For tax
purposes, the goodwill is included in the Companys basis
in its investment in StreetLinks as it is a limited liability
company; therefore it will be non-deductible for tax purposes as
long as the Company holds its investment in StreetLinks.
|
|
Note 14.
|
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 as it did not have
significant operations in the periods. Appraisal management
operations include the appraisal fee income and related expenses
from the Companys majority-owned subsidiaries StreetLinks
and Corvisa.
F-33
The following is a summary of the operating results of the
Companys segments for the years ended December 31,
2010 and 2009 (dollars in thousands):
For
the Year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization
|
|
|
|
|
|
Appraisal
|
|
|
|
|
|
|
|
|
|
Trusts
|
|
|
Corporate
|
|
|
Management
|
|
|
Eliminations
|
|
|
Total
|
|
|
Income and Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
75,168
|
|
|
$
|
|
|
|
$
|
75,168
|
|
Interest income mortgage loans
|
|
|
10,681
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
|
10,848
|
|
Interest income mortgage securities
|
|
|
1,688
|
|
|
|
9,816
|
|
|
|
|
|
|
|
|
|
|
|
11,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,369
|
|
|
|
9,816
|
|
|
|
75,168
|
|
|
|
167
|
|
|
|
97,520
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
|
|
|
|
|
|
|
|
66,475
|
|
|
|
|
|
|
|
66,475
|
|
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
|
|
|
40
|
|
|
|
14,334
|
|
|
|
4,940
|
|
|
|
|
|
|
|
19,314
|
|
Gain on disposition of mortgage loans
|
|
|
(993,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(993,131
|
)
|
Other expenses (income)
|
|
|
3,288
|
|
|
|
(3,249
|
)
|
|
|
(65
|
)
|
|
|
416
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(969,915
|
)
|
|
|
11,085
|
|
|
|
71,350
|
|
|
|
416
|
|
|
|
(887,064
|
)
|
Other income
|
|
|
|
|
|
|
772
|
|
|
|
15
|
|
|
|
|
|
|
|
787
|
|
Interest expense on trust preferred securities
|
|
|
|
|
|
|
(1,073
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
982,284
|
|
|
|
(1,570
|
)
|
|
|
3,833
|
|
|
|
(249
|
)
|
|
|
984,298
|
|
Income tax expense
|
|
|
|
|
|
|
(1,356
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
982,284
|
|
|
|
(214
|
)
|
|
|
3,833
|
|
|
|
(249
|
)
|
|
|
985,654
|
|
Less: Net (loss) income attributable to noncontrolling interests
|
|
|
|
|
|
|
(1,369
|
)
|
|
|
321
|
|
|
|
|
|
|
|
(1,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to NFI
|
|
$
|
982,284
|
|
|
$
|
1,155
|
|
|
$
|
3,512
|
|
|
$
|
(249
|
)
|
|
$
|
986,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense(A)
|
|
$
|
|
|
|
$
|
268
|
|
|
$
|
669
|
|
|
$
|
|
|
|
$
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,497
|
|
|
$
|
30,144
|
|
|
$
|
13,781
|
(B)
|
|
$
|
(7,561
|
)
|
|
$
|
37,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
$
|
|
|
|
$
|
278
|
|
|
$
|
6,854
|
(B)
|
|
$
|
|
|
|
$
|
7,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Amounts are included in the cost of services and selling,
general and administrative expense line item of the consolidated
statements of operations. |
|
(B) |
|
Includes goodwill of $3.2 million. |
F-34
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
|
|
Other income
|
|
|
117
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
887
|
|
Interest expense on trust preferred securities
|
|
|
|
|
|
|
(1,128
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(163,300
|
)
|
|
|
(14,006
|
)
|
|
|
(2,998
|
)
|
|
|
(1,744
|
)
|
|
|
(182,048
|
)
|
Income tax expense
|
|
|
|
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(163,300
|
)
|
|
|
(15,114
|
)
|
|
|
(2,998
|
)
|
|
|
(1,744
|
)
|
|
|
(183,156
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
(1,225
|
)
|
|
|
(829
|
)
|
|
|
|
|
|
|
(2,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to NFI
|
|
$
|
(163,300
|
)
|
|
$
|
(13,889
|
)
|
|
$
|
(2,169
|
)
|
|
$
|
(1,744
|
)
|
|
$
|
(181,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense(A)
|
|
$
|
|
|
|
$
|
438
|
|
|
$
|
431
|
|
|
$
|
|
|
|
$
|
869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,437,059
|
|
|
$
|
26,706
|
|
|
$
|
4,164
|
|
|
$
|
(8,438
|
)
|
|
$
|
1,459,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
$
|
|
|
|
$
|
654
|
|
|
$
|
774
|
|
|
$
|
|
|
|
$
|
1,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Amounts are included in the cost of services and selling,
general and administrative expense line item of the consolidated
statements of operations. |
Revenues from one customer of the appraisal management segment,
approximately $10.6 million, were in excess of 10% of total
consolidated revenues for the year ended December 31, 2010.
There were no customers with revenues in excess of 10% during
the year ended December 31, 2009.
|
|
Note 15.
|
Earnings
Per Share
|
The following table presents computations of basic and diluted
earnings per share for the years ended December 31, 2010
and 2009 as follows (dollars in thousands, except per share
amounts):
As a result of the convertible participating preferred stock
being considered participating securities, earnings per share is
calculated under the two-class method, which is discussed in the
Earnings per Share
F-35
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
year ended December 31, 2010, the two-class method
calculation was more dilutive; therefore, earnings per share 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
year ended December 31, 2009, as the convertible
participating preferred stockholders do not have an obligation
to participate in losses, no allocation of undistributed losses
was necessary.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
985,654
|
|
|
$
|
(183,156
|
)
|
Less loss attributable to noncontrolling interests
|
|
|
(1,048
|
)
|
|
|
(2,054
|
)
|
Dividends on preferred shares
|
|
|
(16,499
|
)
|
|
|
(15,312
|
)
|
Allocation of undistributed income to convertible participating
preferred stock
|
|
|
(162,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
807,957
|
|
|
$
|
(196,414
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and
diluted
|
|
|
9,337,207
|
|
|
|
9,368,053
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
105.56
|
|
|
$
|
(19.55
|
)
|
Less loss attributable to noncontrolling interests
|
|
|
(0.11
|
)
|
|
|
(0.22
|
)
|
Dividends on preferred shares
|
|
|
(1.77
|
)
|
|
|
(1.64
|
)
|
Allocation of undistributed income to convertible participating
preferred stock
|
|
|
(17.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
86.53
|
|
|
$
|
(20.97
|
)
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
105.56
|
|
|
$
|
(19.55
|
)
|
Less loss attributable to noncontrolling interests
|
|
|
(0.11
|
)
|
|
|
(0.22
|
)
|
Dividends on preferred shares
|
|
|
(1.77
|
)
|
|
|
(1.64
|
)
|
Allocation of undistributed income to convertible participating
preferred stock
|
|
|
(17.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
86.53
|
|
|
$
|
(20.97
|
)
|
|
|
|
|
|
|
|
|
|
The following table presents 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 per
share because the effect would be antidilutive (in thousands,
except exercise prices):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
Number of stock options (in thousands)
|
|
|
282
|
|
|
|
114
|
|
Weighted average exercise price of stock options
|
|
$
|
21.91
|
|
|
$
|
52.98
|
|
F-36
The components of income tax expense (benefit) for the years
ended December 31, 2010 and 2009 were as follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,038
|
)
|
|
$
|
1,192
|
|
State and local
|
|
|
(318
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(1,356
|
)
|
|
|
1,108
|
|
Total income tax (benefit) expense
|
|
$
|
(1,356
|
)
|
|
$
|
1,108
|
|
|
|
|
|
|
|
|
|
|
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, 2010 and 2009 were as follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Income tax at statutory rate
|
|
$
|
344,871
|
|
|
$
|
(62,998
|
)
|
State income taxes, net of federal tax benefit
|
|
|
14,734
|
|
|
|
(3,201
|
)
|
Valuation allowance
|
|
|
(382,565
|
)
|
|
|
72,119
|
|
Interest and penalties
|
|
|
(89
|
)
|
|
|
(218
|
)
|
Change in state tax rate
|
|
|
10,583
|
|
|
|
(7,768
|
)
|
Adjustment to net operating loss
|
|
|
4,271
|
|
|
|
2,079
|
|
Derecognition of securitization trust
|
|
|
8,409
|
|
|
|
|
|
Other
|
|
|
(1,570
|
)
|
|
|
1,095
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(1,356
|
)
|
|
$
|
1,108
|
|
|
|
|
|
|
|
|
|
|
The 2010 income tax benefit shown above does not reflect the
($2.0 million) income tax benefit recorded as part of the
Gain on Deconsolidation of Securitization Trusts.
The gain relates to the removal of the income tax payable and
uncertain tax position related to the securitization trusts that
were derecognized during the year.
F-37
Significant components of the Companys deferred tax assets
and liabilities at December 31, 2010 and 2009 were as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Basis difference investments
|
|
$
|
162,675
|
|
|
$
|
389,027
|
|
Federal net operating loss carryforwards
|
|
|
113,527
|
|
|
|
163,280
|
|
Allowance for loan losses
|
|
|
440
|
|
|
|
93,715
|
|
State net operating loss carryforwards
|
|
|
15,055
|
|
|
|
18,719
|
|
Excess inclusion income
|
|
|
|
|
|
|
2,291
|
|
Other
|
|
|
3,048
|
|
|
|
9,801
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
294,745
|
|
|
|
676,833
|
|
Valuation allowance
|
|
|
(292,528
|
)
|
|
|
(674,823
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
2,217
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,217
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
2,217
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Based on the evidence available as of December 31, 2010,
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
$292.5 million for deferred tax assets as of
December 31, 2010 compared to $674.8 million as of
December 31, 2009. This large decrease was mainly
attributable to the derecognition of securitization trusts
during the year ended December 31, 2010.
As of December 31, 2010, the Company had a federal net
operating loss of approximately $324.4 million. The federal
net operating loss may be carried forward to offset future
taxable income, subject to applicable provisions of 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 2030. The Company has state net operating
loss carryovers arising from both combined and separate filings
from as early as 2004. The state net operating loss carryovers
may expire as early as 2011 and as late as 2030.
The activity in the accrued liability for unrecognized tax
benefits for the years ended December 31, 2010 and 2009 was
as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Beginning balance
|
|
$
|
906
|
|
|
$
|
480
|
|
Gross decreases tax positions in prior period
|
|
|
|
|
|
|
|
|
Gross increases tax positions in current period
|
|
|
470
|
|
|
|
674
|
|
Lapse of statute of limitations
|
|
|
(143
|
)
|
|
|
(248
|
)
|
Other
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
966
|
|
|
$
|
906
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and 2009, the total gross amount of
unrecognized tax benefits was $1.0 million and
$0.9 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 of $0.1 million due
to 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.
F-38
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
$0.1 million and $0.2 million for the years ended
December 31, 2010 and 2009, respectively. Accrued interest
and penalties were $0.1 million and $1.9 million as of
December 31, 2010 and 2009, 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 2010 remain
open to examination for U.S. federal income tax. Tax years
2005 to 2010 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 17.
|
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. No contributions
were made to the plans for the year ended December 31,
2010. There were $0.1 million in contributions made to the
plans for the year ended December 31, 2009. The Company may
also elect to make a discretionary contribution, which is
allocated to participants based on each participants
compensation. There were no contributions made to the plans
during the year ended December 31, 2010. For 2009,
$0.4 million was contributed to the plans
participants, all of which came from the plans forfeitures
account.
The Company maintains a stock compensation plan. As a result of
the differential between the exercise price and the current
market price of the options outstanding, it is not likely that
the stock compensation plan will have a significant impact on
the Companys financial statements and, accordingly,
additional information relative to the number of options and
related expenses is not included herein.
|
|
Note 18.
|
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.
F-39
The estimated fair values of the Companys financial
instruments are as follows as of December 31, 2010 and 2009
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,582
|
|
|
$
|
12,582
|
|
|
$
|
7,104
|
|
|
$
|
7,104
|
|
Restricted cash
|
|
|
1,413
|
|
|
|
1,341
|
|
|
|
5,342
|
|
|
|
5,206
|
|
Mortgage loans
held-in-portfolio
|
|
|
|
|
|
|
|
|
|
|
1,289,474
|
|
|
|
1,160,527
|
|
Mortgage securities trading
|
|
|
1,198
|
|
|
|
1,198
|
|
|
|
1,087
|
|
|
|
1,087
|
|
Mortgage securities
available-for-sale
|
|
|
4,580
|
|
|
|
4,580
|
|
|
|
6,903
|
|
|
|
6,903
|
|
Notes receivable
|
|
|
3,965
|
|
|
|
3,965
|
|
|
|
4,920
|
|
|
|
4,920
|
|
Accrued interest receivable
|
|
|
|
|
|
|
|
|
|
|
74,025
|
|
|
|
74,025
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed bonds secured by mortgage loans
|
|
|
|
|
|
|
|
|
|
|
2,270,602
|
|
|
|
1,297,980
|
|
Asset-backed bonds secured by mortgage securities
|
|
|
1,198
|
|
|
|
1,198
|
|
|
|
968
|
|
|
|
968
|
|
Junior subordinated debentures
|
|
|
78,086
|
|
|
|
17,988
|
|
|
|
77,815
|
|
|
|
6,225
|
|
Accrued interest payable
|
|
|
345
|
|
|
|
345
|
|
|
|
751
|
|
|
|
751
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
(157
|
)
|
|
|
(157
|
)
|
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, 2009.
Mortgage securities trading See
Note 11 to the consolidated financial statements for fair
value method utilized.
Mortgage securities
available-for-sale
See Note 11 to the consolidated financial statements for
fair value method utilized.
Notes receivable The fair value of notes
receivable approximates its carrying value.
Accrued interest receivable The fair value of
accrued interest 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
The fair value of asset-backed bonds secured by
mortgage securities and the related accrued interest payable is
approximated using quoted market prices.
F-40
Junior subordinated debentures As of
December 31, 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 is estimated by discounting the projected
future cash flows using appropriate rates.
|
|
Note 19.
|
Subsequent
Events
|
Refinancing
of Trust Preferred Securities
In an effort to improve the Companys liquidity position,
on March 22, 2011, the Company entered into agreements that
cancel the existing $78,125,000 aggregate principal amount of
Trust Preferred Securities (TruPS) issued in
2009 by certain statutory trusts formed by a wholly-owned
subsidiary, NovaStar Mortgage, Inc. (NMI). NMI
issued unsecured junior subordinated notes (Junior
Subordinated Notes), to support the payment obligations
under the TruPS. The Junior Subordinated Notes were guaranteed
by the Company. As a result of the transaction, the Junior
Subordinated Notes were cancelled. In place of the TruPS and
associated Junior Subordinated Notes, the Company issued to the
holders of the TruPS unsecured senior notes pursuant to three
indentures (collectively, the Senior Notes). The
aggregate principal amount of the Senior Notes is $85,937,500,
which is a 10% increase in principal over the liquidation value
of the TruPS. The new Senior Notes will accrue interest at a
rate of 1% until the earlier to occur of (a) a completed
equity offering by the Company or its subsidiaries that results
in proceeds of $40 million or more or
(b) January 1, 2016. Thereafter, the Senior Notes will
accrue interest at a rate of three-month LIBOR plus 3.5% (the
Full Rate). The Senior Notes mature on
March 30, 2033.
The indentures governing the Senior Notes contain negative
covenants that, among other things, restrict the Companys
use of cash (including cash payments for distributions to
shareholders). At any time that the Senior Notes accrue interest
at the Full Rate, and the Company satisfies certain financial
covenants, certain negative covenants and restrictions on cash
will not apply.
Proposed
Recapitalization of Preferred Stock
As described in the Companys
Form S-4
Registration Statement, as amended (Registration
No. 333-171115),
filed with the SEC (the
Form S-4),
the Company is proposing to recapitalize the outstanding shares
of its Series C Preferred Stock and its Series D1
Preferred Stock. The Series C Preferred Stock is publicly
held, and the Series D Preferred Stock is privately held.
Upon the terms and subject to the conditions set forth in the
Form S-4,
the Company is proposing to exchange, for each outstanding share
of Series C Preferred Stock, at the election of the holder,
either:
3 shares of newly-issued Common Stock of the Company, and
$2.00 in cash; or
19 shares of newly-issued Common Stock (the
Series C Offer).
The elections made by the holders of the Series C Preferred
Stock 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 the holders of the Series C Preferred
Stock. The proposed Series C Offer will not be made unless
and until the
Form S-4
is declared effective by the SEC and it is subject to other
closing conditions, such as the acceptance of the Series C
Offer by at least two-thirds of the outstanding shares of
Series C Preferred Stock and the requisite affirmative vote
of shareholders in support of certain aspects of the
recapitalization.
The proposed Series C Offer is part of a larger
recapitalization of the Company, whereby the holders of the
Companys Series D1 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). The closing of the
F-41
Series D Exchange is contingent upon the closing of the
Series C Offer by not later than June 30, 2011 and the
satisfaction of other conditions.
As of March 18, 2011, the Series C Preferred Stock had
an aggregate liquidation preference of $74.8 million and
accrued and unpaid dividends of $23.0 million, and the
Series D1 Preferred Stock had an aggregate liquidation
preference of $52.5 million and accrued and unpaid
dividends of $31.5 million. The proposed recapitalization,
if effected, would eliminate the Series C Preferred Stock
and Series D Preferred Stock and their associated
liquidation preferences and dividends.
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.
F-42
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,
A-1
limitations as to dividends, qualifications or terms or
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 converted into the right to receive
$ and shares
of Common Stock, which cash and Common Stock will be paid as
soon as reasonably practical after, but no sooner than 11
business days after and no later than 180 calendar days after,
the Series C Preferred Stock is converted into the
aforementioned right.
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.
A-2
(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.
(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.
A-3
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 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.
A-4
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.
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).
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(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.
(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
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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 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
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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.
(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
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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.
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.
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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.
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.
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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
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.
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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.
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ATTEST:
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NOVASTAR FINANCIAL, INC.
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By:
Name: Rodney
Schwatken
Title: Chief Financial Officer
|
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By:
(SEAL)
Name: W. Lance Andersen
Title: Chairman of the Board and
Chief Executive Officer
|
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APPENDIX B
December 10,
2010
Board of
Directors
NovaStar Financial, Inc.
2114 Central Street
Suite 600
Kansas City, MO 64108
Members of the Board of Directors:
Stifel, Nicolaus & Company, Incorporated (Stifel
Nicolaus or we) has been advised that NovaStar
Financial, Inc. (NovaStar or the
Company) is considering offering (the
Series C Offer) to exchange each share of the
8.90% Series C Cumulative Redeemable Preferred Stock of the
Company, par value $0.01 per share (the Series C
Preferred Stock), at the election of each holder of the
Series C Preferred Stock (the Series C
Holders), for either: three shares of newly-issued common
stock of the Company, par value $0.01 (the Common
Stock), and $2.00 in cash, subject to adjustment (the
Cash-and-Stock
Option); or 19 shares of newly issued Common Stock,
subject to adjustment (the Stock-Only Option). The
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. Additionally, holders of the Companys 9.00%
Series D1 Mandatory Convertible Preferred Stock, par value
$0.01 (the Series D Preferred Stock), are
contemplating entering into an Exchange Agreement by and among
Jefferies Capital Partners IV L.P., Jefferies Employee
Partners IV LLC, JCP Partners IV LLC, Massachusetts
Mutual Life Insurance Company and NovaStar (the Exchange
Agreement) pursuant to which such holders would exchange
their Series D Preferred Stock for an aggregate of
37,161,600 newly-issued shares of Common Stock and $1,377,000 in
cash (the Series D Exchange and, together with
the Series C Offer, the
Recapitalization).
You have requested Stifel Nicolaus opinion, as investment
bankers, as to the fairness to the Companys common
shareholders, from a financial point of view, of the financial
terms of the Recapitalization pursuant to the Proxy
Statement/Consent Prospectus/Prospectus and the Exchange
Agreement (the Opinion).
In rendering our Opinion, we have, among other things:
(i) reviewed and analyzed a draft copy of the Proxy
Statement/Consent Solicitation/Prospectus dated December 4,
2010;
(ii) reviewed and analyzed a draft copy of the Exchange
Agreement dated November 15, 2010;
(iii) reviewed the audited consolidated financial
statements of the Company as of December 31, 2009, 2008 and
2007 and the related audited consolidated statements of income,
shareholders equity and cash flows for each of such fiscal
years contained in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2009; together with the
Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended September 30, 2010;
(iv) reviewed and analyzed certain other publicly available
information concerning NovaStar, including the terms of the
Series C Preferred Stock and Series D Preferred Stock;
B-1
Board of
Directors NovaStar Financial, Inc.
December 10, 2010
Page 2
(v) reviewed certain non-publicly available information
regarding the Companys business plan and other internal
financial statements and analyses relating to the Companys
business;
(vi) participated in certain discussions and negotiations
between representatives of NovaStar, the Series C Preferred
Stock and the Series D Preferred Stock regarding the terms
of the Recapitalization and the Exchange Agreement and other
matters;
(vii) reviewed the reported prices and trading activity of
the equity securities of NovaStar;
(viii) discussed the past and current operations, financial
condition and future prospects of the Company with senior
executives of the Company;
(ix) analyzed certain publicly available information
concerning the terms of selected merger and acquisition
transactions that we considered relevant to our analysis;
(x) reviewed and analyzed certain publicly available
financial and stock market data relating to selected public
companies that we deemed relevant to our analysis;
(xi) conducted such other financial studies, analyses and
investigations and considered such other information as we
deemed necessary or appropriate for purposes of our
Opinion; and
(xii) took into account our assessment of general economic,
market and financial conditions and our experience in other
transactions, as well as our experience in securities valuations
and our knowledge of the financial services industry generally.
In rendering our Opinion, we have relied upon and assumed,
without independent verification, the accuracy and completeness
of all of the financial and other information that was provided
to Stifel Nicolaus by or on behalf of NovaStar and its
subsidiary StreetLinks National Appraisal Services LLC
(StreetLinks), or that was otherwise reviewed by
Stifel Nicolaus, and have not assumed any responsibility for
independently verifying any of such information. With respect to
the financial forecasts supplied to us by NovaStar, we have
assumed that they were reasonably prepared on the basis
reflecting the best currently available estimates and judgments
of NovaStars management as to the future operating and
financial performance of NovaStar and StreetLinks, as
applicable, and that they provided a reasonable basis upon which
we could form our opinion. Such forecasts and projections were
not prepared with the expectation of public disclosure. All such
projected financial information is based on numerous variables
and assumptions that are inherently uncertain, including,
without limitation, factors related to general economic and
competitive conditions. Accordingly, actual results could vary
significantly from those set forth in such projected financial
information. Stifel Nicolaus has relied on this projected
information without independent verification or analyses and
does not in any respect assume any responsibility for the
accuracy or completeness thereof.
We also assumed, without independent verification and with your
consent, that there were no material changes in the assets,
liabilities, financial condition, results of operations,
business or prospects of NovaStar or StreetLinks since the date
of the last financial statements made available to us. We did
not make or obtain any independent evaluation, appraisal or
physical inspection of NovaStars or StreetLinks
respective assets or liabilities, the collateral securing any of
such assets or liabilities, or the collectability of any such
assets. Estimates of values of companies and assets do not
purport to be appraisals or necessarily reflect the prices at
which companies or assets may actually be sold. Because such
estimates are inherently subject to uncertainty, Stifel Nicolaus
assumes no responsibility for their accuracy. We relied on
advice of NovaStars counsel as to certain legal and tax
matters with respect to NovaStar, the Proxy Statement/Consent
Solicitation/Prospectus, the Exchange Agreement and the
Recapitalization and other transactions and other matters
contained or contemplated therein. We have assumed, with your
consent, that there are no factors that would delay or subject
to any adverse conditions any necessary regulatory or
governmental approvals and that all conditions to the
Recapitalization will be satisfied and not waived. In addition,
we have assumed that the definitive Proxy
B-2
Board of
Directors NovaStar Financial, Inc.
December 10, 2010
Page 3
Statement/Consent Solicitation/Prospectus and Exchange Agreement
will not differ materially from the draft we reviewed. We have
also assumed that the Recapitalization will be consummated
substantially on the terms and conditions described in the Proxy
Statement/Consent Solicitation/Prospectus and Exchange Agreement
each without any waiver of material terms or conditions by
NovaStar or any other party to any transaction contemplated
therein, and that obtaining any necessary regulatory approvals
or satisfying any other conditions for consummation of the
Recapitalization or any other related transaction will not have
an adverse effect on the Company.
Our Opinion is limited to whether the financial terms of the
Recapitalization are fair to the Companys common
shareholders, from a financial point of view. Our Opinion does
not consider, include or address: (i) any other strategic
alternatives currently (or which have been or may be)
contemplated by NovaStars Board of Directors (the
Board) the Special Committee of the Board (the
Special Committee) or NovaStar; (ii) the legal,
tax or accounting consequences of the Recapitalization (or any
aspect thereof) on NovaStar or its shareholders including,
without limitation, whether or not the Recapitalization will
trigger an ownership change pursuant to
Section 382 of the Internal Revenue Code or otherwise
affect the tax status of NovaStars net operating loss
carryforwards; (iii) the fairness of the amount or nature
of any compensation to any of the Companys officers,
directors or employees, or class of such persons, relative to
the compensation to the holders of the Companys
securities; (iv) the effect of the Recapitalization (or any
aspect thereof) on, or the fairness of the consideration to be
received by, holders of any class of securities of the Company
other than the Common Stock, or any class of securities of any
other party to any transaction contemplated by the Proxy
Statement/Consent Solicitation/Prospectus and Exchange
Agreement; (v) any advice or opinions provided by any other
advisor to NovaStar or any other party to the Recapitalization;
(vi) any other transaction contemplated by the Proxy
Statement/Consent Solicitation/Prospectus and Exchange Agreement
other than the Recapitalization; (vii) any potential
transaction by any party to the Proxy Statement/Consent
Solicitation/Prospectus and Exchange Agreement which is not
contemplated by the Proxy Statement/Consent
Solicitation/Prospectus and Exchange Agreement; (viii) the
effect of any pending or threatened litigation involving any
party to the Proxy Statement/Consent Solicitation/Prospectus or
the Exchange Agreement on the Recapitalization (or any aspect
thereof) or any other transaction contemplated by the Proxy
Statement/Consent Solicitation/Prospectus or the Exchange
Agreement; or (ix) the fairness of the Series C Offer,
the Series D Exchange or any other individual aspect of the
Recapitalization without taking into account the other aspects
of the Recapitalization. Furthermore, our Opinion does not
express any opinion as to the prices, trading range or volume at
which the securities of NovaStar will trade following public
announcement or consummation of the Recapitalization or any
aspect thereof.
We are not legal, tax, regulatory or bankruptcy advisors. We
have not considered any legislative or regulatory changes
recently adopted or currently being considered by the United
States Congress, the various federal banking agencies, the
Securities and Exchange Commission (the SEC), or any
other regulatory bodies, or any changes in accounting methods or
generally accepted accounting principles that may be adopted by
the SEC or the Financial Accounting Standards Board, or any
changes in regulatory accounting principles that may be adopted
by any or all of the federal banking agencies. Our Opinion is
not a solvency opinion and does not in any way address the
solvency or financial condition of NovaStar.
Our Opinion is necessarily based on economic, market, financial
and other conditions as they exist on, and on the information
made available to us as of, the date of this letter. It is
understood that subsequent developments may affect the
conclusions reached in this Opinion and that Stifel Nicolaus
does not have any obligation to update, revise or reaffirm this
Opinion, except as otherwise set forth in our engagement letter
agreement with the Company. We also did not perform or rely upon
certain analyses that we would customarily prepare for the
Company in connection with a fairness opinion because such
analyses were deemed not to be meaningful for various reasons.
B-3
Board of
Directors NovaStar Financial, Inc.
December 10, 2010
Page 4
Our Opinion is for the information of, and directed to, the
Board of Directors for their information and assistance in
connection with the consideration of the financial terms of the
Recapitalization. Our Opinion does not constitute a
recommendation to the Special Committee, the Board or any
shareholder of NovaStar as to how the Special Committee, the
Board or such shareholder should vote on the Recapitalization or
any aspect thereof, whether or not any NovaStar shareholder
should elect the
Cash-and-Stock
Option or the Stock-Only Option in connection with the
Series C Offer, or whether or not any NovaStar shareholder
should enter into the Exchange Agreement or any voting,
shareholders or other agreement with respect to the
Recapitalization or any aspect thereof, or exercise any
dissenters or appraisal rights that may be available to
such shareholder. In addition, the Opinion does not compare the
relative merits of the Recapitalization or any aspect thereof
with any other alternative transaction or business strategy
which may have been available to the Special Committee, the
Board or the Company and does not address the underlying
business decision of the Special Committee, the Board or the
Company to proceed with or effect the Recapitalization or any
aspect thereof. We were not requested to, and we did not,
explore alternatives to the Recapitalization or solicit the
interest of any other parties in pursuing transactions with the
Company.
We have acted as financial advisor to the Board of Directors in
connection with the Recapitalization and related matters, and we
have received monthly retainer fees pursuant our engagement
letter with the Board of Directors and NovaStar dated
September 8, 2010. We will not receive any other
significant payment or compensation contingent upon successful
consummation of the Recapitalization or any aspect thereof. In
addition, NovaStar has agreed to indemnify us for certain
liabilities arising out of our engagement. In the past, Stifel
Nicolaus has performed investment banking services for NovaStar
from time to time for which Stifel Nicolaus received customary
compensation. Stifel Nicolaus may seek to provide investment
banking services to the Company or its respective affiliates in
the future, for which we would seek customary compensation. In
the ordinary course of business, Stifel Nicolaus and its clients
trade in the securities of NovaStar and, accordingly, may at any
time hold a long or short position in such securities.
Stifel Nicolaus Fairness Opinion Committee has approved
the issuance of this Opinion. Our Opinion may not be published,
quoted or otherwise used or referred to, in whole or in part,
nor shall any public reference to Stifel Nicolaus or this
Opinion be made, in any registration statement, consent
solicitation, prospectus or proxy statement, or in any other
document used in connection with the offering or sale of
securities or to seek approval for the Recapitalization or any
aspect thereof or otherwise, nor shall our Opinion be used for
any other purposes, without the prior written consent of Stifel
Nicolaus.
Based upon and subject to the foregoing, we are of the opinion
that, as of the date hereof, the financial terms of the
Recapitalization pursuant to the Proxy Statement/Consent
Prospectus/Prospectus and the Exchange Agreement are fair to the
Companys common shareholders, from a financial point of
view.
Very truly yours,
STIFEL, NICOLAUS & COMPANY, INCORPORATED
B-4
APPENDIX
C
April 14, 2011
Board of Directors
NovaStar Financial, Inc.
2114 Central Street
Suite 600
Kansas City, MO 64108
Members of the Board of Directors:
Stifel, Nicolaus & Company, Incorporated (Stifel
Nicolaus or we) has been advised that NovaStar
Financial, Inc. (NovaStar or the
Company) is considering offering (the
Series C Offer) to exchange each share of the
8.90% Series C Cumulative Redeemable Preferred Stock of the
Company, par value $0.01 per share (the Series C
Preferred Stock), at the election of each holder of the
Series C Preferred Stock (the Series C
Holders), for either: three shares of newly-issued common
stock of the Company, par value $0.01 (the Common
Stock), and $2.00 in cash, subject to adjustment (the
Cash-and-Stock
Option); or 19 shares of newly issued Common Stock,
subject to adjustment (the Stock-Only Option). The
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. Additionally, holders of the Companys 9.00%
Series D1 Mandatory Convertible Preferred Stock, par value
$0.01 (the Series D Preferred Stock), are
contemplating entering into an Exchange Agreement by and among
Jefferies Capital Partners IV L.P., Jefferies Employee
Partners IV LLC, JCP Partners IV LLC, Massachusetts
Mutual Life Insurance Company and NovaStar (the Exchange
Agreement) pursuant to which such holders would exchange
their Series D Preferred Stock for an aggregate of
37,161,600 newly-issued shares of Common Stock and $1,377,000 in
cash (the Series D Exchange and, together with
the Series C Offer, the
Recapitalization).
You have requested Stifel Nicolaus opinion, as investment
bankers, as to the fairness to the Companys common
shareholders, from a financial point of view, of the financial
terms of the Recapitalization pursuant to the Proxy
Statement/Consent Prospectus/Prospectus and the Exchange
Agreement (the Opinion).
In rendering our Opinion, we have, among other things:
(i) reviewed and analyzed a draft copy of the Proxy
Statement/Consent Solicitation/Prospectus as of March 24,
2011;
(ii) reviewed and analyzed the Exchange Agreement dated
December 10, 2010;
(iii) reviewed the audited consolidated financial
statements of the Company as of December 31, 2010, 2009,
2008, and 2007 and the related audited consolidated statements
of income, shareholders equity and cash flows for each of
such fiscal years contained in the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2010;
(iv) reviewed and analyzed certain other publicly available
information concerning NovaStar, including the terms of the
Series C Preferred Stock and Series D Preferred Stock;
C-1
Board of
Directors NovaStar Financial, Inc.
April 14, 2011
Page 2
(v) reviewed certain non-publicly available information
regarding the Companys business plan and other internal
financial statements and analyses relating to the Companys
business;
(vi) participated in certain discussions and negotiations
between representatives of NovaStar, the Series C Preferred
Stock and the Series D Preferred Stock regarding the terms
of the Recapitalization and the Exchange Agreement and other
matters;
(vii) reviewed the reported prices and trading activity of
the equity securities of NovaStar;
(viii) discussed the past and current operations, financial
condition and future prospects of the Company with senior
executives of the Company;
(ix) analyzed certain publicly available information
concerning the terms of selected merger and acquisition
transactions that we considered relevant to our analysis;
(x) reviewed and analyzed certain publicly available
financial and stock market data relating to selected public
companies that we deemed relevant to our analysis;
(xi) conducted such other financial studies, analyses and
investigations and considered such other information as we
deemed necessary or appropriate for purposes of our
Opinion; and
(xii) took into account our assessment of general economic,
market and financial conditions and our experience in other
transactions, as well as our experience in securities valuations
and our knowledge of the financial services industry generally.
In rendering our Opinion, we have relied upon and assumed,
without independent verification, the accuracy and completeness
of all of the financial and other information that was provided
to Stifel Nicolaus by or on behalf of NovaStar and its
subsidiaries Advent Financial (Advent) and
StreetLinks National Appraisal Services LLC
(StreetLinks), or that was otherwise reviewed by
Stifel Nicolaus, and have not assumed any responsibility for
independently verifying any of such information. With respect to
the financial forecasts supplied to us by NovaStar, we have
assumed that they were reasonably prepared on the basis
reflecting the best currently available estimates and judgments
of NovaStars management as to the future operating and
financial performance of NovaStar, Advent and StreetLinks, as
applicable, and that they provided a reasonable basis upon which
we could form our opinion. Such forecasts and projections were
not prepared with the expectation of public disclosure. All such
projected financial information is based on numerous variables
and assumptions that are inherently uncertain, including,
without limitation, factors related to general economic and
competitive conditions. Accordingly, actual results could vary
significantly from those set forth in such projected financial
information. Stifel Nicolaus has relied on this projected
information without independent verification or analyses and
does not in any respect assume any responsibility for the
accuracy or completeness thereof.
We also assumed, without independent verification and with your
consent, that there were no material changes in the assets,
liabilities, financial condition, results of operations,
business or prospects of NovaStar, Advent or StreetLinks since
the date of the last financial statements made available to us.
We did not make or obtain any independent evaluation, appraisal
or physical inspection of NovaStars, Advents or
StreetLinks respective assets or liabilities, the
collateral securing any of such assets or liabilities, or the
collectability of any such assets. Estimates of values of
companies and assets do not purport to be appraisals or
necessarily reflect the prices at which companies or assets may
actually be sold. Because such estimates are inherently subject
to uncertainty, Stifel Nicolaus assumes no responsibility for
their accuracy. We relied on advice of NovaStars counsel
as to certain legal and tax matters with respect to NovaStar,
the Proxy Statement/Consent Solicitation/Prospectus, the
Exchange Agreement and the Recapitalization and other
transactions and other matters contained or contemplated
therein. We have assumed, with your consent, that there are no
factors that would delay or subject to any adverse conditions
any necessary regulatory or governmental approvals and that
C-2
Board of
Directors NovaStar Financial, Inc.
April 14, 2011
Page 3
all conditions to the Recapitalization will be satisfied and not
waived. In addition, we have assumed that the definitive Proxy
Statement/Consent Solicitation/Prospectus and Exchange Agreement
will not differ materially from the draft we reviewed. We have
also assumed that the Recapitalization will be consummated
substantially on the terms and conditions described in the Proxy
Statement/Consent Solicitation/Prospectus and Exchange Agreement
each without any waiver of material terms or conditions by
NovaStar or any other party to any transaction contemplated
therein, and that obtaining any necessary regulatory approvals
or satisfying any other conditions for consummation of the
Recapitalization or any other related transaction will not have
an adverse effect on the Company.
Our Opinion is limited to whether the financial terms of the
Recapitalization are fair to the Companys common
shareholders, from a financial point of view. Our Opinion does
not consider, include or address: (i) any other strategic
alternatives currently (or which have been or may be)
contemplated by NovaStars Board of Directors (the
Board) the Special Committee of the Board (the
Special Committee) or NovaStar; (ii) the legal,
tax or accounting consequences of the Recapitalization (or any
aspect thereof) on NovaStar or its shareholders including,
without limitation, whether or not the Recapitalization will
trigger an ownership change pursuant to
Section 382 of the Internal Revenue Code or otherwise
affect the tax status of NovaStars net operating loss
carryforwards; (iii) the fairness of the amount or nature
of any compensation to any of the Companys officers,
directors or employees, or class of such persons, relative to
the compensation to the holders of the Companys
securities; (iv) the effect of the Recapitalization (or any
aspect thereof) on, or the fairness of the consideration to be
received by, holders of any class of securities of the Company
other than the Common Stock, or any class of securities of any
other party to any transaction contemplated by the Proxy
Statement/Consent Solicitation/Prospectus and Exchange
Agreement; (v) any advice or opinions provided by any other
advisor to NovaStar or any other party to the Recapitalization;
(vi) any other transaction contemplated by the Proxy
Statement/Consent Solicitation/Prospectus and Exchange Agreement
other than the Recapitalization; (vii) any potential
transaction by any party to the Proxy Statement/Consent
Solicitation/Prospectus and Exchange Agreement which is not
contemplated by the Proxy Statement/Consent
Solicitation/Prospectus and Exchange Agreement; (viii) the
effect of any pending or threatened litigation involving any
party to the Proxy Statement/Consent Solicitation/Prospectus or
the Exchange Agreement on the Recapitalization (or any aspect
thereof) or any other transaction contemplated by the Proxy
Statement/Consent Solicitation/Prospectus or the Exchange
Agreement; or (ix) the fairness of the Series C Offer,
the Series D Exchange or any other individual aspect of the
Recapitalization without taking into account the other aspects
of the Recapitalization. Furthermore, our Opinion does not
express any opinion as to the prices, trading range or volume at
which the securities of NovaStar will trade following public
announcement or consummation of the Recapitalization or any
aspect thereof.
We are not legal, tax, regulatory or bankruptcy advisors. We
have not considered any legislative or regulatory changes
recently adopted or currently being considered by the United
States Congress, the various federal banking agencies, the
Securities and Exchange Commission (the SEC), or any
other regulatory bodies, or any changes in accounting methods or
generally accepted accounting principles that may be adopted by
the SEC or the Financial Accounting Standards Board, or any
changes in regulatory accounting principles that may be adopted
by any or all of the federal banking agencies. Our Opinion is
not a solvency opinion and does not in any way address the
solvency or financial condition of NovaStar.
Our Opinion is necessarily based on economic, market, financial
and other conditions as they exist on, and on the information
made available to us as of, the date of this letter. It is
understood that subsequent developments may affect the
conclusions reached in this Opinion and that Stifel Nicolaus
does not have any obligation to update, revise or reaffirm this
Opinion, except as otherwise set forth in our engagement letter
agreement with the Company. We also did not perform or rely upon
certain analyses that we would customarily prepare for the
Company in connection with a fairness opinion because such
analyses were deemed not to be meaningful for various reasons.
C-3
Board of
Directors NovaStar Financial, Inc.
April 14, 2011
Page 4
Our Opinion is for the information of, and directed to, the
Board of Directors for their information and assistance in
connection with the consideration of the financial terms of the
Recapitalization. Our Opinion does not constitute a
recommendation to the Special Committee, the Board or any
shareholder of NovaStar as to how the Special Committee, the
Board or such shareholder should vote on the Recapitalization or
any aspect thereof, whether or not any NovaStar shareholder
should elect the
Cash-and-Stock
Option or the Stock-Only Option in connection with the
Series C Offer, or whether or not any NovaStar shareholder
should enter into the Exchange Agreement or any voting,
shareholders or other agreement with respect to the
Recapitalization or any aspect thereof, or exercise any
dissenters or appraisal rights that may be available to
such shareholder. In addition, the Opinion does not compare the
relative merits of the Recapitalization or any aspect thereof
with any other alternative transaction or business strategy
which may have been available to the Special Committee, the
Board or the Company and does not address the underlying
business decision of the Special Committee, the Board or the
Company to proceed with or effect the Recapitalization or any
aspect thereof. We were not requested to, and we did not,
explore alternatives to the Recapitalization or solicit the
interest of any other parties in pursuing transactions with the
Company.
We have acted as financial advisor to the Board of Directors in
connection with the Recapitalization and related matters, and we
have received monthly retainer fees pursuant our engagement
letter with the Board of Directors and NovaStar dated
September 8, 2010, and received a fee for the previously
delivered Fairness Opinion on December 10, 2010. In
addition, we will receive a separate fee upon delivery of this
Opinion. We will not receive any other significant payment or
compensation contingent upon successful consummation of the
Recapitalization or any aspect thereof. In addition, NovaStar
has agreed to indemnify us for certain liabilities arising out
of our engagement. In the past, Stifel Nicolaus has performed
investment banking services for NovaStar from time to time for
which Stifel Nicolaus received customary compensation. Stifel
Nicolaus may seek to provide investment banking services to the
Company or its respective affiliates in the future, for which we
would seek customary compensation. In the ordinary course of
business, Stifel Nicolaus and its clients trade in the
securities of NovaStar and, accordingly, may at any time hold a
long or short position in such securities.
Stifel Nicolaus Fairness Opinion Committee has approved
the issuance of this Opinion. Our Opinion may not be published,
quoted or otherwise used or referred to, in whole or in part,
nor shall any public reference to Stifel Nicolaus or this
Opinion be made, in any registration statement, consent
solicitation, prospectus or proxy statement, or in any other
document used in connection with the offering or sale of
securities or to seek approval for the Recapitalization or any
aspect thereof or otherwise, nor shall our Opinion be used for
any other purposes, without the prior written consent of Stifel
Nicolaus.
Based upon and subject to the foregoing, we are of the opinion
that, as of the date hereof, the financial terms of the
Recapitalization pursuant to the Proxy Statement/Consent
Prospectus/Prospectus and the Exchange Agreement are fair to the
Companys common shareholders, from a financial point of
view.
Very truly
yours,
STIFEL,
NICOLAUS & COMPANY, INCORPORATED
C-4
APPENDIX D
EXCHANGE
AGREEMENT
by and between
JEFFERIES CAPITAL PARTNERS IV L.P.
JEFFERIES EMPLOYEE PARTNERS IV LLC
JCP PARTNERS IV LLC
and
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
and
NOVASTAR FINANCIAL, INC.
dated as of December 10, 2010
TABLE OF
CONTENTS
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Page
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ARTICLE I DEFINITIONS
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D-2
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Section 1.1
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General
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D-2
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Section 1.2
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References; Interpretation
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D-4
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ARTICLE II THE EXCHANGE
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D-5
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Section 2.1
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The Exchange
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D-5
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Section 2.2
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Closing Date
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D-5
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Section 2.3
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Exchange of Certificates
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D-5
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Section 2.4
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The Offer
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D-5
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ARTICLE III REPRESENTATIONS AND WARRANTIES OF NOVASTAR
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D-6
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Section 3.1
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Organization; Good Standing
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D-6
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Section 3.2
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Authorization
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D-6
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Section 3.3
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Non-Contravention
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D-7
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Section 3.4
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Governmental Approvals
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D-7
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Section 3.5
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Litigation
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D-7
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ARTICLE IV REPRESENTATIONS AND WARRANTIES OF JEFFERIES
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D-8
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Section 4.1
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Organization; Good Standing
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D-8
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Section 4.2
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Authorization
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D-8
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Section 4.3
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Non-Contravention
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D-8
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Section 4.4
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Governmental Approvals
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D-8
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Section 4.5
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Litigation
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D-9
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Section 4.6
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Title
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D-9
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Section 4.7
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Investor Representations
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D-9
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ARTICLE V REPRESENTATIONS AND WARRANTIES OF MASS MUTUAL
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D-9
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Section 5.1
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Organization; Good Standing
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D-9
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Section 5.2
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Authorization
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D-9
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Section 5.3
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Non-Contravention
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D-10
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Section 5.4
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Governmental Approvals
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D-10
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Section 5.5
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Litigation
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D-10
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Section 5.6
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Title
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D-10
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Section 5.7
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Investor Representations
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D-10
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ARTICLE VI ADDITIONAL COVENANTS
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D-10
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Section 6.1
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NovaStar Shareholder Meetings
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D-10
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Section 6.2
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Efforts; Cooperation
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D-11
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Section 6.3
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Further Assurances
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D-11
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Section 6.4
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Confidentiality
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D-11
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Section 6.5
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Public Announcements
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D-11
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Section 6.6
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Litigation Cooperation
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D-12
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Section 6.7
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Voting of Series D Preferred
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D-12
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Section 6.8
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Tax Matters
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D-12
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Section 6.9
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Lock-Up
Period
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D-12
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Section 6.10
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Observation Rights
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D-13
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D-i
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Page
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ARTICLE VII SURVIVAL AND INDEMNIFICATION
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D-14
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Section 7.1
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Survival
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D-14
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Section 7.2
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Indemnification by NovaStar
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D-14
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Section 7.3
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Indemnification by Jefferies
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D-15
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Section 7.4
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Indemnification by Mass Mutual
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D-15
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Section 7.5
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Notice; Procedure for Third-Party Claims
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D-15
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Section 7.6
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Remedies Exclusive
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D-16
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ARTICLE VIII TERMINATION
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D-16
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Section 8.1
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Termination
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D-16
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Section 8.2
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Effect of Termination
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D-16
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ARTICLE IX MISCELLANEOUS
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D-17
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Section 9.1
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Entire Agreement
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D-17
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Section 9.2
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Counterparts
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D-17
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Section 9.3
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Expenses
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D-17
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Section 9.4
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Notices
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D-17
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Section 9.5
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Waivers
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D-18
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Section 9.6
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Amendments
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D-18
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Section 9.7
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Assignment
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D-18
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Section 9.8
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Successors and Assigns
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D-18
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Section 9.9
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No Third-Party Beneficiaries
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D-18
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Section 9.10
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Annex A
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D-18
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Section 9.11
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GOVERNING LAW
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D-18
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Section 9.12
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Consent to Jurisdiction; Waiver of Jury Trial
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D-19
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Section 9.13
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Specific Performance
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D-19
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Section 9.14
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Severability
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D-19
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ANNEXES
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Annex A Conditions to Closing the Exchange
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D-21
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Annex B Form of Registration Rights Agreement
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D-23
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D-ii
EXCHANGE
AGREEMENT
This Exchange Agreement (Agreement), dated as
of December 10, 2010 is by and between Jefferies Capital
Partners IV L.P., Jefferies Employee Partners IV LLC
and JCP Partners IV LLC, each organized under the laws of
Delaware (collectively, Jefferies),
Massachusetts Mutual Life Insurance Company, a Massachusetts
corporation (Mass Mutual) and NovaStar
Financial, Inc., a Maryland corporation
(NovaStar).
WHEREAS, as of the close of business on the date of this
Agreement, the authorized capital stock of NovaStar consists of
50,000,000 shares, which includes the common stock, par
value $0.01 (the Common Stock) of which
issued and outstanding is 9,368,053 shares of Common Stock,
2,100,000 shares of 9.00% Series D1 Mandatory
Convertible Preferred Stock, par value $0.01 (the
Series D Preferred) and
2,990,000 shares of 8.90% Series C Cumulative
Redeemable Preferred Stock, par value $0.01 per share (the
Series C Preferred);
WHEREAS, as of close of business on the date of this Agreement,
Jefferies and Mass Mutual each own 1,050,000 shares of the
Series D Preferred;
WHEREAS, the parties desire to exchange all of the Series D
Preferred for shares of Common Stock and cash (the
Exchange), upon the terms and subject to the
conditions set forth in this Agreement;
WHEREAS, prior to the closing of the Exchange, NovaStar
will make an offer (the Offer) to acquire all
the share of the Series C Preferred in accordance with the
terms described (without amendment), in the draft of the
registration statement on
Form S-4
(the Draft Registration Statement)
furnished by NovaStar to Jefferies and Mass Mutual by email on
December 8, 2010;
WHEREAS, upon completion of the transactions contemplated in the
Offer, NovaStars board of directors will initially consist
of six (6) individuals, two (2) of whom will be Howard
Amster and Barry Igdaloff;
WHEREAS, during the
Lock-Up
Period (as defined herein), each of Jefferies and Mass Mutual
will have the right to designate one (1) representative to
attend and observe meetings of the board of directors and will
have the right to cause NovaStar to increase the size of its
board of directors and to appoint such observer to fill the
newly created board seat, subject to the right of Jefferies and
Mass Mutual to replace its respective board seat or board
observer in the event of vacancy;
WHEREAS, the board of directors of NovaStar, upon the
recommendation of the NovaStar Special Committee (as defined
herein), has determined that it is in the best interests of
NovaStar and the NovaStar shareholders to engage in the
Transactions (as defined herein) and, subject to the terms and
conditions of this Agreement, has resolved to recommend that the
shareholders approve the Transactions; and
WHEREAS, each of Jefferies, Mass Mutual and NovaStar has
determined that it is necessary and desirable to set forth the
transactions required to effect the Exchange.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the
parties hereby agree as follows:
D-1
ARTICLE I
DEFINITIONS
Section 1.1 General. As
used in this Agreement, the following terms shall have the
following meanings:
Action shall mean any action, suit,
arbitration, inquiry, proceeding or investigation by or before
any court, any governmental or other regulatory or
administrative agency, body or commission or any arbitration
tribunal.
Affiliate shall mean, when used with
respect to a specified Person, another Person that controls, is
controlled by, or is under common control with the Person
specified; provided, however, that NovaStar shall
not be considered to be an Affiliate of either
Jefferies or Mass Mutual, and neither Jefferies nor Mass Mutual
and their respective Subsidiaries shall be considered to be
Affiliates of NovaStar.
Agreement shall have the meaning set
forth in the preamble.
Amended and Restated NovaStar Articles of
Incorporation shall have the meaning set forth in
Section 2.2.
Board Director shall have the meaning
set forth in Section 6.10.
Board Observer shall have the meaning
set forth in Section 6.10.
Business Day shall have the meaning
given to such term under
Rule 13e-4(a)(3)
under the Exchange Act.
Closing shall have the meaning set
forth in Section 2.2.
Closing Date shall have the meaning
set forth in Section 2.2.
Code shall mean the Internal Revenue
Code of 1986, as amended.
Common Stock shall have the meaning
set forth in the recitals.
Common Stock Proxy Statement shall
have the meaning set forth in Section 2.4(b).
Draft Registration Statement shall
have the meaning set forth in the recitals.
Exchange Act shall mean the
U.S. Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
Form S-4
shall have the meaning set forth in Section 2.4(a).
Frustrating Transactions shall have
the meaning set forth in Section 6.7(a).
Governmental Authority shall mean any
federal, state, local, foreign or international court,
government, department, commission, board, bureau, agency,
official or other regulatory, administrative or governmental
authority.
Indemnified Party shall have the
meaning set forth in Section 7.5(a).
Indemnifying Party shall have the
meaning set forth in Section 7.5(a).
IRS shall mean the Internal Revenue
Service.
IRS Ruling shall mean the private
letter ruling issued by the IRS, dated July 23, 2010, to
NovaStar.
Jefferies Contract shall have the
meaning set forth in Section 4.3(a).
Jefferies Entities shall mean each of
Jefferies Capital Partners IV L.P., Jefferies Employee
Partners IV LLC and JCP Partners IV LLC.
D-2
Jefferies Material Adverse Effect
shall mean any change, effect, event, occurrence or development
that, individually or in the aggregate, is resulting, has
resulted, or would reasonably be expected to result in a
material adverse effect on the ability of Jefferies to perform
its obligations under this Agreement or to consummate the
Exchange.
Law shall mean any federal, state,
local or foreign law (including common law), statute, ordinance,
rule, regulation, judgment, code, order, injunction, decree,
arbitration award, agency requirement, license or permit of any
Governmental Authority.
Liens shall mean mortgages, pledges,
hypothecations, liens, charges, claims, security interests,
indentures, deeds of trust, charges, adverse claims, options,
equitable interests, restrictions, easements, title defects,
title retention agreements, voting trust agreements, or other
encumbrance of any kind, including any restriction on the right
to use, transfer, vote, receive income, sell or otherwise
dispose of stock, other than any Lien created pursuant to this
Agreement.
Lock-Up
Period shall have the meaning set forth in
Section 6.9(a).
Losses shall mean all losses, costs,
charges, expenses (including interest and penalties due and
payable with respect thereto and reasonable attorneys and
other professional fees and expenses in connection with any
Action whether involving a third-party claim or any claim solely
between the parties hereto), obligations, liabilities,
settlement payments, awards, judgments, fines, penalties,
damages, demands, claims, assessments or deficiencies, in any
such case, arising out of, attributable to or resulting from the
Transactions.
Mass Mutual shall have the meaning set
forth in the preamble.
Mass Mutual Contract shall have the
meaning set forth in Section 5.3(a).
Mass Mutual Material Adverse Effect
shall mean any change, effect, event, occurrence or development
that, individually or in the aggregate, is resulting, has
resulted, or would reasonably be expected to result in a
material adverse effect on the ability of Mass Mutual to perform
its obligations under this Agreement or to consummate the
Exchange.
MGCL shall mean the Maryland General
Corporate Law.
NovaStar shall have the meaning set
forth in the preamble.
NovaStar Contract shall have the
meaning set forth in Section 3.3(a).
NovaStar Indemnified Parties shall
have the meaning set forth in Section 7.3.
NovaStar Material Adverse Effect shall
mean any change, effect, event, occurrence or development that,
individually or in the aggregate, is resulting, has resulted, or
would reasonably be expected to result in a material adverse
effect on the business, financial condition, equity reserves,
surplus or results of operations of NovaStar and its
Subsidiaries, taken as a whole, or on the ability of NovaStar to
perform its obligations under this Agreement or to consummate
the Exchange.
NovaStar Required Consents shall have
the meaning set forth in Section 3.4.
NovaStar Shareholder Approvals shall
mean the requisite approval of each proposal submitted to a vote
at a special meeting of the holders of NovaStars Common
Stock, Series C Preferred, or the Series D Preferred
with respect to the Transactions.
NovaStar Common Stock Shareholders
shall mean the holders of NovaStars Common Stock.
NovaStar Series C Preferred
Shareholders shall mean the holders of
NovaStars Series C Preferred.
NovaStar Series D Preferred
Shareholders shall mean the holders of
NovaStars Series D Preferred.
NovaStar Shareholder Meetings shall
have the meaning set forth in Section 6.1.
D-3
NovaStar Special Committee shall mean
the special committee of the board of directors of NovaStar
established to consider and approve this Agreement and the
Transactions and related matters, or any successor committee
established by the NovaStar board of directors and designated
for such purpose.
Offer shall have the meaning set forth
in the recitals.
Offer Documents shall have the meaning
set forth in Section 2.4(c).
Person shall mean any natural person,
corporation, partnership, limited liability company, business
trust, joint venture, association, company, other entity or
government, or any agency or political subdivision thereof.
Prospectus shall have the meaning set
forth in Section 2.4(a).
Representative shall mean a director,
officer, or employee or any investment banker, financial
advisor, attorney, accountant or other advisor, agent or
representative.
Restraint shall mean any Law,
temporary restraining order, preliminary or permanent
injunction, judgment or ruling enacted, promulgated, issued or
entered by any Governmental Authority.
Schedule TO shall have the
meaning set forth in Section 2.4(c).
SEC shall mean the
U.S. Securities and Exchange Commission.
Securities Act shall mean the
U.S. Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
Subsidiary shall mean any corporation,
limited liability company, partnership or other entity of which
another entity (i) owns, directly or indirectly, ownership
interests sufficient to elect a majority of the board of
directors (or persons performing similar functions) or
(ii) is a general partner or an entity performing similar
functions.
Supplemental IRS Ruling shall mean any
private letter ruling issued by the IRS pursuant to any
supplemental request for rulings, submitted by NovaStar to the
IRS following the issuance of the IRS Ruling, relating to the
Transactions.
Tax or Taxes shall
mean taxes of any kind, levies or other like assessments,
customs, duties, imposts, charges or fees, including income,
gross receipts, ad valorem, value added, excise, real or
personal property, asset, sales, use, license, payroll,
transaction, capital, net worth and franchise taxes,
withholding, employment, social security, workers compensation,
utility, severance, production, unemployment compensation,
occupation, premium, windfall profits, transfer and gains taxes
or other governmental taxes imposed or payable to the United
States, or any state, county, local or foreign government or
subdivision or agency thereof, and in each instance such term
shall include any interest, penalties, additions to tax or
additional amounts attributable to any such tax.
Termination Date shall have the meaning set
forth in Section 8.1(b)(i).
Third-Party Claim shall have the meaning set
forth in Section 7.5(b).
Transactions shall mean the transactions
contemplated by this Agreement, including the Offer and
Exchange, each as more fully described in the Draft Registration
Statement.
Treasury Regulation 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).
Section 1.2 References;
Interpretation.
(a) The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
Whenever the words include, includes or
including are used in this Agreement, they shall be
deemed to be followed by the words without
limitation. The words hereof,
herein and hereunder and words of
similar import when used in
D-4
this Agreement shall refer to this Agreement as a whole and not
to any particular provision of this Agreement. All terms defined
in this Agreement shall have the defined meanings when used in
any document made or delivered pursuant hereto unless otherwise
defined therein. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such
terms and to the masculine as well as to the feminine and neuter
genders of such terms. Any statute defined or referred to in
this Agreement or in any agreement or instrument that is
referred to in this Agreement means such statute as from time to
time amended, updated, modified, supplemented or superseded,
including by succession of comparable successor statutes and
references to all attachments thereto and instruments
incorporated therein. References to a Person are also to its
permitted successors and assigns.
(b) The parties have participated jointly in the
negotiation and drafting of this Agreement and, in the event an
ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as jointly drafted by the parties,
and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any
provision of this Agreement.
ARTICLE II
THE EXCHANGE
Provided that this Agreement shall not have been terminated,
upon the satisfaction or waiver of the conditions set forth in
Annex A (the Conditions),
NovaStar, Jefferies and Mass Mutual will effect the Exchange as
follows:
Section 2.1 The
Exchange. At the Closing, each of Jefferies
and Mass Mutual shall tender 1,050,00 shares of
Series D Preferred and each shall accept
18,581,000 shares of Common Stock and $688,500 in exchange.
The shares of Common Stock issued under the Exchange to
Jefferies and Mass Mutual (the Privately Placed
Stock) will be restricted securities under
Regulation D of the Securities Act. The certificates
evidencing the Privately Placed Stock will bear an appropriate
legend regarding restrictions on resale for restricted
securities.
Section 2.2 Closing
Date. The Exchange shall occur on the same
day as, and immediately following, the last of the NovaStar
Shareholder Meetings that results in obtaining the final
NovaStar Shareholder Approval, and the parties agree that they
shall cause an amended and restated NovaStar Articles of
Incorporation eliminating the Series D Preferred and
implementing certain ownership restrictions in order to preserve
existing net operating losses, among other things, in such form
as is reasonably acceptable to Jefferies and Mass Mutual (the
Amended and Restated NovaStar Articles of
Incorporation), to become effective under the MGCL as
of such time (the Closing). The date on
which the Exchange shall occur shall be the
Closing Date.
Section 2.3 Exchange
of Certificates. On or prior to the Closing
Date, each of Jefferies and Mass Mutual shall deposit, or shall
cause to be deposited, with NovaStar the certificate or
certificates representing the shares of Series D Preferred
beneficially owned by it. On the Closing Date, NovaStar shall
cancel such deposited certificate or certificates and issue to
each of Jefferies and Mass Mutual a new certificate or
certificates of Common Stock representing the number of shares
indicated in Section 2.1 above.
Section 2.4 The
Offer.
(a) As promptly as practicable after the date of this
Agreement, NovaStar shall prepare and file with the SEC, a
registration statement on
Form S-4
(the
Form S-4)
to register under the Securities Act the offer and sale of the
Common Stock to be issued in the Offer to holders of the
Series C Preferred. The
Form S-4
will include (i) a proxy statement to be used for the
shareholder meeting of holders of the Series C Preferred
and (ii) a prospectus to be used as a prospectus sent to
the holders of the Series C Preferred for the Offer (the
Prospectus). Following the filing of the
Form S-4,
NovaStar shall use reasonable best efforts to cause the
Form S-4
to become effective under the Securities Act as promptly as
practicable. Following the effectiveness of the
Form S-4,
NovaStar shall use its reasonable best efforts, to cause the
proxy materials in the
Form S-4
to
D-5
be mailed to the NovaStar Series C Preferred Shareholders
entitled to vote at the shareholder meeting for the purpose of
obtaining the approval of the holders of the Series C
Preferred.
(b) As promptly as practicable after the date of this
Agreement, NovaStar shall prepare and file with the SEC a proxy
statement and call a meeting of the holders of NovaStars
Common Stock to approve certain amendments to the Articles of
Incorporation necessary to effect the Transactions (the
Common Stock Proxy Statement).
(c) NovaStar shall file with the SEC a tender offer
statement on Schedule TO (the
Schedule TO) with respect to the Offer,
which Schedule TO shall include the Prospectus, a form of
transmittal letter, a form of notice of guaranteed delivery and
other customary materials (together with any supplements and
amendments thereto, the Offer Documents) and
shall cause the Offer Documents to be disseminated to the
holders of the Series C Preferred. At all times, each of
the parties shall conduct and complete the Transactions in
accordance with the applicable securities Laws.
(d) At or prior to the Closing, either (i) in the form
of a unanimous consent of shareholders or (ii) at a special
meeting duly called, NovaStar shall seek the consent and
approval of Jefferies and Mass Mutual to the Transactions and
all steps necessary thereto. At the Closing, NovaStar, Jefferies
and Mass Mutual shall execute a registration rights agreement
(the Registration Rights Agreement) in
the form as attached hereto as Annex B committing NovaStar
to register the Privately Placed Stock at such time as described
therein.
(e) NovaStar shall take all steps necessary for the
Form S-4,
the Offer Documents and any filing under Rule 425 under the
Securities Act relating to the Transactions to be filed with the
SEC, to comply in all material respects with the Securities Act
and the Exchange Act, as applicable.
(f) Each of Jefferies and Mass Mutual shall furnish
promptly to NovaStar all information concerning itself or its
Subsidiaries that is required or reasonably requested by
NovaStar in connection with the obligations contained in this
Section 2.4, relating to the
Form S-4,
and the Offer Documents.
ARTICLE III
REPRESENTATIONS
AND WARRANTIES OF NOVASTAR
NovaStar hereby represents and warrants to Jefferies and Mass
Mutual, on the date of this Agreement and on the Closing Date as
follows:
Section 3.1 Organization;
Good Standing. NovaStar is duly organized,
validly existing and in good standing under the Laws of the
state of Maryland, and has all requisite corporate power and
corporate authority necessary to own, lease and operate all of
its properties and assets and to carry on its business as it is
now being conducted, except for such failures to be duly
organized, validly existing or in good standing or to have
corporate power or corporate authority that, individually or in
the aggregate, would not have a NovaStar Material Adverse
Effect. NovaStar is duly licensed or qualified to do business
and is in good standing (or equivalent status) in each
jurisdiction in which the nature of the business conducted by it
or the character or location of the properties and assets owned
or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good
standing (or equivalent status) would not, individually or in
the aggregate, have a NovaStar Material Adverse Effect.
Section 3.2 Authorization.
(a) NovaStar has all necessary corporate power and
authority to execute and deliver this Agreement and, subject to
obtaining the NovaStar Shareholder Approvals, to perform its
obligations hereunder and to consummate the Transactions. The
execution, delivery and performance by NovaStar of this
Agreement, and the consummation by it of the Transactions, have
been duly authorized and approved by all necessary corporate
action on the part of NovaStar (including by its board of
directors), and except for the NovaStar Shareholder Approvals,
no other corporate action or proceedings on the part of NovaStar
is necessary to authorize the execution, delivery and
performance by NovaStar of this Agreement and the consummation
by it of the Transactions. This Agreement has been duly executed
and delivered by NovaStar and, assuming due
D-6
authorization, execution and delivery of this Agreement by the
other parties hereto, constitutes a legal, valid and binding
obligation of NovaStar, enforceable against NovaStar in
accordance with its terms, except (i) as such enforcement
may be limited by bankruptcy, insolvency, reorganization,
receivership, moratorium, fraudulent transfer or similar laws
now or hereinafter in effect relating to or affecting
creditors rights generally and by general principles of
equity, and (ii) except with respect to the rights of
indemnification and contribution hereunder, where enforcement
hereof may be limited by federal or state securities Laws or the
policies underlying such Laws.
(b) The board of directors of NovaStar, at a meeting duly
called and held, has (i) approved this Agreement and the
Transactions and (ii) resolved to recommend that NovaStar
Common Stock Shareholders, NovaStar Series C Shareholder
and NovaStar Series D Shareholders vote to approve the
proposals required to effect the Transactions.
Section 3.3 Non-Contravention.
(a) Neither the execution and delivery of this Agreement by
NovaStar nor the consummation by NovaStar of the Transactions,
nor compliance by NovaStar with any of the provisions of this
Agreement, will (i) conflict with or result in any
violation or breach of or default (with or without notice or
lapse of time, or both) under any articles of incorporation,
bylaws or similar organizational documents of NovaStar,
(ii) violate any Law, judgment, writ or injunction of any
Governmental Authority applicable to NovaStar, or
(iii) conflict with or result in any violation or breach
of, or default (with or without notice or lapse of time, or
both) under or give rise to a right of, or result in,
termination, modification, cancellation, recapture or
acceleration of any obligation or to the loss of a benefit, or
result in the creation of any Lien in or upon or with respect
to, any of the properties or other assets of NovaStar, under any
of the terms, conditions or provisions of any loan or credit
agreement, debenture, note, bond, mortgage, indenture, deed of
trust, contract or other agreement (each, a NovaStar
Contract) to which NovaStar is a party, except in the
case of clauses (ii) and (iii), for such violations,
defaults or conflicts as would not, individually or in the
aggregate, have a NovaStar Material Adverse Effect. Other than
as would not result in a NovaStar Material Adverse Effect, none
of the Transactions will constitute a change of
control of NovaStar for purposes of Treasury Regulation
§ 1.382.
(b) Except as would not, individually or in the aggregate,
have a NovaStar Material Adverse Effect, NovaStar (i) is
not in violation of its articles of incorporation, bylaws or
similar organizational documents, (ii) is not in default in
the performance of any NovaStar Contract to which it is a party
or by which it is bound or to which any of its properties is
subject or (iii) is in violation of any Law applicable to
NovaStar.
Section 3.4 Governmental
Approvals. Except for filings required under,
and compliance with other applicable requirements of,
(a) the Securities Act and the Exchange Act and
(b) the filing of the Amended and Restated NovaStar
Articles of Incorporation with the Secretary of State of the
State of Maryland (the NovaStar Required
Consents), no material consents or approvals of, or
filings, declarations or registrations with, any Governmental
Authority are necessary for the execution and delivery of this
Agreement by NovaStar or the consummation by NovaStar of the
Transactions. As of the date of this Agreement, NovaStar has no
knowledge or reason to believe that it will not be able to
obtain the NovaStar Required Consents.
Section 3.5 Litigation. There
are no Actions pending, or to the knowledge of NovaStar,
threatened, to which NovaStar or any of its Subsidiaries is or
may be a party or to which the business or property of NovaStar
or any of its Subsidiaries is or may be subject, and there is no
statute, rule, regulation or order that has been enacted,
adopted or issued by any Governmental Authority or that has been
proposed by any Governmental Authority having jurisdiction over
NovaStar or its Subsidiaries, (a) that seeks to, and
neither NovaStar nor any of its Subsidiaries is subject to any
judgments, decrees or orders that, enjoin, prohibit, rescind or
restrain any of the Transactions or otherwise prevent NovaStar
from complying in all material respects with the terms and
provisions of this Agreement or (b) that would,
individually or in the aggregate, result in a NovaStar Material
Adverse Effect.
D-7
ARTICLE IV
REPRESENTATIONS
AND WARRANTIES OF JEFFERIES
Jefferies hereby represents and warrants to NovaStar, on the
date of this Agreement and on the Closing Date, as follows:
Section 4.1 Organization;
Good Standing. Each Jefferies Entity is duly
organized, validly existing and in good standing under the Laws
of the state of Delaware, and has all requisite limited
partnership or limited liability company (as the case may be)
power and authority necessary to own, lease and operate all of
its properties and assets and to carry on its business as it is
now being conducted, except for such failures to be duly
organized, validly existing or in good standing or to have
corporate power or corporate authority that, individually or in
the aggregate, would not have a Jefferies Material Adverse
Effect. Jefferies is duly licensed or qualified to do business
and is in good standing (or equivalent status) in each
jurisdiction in which the nature of the business conducted by it
or the character or location of the properties and assets owned
or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good
standing (or equivalent status) would not, individually or in
the aggregate, have a Jefferies Material Adverse Effect.
Section 4.2 Authorization. Each
Jefferies Entity has all necessary corporate power and authority
to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the Transactions. The
execution, delivery and performance by each Jefferies Entity of
this Agreement, and the consummation by it of the Transactions,
have been duly authorized and approved by all necessary limited
partnership or limited liability company action, as the case may
be, on its part, no other limited partnership or limited
liability company action or proceedings, as the case may be, on
its part are necessary to authorize the execution, delivery and
performance by it of this Agreement and the consummation by it
of the Transactions. This Agreement has been duly executed and
delivered by each Jefferies Entity and, assuming due
authorization, execution and delivery of this Agreement by the
other parties hereto, constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms,
except (i) as such enforcement may be limited by
bankruptcy, insolvency, reorganization, receivership,
moratorium, fraudulent transfer or similar laws now or
hereinafter in effect relating to or affecting creditors
rights generally and by general principles of equity, and
(ii) except with respect to the rights of indemnification
and contribution hereunder, where enforcement hereof may be
limited by federal or state securities Laws or the policies
underlying such Laws.
Section 4.3 Non-Contravention.
(a) Neither the execution and delivery of this Agreement by
Jefferies nor the consummation by Jefferies of the Transactions,
nor compliance by Jefferies with any of the provisions of this
Agreement, will (i) conflict with or result in any
violation or breach of or default (with or without notice or
lapse of time, or both) under any organizational documents of a
Jefferies Entity, (ii) violate any Law, judgment, writ or
injunction of any Governmental Authority applicable to a
Jefferies Entity, or (iii) conflict with or result in any
violation or breach of, or default (with or without notice or
lapse of time, or both) under or give rise to a right of, or
result in, termination, modification, cancellation, recapture or
acceleration of any obligation or to the loss of a benefit, or
result in the creation of any Lien in or upon or with respect
to, any of the properties or other assets of a Jefferies Entity,
under any of the terms, conditions or provisions of any loan or
credit agreement, debenture, note, bond, mortgage, indenture,
deed of trust, contract or other agreement (each, a
Jefferies Contract) to which a Jefferies
Entity is a party, except in the case of clauses (ii) and
(iii), for such violations, defaults or conflicts as would not,
individually or in the aggregate, have a Jefferies Material
Adverse Effect.
(b) Except as would not, individually or in the aggregate,
have a Jefferies Material Adverse Effect, no Jefferies Entity
(i) is not in violation of its organizational documents,
(ii) is not in default in the performance of any Jefferies
Contract to which it is a party or by which it is bound or to
which any of its properties is subject or (iii) is in
violation of any Law applicable to it.
Section 4.4 Governmental
Approvals. No material consents or approvals
of, or material filings, declarations or registrations with, any
Governmental Authority are necessary for the execution and
delivery of this Agreement by any Jefferies Entity or the
consummation by a Jefferies Entity of the Transactions.
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Section 4.5 Litigation. There
are no Actions pending, or to the knowledge of Jefferies,
threatened, to which any Jefferies Entity or any of its
Subsidiaries is or may be a party or to which the business or
property of any Jefferies Entity or any of its Subsidiaries is
or may be subject, and there is no statute, rule, regulation or
order that has been enacted, adopted or issued by any
Governmental Authority or that has been proposed by any
Governmental Authority having jurisdiction over any Jefferies
Entity or its Subsidiaries, (a) that seeks to, and neither
any Jefferies Entities nor any of its Subsidiaries is subject to
any judgments, decrees or orders that, enjoin, prohibit, rescind
or restrain any of the Transactions or otherwise prevent such
Jefferies Entity from complying in all material respects with
the terms and provisions of this Agreement or (b) that
would, individually or in the aggregate, result in a Jefferies
Material Adverse Effect.
Section 4.6 Title. As
of the date of this Agreement, Jefferies has good and valid
title, in the aggregate, to 1,050,000 shares of
Series D Preferred free and clear of any Liens.
Section 4.7 Investor
Representations. Taking into account its
personnel and resources, Jefferies is knowledgeable,
sophisticated and experienced in making, and is qualified to
make, decisions with respect to investments in shares presenting
an investment decision like that involved in the Exchange,
including investments in securities issued by NovaStar.
Jefferies is an accredited investor, as defined in
Rule 501 under the Securities Act. Jefferies also
acknowledges that the certificates for the Privately Placed
Stock may contain legends regarding a shareholder rights plan
and restrictions on the right to resell the securities without
registration or an applicable exemption from registration.
ARTICLE V
REPRESENTATIONS
AND WARRANTIES OF MASS MUTUAL
Mass Mutual hereby represents and warrants to NovaStar, on the
date of this Agreement and on the Closing Date, as follows:
Section 5.1 Organization;
Good Standing. Mass Mutual is duly organized,
validly existing and in good standing under the Laws of the
state of Massachusetts, and has all requisite corporate power
and corporate authority necessary to own, lease and operate all
of its properties and assets and to carry on its business as it
is now being conducted, except for such failures to be duly
organized, validly existing or in good standing or to have
corporate power or corporate authority that, individually or in
the aggregate, would not have a Mass Mutual Material Adverse
Effect. Mass Mutual is duly licensed or qualified to do business
and is in good standing (or equivalent status) in each
jurisdiction in which the nature of the business conducted by it
or the character or location of the properties and assets owned
or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good
standing (or equivalent status) would not, individually or in
the aggregate, have a Mass Mutual Material Adverse Effect.
Section 5.2 Authorization. Mass
Mutual has all necessary corporate power and authority to
execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the Transactions. The execution,
delivery and performance by Mass Mutual of this Agreement, and
the consummation by it of the Transactions, have been duly
authorized and approved by all necessary corporate action on the
part of Mass Mutual (including, if applicable, by its board of
directors), no other corporate action or proceedings on the part
of Mass Mutual is necessary to authorize the execution, delivery
and performance by Mass Mutual of this Agreement and the
consummation by it of the Transactions. This Agreement has been
duly executed and delivered by Mass Mutual and, assuming due
authorization, execution and delivery of this Agreement by the
other parties hereto, constitutes a legal, valid and binding
obligation of Mass Mutual, enforceable against Mass Mutual in
accordance with its terms, except (i) as such enforcement
may be limited by bankruptcy, insolvency, reorganization,
receivership, moratorium, fraudulent transfer or similar laws
now or hereinafter in effect relating to or affecting
creditors rights generally and by general principles of
equity, and (ii) except with respect to the rights of
indemnification and contribution hereunder, where enforcement
hereof may be limited by federal or state securities Laws or the
policies underlying such Laws.
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Section 5.3 Non-Contravention.
(a) Neither the execution and delivery of this Agreement by
Mass Mutual nor the consummation by Mass Mutual of the
Transactions, nor compliance by Mass Mutual with any of the
provisions of this Agreement, will (i) conflict with or
result in any violation or breach of or default (with or without
notice or lapse of time, or both) under any articles of
incorporation, bylaws or similar organizational documents of
Mass Mutual, (ii) violate any Law, judgment, writ or
injunction of any Governmental Authority applicable to Mass
Mutual, or (iii) conflict with or result in any violation
or breach of, or default (with or without notice or lapse of
time, or both) under or give rise to a right of, or result in,
termination, modification, cancellation, recapture or
acceleration of any obligation or to the loss of a benefit, or
result in the creation of any Lien in or upon or with respect
to, any of the properties or other assets of Mass Mutual, under
any of the terms, conditions or provisions of any loan or credit
agreement, debenture, note, bond, mortgage, indenture, deed of
trust, contract or other agreement (each, a Mass Mutual
Contract) to which Mass Mutual is a party, except in
the case of clauses (ii) and (iii), for such violations,
defaults or conflicts as would not, individually or in the
aggregate, have a Mass Mutual Material Adverse Effect.
(b) Except as would not, individually or in the aggregate,
have a Mass Mutual Material Adverse Effect, Mass Mutual
(i) is not in violation of its articles of incorporation,
bylaws or similar organizational documents, (ii) is not in
default in the performance of any Mass Mutual Contract to which
it is a party or by which it is bound or to which any of its
properties is subject or (iii) is in violation of any Law
applicable to Mass Mutual.
Section 5.4 Governmental
Approvals. No material consents or approvals
of, or material filings, declarations or registrations with, any
Governmental Authority are necessary for the execution and
delivery of this Agreement by Mass Mutual or the consummation by
Mass Mutual of the Transactions.
Section 5.5 Litigation. There
are no Actions pending, or to the knowledge of Mass Mutual,
threatened, to which Mass Mutual or any of its Subsidiaries is
or may be a party or to which the business or property of Mass
Mutual or any of its Subsidiaries is or may be subject, and
there is no statute, rule, regulation or order that has been
enacted, adopted or issued by any Governmental Authority or that
has been proposed by any Governmental Authority having
jurisdiction over Mass Mutual or its Subsidiaries, (a) that
seeks to, and neither Mass Mutual nor any of its Subsidiaries is
subject to any judgments, decrees or orders that, enjoin,
prohibit, rescind or restrain any of the Transactions or
otherwise prevent Mass Mutual from complying in all material
respects with the terms and provisions of this Agreement or
(b) that would, individually or in the aggregate, result in
a Mass Mutual Material Adverse Effect.
Section 5.6 Title. As
of the date of this Agreement, Mass Mutual has good and valid
title to 1,050,000 shares of Series D Preferred free
and clear of any Liens.
Section 5.7 Investor
Representations. Taking into account its
personnel and resources, Mass Mutual is knowledgeable,
sophisticated and experienced in making, and is qualified to
make, decisions with respect to investments in shares presenting
an investment decision like that involved in the Exchange,
including investments in securities issued by NovaStar. Mass
Mutual is an accredited investor, as defined in
Rule 501 under the Securities Act. Mass Mutual also
acknowledges that the certificates for the Privately Placed
Stock may contain legends regarding a shareholder rights plan
and restrictions on the right to resell the securities without
registration or an applicable exemption from registration.
ARTICLE VI
ADDITIONAL
COVENANTS
Section 6.1 NovaStar
Shareholder Meetings. NovaStar shall, in
accordance with applicable Law and its articles of incorporation
and bylaws, duly call, give notice of, convene and hold meetings
of the NovaStar Common Stock Shareholders, the NovaStar
Series C Preferred Shareholders and the NovaStar
Series D Preferred Shareholders (the NovaStar
Shareholder Meetings), on a date selected by NovaStar,
in its discretion, for the purpose of obtaining the NovaStar
Shareholder Approvals, and, shall take all lawful action to
solicit the NovaStar Shareholder Approvals.
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Section 6.2 Efforts;
Cooperation.
(a) Each of the parties agrees to use its reasonable best
efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary, proper or advisable to
consummate and make effective as promptly as practicable the
Transactions and to cooperate with the other in connection with
the foregoing, including using its reasonable best efforts
(i) to make promptly any filings that may be required under
applicable Law or by any Governmental Authority, and to supply
promptly any additional information or documentary material that
may be requested by a Governmental Authority, if any,
(ii) to obtain all other consents, approvals and
authorizations that are required to be obtained under any
federal, state, local or foreign Law or regulation,
(iii) to lift or rescind at NovaStars expense any
injunction or restraining order or other order adversely
affecting the ability of the parties to this Agreement to
consummate the transactions contemplated by this Agreement,
(iv) to effect as promptly as practicable all necessary
registrations, filings and responses to requests for additional
information or documentary material from a Governmental
Authority, if any, and (v) to fulfill all conditions to
this Agreement.
(b) Further, and without limiting the generality of the
rest of this Section, each of Jefferies and Mass Mutual shall
promptly (i) furnish to NovaStar such necessary information
and reasonable assistance as NovaStar may request in connection
with the foregoing, (ii) inform NovaStar of any
communication from any Governmental Authority regarding any of
the Transactions or related filings or approvals, and
(iii) provide counsel for NovaStar with copies of all
filings made by such party, and all correspondence between such
party (and its advisors) with any Governmental Authority and any
other information supplied by such party and such partys
Subsidiaries to a Governmental Authority or received from such a
Governmental Authority in connection with the transactions
contemplated by this Agreement, provided, however,
that materials may be redacted (x) as necessary to comply
with contractual arrangements and (y) as may be necessary
to address any reasonable concerns relating to classified,
privileged or confidential information.
(c) In the event that any Action is instituted (or
threatened to be instituted) by a Governmental Authority or
private party challenging any of the Transactions, each of the
parties shall cooperate with each other and use its respective
commercially reasonable efforts at NovaStars expense to
contest and resist any such Action and to have vacated, lifted,
reversed or overturned any decree, judgment, injunction or other
order, whether temporary, preliminary or permanent, that is in
effect and that prohibits, prevents or restricts consummation of
the Transactions.
Section 6.3 Further
Assurances. Each of the parties agrees that,
from time to time, whether before, at or after the Closing Date,
each of them will execute and deliver such further instruments
of conveyance and transfer and take such other action as may be
reasonably necessary to carry out the purposes and intents of
this Agreement.
Section 6.4 Confidentiality. Each
of the parties shall keep, and shall cause its Representatives
to keep, confidential all information concerning the other
parties in its possession, its custody or under its control
(except to the extent that (a) such information is then in
the public domain through no fault of such party, (b) such
information has been lawfully acquired from other sources by
such party or (c) this Agreement or any other agreement
entered into pursuant hereto or thereto permits the use or
disclosure of such information) and each party shall not, and
shall cause its Representatives not to (without the prior
written consent of the other party), otherwise release or
disclose such information to any other Person, except such
partys Representatives, unless compelled to disclose such
information by judicial or administrative process or unless such
disclosure is required by Law and such party has used all
commercially reasonable efforts to consult with the other
affected party or parties prior to such disclosure at the
expense of the other affected party or parties, and in such case
shall exercise all commercially reasonable efforts to obtain
reliable assurance that such information will be accorded
confidential treatment.
Section 6.5 Public
Announcements. The initial press release with
respect to the execution of this Agreement shall be a joint
press release to be reasonably agreed upon by the parties
hereto. No public release, announcement or other public
disclosure (including pursuant to Rule 425 of the
Securities Act, to the extent practicable) concerning the
Transactions shall be issued by any party without the prior
written consent of the other parties (which shall not be
unreasonably withheld or delayed), except as such release or
announcement
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may be required by Law or the rules or regulations of any
U.S. securities exchange, in which case the party required
to make the release or announcement shall use its commercially
reasonable efforts to allow the other party reasonable time to
comment on the release or announcement in advance of such
issuance and shall consider and address in good faith the views
and comments made by such other party regarding any such
release, announcement or other public disclosure.
Section 6.6 Litigation
Cooperation. Each of the parties (with the
Jefferies Entities constituting one party for the purpose of
this Section 6.6) shall use commercially reasonable efforts
to make available to the other party or parties, upon written
request and at the expense of the other party or parties, its
officers, directors, employees and agents as witnesses to the
extent such Persons may reasonably be required in connection
with any Action arising out of the Transactions; provided
that such Action does not involve a claim by any party against
the other parties.
Section 6.7 Voting
of Series D Preferred.
(a) From the date of this Agreement until the earlier of
Closing Date or the termination of this Agreement in accordance
with its terms, each of Jefferies and Mass Mutual agrees that
it, and each of its applicable Subsidiaries, shall be present,
in person or by proxy, at each and every shareholders meeting of
NovaStar, and otherwise cause all shares of the Series D
Preferred held by it to be counted as present for purposes of
establishing a quorum at any such meeting, and to vote or
consent, or cause to be voted or consented, all shares of the
Series D Preferred owned directly or indirectly by it or
its Subsidiaries (i) in favor of any proposal to implement
the Transactions, which is presented at any of the NovaStar
Shareholder Meetings or any such other meeting and
(ii) against any proposal, action or transaction involving
or affecting NovaStar that would reasonably be expected to
prevent, impede or delay the consummation of the Transactions
(collectively, Frustrating
Transactions); provided that NovaStar shall
send written notice to Jefferies and Mass Mutual of any proposal
that NovaStar considers to be a Frustrating Transaction at least
10 Business Days prior to the vote on any such Frustrating
Transaction.
(b) Each of Jefferies and Mass Mutual shall, and shall
cause its applicable Subsidiaries to, grant an irrevocable
proxy, which shall be deemed coupled with an interest sufficient
in law to support an irrevocable proxy to NovaStar or its
designees to vote in favor of any proposal to implement the
Transactions any shares of Series D Preferred held by
Jefferies or Mass Mutual, as applicable or any of its applicable
Subsidiaries at any of the NovaStar Shareholder Meetings until
such time as this Agreement shall terminate or the Exchange
shall have closed.
(c) Each of Jefferies and Mass Mutual agrees to, and shall
cause its applicable Subsidiaries to, perform such further acts
and execute such further instruments as may be reasonably
necessary to vest in NovaStar the power to carry out and give
effect to the provisions of this Section.
Section 6.8 Tax
Matters. Each of the parties shall use
reasonable best efforts to obtain at NovaStars expense any
Supplemental IRS Ruling relating to the Transactions that
NovaStar may request (whether prior to, during, or following the
Transactions) as promptly as practicable. In connection with the
foregoing, Jefferies and Mass Mutual shall (i) promptly
furnish to NovaStar such necessary information and reasonable
assistance as NovaStar may request in connection with the
foregoing, (ii) promptly inform NovaStar of any
communication from the IRS regarding the IRS Ruling or any
Supplemental IRS Ruling, (iii) make any filings with, or
submissions of information to, the IRS regarding the IRS Ruling
or any Supplemental IRS Ruling, (iv) promptly provide
NovaStar with copies of all filings and information submissions
made with the IRS and all correspondence and information
received from the IRS in connection with the IRS Ruling, any
Supplemental IRS Ruling or the Transactions, and (v) cooperate
to obtain any Supplemental IRS Ruling. NovaStar shall, subject
to applicable Law, permit counsel for Jefferies and Mass Mutual
to review in advance, and consider in good faith any proposed
communication to the IRS in connection with the IRS Ruling or
any Supplemental IRS Ruling and the Transactions.
Section 6.9 Lock-Up
Period.
(a) During the period commencing on the date of this
Agreement and ending on the earlier of (i) the termination
of this Agreement in accordance with its terms or (ii) in
the event of completion of the Exchange,
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the earlier to occur of (A) the third (3rd) anniversary of
the Closing Date, (B) such point that an Ownership
Change under § 1.382 of the applicable Treasury
Regulations occurs and with respect to Jefferies only when such
an Ownership Change occurs at no fault of Jefferies
and with respect to Mass Mutual only when such an
Ownership Change occurs at no fault of Mass Mutual,
(C) such point at which NovaStars board of directors
takes such action that will result in an Ownership Change under
§ 1.382 of the applicable Treasury Regulations, or
(D) such point at which the NovaStar board of directors
reasonably determines and declares that NovaStars net
operating loss tax benefits will not be realized in whole or in
part, (such period, the
Lock-Up
Period), except as otherwise contemplated or permitted by
this Agreement, neither Jefferies nor Mass Mutual shall not, nor
shall it authorize, permit or direct its Affiliates or
Subsidiaries to, during the
Lock-Up
Period, without the prior written consent of NovaStar, directly
or indirectly (x) offer, pledge, transfers, 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 Common Stock, Series C
Preferred or Series D Preferred, 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 Common
Stock, Series C Preferred or Series D Preferred.
(b) During the
Lock-Up
Period, so long as it does not result in a testing
date under § 1.382-2 of the applicable Treasury
Regulations, Mass Mutual may transfer Common Stock to any wholly
owned Mass Mutual Subsidiary that is part of its consolidated
group of companies without violating Section 6.9(a).
(c) During the
Lock-Up
Period, so long as it is effected with the agreement of NovaStar
(which will not be unreasonably withheld, provided that seeking
the confirmation of NovaStars outside tax consultants that
such a transfer will not impair NovaStars existing net
operating losses shall not be unreasonable) that it does not
result in an increase in the ownership shift
percentage under § 1.382-2T of the applicable
Treasury Regulations, Jefferies may distribute Common Stock pro
rata to the investors of the Jefferies funds owning the
Common Stock after the Exchange without violating
Section 6.9(a).
(d) After the Closing Date and until the earlier to occur
of (i) the end of the
Lock-Up
Period or (ii) the closing of the next annual meeting of
shareholders, including any adjournments or postponements
thereto, Jefferies agrees that it, and each of its applicable
Subsidiaries, shall be present, in person or by proxy, at each
and every shareholders meeting of NovaStar, and otherwise cause
all shares of the Common Stock held by it to be counted as
present for purposes of establishing a quorum at any such
meeting, and to vote or consent, or cause to be voted or
consented, all shares of the Common Stock owned directly or
indirectly by it or its Subsidiaries in favor of the nominees to
NovaStars board of directors receiving the recommendation
of the existing board of directors and, if applicable, in favor
of a Company proposal seeking ratification of a shareholder
rights agreement designed to protect the Companys net
operating losses.
(e) After the Closing Date and until the earlier to occur
of (i) the end of the
Lock-Up
Period or (ii) the closing of the next annual meeting of
shareholders, including any adjournments or postponements
thereto, Mass Mutual agrees that it, and each of its applicable
Subsidiaries, shall be present, in person or by proxy, at each
and every shareholders meeting of NovaStar, and otherwise cause
all shares of the Common Stock held by it to be counted as
present for purposes of establishing a quorum at any such
meeting, and to vote or consent, or cause to be voted or
consented, all shares of the Common Stock owned directly or
indirectly by it or its Subsidiaries in favor of the nominees to
NovaStars board of directors receiving the recommendation
of the existing board of directors and, if applicable, in favor
of a Company proposal seeking ratification of a shareholder
rights agreement designed to protect the Companys net
operating losses.
Section 6.10 Board
Rights.
(a) After the Closing Date and during the
Lock-Up
Period, Jefferies and Mass Mutual, each shall be entitled to
designate either one board observer (Board
Observer) or director of the Company (Board
Director). The designation of any individual to act as
a Board Observer or Board Director shall be made in writing in
accordance with Section 9.4 and must identify the
individual and make clear whether such person will act as a
Board Observer or Board Director. For the avoidance of doubt,
any Board Director appointed under this Section 6.10 shall
have the same rights, obligations and duties as any other
director on the Companys board of directors, except as set
forth below.
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(b) The Company will provide any Board Observer with prior
notice of the time and place of any proposed meeting of the
board and any proposed action by written consent of the board.
In addition, the Company will provide any Board Observer with
copies of any documents that are provided by the Company to
members of the board in connection with any meeting of the board
or action by written consent of the board. All such notices of
meetings and written materials shall be delivered to the Board
Observers at the same time and in the same format as the notice
of meetings and written materials delivered to applicable
members of the board. The Board Observers shall be entitled to
attend any board meeting, including a meeting to be held by
telephone conference, and to participate therein, but the
foregoing right of attendance or participation shall not include
the right to vote on any matter presented to the board. Any
information provided to a Board Observer as a result of the
rights under this Section 6.10 shall be treated by such
Board Observer in the same manner as if such Board Observer had
obtained such information as a member of the board.
Notwithstanding the foregoing, the Company reserves the right to
withhold any information, documents or notices and to exclude
any Board Observer from any board meeting or committee meeting
or any portion thereof if access to such information or
documents or attendance at such meeting could adversely affect
the attorney-client privilege between the Company and its
counsel or result in the disclosure of trade secrets or a
conflict of interest. Prior to the designation of any individual
to act as a Board Observer, such individual shall enter into a
confidentiality agreement with the Company on terms reasonably
acceptable to the Company and Jefferies or Mass Mutual, as
applicable.
(c) In the event either Jefferies or Mass Mutual exercises
its right to appoint a Board Director, as provided under
Section 6.10(a), as soon as reasonably practicable after
such designation the Company shall use its reasonable best
efforts to expand its board of directors by one position and
appoint the individual designated by Jefferies or Mass Mutual,
as applicable, to fill the newly created position. Jefferies and
Mass Mutual each shall also have the right to notify the Company
of its intent to remove from the board the Board Director so
designated, and the Company shall use its reasonable best
efforts to take all actions necessary to effect such removal. If
a vacancy is to occur on the board of directors arising from the
removal, resignation, death or incapacity of a Board Director,
Jefferies or Mass Mutual, as applicable, shall have the sole
right to designate a new director to fill such vacancy. The
Company shall take all actions necessary to fill such a vacancy
with the replacement director promptly upon notice.
(d) So long as any Board Director serves on the board of
directors, the Company shall maintain directors and officers
indemnity insurance coverage for the Board Director on the same
basis as which it is provided to other members of the board.
(e) Notwithstanding any Company policy regarding the
payment of non-cash compensation to its directors, Board
Directors shall not be eligible to receive any non-cash
compensation, including stock or stock options.
ARTICLE VII
SURVIVAL AND
INDEMNIFICATION
Section 7.1 Survival. Except
as otherwise contemplated by this Agreement, all covenants,
representations, warranties and agreements of the parties
contained in this Agreement, or in any certificate, document or
other instrument delivered in connection with this Agreement,
shall survive the consummation of the Transactions.
Section 7.2 Indemnification
by NovaStar. NovaStar shall indemnify, defend
and hold harmless each of Jefferies and Mass Mutual and their
respective Subsidiaries, respective Affiliates, each of their
respective directors, officers, employees and agents, and each
of the heirs, executors, successors and assigns of any of the
foregoing from and against:
(a) any and all Losses to the extent arising out of,
attributable to or resulting from any breach or inaccuracy of
any representation or warranty of NovaStar contained in this
Agreement or in any certificate delivered pursuant to this
Agreement; and
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(b) any and all Losses to the extent arising out of,
attributable to or resulting from any breach of any covenant or
agreement to be performed by NovaStar contained in this
Agreement or in any certificate delivered pursuant to this
Agreement.
Section 7.3 Indemnification
by Jefferies. Jefferies shall indemnify,
defend and hold harmless NovaStar, its Subsidiaries, Affiliates,
each of their respective directors, officers, employees and
agents, and each of the heirs, executors, successors and assigns
of any of the foregoing (collectively, the NovaStar
Indemnified Parties) from and against:
(a) any and all Losses to the extent arising out of,
attributable to or resulting from any breach or inaccuracy of
any representation or warranty of Jefferies contained in this
Agreement or in any certificate delivered pursuant to this
Agreement; and
(b) any and all Losses to the extent arising out of,
attributable to or resulting from any breach of any covenant or
agreement to be performed by Jefferies contained in this
Agreement or in any certificate delivered pursuant to this
Agreement.
Section 7.4 Indemnification
by Mass Mutual. Mass Mutual shall indemnify,
defend and hold harmless the NovaStar Indemnified Parties from
and against:
(a) any and all Losses to the extent arising out of,
attributable to or resulting from any breach or inaccuracy of
any representation or warranty of Mass Mutual contained in this
Agreement or in any certificate delivered pursuant to this
Agreement; and
(b) any and all Losses to the extent arising out of,
attributable to or resulting from any breach of any covenant or
agreement to be performed by Mass Mutual contained in this
Agreement or in any certificate delivered pursuant to this
Agreement.
Section 7.5 Notice;
Procedure for Third-Party Claims.
(a) Any Person entitled to indemnification under this
Agreement (an Indemnified Party) may
seek indemnification for any Loss or potential Loss by giving
written notice to the applicable party or parties from whom
indemnification is sought (the Indemnifying
Party), specifying (i) the representation,
warranty, covenant or other agreement that is alleged to have
been inaccurate, to have been breached or to have given rise to
indemnification, (ii) the basis for such allegation and
(iii) if known, the aggregate amount of the Losses for
which a claim is being made under this Article VII or, to
the extent that such Losses are not known or have not been
incurred at the time such claim is made, an estimate, prepared
in good faith, of the aggregate potential amount of such Losses.
Written notice to such Indemnifying Party of the existence of a
claim shall be given by the Indemnified Party as soon as
practicable after the Indemnified Party first receives notice of
the potential claim; provided that any failure to provide
such prompt notice of the existence of a claim to the applicable
Indemnifying Party shall not affect the Indemnified Partys
right to seek indemnification pursuant to this Article VI
except and only to the extent that such failure results in a
lack of actual notice to the Indemnifying Party and such
Indemnifying Party has been materially prejudiced as a result of
such delay.
(b) In the case of any claim asserted by a Person that is
not a party to this Agreement against an Indemnified Party (a
Third-Party Claim), the Indemnified Party
shall permit the Indemnifying Party (at the expense of such
Indemnifying Party) to assume the defense of such Third-Party
Claim and any litigation or proceeding resulting therefrom;
provided that (i) counsel for the Indemnifying Party
who shall conduct the defense of such claim or litigation shall
be reasonably satisfactory to the Indemnified Party and
(ii) the Indemnified Party may participate in such defense
at such Indemnified Partys expense. Except with the prior
written consent of the Indemnified Party, no Indemnifying Party,
in the defense of any Third-Party Claim, shall consent to entry
of any judgment or enter into any settlement. In the event that
the Indemnified Party shall in good faith determine that the
conduct of the defense of any Third-Party Claim subject to
indemnification hereunder or any proposed settlement of any such
claim by the Indemnifying Party might be expected to impair the
ability of Jefferies, Mass Mutual or NovaStar, or their
respective Affiliates, to conduct their businesses or impair
their respective reputations or business, or that the
Indemnified Party may have available to it one or more defenses
or counterclaims that are inconsistent with one or more of those
that may be
D-15
available to the Indemnifying Party in respect of such claim or
any litigation relating thereto, the Indemnified Party shall
have the right at all times to take over and assume control over
the defense, settlement, negotiations or litigation relating to
any such claim at the sole cost of the Indemnifying Party;
provided that, if the Indemnified Party does so take over
and assume control, the Indemnified Party shall not settle such
claim or litigation without the written consent of the
Indemnifying Party, such consent not to be unreasonably
withheld. In the event that the Indemnifying Party does not
accept the defense of any matter as above provided, the
Indemnified Party shall have the right to defend against any
such claim or demand, and shall be entitled to settle or agree
to pay in full such claim or demand at the sole expense of the
Indemnifying Party and without affecting its right to
indemnification hereunder. In any event, Jefferies, Mass Mutual
and NovaStar shall reasonably cooperate in the defense of any
Third-Party Claim subject to this Article VII, and the
records of each shall be made reasonably available to the other
with respect to such defense, subject to reasonable restrictions
for classified, privileged or confidential information and
consistent with applicable Law and in accordance with the
procedures established by such party.
Section 7.6 Remedies
Not Exclusive. The remedies provided in this
Article VII shall be cumulative and shall not preclude
assertion by any Indemnified Party of any and all other rights
or the seeking of any and all other remedies against the
Indemnifying Party; provided that no Person may recover
more than once for a Loss it has incurred.
ARTICLE VIII
TERMINATION
Section 8.1 Termination. This
Agreement may be terminated and the Exchange may be abandoned at
any time prior to the Closing Date:
(a) by mutual written consent of Jefferies, Mass Mutual and
NovaStar;
(b) by either Jefferies, Mass Mutual or NovaStar:
(i) if the Exchange shall not have been consummated on or
prior to June 30, 2011 (the Termination
Date); provided, however, that the right
to terminate this Agreement under this Section shall not be
available to any party whose failure to fulfill any obligation
under this Agreement has been a significant cause of, or
resulted in, the Offer or Exchange not being consummated on or
prior to the Termination Date;
(ii) if a Restraint prohibiting any material part of the
Transactions shall have become final and nonappealable; or
(iii) if the NovaStar Shareholder Approvals shall not have
been obtained upon the completion of any of the NovaStar
Shareholder Meetings (including any adjournment thereof);
(c) by NovaStar, if Jefferies or Mass Mutual have breached
or failed to perform any of its representations, warranties,
covenants or other obligations set forth in this Agreement,
which breach or failure to perform would result in the failure
of the conditions set forth in Annex A and is not
cured, or cannot be cured, within 30 calendar days (or if the
Termination Date is less than 30 calendar days from such breach
or failure to perform a representation, warranty, covenant or
other obligation within the period remaining to the Termination
Date); or
(d) by either Jefferies or Mass Mutual, if NovaStar has
breached or failed to perform any of its representations,
warranties, covenants or other obligations set forth in this
Agreement, which breach or failure to perform would result in
the failure of the conditions set forth in Annex A
and is not cured, or cannot be cured, within 30 calendar days
(or if the Termination Date is less than 30 calendar days from
such breach or failure to perform a representation, warranty,
covenant or other obligation within the period remaining to the
Termination Date).
Section 8.2 Effect
of Termination. In the event of the
termination of this Agreement as provided in Section 8.1,
written notice of such termination shall be given to the other
party or parties, specifying the
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provision of this Agreement pursuant to which such termination
is made, and this Agreement shall forthwith become null and void
(other than Sections 6.4 and 6.6, and Articles VII,
VIII and IX, all of which shall survive termination of this
Agreement in accordance with their terms), and there shall be no
liability or other obligation on the part of Jefferies, Mass
Mutual or NovaStar or their respective Subsidiaries, or its or
their respective Affiliates, stockholders or shareholders,
controlling persons or Representatives, except nothing shall
relieve Jefferies, Mass Mutual or NovaStar from (a) their
respective liabilities or other obligations set forth in
Sections 6.4 and 6.6, and Articles VII (assuming with
respect to a Third-Party Claim the survival of their respective
warranties, representations and covenants), VIII and IX or
(b) liability for any willful and material breach by such
party of its covenants under this Agreement to be performed.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Entire
Agreement. This Agreement, including
Annex A and Annex B hereto, shall constitute the
entire agreement between the parties with respect to the subject
matter hereof and shall supersede all prior agreements and
understandings, both written and oral, between the parties with
respect to the subject matter of this Agreement.
Section 9.2 Counterparts. This
Agreement may be executed and delivered (including by facsimile
transmission) in multiple counterparts, and by the different
parties in separate counterparts, each of which when executed
and delivered shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
Copies of executed counterparts transmitted by telecopy, telefax
or electronic transmission shall be considered original executed
counterparts for purposes of this Section 9.2;
provided that receipt of copies of such counterparts is
confirmed.
Section 9.3 Expenses. Except
as otherwise expressly set forth in this Agreement, whether the
Transactions are consummated or not, all legal and other costs
and expenses to the extent incurred in connection with, arising
out of, or relating to this Agreement, shall be paid by the
party incurring such costs and expenses.
Section 9.4 Notices. All
notices, requests and other communications to any party
hereunder shall be in writing and shall be deemed given if
delivered personally or sent by overnight courier (providing
proof of delivery) to the parties at the following addresses:
To Jefferies Capital Partners IV L.P,
Jefferies Employee Partners IV LLC and/or
JCP Partners IV LLC:
Jefferies Capital Partners
520 Madison Avenue
New York, NY 10022
with a copy to (which shall not constitute notice):
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, NY
10038-4982
Attention: Melvin Epstein, Esq.
To Mass Mutual:
Massachusetts Mutual Life Insurance Company
1295 State Street
Springfield, MA 01111
Attention: Michael Rollings
D-17
with a copy to (which shall not constitute notice):
Massachusetts Mutual Life Insurance Company
1295 State Street
Springfield, MA 01111
Attention: General Counsel
To NovaStar:
NovaStar Financial, Inc.
2114 Central Street, Suite 600
Kansas City, MO 64108
Attention: Rodney Schwatken
with a copy to (which shall not constitute notice):
Bryan Cave LLP
One Kansas City Place
1200 Main Street, Suite 3500
Kansas City, Missouri 64105
Attention: Gregory G. Johnson, Esq.
or such other address or facsimile number as such party may
hereafter specify by like notice to the other parties hereto.
All such notices, requests and other communications shall be
deemed received on the date of receipt by the recipient if
received prior to 5 P.M., local time, in the place of
receipt and such day is a Business Day in the place of receipt.
Otherwise, any such notice, request or communication shall be
deemed not to have been received until the next succeeding
Business Day in the place of receipt.
Section 9.5 Waivers. No
failure or delay by Jefferies, Mass Mutual or NovaStar in
exercising any right hereunder shall operate as a waiver of
rights, nor shall any single or partial exercise of such rights
preclude any other or further exercise of such rights or the
exercise of any other right hereunder. Any agreement on the part
of a party hereto to any such waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party.
Section 9.6 Amendments. This
Agreement may be amended or supplemented in any and all
respects, whether before or after receipt of the NovaStar
Shareholder Approvals, by written agreement of the parties;
provided, however, that following the receipt of
the NovaStar Shareholder Approvals, there shall be no amendment
or change to the provisions of this Agreement which by Law would
require further approval by the NovaStar Shareholders. No
amendment to or modification of any provision of this Agreement
shall be binding upon any party unless in writing and signed by
all parties.
Section 9.7 Assignment. Neither
this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned, in whole or in part, by any of the
parties without the prior written consent of the other parties.
Any purported assignment not permitted under this Section shall
be null and void.
Section 9.8 Successors
and Assigns. The terms and provisions of this
Agreement shall be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and
permitted assigns.
Section 9.9 No
Third-Party Beneficiaries. This Agreement is
for the sole benefit of the parties and their successors and
permitted assigns, and nothing herein express or implied shall
give or shall be construed to confer any legal or equitable
rights or remedies to any person other than the parties to this
Agreement and such successors and permitted assigns.
Section 9.10
Annex A. Annex A shall be construed with and as
an integral part of this Agreement to the same extent as if the
same had been set forth verbatim herein.
Section 9.11 GOVERNING
LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THE STATE OF
DELAWARE, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN
UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS;
PROVIDED THAT THE FIDUCIARY DUTIES OF THE NOVASTAR
SPECIAL COMMITTEE
D-18
AND THE BOARD OF DIRECTORS OF NOVASTAR, AND THE VALIDITY OF ANY
CORPORATE ACTION ON THE PART OF NOVASTAR, INCLUDING THE
ADOPTION AND APPROVAL OF THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION AND OTHER MATTERS GOVERNED BY THE
MGCL SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MARYLAND.
Section 9.12 Consent
to Jurisdiction; Waiver of Jury Trial.
(a) All actions and proceedings arising out of or relating
to this Agreement shall be heard and determined in the Chancery
Court of the State of Delaware or, in the event that such court
does not have subject matter jurisdiction over such action or
proceeding, any federal court sitting in the State of Delaware,
and the parties to this Agreement irrevocably submit to the
exclusive jurisdiction of such courts (and, in the case of
appeals, appropriate appellate courts therefrom) in any such
action or proceeding and irrevocably waive the defense of an
inconvenient forum to the maintenance of any such action or
proceeding. The consents to jurisdiction set forth in this
paragraph shall not constitute general consents to service of
process in the State of Delaware and shall have no effect for
any purpose except as provided in this paragraph and shall not
be deemed to confer rights on any Person other than the parties
hereto. Each of the parties to this Agreement consents to
service being made through the notice procedures set forth
herein and agrees that service of any process, summons, notice
or document by registered mail (return receipt requested and
first-class postage prepaid) to the respective addresses of the
parties set forth herein shall be effective service of process
for any suit or proceeding in connection with this Agreement or
the transactions contemplated by this Agreement. The parties
hereto agree that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner
provided by applicable Law.
(b) EACH OF THE PARTIES TO THIS AGREEMENT IRREVOCABLY
WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT.
Section 9.13 Specific
Performance. The parties agree that
irreparable and unquantifiable damage would occur in the event
that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise
breached. Accordingly, the parties agree that, if for any reason
Jefferies, Mass Mutual or NovaStar shall have failed to perform
its obligations under this Agreement, the breaching party shall
not object to the granting of specific performance of the terms
and provisions of this Agreement or other equitable relief on
the basis that there exists an adequate remedy at law, and the
party seeking to enforce this Agreement against such
nonperforming party under this Agreement shall be entitled to
specific performance and injunctive and other equitable relief,
and the parties further agree to waive any requirement for the
securing or posting of any bond in connection with the obtaining
of any such injunctive or other equitable relief, this being in
addition to any other remedy to which they are entitled at Law
or in equity. If, notwithstanding the preceding sentence, a
court shall require that the non-breaching party prove that such
non-breaching party is entitled to specific performance,
injunctive or other equitable relief for a breach or
non-performance of this Agreement by the other party, the
parties agree that a partys entitlement to such specific
performance, injunctive or other equitable relief shall be
governed by the preponderance of the evidence standard (and not
the clear and convincing evidence or any other higher standard)
for the burden of persuasion with respect to a partys
entitlement to such relief.
Section 9.14 Severability. In
the event any one or more of the provisions contained in this
Agreement should be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in
any way be affected or impaired thereby; provided,
however, that the consummation of the Exchange is
conditioned upon and is not severable from the Offer. The
parties shall endeavor in good-faith negotiations to replace the
invalid, illegal or unenforceable provisions with valid
provisions, the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable
provisions.
[Remainder
of page left intentionally blank]
D-19
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed as of the day and year first above written.
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By: BABSON CAPITAL MANAGEMENT LLC, its investment
advisor
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By:
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/s/ Jeffrey
A. Dominick
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Name: Jeffrey A. Dominick
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Title:
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Managing Director Mass Mutual Capital
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JEFFERIES CAPITAL PARTNERS IV L.P.
JEFFERIES EMPLOYEE PARTNERS IV LLC
JCP PARTNERS IV LLC
By: JEFFERIES CAPITAL PARTNERS IV LLC,
as manager
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By:
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/s/ Brian
P. Friedman
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NOVASTAR FINANCIAL, INC.
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By:
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/s/ W.
Lance Anderson
Name: W.
Lance Anderson
Title: Chairman and Chief Executive Officer
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[Signature
Page to Exchange Agreement]
D-20
ANNEX A
CONDITIONS
TO CLOSING THE EXCHANGE
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I.
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Conditions
Waivable Only by All Parties
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Notwithstanding any other provisions of the Agreement, none of
the parties to the Agreement shall be obligated to complete the
Exchange unless each of the following conditions shall be
satisfied (or waived by Jefferies, Mass Mutual and NovaStar):
(a) NovaStar Shareholder Approval. The
NovaStar Shareholder Approvals shall have been obtained,
including the board structure and representation rights
described in the recitals of this Agreement;
(b) IRS Ruling. There shall be no change
in, revocation of, or amendment to the IRS Ruling, any
Supplemental IRS Ruling or applicable Law that could reasonably
be expected to cause any party to incur any Taxes (other than
any de minimis Taxes). There shall be no change in,
revocation of, or amendment to the IRS Ruling, any Supplemental
IRS Ruling or the applicable Law that could reasonably be
expected to impose a limitation on the ability of NovaStar to
utilize its net operating losses as a result of the Offer and
Exchange, and there shall be no other change in, revocation of,
or amendment to such ruling or the applicable law that could
reasonably be expected to adversely affect NovaStar;
(c) SEC Filings. (i) The
Form S-4
shall have been declared effective by the SEC and shall not have
become subject to a stop order or proceeding seeking a stop
order and (ii) the SEC staff shall have no further comments
on either the Schedule TO or the Common Stock Proxy
Statement;
(d) No Illegality or Injunctions. There
shall not be any temporary, preliminary or permanent Restraints
in effect preventing or prohibiting the Exchange;
(e) Governmental Action. There shall not
be instituted or pending any material Action by any Governmental
Authority seeking to restrain or prohibit the Offer or Exchange;
(f) 5% Shareholder under
Section 382. No Person or group shall have
qualified as or otherwise become a 5-percent
shareholder under Treasury Regulation
§ 1.382-2T(g);
(g) Closing of the Offer. The closing of
the Offer substantially in accordance with the terms described
in the Agreement shall have occurred prior to or concurrently
with the closing of the Exchange.
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II.
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Conditions
Waivable by Jefferies and Mass Mutual
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Notwithstanding any other provisions of the Agreement, each of
Jefferies and Mass Mutual shall not be obligated to complete the
Exchange unless each of the following conditions shall be
satisfied (or waived by both Jefferies and Mass Mutual):
(a) Representations and Warranties. The
representations and warranties of NovaStar set forth in the
Agreement shall be true and correct as of the date of the
Agreement and as of the Closing Date as though made on the
Closing Date (except to the extent that such representations and
warranties expressly relate to a specified date, in which case
as of such specified date);
(b) Covenants. NovaStar shall have
performed in all material respects its obligations, agreements
or covenants required to be performed by it on or prior to the
Closing Date under the Agreement;
(c) Officers Certificate. NovaStar
shall have furnished Jefferies and Mass Mutual with a
certificate dated as of the Closing Date signed on its behalf by
its Chief Executive Officer, Chief Financial Officer, or other
duly authorized officer to the effect that the conditions set
forth in clauses II.(a) and II.(b) of this
Annex A shall have been satisfied.
D-21
III.
Conditions Waivable by NovaStar
Notwithstanding any other provisions of the Agreement, NovaStar
shall not be obligated to complete the Exchange unless each of
the following conditions shall be satisfied (or waived by
NovaStar):
(a) Representations and Warranties. The
representations and warranties of each of Jefferies and Mass
Mutual set forth in the Agreement shall be true and correct as
of the date of the Agreement and as of the Closing Date as
though made on the Closing Date (except to the extent that such
representations and warranties expressly relate to a specified
date, in which case as of such specified date);
(b) Covenants. Each of Jefferies and Mass
Mutual shall have performed in all material respects its
obligations, agreements or covenants required to be performed by
it on or prior to the Closing Date under the Agreement;
(c) Fairness Opinion. NovaStars
financial advisor shall have provided a fairness opinion bring
down satisfactory to NovaStars board of directors;
(d) Material Adverse Effect. Since the
date of execution of the Agreement, there has been no NovaStar
Material Adverse Effect;
(e) Officers Certificate. Each of
Jefferies and Mass Mutual shall have furnished NovaStar with a
certificate dated as of the Closing Date signed on its behalf by
its Chief Executive Officer, Chief Financial Officer, or other
duly authorized officer, to the effect that the conditions set
forth in clauses III.(a) and III.(b) of this
Annex A shall have been satisfied.
The capitalized terms used in this Annex A shall
have the meanings set forth in the Agreement to which it is
annexed, except that the term Agreement shall be
deemed to refer to the agreement to which this
Annex A is annexed
D-22
ANNEX B
FORM OF
REGISTRATION RIGHTS AND SHAREHOLDERS AGREEMENT
This REGISTRATION RIGHTS AND SHAREHOLDERS AGREEMENT, dated as of
[ ]
(this Agreement), is made by and among
NovaStar Financial, Inc., a Maryland corporation (the
Company), Massachusetts Mutual Life
Insurance Company, a mutual life insurance company
(Mass Mutual), Jefferies Capital
Partners IV L.P., Jefferies Employee Partners IV LLC
and JCP Partners IV LLC (collectively
Jefferies; and together with Mass Mutual,
collectively, the Investors).
RECITALS:
A. The Company and the Investors have agreed to exchange
(the Exchange) an aggregate of
2,100,000 shares of 9.00%
Series D-1
Mandatory Convertible Preferred Stock, par value $0.01 per share
of the Company held by the Investors for 37,161,600 newly-issued
shares of common stock, par value $0.01 per share of the Company
(the Common Shares) and $1,377,000 in cash
pursuant to the Exchange Agreement, dated as of
December 10, 2010 (the Exchange
Agreement), by and between the Company and the
Investors.
B. Under the Exchange Agreement, the Company and the
Investors agreed to execute this Agreement upon the closing of
the Exchange.
C. Capitalized terms used in this Agreement and not
otherwise defined are used as defined in Section 11.
AGREEMENT
Now, therefore, the parties hereto agree as follows:
1. Demand Registrations.
(a) Requests for
Registration. Upon the earlier to occur of
(A) the third (3rd) anniversary of the date of this
Agreement, (B) an Ownership Change of the
Company occurs under § 1.382 of the applicable
regulations promulgated under Code and with respect to Jefferies
only when such an Ownership Change occurs at no
fault of Jefferies and with respect to Mass Mutual only when
such an Ownership Change occurs at no fault of Mass
Mutual, (C) the Companys board of directors takes
such action that will result in an Ownership Change under
§ 1.382 of the applicable regulations promulgated
under the Code, or (D) the Companys board of
directors reasonably determines and declares that the
Companys net operating loss tax benefits will not be
realized in whole or in part (the time period prior to
satisfaction of A, B, C or D above, the
Lock-Up
Period), the Required Investor Holders may request in
writing that the Company effect the registration (a
Demand Registration) of all or any part of
the Registrable Securities held by such Required Investor
Holders, specifying the intended method of disposition thereof
(a Registration Request) by filing with
the Commission a Demand Registration Statement. Promptly after
its receipt of any Registration Request, but no later than
10 days after receipt of such Registration Request, the
Company will give written notice of such request to all other
Holders of, and will use its reasonable best efforts to
register, as expeditiously as practicable following a
Registration Request in accordance with the provisions of this
Agreement, all Registrable Securities (subject to any reduction
pursuant to Section 1(f)) that have been requested to be
registered by the Initiating Holders in the Registration Request
or by any other Holders by written notice to the Company given
within 20 days after the date the Company has given such
Holders notice of the Registration Request to the extent
necessary to permit the disposition of such Registrable
Securities so to be registered in accordance with the intended
methods of disposition thereof specified in such Registration
Request or further requests (including, without limitation, only
with respect to a Registration Request of the Required Investor
Holders, by means of a shelf registration pursuant to
Rule 415 under the Securities Act (a Shelf
Registration) if so requested and if the Company is
then eligible to use such a registration). The Company shall use
its reasonable best efforts to have such Demand Registration
Statement declared effective by the Commission as soon as
practicable after the filing thereof and to keep such Demand
Registration Statement continuously effective for the period
specified in Section 3. The Company will pay all
Registration Expenses incurred in connection with any
registration pursuant to this Section 1.
D-23
(b) Limitation on Demand
Registrations. Other than as provided in
Section 1(c), the Company will not be obligated to effect
or pay the Registration Expenses of more than two registrations
requested by each of Mass Mutual (together with its Affiliates),
and Jefferies (together with its Affiliates), pursuant to this
Section 1; provided, however, that such
number shall be increased to the extent the Company does not
include in what would otherwise be the final registration for
which the Company is required to pay Registration Expenses the
number of Registrable Securities requested to be registered by
the Holders by reason of Section 1(f); provided,
further, that a request for registration will not count
for the purposes of this limitation if (i) the Majority
Holders of the Registration determine in good faith to withdraw
(x) such Registration Request prior to the filing of a
Demand Registration Statement or (y) such Demand
Registration Statement (prior to the effective date of the
Demand Registration Statement relating to such request) due to
(1) regulatory reasons, (2) because of a material
adverse change in the business, financial condition or prospects
of the Company or (3) due to the exercise by the Company of
its rights under Section 1(d) hereof, (ii) the
Registration Statement relating to such request is not declared
effective within 90 days (in any case where the Commission
has no comments on the Registration Statement) or 180 days
(in any case where the Commission has comments on the
Registration Statement) of the date such registration statement
is first filed with the Commission (other than solely by reason
of Holders refusing to proceed) and the Majority Holders of the
Registration withdraw such Registration Request prior to the
effective date of the Demand Registration Statement relating to
such request, (iii) prior to the sale of at least 90% of
the Registrable Securities included in the registration relating
to such request, such registration is adversely affected by any
stop order, injunction or other order or requirement of the
Commission or other governmental agency or court for any reason
and the Company fails to have such stop order, injunction or
other order or requirement removed, withdrawn or resolved to the
reasonable satisfaction of the Majority Holders of the
Registration within 30 days of the date of such order,
(iv) more than 10% of the Registrable Securities requested
by the Required Investor Holders to be included in the
registration are not so included pursuant to Section 1(f),
or (v) the conditions to closing specified in the
underwriting agreement or purchase agreement entered into in
connection with the registration relating to such request are
not satisfied (other than as a result of a material default or
breach thereunder by the Required Investor Holders).
Notwithstanding the foregoing, the Company will pay all
Registration Expenses in connection with any request for
registration pursuant to Section 1(a) regardless of whether
or not such request counts toward the limitation set forth above
until such limit is reached.
(c) Short-Form Registrations.
(i) S-3
Registration. After the end of the
Lock-Up
Period, if at any time (A) one or more Holders of
Registrable Securities request that the Company file a
registration statement on
Form S-3
or any successor form thereto for a public offering of all or
any portion of the shares of Registrable Securities held by such
Holder or Holders, the reasonably anticipated aggregate price to
the public of which would exceed $10,000,000, and (B) the
Company is a registrant entitled to use
Form S-3
or any successor form thereto to register such securities, then
the Company shall, as expeditiously as practicable following
such request, use its reasonable best efforts to register under
the Securities Act on
Form S-3
or any successor form thereto, for public sale in accordance
with the intended methods of disposition specified in such
request or any related subsequent requests (including, without
limitation, by means of a Shelf Registration) the Registrable
Securities specified in such request and any related subsequent
requests; provided, that if such registration is for an
Underwritten Offering, the terms of Sections 1(e) and 1(f)
shall apply (and any reference to Demand
Registration therein shall, for purposes of this
Section 1(c), instead be deemed a reference to
S-3
Registration). Whenever the Company is required by
this Section 1(c) to use its reasonable best efforts to
effect the registration of Registrable Securities, each of the
procedures and requirements of Sections 1(a) and 1(g)
(including but not limited to the requirements that the Company
(A) notify all Holders of Registrable Securities from whom
such request for registration has not been received and provide
them with the opportunity to participate in the offering and
(B) use its reasonable best efforts to have a Registration
Statement in connection with such
S-3
Registration declared and remain effective for the time period
specified herein) shall apply to such registration (and any
reference in such Sections 1(e) and 1(f) to Demand
Registration shall, for purposes of this
Section 1(c)(i), instead be deemed a reference to
S-3
Registration). Notwithstanding anything to the
contrary contained herein, no request may be made under this
Section 1(c) within 90 days after the effective date
of a Registration Statement filed by the Company covering a firm
D-24
commitment Underwritten Offering in which the Holders of
Registrable Securities shall have been entitled to join pursuant
to this Agreement in which there shall have been effectively
registered all shares of Registrable Securities as to which
registration shall have been requested (subject to any reduction
pursuant to Section 1(f)). There is no limitation on the
number of
S-3
Registrations that the Company is obligated to effect in
response to Holders requests for
S-3
Registrations, and
S-3
Registrations shall not count as Demand Registrations for
purposes of Section 1(a) or otherwise reduce the number of
Demand Registrations to which the Holders are entitled. The
Company will pay all Registration Expenses incurred in
connection with any
S-3
Registration.
(ii) Shelf Registration. If a
request made pursuant to Section 1(a) or 1(c) is for a
Shelf Registration, the Company shall use its reasonable best
efforts to keep the Shelf Registration continuously effective
through the date on which all of the Registrable Securities
covered by such Shelf Registration may be sold pursuant to
Rule 144 under the Securities Act (or any successor
provision having similar effect); provided,
however, that prior to the termination of such Shelf
Registration, the Company shall first furnish to each Holder of
Registrable Securities participating in such Shelf Registration
(i) an opinion, in form and substance satisfactory to the
Majority Holders of the Registration, of counsel for the Company
satisfactory to the Majority Holders of the Registration stating
that such Registrable Securities are freely saleable pursuant to
Rule 144 under the Securities Act (or any successor
provision having similar effect) or (ii) a No-Action
Letter from the staff of the Commission stating that the
Commission would not recommend enforcement action if the
Registrable Securities included in such Shelf Registration were
sold in a public sale other than pursuant to an effective
registration statement.
(d) Restrictions on Demand
Registrations. The Company may postpone for a
reasonable period of time the filing of a Prospectus or the
effectiveness of a Registration Statement for a Demand
Registration or
S-3
Registration if the Company furnishes to the Holders a
certificate signed by the Chief Executive Officer of the
Company, following consultation with, and after obtaining the
good faith approval of, the board of directors (the
Board) of the Company, stating that the
Company believes that such Demand Registration or
S-3
Registration would have a material adverse effect on any
proposal by the Company to engage in any acquisition of assets
(other than in the ordinary course of business) or any merger,
consolidation, tender offer or similar transaction, or otherwise
would require disclosure of a material corporate development
that the Company is not otherwise required to disclose, and
which disclosure would be detrimental to the Company and its
shareholders or would have a material adverse effect on the
business, assets, operations, prospects or financial condition
of the Company. The Company may only delay a Demand Registration
or an S-3
Registration pursuant to this Section 1(d) by delivery of a
Blackout Notice (as defined below) within 30 days of
delivery of the request for such Registration under
Section 1(a) or (c), as applicable, and may delay a Demand
Registration or an
S-3
Registration and require the Holders of Registrable Securities
to discontinue the disposition of their securities covered by a
Shelf Registration only for a reasonable period of time not to
exceed 60 days (or such earlier time as such transaction is
consummated or no longer proposed) (the Blackout
Period). There shall not be more than two Blackout
Periods in any 12 month period and the aggregate length of
such Blackout Periods shall not exceed 120 days in any
12 month period. The Company shall promptly notify the
Holders in writing (a Blackout Notice) of any
decision to postpone a Demand Registration or an
S-3
Registration or to discontinue sales of Registrable Securities
covered by a Shelf Registration pursuant to this
Section 1(d) and shall include a general statement of the
reason for such postponement, an approximation of the
anticipated delay and an undertaking by the Company promptly to
notify the Holders as soon as a Demand Registration or an
S-3
Registration may be effected or sales of Registrable Securities
covered by a Shelf Registration may resume. If the Company shall
postpone the filing of a Demand Registration Statement or an
S-3
Registration Statement, the Majority Holders of the Registration
who were to participate therein shall have the right to withdraw
the request for registration. Any such withdrawal shall be made
by giving written notice to the Company within 30 days
after receipt of the Blackout Notice. Such withdrawn
registration request shall not be treated as a request for a
Demand Registration effected pursuant to Section 1(a) (and
shall not be counted towards the number of Demand Registrations
effected), and the Company shall pay all Registration Expenses
in connection therewith.
(e) Selection of Underwriters. If
the Initiating Holders holding a majority of the Registrable
Securities for which registration was requested intend to
distribute the Registrable Securities covered by their
D-25
Registration Request by means of an Underwritten Offering, they
will so advise the Company as a part of the Registration
Request, and the Company will include such information in the
notice sent by the Company to the other Holders with respect to
such Registration Request and the offering of such Registrable
Securities pursuant to such Demand Registration shall be in the
form of a firm commitment Underwritten Offering. In such event,
the Initiating Holders holding a majority of the Registrable
Securities for which registration was requested will have the
right to select the Underwriters or other investment banker(s)
and manager(s) to administer the offering, subject to the
Companys approval which will not be unreasonably withheld,
conditioned or delayed. If the offering is an Underwritten
Offering, the Company will use reasonable best efforts to ensure
that the right of any Person (including other Holders) to
participate in such registration will be conditioned upon such
Persons participation in such underwriting at the same
price and on the same terms of underwriting applicable to the
Initiating Holders and the inclusion of such Persons
Registrable Securities in the Underwritten Offering (unless
otherwise agreed by the Majority Holders of the Registration),
and each such Person will (together with the Company and the
other Holders distributing their securities through such
Underwritten Offering) enter into an underwriting agreement in
customary form with the Underwriter or Underwriters selected for
such Underwritten Offering. If any Holder disapproves of the
terms of the Underwritten Offering, such Holder may elect to
withdraw therefrom by written notice to the Company, the
managing Underwriter and the Majority Holders of the
Registration.
(f) Priority on Demand
Registrations. The Company will not include
in any underwritten registration pursuant to Sections 1(a)
or (c) any securities that are not Registrable Securities
without the prior written consent of the Initiating Holders
holding a majority of the Registrable Securities for which
registration was requested, which consent will not be
unreasonably withheld, conditioned or delayed. Other than in
connection with a Shelf Registration, if the managing
Underwriter advises the Company that in its opinion the number
of Registrable Securities (and, if permitted hereunder, other
securities requested to be included in such offering) exceeds
the number of securities that can be sold in such offering
without materially adversely affecting the successful
marketability of the offering (including a material adverse
effect on the per share offering price), the Company will
include in such offering only such number of securities that in
the opinion of such Underwriters can be sold without materially
adversely affecting the successful marketability of the
offering, which securities will be so included in the following
order of priority: (i) first, Registrable Securities, pro
rata among the respective Holders thereof on the basis of the
aggregate number of Registrable Securities requested to be
included in such registration by each of them, and
(ii) second, any other securities of the Company that have
been requested to be so included. Notwithstanding the foregoing,
no employee of the Company or any Subsidiary thereof will be
entitled to participate, directly or indirectly, in any such
registration to the extent that the managing Underwriter
determines in good faith that the participation of such employee
in such registration would adversely affect the marketability or
offering price of the securities being sold in such
registration. In the event the Company shall not, by virtue of
this Section 1(f), include in any Demand Registration all
of the Registrable Securities of any Holder requesting to be
included in such Demand Registration, such Holder may, upon
written notice to the Company given within five days of the time
such Holder first is notified of such matter, reduce the amount
of Registrable Securities it desires to have included in such
Demand Registration, whereupon only the Registrable Securities,
if any, it desires to have included will be so included and the
Holders not so reducing shall be entitled to a corresponding
increase in the amount of Registrable Securities to be included
in such Demand Registration.
(g) Registration of Other
Securities. Whenever the Company shall effect
a Demand Registration, securities other than the Registrable
Securities may be covered by such registration only to the
extent the inclusion of such other securities is made in
compliance with the provisions of Section 1(f).
(h) Registration Statement
Form. Registrations under this Section 1
shall be on such appropriate registration form of the Commission
(i) as shall be selected by the Initiating Holders holding
a majority of the Registrable Securities for which registration
was requested in the Registration Request, and (ii) which
shall be available for the sale of Registrable Securities in
accordance with (A) the intended method or methods of
disposition specified in the requests for registration and
(B) applicable law. The Company agrees to consult
D-26
with any selling Holder with respect to any information which
such selling Holder, upon advice of counsel, has reasonably
requested to be included in such Registration Statement.
(i) Conversions;
Exercises. Notwithstanding anything to the
contrary herein, in order for any Registrable Securities that
are issuable upon the exercise of conversion rights, options or
warrants to be included in any registration pursuant to
Section 1 or 2 hereof, the exercise of such conversion
rights, options or warrants must be effected no later than
immediately prior to the closing of any sales under the
Registration Statement pursuant to which such Registrable
Securities are to be sold.
(j) Exclusive Rights. The
registration rights granted pursuant to the provisions of this
Section 1 shall be in addition to the registration rights
granted pursuant to the provisions of Section 2 hereof.
2. Piggyback Registrations.
(a) Right to Piggyback. After the
end of the
Lock-Up
Period, whenever the Company proposes to register any of its
securities (including in response to a demand of a shareholder
not party hereto, but excluding a registration pursuant to
Section 1, relating solely to employee benefit plans, or
relating solely to the sale of debt or convertible debt
instruments) and the registration form to be filed may be used
for the registration or qualification for distribution of
Registrable Securities, the Company will give prompt written
notice to all Holders of its intention to effect such a
registration and will include in such registration all
Registrable Securities with respect to which the Company has
received written requests for inclusion therein within fifteen
(15) days after the date of the Companys notice (a
Piggyback Registration). Any Holder that has
made such a written request may withdraw its Registrable
Securities from such Piggyback Registration by giving written
notice to the Company and the managing Underwriter, if any, on
or before the thirtieth (30th) day prior to the planned
effective date of such Piggyback Registration. The Company may
delay, terminate or withdraw any registration under this
Section 2 prior to the effectiveness of such registration,
whether or not any Holder has elected to include Registrable
Securities in such registration, and except for the obligation
to pay Registration Expenses pursuant to Section 2(c) the
Company will have no liability to any Holder in connection with
such delay, termination or withdrawal; provided,
however, that if such delay shall extend beyond
120 days from the date the Company received a request to
include Registrable Securities in such Piggyback Registration,
then the Company shall again give all Holders the opportunity to
participate therein and shall follow the notification procedures
set forth in this Section 2(a). There is no limitation on
the number of such Piggyback Registrations pursuant to this
Section 2 which the Company is obligated to effect. The
registration rights granted pursuant to the provisions of this
Section 2 shall be in addition to the registration rights
granted pursuant to the other provisions of Section 1
hereof.
(b) Underwritten Registration. If
any Piggyback Registration involves an Underwritten Offering,
the Company will so advise the Holders as a part of the written
notice given pursuant to Section 2(a). In such event, the
Company will use reasonable best efforts to ensure that the
right of any Holder to registration pursuant to this
Section 2 will be conditioned upon such Holders
participation in such Underwritten Offering and the inclusion of
such Holders Registrable Securities in the Underwritten
Offering, and each such Holder will (together with the Company
and the other Holders distributing their securities through such
Underwritten Offering) enter into an underwriting agreement in
customary form with the Underwriter or Underwriters selected for
such Underwritten Offering by the Company. If any Holder
disapproves of the terms of the Underwritten Offering, such
Holder may elect to withdraw therefrom by written notice to the
Company, the managing Underwriter and the Holders participating
in the Underwritten Offering.
(c) Piggyback Registration
Expenses. The Company will pay all
Registration Expenses in connection with any Piggyback
Registration, whether or not any registration or Prospectus
becomes effective or final.
(d) Priority on Primary
Registrations. If a Piggyback Registration
relates to an underwritten primary offering on behalf of the
Company, and the managing Underwriters advise the Company (a
copy of such notice if in writing or prompt communication of the
content of such notice, if oral, to be provided by the Company
to each Holder requesting registration) that in their opinion
the number of securities requested to be included in such
registration exceeds the number which can be sold without
materially adversely affecting the successful marketability of
such offering, the Company will include in such registration or
Prospectus only
D-27
such number of securities that in the opinion of such
Underwriters can be sold without materially adversely affecting
the successful marketability of the offering, which securities
will be so included in the following order of priority: (i)
first, the securities the Company proposes to sell, (ii)
second, the Registrable Securities requested to be
included in such registration, pro rata among the Holders of
such Registrable Securities on the basis of the number of
Registrable Securities so requested to be included therein owned
by each such Holder, and (iii) third, other securities
requested to be included in such registration; provided,
however, that in the event the Company will not, by
virtue of this Section 2(d), include in any such
registration all of the Registrable Securities of any Holder
requested to be included in such registration, such Holder may,
upon written notice to the Company given within three days of
the time such Holder first is notified of such matter, reduce
the amount of Registrable Securities it desires to have included
in such registration, whereupon only the Registrable Securities,
if any, it desires to have included will be so included and the
Holders not so reducing shall be entitled to a corresponding
increase in the amount of Registrable Securities to be included
in such registration. Notwithstanding the foregoing, any
employee of the Company or any subsidiary thereof will not be
entitled to participate, directly or indirectly, in any such
registration to the extent that the managing Underwriter
determines in good faith that the participation of such employee
in such registration would adversely affect the marketability or
offering price of the securities being sold in such registration.
(e) Priority on Secondary
Registrations. If a Piggyback Registration
relates to an underwritten secondary registration on behalf of
holders of the Companys securities other than the Holders
of Registrable Securities, and the managing Underwriters advise
the Company (a copy of such notice if in writing or prompt
communication of the content of such notice, if oral, to be
provided by the Company to each Holder requesting registration)
that in their opinion the number of securities requested to be
included in such registration exceeds the number which can be
sold without materially adversely affecting the successful
marketability of the offering, the Company will include in such
registration only such number of securities that in the opinion
of such Underwriters can be sold without materially adversely
affecting the successful marketability of the offering, which
securities will be so included in the following order of
priority: (i) first, the securities requested to be
included therein by the holders requesting such registration and
the Registrable Securities requested to be included in such
registration, pro rata among the holders of such securities and
Registrable Securities on the basis of the number of securities
so requested to be included therein owned by each such holder,
and (ii) second, other securities requested to be
included in such registration; provided, however,
that in the event the Company will not, by virtue of this
Section 2(e), include in any such registration all of the
Registrable Securities of any Holder requested to be included in
such registration, such Holder may, upon written notice to the
Company given within three days of the time such Holder first is
notified of such matter, reduce the amount of Registrable
Securities it desires to have included in such registration,
whereupon only the Registrable Securities, if any, it desires to
have included will be so included and the Holders not so
reducing shall be entitled to a corresponding increase in the
amount of Registrable Securities to be included in such
registration. Notwithstanding the foregoing, any employee of the
Company or any subsidiary thereof will not be entitled to
participate, directly or indirectly, in any such registration to
the extent that the managing Underwriter determines in good
faith that the participation of such employee in such
registration would adversely affect the marketability or
offering price of the securities being sold in such registration.
(f) Other Registrations. If the
Company receives a Registration Request or files a Registration
Statement with respect to Registrable Securities pursuant to
Section 1 or Section 2, and if such registration has
not been withdrawn or abandoned, the Company will not file or
cause to be effected any other registration of any of its equity
securities or securities convertible or exchangeable into or
exercisable for its equity securities under the Securities Act
(except on
Form S-4
or S-8 or
any successor or similar forms), whether on its own behalf or at
the request of any holder or holders of such securities, from a
period beginning on the date of a Registration Request and
ending at least 120 days from the effective date of the
effectiveness of such Registration Statement, and shall not be
required to do so notwithstanding any other provision of this
Agreement.
3. Registration
Procedures. Subject to Section 1(d),
whenever the Holders of Registrable Securities have requested
that any Registrable Securities be registered pursuant to this
Agreement, the Company will use its reasonable best efforts to
effect the registration and sale of such Registrable Securities
in accordance with
D-28
the intended method of disposition thereof. Without limiting the
generality of the foregoing, the Company will, as expeditiously
as practicable:
(a) prepare and (within 60 days after the end of the
thirty-day
period within which requests for registration may be given to
the Company pursuant hereto) file with the Commission a
Registration Statement with respect to such Registrable
Securities which Registration Statement shall comply as to form
in all material respects with the requirements of the applicable
form and include all financial statements required by the
Commission to be filed therewith, make all required filings with
the Financial Industry Regulatory Authority (FINRA)
and thereafter use its reasonable best efforts to cause such
Registration Statement to become effective, provided that
before filing a Registration Statement or any amendments or
supplements thereto, the Company will furnish to the
Holders counsel copies of all such documents proposed to
be filed, which documents will be subject to review of such
counsel at Holders expense and the Company shall provide
the Holders counsel and any attorney, accountant or other
agent retained by any such seller or any Underwriter (each, an
Inspector) with a reasonable opportunity, in
light of the circumstances, to participate in the preparation of
such Registration Statement and each Prospectus included therein
(and each amendment or supplement thereto or comparable
statement) to be filed with the Commission. Unless such
Holders counsel has reasonably objected in writing to the
filing of such Registration Statement, amendment or supplement
prior thereto, the Company will file such Registration
Statement, Prospectus, amendment or supplement or comparable
statement as required by this Agreement. The Company will not
file any Registration Statement or amendment or post-effective
amendment or supplement to such Registration Statement to which
such Holders counsel has reasonably objected in writing on
the grounds that (and explaining why) such amendment or
supplement does not comply in all material respects with the
requirements of the Securities Act or of the rules or
regulations thereunder;
(b) prepare and file with the Commission such amendments
and supplements to such Registration Statement and the
Prospectus used in connection therewith as may be necessary to
keep such Registration Statement effective and to comply with
the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration
Statement until such time as all of such securities have been
disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such
Registration Statement; provided, that except with
respect to any Shelf Registration, such period need not extend
beyond nine months after the effective date of the Registration
Statement; and provided further, that with respect
to any Shelf Registration, such period need not extend beyond
the time period provided in Section 1(c), and which
periods, in any event, shall terminate when all Registrable
Securities covered by such Registration Statement have been sold
(but not before the expiration of the 90 day period
referred to in Section 4(3) of the Securities Act and
Rule 174 thereunder, if applicable);
(c) furnish to each seller of Registrable Securities and
each Underwriter, if any, such number of copies, without charge,
of such Registration Statement, each amendment and supplement
thereto, including each preliminary Prospectus, final
Prospectus, all exhibits and other documents filed therewith and
such other documents as such seller may reasonably request
including in order to facilitate the disposition of the
Registrable Securities owned by such seller;
(d) use its reasonable best efforts to register or qualify
such Registrable Securities under such other securities or blue
sky laws of such jurisdictions as any seller or the sole or lead
managing Underwriter, if any, reasonably requests, to continue
such registration or qualification in effect in each such
jurisdiction for as long as such Registration Statement remains
in effect (including through new filings or amendments or
renewals) and do any and all other acts and things that may be
necessary or reasonably advisable to enable such seller to
consummate the disposition in such jurisdictions of the
Registrable Securities owned by such seller (provided that the
Company will not be required to (i) qualify generally to do
business in any jurisdiction where it would not otherwise be
required to qualify but for this subsection, (ii) subject
itself to taxation in any such jurisdiction or
(iii) consent to general service of process in any such
jurisdiction);
D-29
(e) use its reasonable best efforts to cause all
Registrable Securities covered by such Registration Statement to
be registered with or approved by such other governmental
agencies, authorities or self-regulatory bodies as may be
necessary or reasonably advisable in light of the business and
operations of the Company to enable the seller or sellers
thereof to consummate the disposition of such Registrable
Securities in accordance with the intended method or methods of
disposition thereof;
(f) promptly notify the Holders counsel, the sole or
lead managing Underwriter, if any, and each seller of such
Registrable Securities, at any time when a Registration
Statement related thereto is required to be amended or
supplemented or a Prospectus relating thereto is required to be
delivered under the Securities Act, upon discovery that, or upon
the discovery of the happening of any event as a result of
which, the Registration Statement or the Prospectus contains an
untrue statement of a material fact or omits any fact necessary
to make the statements therein not misleading in the light of
the circumstances under which they were made, and, as promptly
as practicable, prepare and furnish to such seller a reasonable
number of copies of a supplement or amendment to such
Registration Statement or Prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such
Registration Statement or Prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary
to make the statements therein not misleading in the light of
the circumstances under which they were made;
(g) notify each seller of any Registrable Securities
covered by such Registration Statement (i) when the
Prospectus or any Prospectus supplement or post-effective
amendment has been filed and, with respect to such Registration
Statement or any post-effective amendment, when the same has
become effective, (ii) of any request by the Commission or
any state securities or blue sky authority for amendments or
supplements to the Registration Statement or the Prospectus
related thereto or for additional information, (iii) of the
issuance by the Commission of any stop order suspending the
effectiveness of such Registration Statement or the initiation
or threat (of which the Company has actual knowledge) of any
proceedings for any of such purposes or (iv) of the receipt
by the Company of any notification with respect to the
suspension of the qualification of any Registrable Securities
for sale under the securities or blue sky laws of any
jurisdiction or the initiation of any proceeding for such
purpose;
(h) if so requested by the Majority Holders of the
Registration, use its reasonable best efforts to cause all such
Registrable Securities to be listed on each securities exchange
on which similar securities issued by the Company are then
listed;
(i) provide a CUSIP number for all Registrable Securities
and provide and cause to be maintained a transfer agent and
registrar for all such Registrable Securities not later than the
effective date of, or date of final receipt, for such
Registration Statement;
(j) enter into and perform such customary agreements
(including underwriting agreements with customary provisions)
and provide officers certificates and other customary
closing documents and take all such other actions as the
Majority Holders of the Registration or the Underwriters, if
any, reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities;
(k) make available for inspection by any seller of
Registrable Securities, Holders counsel, any Underwriter
participating in any disposition pursuant to such Registration
Statement and any Inspector, all financial and other records,
pertinent corporate documents and documents relating to the
business of the Company, and cause the Companys officers,
directors, employees and independent accountants to supply all
information reasonably requested by any such seller,
Holders counsel, Underwriter, or Inspector in connection
with such Registration Statement; provided that each
Holder will, and will use its commercially reasonable efforts to
cause each such Underwriter or Inspector to (i) enter into
a confidentiality agreement in form and substance reasonably
satisfactory to the Company and (ii) minimize the
disruption to the Companys business in connection with the
foregoing; provided, further, that the Company
shall not be required to make available for inspection any
documents containing material non-public information or
otherwise provide such material non-public information to any
person unless permitted under applicable securities laws (in
particular
Regulation F-D)
without also making public disclosure thereof;
D-30
(l) otherwise use its reasonable best efforts to comply
with all applicable rules and regulations of the Commission and
any other governmental agency or authority having jurisdiction
over the offering, and make available to its security holders,
as soon as reasonably practicable earnings statements covering
such
12-month
periods beginning after the effective date of the
registration statement (as defined in Rule 158(c) of
the Securities Act) in a manner which satisfies the provisions
of Section 11(a) of the Securities Act and Rule 158
thereunder;
(m) in the event of the issuance of any stop order
suspending the effectiveness of a Registration Statement, or of
any order suspending or preventing the use of any related
Prospectus or ceasing trading of any securities included in such
Registration Statement for sale in any jurisdiction, use its
reasonable best efforts promptly to obtain the withdrawal of
such order;
(n) cooperate with each selling Holder of Registrable
Securities and each Underwriter participating in the disposition
of such Registrable Securities and their respective counsel in
connection with any filings required to be made with FINRA and
make reasonably available its employees and personnel and
otherwise provide reasonable assistance to the Underwriters
(taking into account the needs of the Companys businesses
and the requirements of the marketing process) in the marketing
of Registrable Securities in any Underwritten Offering,
including, without limitation, preparing for and participating
in such number of road shows and all such other
customary selling efforts as the Underwriters reasonably request
in order to expedite or facilitate such disposition; and enter
into such agreements and take such other actions as the sellers
of Registrable Securities or the Underwriters reasonably request
in order to expedite or facilitate the disposition of such
Registrable Securities;
(o) if requested by the sole or lead managing Underwriter
or any selling Holder of Registrable Securities, obtain one or
more comfort letters, addressed to the sellers of Registrable
Securities, dated the effective date of such Registration
Statement (and, if such registration includes an underwritten
public offering dated the date of the closing under the
underwriting agreement for such offering), signed by the
Companys independent public accountants in customary form
and covering such matters of the type customarily covered by
comfort letters as the Holders of a majority of the Registrable
Securities being sold in such offering reasonably request;
(p) if requested by the sole or lead managing Underwriter
or any selling Holder of Registrable Securities, provide legal
opinions of the Companys outside counsel and a
negative assurance letter from counsel, in each
case, addressed to the Holders of the Registrable Securities
being sold, dated the effective date of such Registration
Statement, each amendment and supplement thereto (and, if such
registration includes an underwritten public offering, dated the
date of the closing under the underwriting agreement), with
respect to the Registration Statement, each amendment and
supplement thereto (including the preliminary Prospectus) and
such other documents relating thereto in customary form and
covering such matters of the type customarily covered by legal
opinions and negative assurance letters of such
nature;
(q) cooperate with the selling Holders of Registrable
Securities and the sole or lead managing Underwriter, if any, to
facilitate the timely preparation and delivery of certificates
not bearing any restrictive legends representing the Registrable
Securities to be sold, and cause such Registrable Securities to
be issued in such denominations and registered in such names in
accordance with the underwriting agreement prior to any sale of
Registrable Securities to the Underwriters or, if not an
Underwritten Offering, in accordance with the instructions of
the selling Holders of Registrable Securities at least three
business days prior to any sale of Registrable Securities;
(r) if requested by the sole or lead managing Underwriter
or any selling Holder of Registrable Securities, immediately
incorporate in a prospectus supplement or post-effective
amendment such information concerning such Holder of Registrable
Securities, the Underwriters or the intended method of
distribution as the sole or lead managing Underwriter or the
selling Holder of Registrable Securities reasonably requests to
be included therein and as is appropriate in the reasonable
judgment of the Company, including, without limitation,
information with respect to the number of shares of the
Registrable Securities being sold to the Underwriters, the
purchase price being paid therefor by such
D-31
Underwriters and with respect to any other terms of the
Underwritten Offering of the Registrable Securities to be sold
in such offering; make all required filings of such Prospectus
supplement or post-effective amendment as soon as notified of
the matters to be incorporated in such Prospectus supplement or
post-effective amendment; and supplement or make amendments to
any Registration Statement if requested by the sole or lead
managing Underwriter of such Registrable Securities; and
(s) use its reasonable best efforts to take or cause to be
taken all other actions, and do and cause to be done all other
things, necessary or reasonably advisable to effect the
registration of such Registrable Securities contemplated hereby.
The Company agrees not to file or make any amendment to any
Registration Statement with respect to any Registrable
Securities, or any amendment of or supplement to the Prospectus
used in connection therewith, that refers to any Holder covered
thereby by name, or otherwise identifies such Holder as the
holder of any securities of the Company, without the consent of
such Holder, such consent not to be unreasonably withheld or
delayed, unless and to the extent such disclosure is required by
law. If any Registration Statement or comparable statement under
blue sky laws refers to any Holder by name or
otherwise as the Holder of any securities of the Company, then
such Holder shall have the right to require (i) the
insertion therein of language, in form and substance
satisfactory to such Holder and the Company, to the effect that
the holding by such Holder of such securities is not to be
construed as a recommendation by such Holder of the investment
quality of the Companys securities covered thereby and
that such holding does not imply that such Holder will assist in
meeting any future financial requirements of the Company, and
(ii) in the event that such reference to such Holder by
name or otherwise is not in the judgment of the Company, as
advised by counsel, required by the Securities Act or any
similar federal statute or any state blue sky or
securities law then in force, the deletion of the reference to
such Holder.
The Company may require each Holder of Registrable Securities as
to which any registration is being effected to furnish the
Company with such information regarding such Holder and
pertinent to the disclosure requirements relating to the
registration and the distribution of such securities as the
Company may from time to time reasonably request in writing.
The Company represents and agrees that, unless it obtains the
prior consent of the Majority Holders of the Registration or
Holders counsel, and each of the Holders represents and
agrees that, unless it obtains the prior consent of the Company,
it will not make any offer relating to Registrable Securities
that would constitute a free writing prospectus as
defined in Rule 433 under the Securities Act (an
Issuer Free Writing Prospectus), or that
would otherwise constitute a free writing
prospectus, as defined in Rule 405 under the
Securities Act, required to be filed with the Commission. The
Company represents that any Issuer Free Writing Prospectus will
not include any information that conflicts with the information
contained in the Registration Statement or Prospectus and that
any Issuer Free Writing Prospectus, when taken together with the
information in the Registration Statement and the Prospectus,
will not include any untrue statement of a material fact or omit
to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading.
4. Registration Expenses.
(a) Except for Selling Expenses and as otherwise provided
for herein, all expenses incidental to the Companys
performance of or compliance with this Agreement whether or not
any Registration Statement becomes effective and whether or not
all Registrable Securities originally requested to be included
in such registration are withdrawn or otherwise ultimately not
included in such registration, including, without limitation,
all registration, listing and filing fees, fees and expenses of
compliance with securities or blue sky laws and the rules of any
stock exchange, word processing, duplicating, distributing and
printing expenses, messenger and delivery expenses, and fees and
disbursements of counsel for the Company, all independent
certified public accountants (including the expenses of any
audit and/or
cold comfort letters), Underwriters and other
Persons retained by the Company, the reasonable
out-of-pocket
expenses incurred in connection with making road show
presentations and holding meetings with potential investors to
facilitate the distribution and sale of Registrable Securities
which are customarily borne by the issuer (all such expenses,
Registration Expenses), will be borne as
provided in this Agreement, except that the Company will, in any
event, pay its
D-32
internal expenses (including, without limitation, all salaries
and expenses of its officers and employees performing legal or
accounting duties), the expenses of any annual audit or
quarterly review, the expenses of its liability insurance and
the expenses and fees for listing the securities to be
registered on each securities exchange on which similar
securities issued by the Company are then listed. All Selling
Expenses will be borne by the holders of the securities so
registered pro rata on the basis of the number of their
securities so registered.
(b) In connection with each registration pursuant to
Section 1 and each Piggyback Registration whether or not
any Registration Statement becomes effective and whether or not
all Registrable Securities originally requested to be included
in such registration are withdrawn or otherwise ultimately not
included in such registration, the Company will reimburse the
holders of Registrable Securities covered by such registration
or qualification for the reasonable fees and disbursements of
one United States counsel, which counsel shall be selected
(i) in the case of a Demand Registration or an
S-3
Registration by the Initiating Holders holding a majority of the
Registrable Securities for which registration was requested in
the Registration Request, and (ii) in all other cases, by
the Majority Holders of the Registration, and in each case in
consultation with the Company.
(c) To the extent Registration Expenses are not required to
be paid by the Company pursuant to this Agreement, each holder
of securities included in any registration or qualification
hereunder will pay those Registration Expenses allocable to the
registration or qualification of such holders securities
so included, and any Registration Expenses not so allocable will
be borne by all sellers of securities included in such
registration in proportion to the aggregate selling price of the
securities to be so registered or qualified.
5. Indemnification.
(a) The Company agrees to indemnify and hold harmless, and
hereby does indemnify and hold harmless, each Holder, its
Affiliates and their respective officers, directors and
partners, members, shareholders, employees, and agents (each, an
Agent) and each Person who
controls such Holder (within the meaning of the
Securities Act and Section 20 of the Exchange Act) against,
and pay and reimburse such Holder, Agent or controlling person
for any losses, claims, damages, liabilities, joint or several,
to which such Holder, Agent or controlling person may become
subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect
thereof) arise out of or are based upon (i) any untrue or
alleged untrue statement of material fact contained in any
Registration Statement, Prospectus, preliminary Prospectus or
Issuer Free Writing Prospectus or any amendment thereof or
supplement thereto, (ii) any omission or alleged omission
of a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (iii) any
violation by the Company of any rule or regulation promulgated
under the Securities Act or any state securities laws applicable
to the Company and relating to action or inaction required of
the Company in connection with any such registration, and the
Company will pay and reimburse such Holder and each such Agent
and controlling person for any legal or any other expenses
actually and reasonably incurred by them in connection with
investigating, defending or settling any such loss, claim,
liability, action or proceeding, provided that the
Company will not be liable in any such case to the extent that
any such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expense arises out of or is based upon an
untrue statement or alleged untrue statement, or omission or
alleged omission, made in such Registration Statement, any such
Prospectus, preliminary Prospectus or Issuer Free Writing
Prospectus or any amendment or supplement thereto, or in any
application, in reliance upon, and in conformity with, written
information prepared and furnished to the Company by such Holder
or its Affiliates for use therein. In connection with an
Underwritten Offering, the Company, if requested, will indemnify
such Underwriters, their officers and directors and each Person
who controls such Underwriters (within the meaning of the
Securities Act) to the same extent as provided above with
respect to the indemnification of the Holders.
(b) In connection with any Registration Statement in which
a Holder is participating, each such Holder will furnish to the
Company in writing such information, affidavits and
officers certificates as the Company reasonably requests
for use in connection with any such Registration Statement,
Prospectus or preliminary Prospectus and, will indemnify and
hold harmless the Company, its directors and officers, each
Underwriter
D-33
and each other Person who controls the Company
(within the meaning of the Securities Act and Section 20 of
the Exchange Act) and each such Underwriter against any losses,
claims, damages, liabilities, joint or several, to which the
Company or any such director or officer, any such Underwriter or
controlling person may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon
(i) any untrue or alleged untrue statement of material fact
contained in the Registration Statement, Prospectus or
preliminary Prospectus or any amendment thereof or supplement
thereto or in any application or (ii) any omission or
alleged omission of a material fact required to be stated
therein or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or
omission is made in such Registration Statement, any such
Prospectus or preliminary Prospectus or any amendment or
supplement thereto, or in any application, in reliance upon and
in conformity with written information prepared and furnished to
the Company by such Holder for use therein, and such Holder will
reimburse the Company and each such director, officer,
Underwriter and controlling Person for any legal or any other
expenses actually and reasonably incurred by them in connection
with investigating, defending or settling any such loss, claim,
liability, action or proceeding, provided that the
obligation to indemnify and hold harmless will be individual and
several to each Holder and will be limited to the proceeds
received by such Holder from the sale of Registrable Securities
pursuant to such Registration Statement.
(c) Any Person entitled to indemnification hereunder will
(i) give prompt written notice to the indemnifying party of
any claim with respect to which it seeks indemnification and
(ii) unless in such indemnified partys reasonable
judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such
claim with counsel reasonably satisfactory to the indemnified
party. If such defense is assumed, the indemnifying party will
not be subject to any liability for any settlement made by the
indemnified party without its consent (but such consent will not
be unreasonably withheld). An indemnifying party who is not
entitled to, or elects not to, assume the defense of a claim
will not be obligated to pay the fees and expenses of more than
one counsel for all parties indemnified by such indemnifying
party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may
exist between such indemnified party and any other of such
indemnified parties with respect to such claim.
(d) The indemnification provided for under this Agreement
will remain in full force and effect regardless of any
investigation made by or on behalf of the indemnified party or
any officer, director or controlling Person of such indemnified
party and will survive the registration and sale of any
securities by any Person entitled to any indemnification
hereunder and the expiration or termination of this Agreement.
(e) If the indemnification provided for in this
Section 5 is held by a court of competent jurisdiction to
be unavailable to an indemnified party with respect to any loss,
liability, claim, damage or expense referred to therein, then
the indemnifying party, in lieu of indemnifying such indemnified
party thereunder, will contribute to the amount paid or payable
by such indemnified party as a result of such loss, liability,
claim, damage or expense in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one
hand and of the indemnified party on the other hand in
connection with the statements or omissions which resulted in
such loss, liability, claim, damage or expense as well as any
other relevant equitable considerations. The relevant fault of
the indemnifying party and the indemnified party will be
determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party
and the parties relative intent, knowledge, access to
information and opportunity to correct or prevent such statement
or omission. Notwithstanding the foregoing, the amount any
Holder will be obligated to contribute pursuant to this
Section 5(e) will be limited to an amount equal to the
proceeds to such Holder of the Registrable Securities sold
pursuant to the registration statement which gives rise to such
obligation to contribute (less the aggregate amount of any
damages which the Holder has otherwise been required to pay in
respect of such loss, claim, damage, liability or action or any
substantially similar loss, claim, damage, liability or action
arising from the sale of such Registrable Securities). The
parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(e) were determined
by pro rata allocation or by any other method of
allocation which does not take into account the equitable
considerations referred to in the
D-34
immediately preceding sentence. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
6. Participation in Underwritten
Registrations.
(a) No Holder may participate in any registration hereunder
that is underwritten unless such Holder (i) agrees to sell
its Registrable Securities on the basis provided in any
underwriting arrangements approved by the Person or Persons
entitled hereunder to approve such arrangements (including,
without limitation, pursuant to the terms of any over-allotment
or green shoe option requested by the managing
Underwriter(s), provided that no Holder will be required
to sell more than the number of Registrable Securities that such
Holder has requested the Company to include in any
registration), (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the
terms of such underwriting arrangements, and
(iii) cooperates with the Companys reasonable
requests in connection with such registration or qualification
(it being understood that the Companys failure to perform
its obligations hereunder, which failure is caused by such
Holders failure to cooperate, will not constitute a breach
by the Company of this Agreement). Notwithstanding the
foregoing, no Holder will be required to agree to any
indemnification obligations on the part of such Holder that are
greater than its obligations pursuant to Section 5(b).
(b) Each Holder that is participating in any registration
hereunder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in
Section 3(f) above, such Holder will forthwith discontinue
the disposition of its Registrable Securities pursuant to the
Registration Statement until such Holder receives copies of a
supplemented or amended Prospectus as contemplated by such
Section 3(f). In the event the Company gives any such
notice, the applicable time period mentioned in
Section 3(b) during which a Registration Statement is to
remain effective will be extended by the number of days during
the period from and including the date of the giving of such
notice pursuant to this Section 6(b) to and including the
date when each seller of a Registrable Security covered by such
Registration Statement will have received the copies of the
supplemented or amended Prospectus contemplated by
Section 3(f).
7. Rule 144 Reporting. With a
view to making available the benefits of certain rules and
regulations of the Commission which may permit the sale of the
Registrable Securities to the public without registration, the
Company agrees to use its reasonable best efforts to:
(a) make and keep public information available as those
terms are understood and defined in Rule 144 under the
Securities Act, at all times,
(b) file with the Commission in a timely manner all reports
and other documents required of the Company under the Securities
Act and the Exchange Act, and
(c) take such further action as any Holder of Registrable
Securities may reasonably request, all to the extent required
from time to time to enable such Holder to sell Registrable
Securities without registration under the Securities Act within
the limitation of the exemptions provided by
(i) Rule 144 under the Securities Act, as such rules
may be amended from time to time, or (ii) any other rule or
regulation now existing or hereafter adopted by the Commission.
Upon the request of any Holder of Registrable Securities, the
Company shall deliver to such Holder a written statement as to
whether it has complied with such requirements.
8. Lock Up Agreements. In
consideration for the Company agreeing to its obligations under
this Agreement, each Holder agrees in connection with any
registration of the Companys securities (whether or not
such Holder is participating in such registration) upon the
timely request of the Company and the Underwriters managing any
Underwritten Offering of the Companys securities, not to
effect (other than pursuant to such registration) any public
sale or distribution of Registrable Securities, including, but
not limited to, any sale pursuant to Rule 144 or
Rule 144A, or make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any
Registrable Securities, any other equity securities of the
Company or any securities convertible into or exchangeable or
exercisable for any equity securities of the Company
D-35
without the prior written consent of the Company or such
Underwriters, as the case may be, for such period of time (not
to exceed 90 days) from the effective date of such
registration as the Company and the Underwriters may specify,
such consent not to be unreasonably withheld, delayed or
conditioned, in the case of the Company, so long as all Holders
or shareholders holding more than five percent (5%) of the
outstanding Common Shares and all officers and directors of the
Company are bound by a comparable obligation, provided
that nothing herein will prevent any Holder that is a
partnership or corporation from making a distribution of
Registrable Securities to the partners or shareholders thereof
that is otherwise in compliance with applicable securities laws,
so long as such distributees agree to be so bound. The Company
agrees that (i) if timely requested in writing by the sole
or lead managing Underwriter in an Underwritten Offering of any
Registrable Securities, not to make any short sale of, loan,
grant any option for the purchase of or effect any public sale
or distribution of any of the Companys equity securities
(or any security convertible into or exchangeable or exercisable
for any of the Companys equity securities) during the time
period reasonably requested by the sole or lead managing
Underwriter not to exceed 90 days, beginning on the
effective date of the applicable Registration Statement (except
as part of such underwritten registration or pursuant to
registrations on
Forms S-4
or S-8 or
any successor form to such forms), and (ii) it will cause
each holder of equity securities (or any security convertible
into or exchangeable or exercisable for any of its equity
securities) of the Company purchased from the Company at any
time after the date of this Agreement (other than in a
registered public offering) to so agree.
9. Term. This Agreement will be
effective as of the date hereof and will continue in effect
thereafter until the earliest of (a) its termination by the
consent of the Company and the holders of not less than
662/3%
of the Registrable Securities, (b) the dissolution,
liquidation or winding up of the Company or (c) the date on
which no Registrable Securities remain outstanding;
provided, that Sections 5 and 10 shall survive any
such termination, in accordance with their terms.
10. No Restriction on Ability to Engage in Competing
Businesses. The parties acknowledge that the
Investors and their Affiliates are engaged, and may in the
future engage, in a variety of financial services businesses,
and may make investments in, and have investments in, other
businesses from time to time similar to and that may compete
with the businesses of the Company and its direct and indirect
subsidiaries (Competing Businesses). The
Investors and their Affiliates reserve the right to make
additional investments in other Competing Businesses independent
of their investments in the Company. In addition, by virtue of
an Investor holding equity or other interests in the Company or
by having individuals designated by or affiliated with such
Investor serving on or observing at meetings of the Board (or
committees thereof) or otherwise (an Investor
Director), no Investor nor any of the Investors
respective Affiliates, including without limitation, any
Investor Director (to the extent not prohibited by the Investor
Directors non-waivable fiduciary duties under Maryland
law), shall have any obligation to the Company or any Subsidiary
of the Company to refrain from competing with the Company or any
Subsidiary of the Company, making investments in Competing
Businesses, or otherwise engaging in any commercial activity;
and none of the Company or any Subsidiary of the Company shall
have any right with respect to any such other investments or
activities undertaken by such Investor or such Affiliates.
Without limitation of the foregoing, each Investor or any
Affiliates thereof, including, without limitation, any Investor
Director (to the extent not prohibited by the Investor
Directors non-waivable fiduciary duties under Maryland
law), may engage in or possess an interest in other business
ventures of any nature of description, independently or with
others, similar or dissimilar to the business of the Company or
any Subsidiary of the Company, and none of the Company, any
Subsidiary of the Company or any Investor (other than such
Investor) shall have any rights or expectancy by virtue of such
Investors relationships with the Company, this Agreement
or otherwise in and to such independent ventures or the income
or profits derived therefrom; and the pursuit of any such
venture, even if such investment is in a Competing Business
shall not be deemed wrongful or improper. No Investor nor any of
their respective Affiliates, including, without limitation, any
Investor Director, shall be obligated to present any particular
investment or business opportunity to the Company or any
Subsidiary of the Company even if such opportunity is of a
character that, if presented to the Company or a Subsidiary of
the Company, could be taken by the Company, and the Investors
and their respective Affiliates shall continue to have the right
to take for their own respective accounts or to recommend to
others any such particular investment or business opportunity.
D-36
11. Defined Terms. Capitalized
terms when used in this Agreement have the following meanings:
Affiliate of any Person means another
Person that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common
control with, such first Person. The Affiliates of Investors
shall be deemed to include one or more funds under common
management and their respective limited partners and Affiliates.
Agent has the meaning set forth in
Section 5(a).
Agreement has the meaning set forth in the
first paragraph of this Agreement.
Blackout Notice has the meaning set
forth in Section 1(d).
Blackout Period has the meaning set
forth in Section 1(d).
Board has the meaning set forth in
Section 1(d).
Code means the Internal Revenue Code
of 1986, as amended.
Commission means the Securities and
Exchange Commission or any other federal agency administering
the Securities Act.
Common Shares has the meaning set
forth in the recitals.
Company has the meaning set forth in
the first paragraph of this Agreement.
Competing Businesses has the meaning
set forth in Section 10.
Demand Registration has the meaning
set forth in Section 1(a).
Demand Registration Statement means a
registration statement of the Company that covers the
Registrable Securities requested to be included therein pursuant
to the provisions of Section 1(a) (as such amount may be
reduced in accordance with the provisions of Section 1(f))
and all amendments and supplements to such registration
statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto
and all material incorporated by reference (or deemed to be
incorporated by reference) therein.
Exchange has the meaning set forth in
the recitals.
Exchange Act means the Securities
Exchange Act of 1934, as amended, or any similar federal statute
and the rules and regulations thereunder, as in effect from time
to time.
Exchange Agreement has the meaning set
forth in the recitals.
FINRA has the meaning set forth in
Section 3(a).
Holder means any holder of outstanding
Registrable Securities who is a party to this Agreement or to
whom the benefits of this Agreement have been validly assigned
and such of its respective heirs, successors and permitted
assigns (including any permitted transferees of Registrable
Securities) who acquire or are otherwise the transferee of
Registrable Securities, directly or indirectly, from such
holder, for so long as such heirs, successors and permitted
assigns own any Registrable Securities.
Initiating Holders means, with respect
to a particular registration, the Holders who initiated the
request for such registration.
Inspector has the meaning set forth in
Section 3(a).
Investor Director has the meaning set
forth in Section 10.
Investors has the meaning set forth in
the first paragraph of this Agreement.
Issuer Free Writing Prospectus has the
meaning set forth in the last paragraph of Section 3.
Jefferies has the meaning set forth in
the first paragraph of this Agreement.
D-37
Lock-Up
Period has the meaning set forth in Section 1.
Majority Holders of the Registration
means, with respect to a particular registration, one or more
Holders of Registrable Securities who would hold a majority of
the Registrable Securities to be included in such registration.
Mass Mutual has the meaning set forth
in the first paragraph of this Agreement.
New York Court has the meaning set
forth in Section 12(l).
Person means an individual, a
partnership, a joint venture, a corporation, a limited liability
company, a trust, an unincorporated organization or a government
or department or agency thereof.
Piggyback Registration has the meaning
set forth in Section 2(a).
Prospectus means the prospectus
included in a Registration Statement (including, without
limitation, any preliminary prospectus and any prospectus that
includes any information previously omitted from a prospectus
filed as part of an effective registration statement in reliance
upon Rule 430A promulgated under the Securities Act), and
any such Prospectus as amended or supplemented by any prospectus
supplement, and all other amendments and supplements to such
Prospectus, including post-effective amendments, and in each
case including all material incorporated by reference (or deemed
to be incorporated by reference) therein.
register,
registered and
registration refers to a registration
effected by preparing and filing a Registration Statement in
compliance with the Securities Act, and the declaration or
ordering of the effectiveness of such Registration Statement,
and compliance with applicable state securities laws of such
states in which Holders notify the Company of their intention to
offer Registrable Securities.
Registrable Securities means
(i) any Common Shares, (ii) any other shares or
securities that the holders of the Common Shares may be entitled
to receive, or will have received, pursuant to such
holders ownership of the Common Shares, (iii) any
Common Shares otherwise or hereafter purchased or acquired by
the Investors or their Affiliates, and (iv) any securities
of the Company (or any successor or assign of the Company,
whether by merger, consolidation, sale of assets or otherwise)
issued or issuable directly or indirectly with respect to the
securities referred to in the foregoing clause (i), (ii)or
(iii) by way of conversion or exchange thereof or share
dividend or share split or in connection with a combination of
shares, recapitalization, reclassification, merger,
consolidation or other reorganization, sale of assets or similar
transactions. As to any particular securities constituting
Registrable Securities, such securities will cease to be
Registrable Securities when (x) they have been effectively
registered or qualified for sale by Prospectus filed under the
Securities Act and disposed of in accordance with the
Registration Statement contained therein, (y) they can be
sold to the public through a broker, dealer or market maker
pursuant to Rule 144 or other exemption from registration
under the Securities Act, or (z) they can be sold by such
Holder without restriction as to volume or manner of sale
pursuant to Rule 144(e) under the Securities Act. For
purposes of this Agreement, a Person will be deemed to be a
Holder whenever such Person holds an option to purchase, or a
security convertible into or exercisable or exchangeable for,
Registrable Securities, whether or not such purchase,
conversion, exercise or exchange has actually been effected and
disregarding any legal restrictions upon the exercise of such
rights. Registrable Securities issuable upon exercise of an
option or upon conversion, exchange or exercise of another
security shall be deemed outstanding for the purposes of this
Agreement.
Registration Expenses has the meaning
set forth in Section 4.
Registration Request has the meaning
set forth in Section 1(a). The term Registration Request
will also include, where appropriate, a
S-3
Registration request made pursuant to Section 1(c).
Registration Statement means the
registration statement, Prospectus and other documents filed
with the Commission to effect a registration under the
Securities Act.
D-38
Required Investor Holders means one or
more shareholders or members who would hold in the aggregate 50%
or more of the outstanding Registrable Securities held by
Investors or their permitted assignees and transferees.
Rule 144 means Rule 144
under the Securities Act or any successor or similar rule as may
be enacted by the Commission from time to time, as in effect
from time to time.
S-3
Registration means a registration required to be
effected by the Company pursuant to Section 1(c).
Securities Act means the Securities
Act of 1933, as amended, or any similar federal statute and the
rules and regulations thereunder, as in effect from time to time.
Selling Expenses means all
underwriting discounts, selling commissions and transfer taxes
applicable to the sale of Registrable Securities hereunder.
Shelf Registration has the meaning set
forth in Section 1(a).
Subsidiary of any person means another
person 50% or more of the total combined voting power of all
classes of capital stock or other voting interests of which, or
50% or more of the equity securities of which, is owned directly
or indirectly by such first person.
Underwriters means the underwriters,
if any, of the offering being registered under the Securities
Act.
Underwritten Offering means a sale of
securities of the Company to an Underwriter or Underwriters for
reoffering to the public.
12. Miscellaneous.
(a) No Inconsistent
Agreements. The Company will not hereafter
enter into any agreement with respect to its securities that is
directly inconsistent with or violates the rights granted to
Holders of Registrable Securities in this Agreement. Except as
provided in this Agreement, the Company will not grant to any
holder or prospective holder of any securities of the Company
registration rights with respect to such securities that are the
same as or more favorable from the perspective of such Person as
or than, the registration rights granted hereunder without the
prior written consent of the Required Investor Holders, unless
such rights are also offered to the Required Investor Holders.
(b) Adjustments Affecting Registrable
Securities. Except as may be required by
applicable law, the Company will not take any action, or permit
any change to occur, with respect to its securities which would
materially and adversely affect the ability of the holders of
Registrable Securities to include such Registrable Securities in
a registration or qualification for sale by Prospectus
undertaken pursuant to this Agreement or which would adversely
affect the marketability of such Registrable Securities in any
such registration or qualification (including, without
limitation, effecting a share split or a combination of shares).
(c) Remedies. The parties hereto
acknowledge that money damages would not be an adequate remedy
at law if any party fails to perform in any material respect any
of its obligations hereunder, and accordingly agree that each
party, in addition to any other remedy to which it may be
entitled at law or in equity, shall be entitled to seek to
compel specific performance of the obligations of any other
party under this Agreement, without the posting of any bond, in
accordance with the terms and conditions of this Agreement in
any court of the United States or any State thereof having
jurisdiction, and if any action should be brought in equity to
enforce any of the provisions of this Agreement, none of the
parties hereto shall raise the defense that there is an adequate
remedy at law. Except as otherwise provided by law, a delay or
omission by a party hereto in exercising any right or remedy
accruing upon any such breach shall not impair the right or
remedy or constitute a waiver of or acquiescence in any such
breach. No remedy shall be exclusive of any other remedy. All
available remedies shall be cumulative.
(d) Amendments and Waivers. Except
as otherwise provided herein, the provisions of this Agreement
may be amended or waived only upon the prior written consent of
the Company (upon the approval of the
D-39
independent directors of the Board, which shall not include the
representatives of the Investors) and the Required Investor
Holders; provided, however, that in the event that
such amendment or waiver would treat a Holder or group of
Holders in a manner different from any other Holders, then such
amendment or waiver will require the consent of such Holder or
the Holders of a majority of the Registrable Securities of such
group adversely treated.
(e) Successors and Assigns. This
Agreement will be binding upon and inure to the benefit of and
be enforceable by the parties hereto and their respective heirs,
successors and assigns (including any permitted transferee of
Registrable Securities). Except as otherwise provided in this
Agreement, any Holder may assign to any permitted transferee (as
determined under the Securities Purchase Agreement and this
Agreement) of its Registrable Securities (other than a
transferee that acquires such Registrable Securities in a
registered public offering or pursuant to a sale under
Rule 144 of the Securities Act (or any successor rule)),
its rights and obligations under this Agreement. In addition,
and whether or not any express assignment will have been made,
the provisions of this Agreement which are for the benefit of
the Holders of the Registrable Securities (or any portion
thereof) as such will be for the benefit of and enforceable by
any permitted transferee that is a subsequent holder of any
Registrable Securities (or of such portion thereof), as
applicable, subject to the provisions respecting the minimum
numbers or percentages of shares of Registrable Securities (or
of such portion thereof), as applicable, required in order to be
entitled to certain rights, or take certain actions, contained
herein. For purposes of this Agreement, successor
for any entity other than a natural person shall mean a
successor to such entity as a result of such entitys
merger, consolidation, sale of substantially all of its assets,
or similar transaction. For the avoidance of doubt, the rights
under Section 10 may not be assigned by either Investor to
any third party, other than to its Affiliates or the other
Investor, provided that in the case of any such
assignment to an Affiliate or the other Investor, at all times
voting and disposition control of such Registrable Securities
and the right to exercise such rights under Section 10
shall remain with the Investors pursuant to appropriate proxies
or other similar methods.
(f) Severability. Whenever
possible, each provision of this Agreement will be interpreted
in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity,
illegality or unenforceability will not affect any other
provision or the effectiveness or validity of any provision in
any other jurisdiction, and this Agreement will be reformed,
construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained
herein.
(g) Counterparts. This Agreement
may be executed simultaneously in multiple counterparts, any one
of which need not contain the signatures of more than one party,
but all such counterparts taken together will constitute one and
the same Agreement.
(h) Descriptive Headings. The
descriptive headings of this Agreement are inserted for
convenience only and do not constitute a part of this Agreement.
(i) Governing Law. This Agreement
and the rights and duties of the parties hereto hereunder shall
be governed by and construed in accordance with laws of the
State of New York, without giving effect to its principles or
rules of conflict of laws to the extent such principles or rules
are not mandatorily applicable by statute and would require or
permit the application of the laws of another jurisdiction.
(j) Entire Agreement. This
Agreement and the Exchange Agreement are intended by the parties
as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject
matter contained herein. There are no restrictions, promises,
representations, warranties, covenants or undertakings relating
to such subject matter, other than those set forth or referred
to herein or in this Agreement and the Exchange Agreement. This
Agreement and the Exchange Agreement supersede all prior
agreements and understandings between the Company and the other
parties to this Agreement with respect to such subject matter,
specifically, this Agreement supersedes and terminates the
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.
D-40
(k) Nominees for Beneficial
Owners. In the event that any Registrable
Securities are held by a nominee for the beneficial owner
thereof, the beneficial owner thereof may, at its election in
writing delivered to the Company (and countersigned by the
nominee), be treated as the holder of such Registrable
Securities for purposes of any request or other action by any
holder or holders of Registrable Securities pursuant to this
Agreement or any determination of any number or percentage of
shares of Registrable Securities held by any holder or holders
of Registrable Securities contemplated by this Agreement. If the
beneficial owner of any Registrable Securities so elects, the
Company may require assurances reasonably satisfactory to it of
such owners beneficial ownership of such Registrable
Securities and the nominees consent to such.
(l) Consent to Jurisdiction. Each
party to this Agreement hereby irrevocably and unconditionally
agrees that any legal action, suit or proceeding arising out of
or relating to this Agreement or any agreements or transactions
contemplated hereby may be brought in any federal court or any
state court which in either case is located in the City and
County of New York (any such federal or state court, a
New York Court). In addition, each party to
this Agreement hereby irrevocably and unconditionally expressly
(i) submits to the personal jurisdiction and venue of any
New York Court in the event any dispute arises out of this
Agreement or any of the transactions contemplated by this
Agreement and (ii) agrees that it will not attempt to deny
or defeat such personal jurisdiction or venue by motion or other
request for leave from any such New York Court.
(m) Further Assurances. Each party
hereto shall do and perform or cause to be done and performed
all such further acts and things and shall execute and deliver
all such other agreements, certificates, instruments and
documents as any other party hereto reasonably may request in
order to carry out the intent and accomplish the purposes of
this Agreement and the consummation of the transactions
contemplated hereby.
(n) Notices. All notices,
requests, claims, demands and other communications under this
Agreement shall be in writing and shall be deemed given if
delivered personally, or sent by overnight courier (providing
proof of delivery) to the parties at the following addresses (or
at such other address for a party as shall be specified by like
notice):
(i) if to Mass Mutual, to
Massachusetts Mutual Life Insurance Company
1295 State Street
Springfield, Massachusetts 01111
Attention: Michael Rollings
with a copy to (which shall not constitute notice):
Massachusetts Mutual Life Insurance Company
1295 State Street
Springfield, MA 01111
Attention: General Counsel
(ii) if to Jefferies, to
Jefferies Capital Partners
520 Madison Avenue
New York, New York 10022
with a copy to (which shall not constitute notice):
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York
10038-4982
Fax:
(212) 806-6006
Attention: Melvin Epstein, Esq.
D-41
(iii) if to the Company, to
NovaStar Financial, Inc.
2114 Central Street, Suite 600
Kansas City, MO 64108
Attention: Rodney Schwatken
with a copy to (which shall not constitute notice):
Bryan Cave LLP
One Kansas City Place
1200 Main Street, Suite 3500
Kansas City, Missouri 64105
Attention: Gregory G. Johnson, Esq.
[the
remainder of this page left intentionally blank]
D-42
IN WITNESS WHEREOF, the undersigned have caused this Agreement
to be signed by their respective officers thereunto duly
authorized, all as of the date first written above.
NOVASTAR FINANCIAL, INC.
Name:
Title:
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
Name:
Title:
JEFFERIES CAPITAL PARTNERS IV L.P.
JEFFERIES EMPLOYEE PARTNERS IV LLC
JCP PARTNERS IV LLC
By: Jefferies Capital Partners IV LLC,
as Manager
Name:
Title:
D-43
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Preliminary Copy |
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NovaStar Financial, Inc. |
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Using a black ink pen, mark your votes with an X as shown in
this example. Please do not write outside the designated areas. |
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Electronic Voting Instructions
You can vote by Internet or telephone!
Available 24 hours a day, 7 days a week!
Instead of mailing your proxy, you may choose one of the two voting methods outlined below to vote
your proxy.
VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.
Proxies submitted
by the Internet or telephone must be received by 11:59 p.m., Central Time, on June 22, 2011.
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Vote by Internet |
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Log on to the Internet and go to |
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www.investorvote.com |
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Follow the steps outlined on the secured website. |
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Vote by telephone |
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Call toll free 1-800-652-VOTE (8683) within the USA,
US territories & Canada any time on a touch tone
telephone. There is NO CHARGE to you for the call.
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Follow the instructions provided by the recorded message. |
6 IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. 6
A The
Board recommends you vote FOR the listed proposals.
Vote on Proposals
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TO APPROVE AN AMENDMENT TO THE CHARTER
TO ELIMINATE THE 8.90% SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK
OF THE COMPANY, PAR VALUE $0.01 PER SHARE, AND THE APPLICABLE ARTICLES
SUPPLEMENTARY |
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TO APPROVE AN AMENDMENT TO THE
CHARTER TO ELIMINATE THE 9.00% SERIES
D1 MANDATORY CONVERTIBLE PREFERRED
STOCK OF THE COMPANY, PAR VALUE $0.01
PER SHARE, AND THE APPLICABLE
ARTICLES SUPPLEMENTARY |
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3.
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TO APPROVE AN AMENDMENT TO THE CHARTER
TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF
CAPITAL STOCK OF THE COMPANY FROM 50,000,000
TO 120,000,000 |
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TO APPROVE AN AMENDMENT TO THE
CHARTER TO PRESERVE THE COMPANYS
NET OPERATING LOSS CARRYFORWARDS |
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5.
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TO APPROVE CERTAIN TECHNICAL AMENDMENTS
TO
THE CHARTER IN CONNECTION WITH THE FOREGOING
PROPOSALS, AND TO REMOVE PROVISIONS
PREVIOUSLY REQUIRED BY THE COMPANYS FORMER
STATUS AS A REAL ESTATE INVESTMENT TRUST |
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IN THEIR DISCRETION, THE PROXIES
ARE AUTHORIZED TO VOTE UPON SUCH OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE MEETING.
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B Authorized
Signatures This section must be completed for your vote to be counted.
Date and Sign Below
Please sign and
date this Proxy below and return in the enclosed envelope. Please sign exactly
as the name appears on the stock certificate. If shares are registered in
two names, both stockholders should sign this Proxy. If signing as attorney,
executor, administrator, trustee or guardian, please give your full title
as such.
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Date (mm/dd/yyyy) Please print date below. |
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Signature 1 Please keep signature within the box. |
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Signature 2 Please keep signature within the box. |
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6
IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM
PORTION IN THE ENCLOSED ENVELOPE. 6
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Revocable Proxy NovaStar Financial, Inc. |
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2114 Central Street, Suite 600
Kansas City, MO 64108
For Special Meeting of Stockholders June 23, 2011
This Proxy is solicited on behalf of the Board of Directors
The undersigned holder of the common stock, par value $0.01 per share (the Common Stock),
of NovaStar Financial, Inc. (the Company) hereby appoints Rodney E. Schwatken or Brett A.
Monger, and each of them, as attorneys and proxies, with full power of substitution to each, to
vote all shares of Common Stock of the Company which the undersigned is entitled to vote at the
Special Meeting of Stockholders of the Company to be held at the Hyatt Regency Crown Center Hotel,
2345 McGee Street, Kansas City, MO 64108 on June 23, 2011, at 10:00 a.m., Central Time, and at any
and all postponements or adjournments thereof.
This proxy will be voted as directed, but if no instructions are specified, this proxy will be
voted FOR the proposals. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting. At the present time the board of directors knows
of no other business to be presented at the meeting.
(Continued and to be signed on other side.)
C Non-Voting Items
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Change of Address Please print your new address below. |
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Comments Please print your comments below. |
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Meeting Attendance |
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Mark the box to the right if you plan to attend the Special Meeting. |
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IF VOTING BY MAIL, YOU
MUST COMPLETE SECTIONS A - C ON BOTH SIDES OF THIS CARD. |
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