sv4za
As Filed with
the Securities and Exchange Commission on
April 14, 2011
Registration
No. 333-171115
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 4
to
Form S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
NOVASTAR FINANCIAL,
INC.
(Exact name of Company as
specified in its charter)
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Maryland
(State or jurisdiction of
incorporation or organization)
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6531
(Primary Standard
Industrial
Classification Code Number)
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74-2830661
(I.R.S. Employer
Identification)
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2114 Central Street
Suite 600
Kansas City, Missouri
64108
(816) 237-7000
(Address, including zip code,
and telephone number, including area code, of Companys
principal executive offices)
W. Lance Anderson
Chairman and Chief Executive
Officer
2114 Central Street
Suite 600
Kansas City, Missouri
64108
(816) 237-7000
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies of all communications
to:
Gregory G.
Johnson, Esq.
Bryan Cave LLP
One Kansas City Place
1200 Main Street
Suite 3500
Kansas City, Missouri
64105
(816) 374-3200
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement and satisfaction
or of all other conditions to the transactions described in the
enclosed proxy statement/consent solicitation/prospectus.
If the securities being registered on this form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check
the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ
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If applicable, place an X in the box to designate the
appropriate rule provision relied upon in conducting this
transaction:
Exchange Act
Rule 13e-4(i)
(Cross-Border Issuer Tender
Offer) o
Exchange Act
Rule 14d-1(d)
(Cross-Border Third Party Tender
Offer) o
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Offering
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Aggregate
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Registration
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Securities Registered
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Registered(1)
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Price per Security
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Offering Price(2)
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Fee(3)(4)
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Common Stock, par value $0.01
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43,823,600
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n/a
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$3,489,900
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$248.83
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(1)
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Represents the estimated maximum
number of shares of the Companys common stock issuable in
connection with the exchange offer described in the proxy
statement/consent solicitation/prospectus.
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(2)
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Computed pursuant to
Rule 457(c) and 457(f)(1) and (f)(3) of the Securities Act
of 1933. The proposed maximum aggregate offering price is equal
to (i) the product of (a) $1.71, the average of the
high and low prices per share of the Companys 8.90%
Series C Cumulative Redeemable Preferred Stock as quoted by
Pink OTC Markets inter-dealer quotation service on
December 9, 2010 and (b) 2,990,000, the maximum
possible number of shares of the Companys 8.90%
Series C Cumulative Redeemable Preferred Stock that may be
converted into the right to receive the Companys common
stock pursuant to the exchange offer, less (ii) $1,623,000,
the estimated amount of cash that would be paid by the
Registrant in the exchange offer.
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(3)
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Calculated in accordance with
Section 6(b) of the Securities Act and SEC Fee Advisory #4
for Fiscal Year 2010 at a rate equal to 0.0000713 multiplied by
the proposed maximum aggregate offering price.
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(4)
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Previously paid.
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The Company hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date
until the Company shall file a further amendment that
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until this Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this proxy statement/consent
solicitation/prospectus is not complete and may be changed.
These securities may not be sold until the Registration
Statement filed with the Securities and Exchange Commission is
effective. This proxy statement/consent solicitation/prospectus
is not an offer to sell securities nor does it seek an offer to
buy those securities in any jurisdiction where the offer or sale
is not permitted.
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SUBJECT TO COMPLETION, DATED
APRIL 14, 2011
Proxy Statement/Consent Solicitation/Prospectus
Offer to Exchange Each
Outstanding Share of
Series C Preferred
Stock
of
NovaStar Financial,
Inc.
For, at the Election of the
Holder,
Common Stock Only
or
Common Stock and Cash
and
Solicitation of Consents
Relating to the Recapitalization
THE SERIES C OFFER, CONSENT
SOLICITATION AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT, EASTERN TIME, ON [ ], 2011
UNLESS THE OFFER IS EXTENDED.
NovaStar Financial, Inc. (NFI or the
Company) is offering (the Series C
Offer), upon the terms and subject to the conditions set
forth in this document and in the related letter of transmittal
(the Letter of Transmittal), to exchange each share
of its 8.90% Series C Cumulative Redeemable Preferred Stock
of the Company, par value $0.01 per share (the
Series C Preferred Stock), held by you for, at
your election, either:
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3 shares of newly-issued common stock of the Company, par
value $0.01 (the Common Stock), and $2.00 in cash
(the
Cash-and-Stock
Option); or
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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 shares) will be issued to Series C
Holders (the Offer Consideration). The Cash and
Stock Option and the Stock-Only Option are the
Consideration Options.
As of the date of this proxy statement/consent
solicitation/prospectus, there are 2,990,000 shares of
Series C Preferred Stock outstanding, each of which has a
par value of $0.01 per share. The Series C Offer is part of
a larger recapitalization of the Company, whereby the holders of
the Companys 9.00% Series D1 Mandatory Convertible
Preferred Stock, par value $0.01 per share (the
Series D Preferred Stock), have agreed to
exchange their stock for an aggregate of 37,161,600 newly-issued
shares of Common Stock and $1,377,000 in cash (the
Series D Exchange). As of April 8, 2011,
the Series C Preferred Stock had an aggregate liquidation
preference of $74.8 million and accrued and unpaid
dividends of $23.5 million. As of April 8, 2011, the
Series D Preferred Stock had an aggregate liquidating
preference of $52.5 million and accrued and unpaid
dividends of $32.1 million. Our common stock and
Series C Preferred Stock are currently quoted by Pink OTC
Markets inter-dealer quotation service as an OTCQB
security under the symbol NOVS and
NOVSP, respectively. The Series D Preferred
Stock is privately held.
As part of the Series C Offer, we are soliciting consents
from the holders of the Series C Preferred Stock (the
Series C Holders) to effect the Series C
Offer and the Series D Exchange. We refer to our
solicitation of these consents as the Consent
Solicitation. Series C Holders are required to
deliver consents to effect the Series C Offer and the
Series D Exchange in order to participate in the
Series C Offer, and Series C Holders may not deliver
consents unless they surrender their Series C Preferred
Stock for exchange in the Series C Offer.
Our Series C Offer and Consent Solicitation is subject to
the conditions listed under The Series C Offer and
Consent Solicitation Certain Conditions of the
Series C Offer and Consent Solicitation. One of
the conditions to the Series C Offer and Consent
Solicitation is the final completion of the Series D
Exchange. There are multiple conditions to the closing of the
Series C Offer and the Series D Exchange that are
beyond our control, and we cannot provide you any assurance that
these conditions will be satisfied or that the Series C
Offer and the Series D Exchange will close.
Exchange of the Series C Preferred Stock and an
investment in the common stock involves risks. See Risk
Factors beginning on page 11 of this document for a
discussion of factors that you should consider in connection
with the Series C Offer and Consent Solicitation.
IMPORTANT
If you wish to tender all of your shares of Series C
Preferred Stock, and deliver your consent to the Series C
Offer and Series D Exchange and your proxy, you should
follow the instructions beginning on
page [ ] of this document. If you wish to
withdraw your tender, you may do so by following the
instructions set forth in this proxy statement/consent
solicitation/prospectus. Any holder who withdraws a prior tender
may tender for different Consideration Option by timely
submitting a new Letter of Transmittal to the Exchange Agent.
Neither the Securities and Exchange Commission nor any state
securities authority has approved or disapproved this
transaction or these securities or determined the fairness of
merits of this transaction or proxy statement/consent
solicitation/prospectus, or determined if this proxy
statement/consent solicitation/prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
ADDITIONAL
INFORMATION
We engaged Georgeson Inc. to act as the information agent
in connection with the Series C Offer. Requests for
assistance or additional copies of this document or the related
Letter of Transmittal should be delivered to
Georgeson Inc., 199 Water Street,
26th
Floor, New York, NY, 10038-3560. Questions may be directed to
Georgeson Inc. at
(212) 440-9800
for banks and brokers, and at
(866) 695-6074
for all other callers (toll-free).
The date of this Proxy
Statement/Consent Solicitation/Prospectus is
[ ], 2011.
To the Holders of Our Series C Preferred Stock:
You are cordially invited to attend the special meeting of the
stockholders of NovaStar Financial, Inc., a Maryland corporation
(the Company), to be held on
[ ], 2011 at [ ]
a.m., 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 (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 Series C Preferred Stock, you will be
entitled to vote on proposals 1, 4 and 5 above. Depending
on the subject matter of any additional proposals properly
brought before the special meeting, you may also be entitled to
vote on other business properly brought before the meeting.
At the meeting, the holders of the Common Stock and the holders
of the Series D Preferred Stock will be entitled to vote on
all business properly brought before the meeting, including
proposals 1, 2, 3, 4 and 5 above. A proxy statement/consent
solicitation/prospectus describing the matters to be considered
at the special meeting to which you will be entitled to vote is
attached to this notice.
The Board of Directors is calling this special meeting in
connection with a recapitalization of the Company involving
(i) an exchange of all outstanding shares of Series D
Preferred Stock, by which the private holders of the
Series D 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 Series C
Offer and Series D Exchange. Please see the attached proxy
statement/consent solicitation/prospectus for additional
information related to these transactions.
The Board of Directors has fixed the close of business on
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
April [ ], 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/CONSENT
SOLICITATION/PROSPECTUS. IF YOU ATTEND THE SPECIAL MEETING, YOU
MAY VOTE IN PERSON EVEN IF YOU RETURNED A PROXY.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in the proxy statement/consent
solicitation/prospectus summary, including under the sections
titled Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Description of Business and
elsewhere in this proxy statement/consent
solicitation/prospectus constitute forward-looking statements.
These statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially
different from any future results, levels or activity,
performance, or achievements expressed or implied by such
forward-looking statements.
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/consent solicitation/prospectus has been
generally prepared as of April [ ], 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 all such information unless
required by law.
HOW TO
OBTAIN ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission
(SEC) a Registration Statement on
Form S-4
under the Securities Act with respect to the offered Common
Stock in this proxy statement/consent solicitation/prospectus.
Additional information is contained in the Registration
Statement and you should refer to the Registration Statement and
its exhibits for this information. The Registration Statement
and exhibits and schedules filed as a part thereof, may be
inspected, without charge, at the SEC public reference room
located at 100 F Street, NE, Washington, 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.
You may also access information about the Company at the SEC
website at:
http://www.sec.gov.
The SEC website contains reports, proxy and information
statements regarding companies that file electronically with the
SEC. Copies of all or any portion of the Registration Statement
may be obtained from the public reference section of the SEC
upon payment of the prescribed fees.
If you would like additional copies of this proxy
statement/consent solicitation/prospectus, or if you have
questions about the Series C Offer or Consent Solicitation,
you should contact:
Georgeson
Inc.
199 Water Street,
26th
Floor
New York, NY 10038-3560
Banks and Brokers Call (212) 440-9800
All Others Call Toll-Free (866) 695-6074
This proxy statement/consent solicitation/prospectus contains
certain business and financial information about the Company
that is not included in or delivered with this document. You may
request a copy of any document that we have filed with the SEC
at no cost, by writing the Company at 2114 Central Street,
Suite 600, Kansas City, Missouri 64108. To receive timely
delivery of the requested documents in advance of the Expiration
Date, your request should be received no later than
[ ], 2011.
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We have not authorized anyone to give any information or
make any representation about our Series C Offer or Consent
Solicitation that is different from, or in addition to, that
contained in this proxy statement/consent
solicitation/prospectus or in any of the materials that we have
incorporated into this proxy statement/consent
solicitation/prospectus. Therefore, if anyone gives you
information of this sort, you should not rely on it. If you are
in a jurisdiction where offers to exchange or sell, or
solicitations of offers to exchange or purchase, the securities
offered by this document are unlawful, or if you are a person to
whom it is unlawful to direct these types of activities, then
the Series C Offer and Consent Solicitation presented in
this document do not extend to you. We are not aware, however,
of any jurisdiction in which the transactions of this type would
be unlawful.
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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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EX-23.1 |
EX-99.1 |
iv
THE
SERIES C OFFER AND CONSENT SOLICITATION SUMMARY
This summary highlights the material information contained in
this document, but may not include all of the information that
you, as a holder of Series C Preferred Stock, would like to
know. To fully understand the Series C Offer and Consent
Solicitation, and for a more complete description of the legal
terms of the Series C Offer and Consent Solicitation, you
should carefully read this entire document, including the other
documents we refer to in this document.
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The Company |
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NovaStar Financial, Inc. |
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The Address and Phone Number of the Companys Principal
Executive Offices |
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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), a national residential appraisal and real estate
valuation management services company, and Advent Financial
Services LLC. 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 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, par value $0.01 (the Common Stock) 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 shares) will be issued to Series C
Holders (the Offer Consideration). Series C Holders
who otherwise properly submit a Letter of Transmittal but do not
elect either the Cash-and-Stock Option or the
Stock-Only Option will be deemed to have elected to
receive the Cash-and-Stock Option. See The Series C
Offer and Consent Solicitation General and
Series C Offer Consideration Explanation
and Examples. |
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Common Stock Outstanding Before the Series C
Offer |
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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 Series C
Offer |
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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 |
1
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Common Stock would be issued in the Series C Offer, and
90,353,253 shares of our Common Stock would be outstanding
after completion of the Series C Offer and the issuance of
37,161,600 shares of Common Stock in the Series D
Exchange. |
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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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Consent Solicitation |
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As part of the Series C Offer, we are soliciting the
consent of Series C Holders to the Series C Offer and
the Series D Exchange. 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. Series C Holders are required to deliver consents
to participate in the Series C Offer. Series C Holders
who properly submit a Letter of Transmittal and validly
surrender their Series C Preferred Stock for exchange in
the Series C Offer (who do not indicate Consent
Withheld) will be deemed to have consented to the
Series C Offer and the Series D Exchange. |
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Reasons for the Series C Offer |
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The Series C Offer is being conducted, along with the
Series D Exchange, 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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Offer Consideration |
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The total aggregate consideration offered is 43,823,600
newly-issued
shares of Common Stock and $1,623,000 in cash. Regardless of the
number of Series C Preferred Stock tendered for each
Consideration Option, the Company will not issue more than
43,823,600 shares of Common Stock or pay out more than
$1,623,000 in cash (other than any cash necessary to cash out
fractional shares). |
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Trading and Related Matters |
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The Common Stock issuable pursuant to the Series C Offer is
being registered under the Securities Act of 1933, as amended,
and will be freely tradable, except by our affiliates. |
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Differences in Rights of Our Common Stock and
Series C Preferred Stock |
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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. |
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Market Price Information |
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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
$[ ]. |
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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 the Companys 9.00% Series D1
Mandatory Convertible Preferred Stock, par value $0.01, for an
aggregate of 37,161,600 newly-issued shares of Common Stock and
$1,377,600 in cash. |
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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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Expiration Date |
|
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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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 closing of the Series C
Offer. We expect the closing to be within three business days
after the special meeting at which the Proposals (defined below)
will be considered. |
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How to Tender Series C Preferred Stock for
Exchange and Deliver Consents to the Series C
Offer |
|
For you to validly tender shares of Series C Preferred
Stock pursuant to our Series C Offer and Consent
Solicitation: |
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a properly completed and duly executed Letter of
Transmittal, along with any required signature guarantees, and
any other required documents, and certificates for tendered
shares of Series C Preferred Stock must be received by the
Exchange Agent at the address issued herein prior to the
Expiration Date; and
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a properly completed and duly executed proxy card
indicating Consent should be returned in the
accompanying return envelope.
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Fractional Shares |
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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
Companys average closing price over the
10-day
period preceding the Expiration Date. |
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Partial Tenders |
|
We will not accept partial tender of your shares. To participate
in the Series C Offer, a Series C Holder must tender
all Series C Preferred Stock held by that Series C
Holder. |
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Withdrawal Rights |
|
Your tender of shares of Series C Preferred Stock pursuant
to the Series C Offer and Consent Solicitation is
irrevocable, except that shares of Series C Preferred Stock
tendered pursuant to the Series C Offer and Consent
Solicitation may be withdrawn at any time prior to the
Expiration Date, and after [ ], 2011 for any
tendered shares of Series C Preferred Stock not yet accepted for
payments 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 |
3
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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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Conditions Precedent to the Series C Offer |
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Our 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 Amendments to our charter;
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participation by the holders of at least two-thirds
of the outstanding Series C Preferred Stock; and
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the effectiveness of the registration statement of
which the proxy statement/consent solicitation/prospectus is a
part.
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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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Consequences of Failure to Exchange Outstanding
Series C Preferred Stock |
|
If the Series C Offer closes, all shares of Series C
Preferred Stock that are not tendered in the Series C Offer
and Consent Solicitation will be automatically converted into
the right to receive, prorata per share of Series C
Preferred Stock that remain outstanding, the cash and Common
Stock remaining from the Offer Consideration after the
Series C Offer closes (the Remainder
Consideration). The Remainder Consideration will be
distributed to the non-tendering former Series C Holders as
soon as reasonably practical after, but no sooner than
11 business days after and no later than 180 calender 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, 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. The Series C Offer will not be
consummated unless at least
two-thirds
of the Series C Holders participate in the Series C
Offer. |
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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. |
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Interest of Certain Persons in the Series C Offer
and Consent Solicitation |
|
Howard Amster and Barry Igdaloff are directors of the Company
who were elected to serve on the board of directors of the
Company (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 207,649 shares
of Series C Preferred Stock, and as a registered investment
advisor, he controls an additional 100,125 shares. |
4
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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 a Voting
Agreement with the Company, dated December 10, 2010,
pursuant to which the Company agreed to include
Messrs. Amster and Igdaloff on the managements
proposed slate of directors presented to the Company
stockholders at the following annual stockholders meeting. |
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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. 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 Special
Factors Background of the Series C Offer and
Consent Solicitation. 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
of Directors beyond the 2011 Annual Stockholder Meeting. For
more information regarding the service on the Board of Directors
of Messrs. Amster and Igdaloff, see Directors,
Executive Officers and Control Persons Series C
Directors. |
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Material U.S. Federal Income Tax Considerations |
|
As discussed below under Material United States Federal
Income Tax Considerations Tax Consequences to
Holders of Series C Preferred Stock any loss on your
Series C Preferred Stock will not be recognized. In
addition, if you have gain on your Series C Preferred
Stock, you may recognize taxable income on the receipt of cash
and shares of Common Stock in exchange for shares of our
Series C Preferred Stock in the Series C Offer. We
urge you to carefully consider the discussion set forth below
under Material United States Federal Income Tax
Considerations Tax Consequences to Holders of
Series C Preferred Stock and to |
5
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consult your own tax advisors regarding the Series C Offer
in light of your own particular circumstances. |
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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). |
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Exchange Agent |
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Computershare Trust Company, N.A. |
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Transfer Agent |
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Computershare Trust Company, N.A. |
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Information Agent |
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Georgeson Inc. |
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Regulatory Approvals |
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We are not aware of any other material regulatory approvals
necessary to complete the Series C Offer, other than the
obligation to file a Schedule TO/13E-3 with the Securities
and Exchange Commission (the SEC) and to otherwise
comply with applicable securities laws. |
|
Appraisal Rights and Right to Petition for Fair
Value |
|
Neither the Series C Holders nor the Series D Holders
will 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. Under
Section 3-202(a)(4)
of the Maryland General Corporation Law (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 for
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. |
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Further Information |
|
If you have questions regarding the Series C Offer or the
Consent Solicitation or the procedures for exchanging your
Series C Preferred Stock in the Series C Offer, or if
you require additional Series C Offer materials, please
contact: |
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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 |
6
SUMMARY
HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL
INFORMATION
The following information reflects selected summary historical
and unaudited pro forma financial information of the Company to
give the effect of the Series C Offer and Series D
Exchange. The unaudited pro forma financial information is
presented for illustrative purposes only and does not
necessarily indicate the financial position or results that
would have been realized had the Series C 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.
|
The unaudited pro forma financial information does not reflect
the impact of the transactions in which the Company cancelled
the existing $78.1 million aggregate principal amount of
trust preferred securities and issued the Senior Notes as
described in the Recent Developments section. The
Company does not believe these transactions will have a material
impact on the unaudited pro forma financial information.
7
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As of and for the Years Ended December 31,
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2010
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2009
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2008
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2007
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2006
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Summary Historical Financial Information:
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Weighted average common shares outstanding-basic
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9,337,207
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9,368,053
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9,338,131
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9,332,405
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8,552,911
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Weighted average common shares outstanding-dilutive
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9,337,207
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9,368,053
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9,338,131
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9,332,405
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8,617,904
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Book value per common share-basic
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$
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(25.01
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)
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$
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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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$
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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
stockholders 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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)
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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
stockholders 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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)
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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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$
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(4.46
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)
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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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)
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(10.67
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)
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(4.46
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)
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8.73
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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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)
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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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)
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(6.66
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)
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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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)
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(A
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)
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(A
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)
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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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)
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(B
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(B
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)
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(B
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)
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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. |
8
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, owns 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
9
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
transaction has 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.
10
RISK
FACTORS
In deciding whether to tender your shares of Series C
Preferred Stock pursuant to the Series C Offer and Consent
Solicitation, you should read carefully this proxy
statement/consent solicitation/prospectus and the documents to
which we refer you. You should also carefully consider the
following factors.
Risks
Related to Series C Offer
The
Series C Offer and Series D Exchange may not benefit
us or our stockholders.
The Series C Offer and Series D Exchange may not
enhance stockholder value or improve the liquidity and
marketability of our Common Stock. As of 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 C Offer and Consent
Solicitation by the investment community, may cause a decrease
in the value of the Common Stock and impair its liquidity and
marketability. 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 C Offer and
Consent Solicitation and Series D Exchange, particularly if
the Series C Offer and Consent Solicitation and
Series D Exchange is not viewed favorably by the investment
community.
If
completion of our Series C Offer does not qualify as a
reorganization under the Internal Revenue Code of 1986, as
amended (the Code), you may be taxed on the full
amount of the consideration you receive from us.
We believe that the exchange of Common Stock and cash, if any,
for all of a holders Series C Preferred Stock
pursuant to the Series C Offer should be treated for
federal income tax purposes as a recapitalization within the
meaning of Section 368 of the Code. In such case,
Series C Holders who participate in the Series C Offer
will not recognize gain or loss other than to the extent that
they receive cash in the Series C Offer or securities for
accrued and unpaid dividends.
The tax treatment described above, however, is not free from
doubt. If we complete our Series C Offer in a manner in
which the Series C Offer does not qualify for the tax
treatment described above, you may be taxed on any gain you
realize up to the full Offer Consideration.
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 $55.6 million as of April 8, 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.
Tendering
stockholders may be required to return their consideration if a
court were to determine that the Series C Offer constituted
a fraudulent transfer under federal or state laws.
A payment or transfer of property can subsequently be voided if
a court finds that the payment or transfer constituted a
fraudulent transfer. There are generally two
standards used by courts to determine whether a transfer was
fraudulent under federal or state law.
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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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Litigation seeking to void the Series C Offer or
Series D Exchange as fraudulent transfers would have to be
commenced by our creditors or someone acting on their behalf,
such as a bankruptcy trustee. If such litigation is instituted,
we cannot assure you as to what standard a court would apply in
order to determine whether we were insolvent as of
the date the Series C Offer and Series D Exchange was
closed, or that a court would not determine that we were
insolvent on the date of closing. We can also not assure you
that a court would not determine that the Series C Offer or
Series D Exchange constituted fraudulent transfers on
another ground.
The definition of insolvent varies under three
potentially applicable statutes. The measure of insolvency for
purposes of the foregoing will vary depending upon the law of
the jurisdiction which is being applied. Under the Bankruptcy
Code, we would be considered insolvent if the sum of all our
liabilities is greater than the value of all our property at a
fair valuation. The foregoing standards are applied on a
case-by-case
basis to determine the insolvency of a particular person.
Because there can be no assurance which jurisdictions
fraudulent transfer law would be applied by a court, there can
be no assurance as to what standard a court would apply in order
to determine insolvency.
If a court determines the Series C Offer or Series D
Exchange constituted fraudulent transfers, the Series C
Offer or Series D Exchange could be voided. If the
Series C Offer is deemed a fraudulent transfer, holders of
the Series C Preferred Stock that successfully tender their
shares may be required to return the consideration received for
their Series C Preferred Stock, and such holders would be
returned to their original position as a holder of Series C
Preferred Stock.
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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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.
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 stockholders deficit, as well as
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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 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
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increased delinquencies and losses on residential mortgage loans
generally, especially where the aggregate loan amounts
(including any subordinate loans) are close to or greater than
the related property value. A borrowers ability to repay a
loan also may be adversely affected by factors beyond our
control, such as subsequent over-leveraging of the borrower,
reductions in personal incomes, and increases in unemployment.
In addition, interest-only loans, negative amortization loans,
adjustable-rate loans, reduced documentation loans, home equity
lines of credit and second lien loans may involve higher than
expected delinquencies and defaults. For instance, any increase
in prevailing market interest rates may result in increased
payments for borrowers who have adjustable rate mortgage loans.
Moreover, borrowers with option ARM mortgage loans with a
negative amortization feature may experience a substantial
increase in their monthly payment, even without an increase in
prevailing market interest rates, when the loan reaches its
negative amortization cap. The current lack of appreciation in
residential property values and the adoption of tighter
underwriting standards throughout the mortgage loan industry may
adversely affect the ability of borrowers to refinance these
loans and avoid default.
Each of these factors may be exacerbated by general economic
slowdowns and by changes in consumer behavior, bankruptcy laws,
and other laws.
To the extent that delinquencies or losses continue to increase
for these or other reasons, the value of our mortgage securities
and the mortgage loans held in our portfolio will be further
reduced, which will adversely affect our operating results,
liquidity, cash flows and financial condition.
Risks
Related to Our 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 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
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its ability to develop systems and a network of business
partners for the distribution of its products and 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.
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 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
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 our
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 our 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 stockholders.
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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 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 stockholders will bear the risk that our
future issuances, reclassifications and exchanges will reduce
the market price of our stock
and/or
dilute their interest in us.
Other
Risks Related to our Business
Our
ability to use our net operating loss carryforwards and net
unrealized built-in losses could be severely limited in the
event of certain transfers of our voting
securities.
We currently have recorded a significant net deferred tax asset,
before valuation allowance, almost all of which relates to
certain loss carryforwards and net unrealized
built-in-losses.
While we believe that it is more likely than not that we will
not be able to utilize such losses in the future, the net
operating loss carryforwards (NOLs) and net
unrealized built-in losses could provide significant future tax
savings to us if we are able to use such losses. However, our
ability to use these tax benefits may be impacted, restricted or
eliminated due to
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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.
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 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.
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 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 stockholder 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 our
stockholders, and that 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
19
stock and consult their own legal advisors
and/or the
Company to determine whether their ownership of the
Companys stock approaches the proscribed level.
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, our Senior
Notes and the Indentures restrict, among other things, our
ability and the ability of our subsidiaries to:
incur indebtedness;
create certain liens;
restrict payments by our subsidiaries to us;
restrict payments by us to our stockholders;
acquire our outstanding shares, or the shares of our
subsidiaries;
make payments on debt securities pari passu or
junior to the Senior Notes;
dispose of any equity interest in our subsidiaries;
and
merge, consolidate, transfer and/or sell assets.
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 stockholders. 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.
20
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 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.
21
QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETING, SERIES C OFFER AND
CONSENT SOLICITATION
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Q: |
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WHY IS THE COMPANY OFFERING TO EXCHANGE THE SERIES C
PREFERRED STOCK? |
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A: |
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The Series C Offer, along with the Series D Exchange,
are part of our recapitalization to improve our capital
structure. The Series C Preferred Stock was issued with an
annual dividend equivalent to 8.9% and the Series D
Preferred Stock was issued with an annual dividend equivalent to
9.0%. We have failed to make all dividend payments on the
Series C Preferred Stock and Series D Preferred Stock
since October 2007. Because we have not made all required
dividend payments on the Series D Preferred Stock, the
dividend rate increased to 13.0%, retroactive and compounded to
the beginning of the first quarter in which the dividends were
not paid. The unpaid dividends continue to accrue and have
resulted in the large increase in unpaid dividends recorded in
our consolidated balance sheets of $55.6 million as of
April 8, 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 8, 2011.
Therefore, the aggregate obligation relating to the preferred
stock as of April 8, 2011 was $182.9 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 $23.5 million in accrued and
unpaid dividends on the Series C Preferred Stock and
$32.1 million of accrued and unpaid dividends on the
Series D Preferred Stock (through April 8,
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. |
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Q: |
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WHY IS THE COMPANY SOLICITING CONSENTS OF THE SERIES C
HOLDERS? |
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A: |
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We are soliciting consent to the Series C Offer and the
Series D Exchange from all Series C Holders. The
Articles Supplementary governing the Series C
Preferred Stock contains certain conversion and exchange
restrictions. Thus, we are soliciting your consent to complete
the Series C Offer regardless of any applicable conversion
or exchange restrictions. Further, such consent is required to
pay cash in the Series D Exchange. |
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Q: |
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WHY IS THE COMPANY CALLING A SPECIAL MEETING? |
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A: |
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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. |
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Q: |
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WHAT WILL I RECEIVE IN EXCHANGE FOR MY SHARES OF
SERIES C PREFERRED STOCK? |
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A: |
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For each share of Series C Preferred Stock validly tendered
and not properly withdrawn by you, you will receive, at your
election, either (a) 3 shares of newly-issued Common
Stock and $2.00 in cash or (b) 19 shares of
newly-issued Common Stock. The actual mix of each Consideration
Option a Series C Holder will receive upon tender will be
subject to allocation and proration procedures intended to
ensure that, in the aggregate, 43,823,600 newly-issued shares of
Common Stock and $1,623,000 in cash (plus any cash needed to
cash out the fractional shares of Common Stock) will be issued
to Series C Holders. In the aggregate, 811,650 (27.15%) of
the Series C Shares will receive the Cash-and-Stock Option
and 2,178,350 (72.85%) of the Series C Shares will receive
the Stock-Only Option. |
22
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For example, if you owned 100 shares of Series C
Preferred Stock, the aggregate consideration you receive for
each Consideration Option elected based on a range of election
mixes for the Series C Holders in the aggregate would be as
follows: |
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%of Series C Preferred Stock
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What You Would Receive If You Own
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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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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 You Elected Cash
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If You Elected
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Stock
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Stock
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Stock
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Stock
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Stock
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Stock
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and Stock
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Stock Only
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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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2,990,000
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N/A
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73%
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N/A
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N/A
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$
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54.29
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1,466
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25
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%
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75
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%
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747,500
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2,242,500
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100%
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97%
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$
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200.00
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300
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$
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5.72
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1,854
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50
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%
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50
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%
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1,495,000
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1,495,000
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54%
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100%
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$
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108.58
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1,031
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$
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1,900
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75
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%
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25
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%
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2,242,500
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747,500
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36%
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100%
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$
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72.39
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1,321
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$
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1,900
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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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0
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27%
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N/A
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$
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54.29
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1,466
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N/A
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N/A
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Assumes all Series C Shares are tendered.
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Q: |
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WHY SHOULD I PARTICIPATE IN THE SERIES C OFFER AND
CONSENT SOLICITATION? |
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A. |
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If you participate in the Series C Offer and Consent
Solicitation, you can choose the Stock-Only Option or
Cash-and-Stock
Option for your Series C Preferred Stock. While the Company
may adjust the exact amount of your shares of Series C
Preferred Stock that would receive each Consideration Option,
depending on the Consideration Option elected by each of the
other participants in Series C Offer and Consent
Solicitation, you will have more control over the consideration
you will receive for your Series C Preferred Stock if you
participate in the Series C Offer and Consent Solicitation.
If you do not participate in the Series C Offer and Consent
Solicitation and the Series C Offer is consummated, you
will receive the Remainder Consideration after the Series C
Offer closes pro rata for each of your shares of Series C
Preferred Stock. You will have no control over the approximate
amount and mix of cash and Common Stock you will receive if you
do not participate. The Series C Offer will not be
consummated unless at least two-thirds of the Series C
Holders participate in the Series C Offer. |
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Further, if the Series C Holders do not participate and we
are not able to complete the recapitalization, we may not be
able to meet our financial obligations. This could result in a
material adverse effect to the Company, which could include
bankruptcy. |
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Q: |
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HOW DO I PARTICIPATE IN THE SERIES C OFFER? |
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A: |
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To tender your shares of Series C Preferred Stock, you
should complete and sign the Letter of Transmittal that will be
mailed to you in a separate mailing, and return it with your
share certificate to the Exchange Agent by mail at: |
Computershare
Trust Company, N.A.
c/o Voluntary
Corporate Actions
P.O. Box 43011
Providence, RI
02940-3011
Or, you may return it to the Exchange Agent by overnight mail at:
Computershare
Trust Company, N.A.
c/o Voluntary
Corporate Actions
Suite V
250 Royall Street
Canton, MA 02021
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If you desire to tender your shares of Series C Preferred Stock
and your certificates are not immediately available or time will
not permit your Letter of Transmittal, stock certificates or any
other required documents to reach the Exchange Agent prior to
the Expiration Date, your tender may nevertheless be effected if
all the conditions are met, including the submission of a
properly completed and duly executed |
23
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Notice of Guaranteed Delivery substantially in the form provided
by us herewith. See The Series C Offer and Consent
Solicitation Procedure for Tendering Shares and
Notice of Guaranteed Delivery. |
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Q: |
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MAY I MAKE ONE ELECTION TO RECEIVE ONE CONSIDERATION OPTION
FOR SOME OF MY SHARES OF SERIES C PREFERRED STOCK AND
ANOTHER ELECTION TO RECEIVE THE OTHER CONSIDERATION OPTION FOR
OTHER SHARES? |
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A: |
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No. You may choose to receive either the Stock-Only Option
for your shares of Series C Preferred Stock or the
Cash-and-Stock
Option for your shares of Series C Preferred Stock. If you
otherwise properly submit a Letter of Transmittal, but you do
not elect either the Cash-and-Stock Option or the
Stock-Only Option, you will be deemed to have
elected to receive the Cash-and-Stock Option. |
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|
Q: |
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CAN I TENDER ONLY SOME OF MY SERIES C PREFERRED
STOCK? |
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A: |
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No. If you want to participate in the Series C Offer, you
must tender 100% of your Series C Preferred Stock. Partial
tenders will not be accepted. |
|
Q: |
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WHEN AND HOW CAN I WITHDRAW TENDERED SHARES? |
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A: |
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Shares of Series C Preferred Stock tendered in the
Series C Offer and Consent Solicitation may be withdrawn by
you at any time prior to the Expiration Date. Your withdrawal
will only be effective if Computershare Trust Company, N.A.
receives a written notice of withdrawal at Computershare
Trust Company, N.A.,
c/o Voluntary
Corporate Actions, P.O. Box 43011, Providence, RI
02940-3011,
if by mail, or alternatively if by courier, at Computershare
Trust Company, N.A.,
c/o Voluntary
Corporate Actions, Suite V, 250 Royall Street, Canton, MA
02021. The written notice must contain your name, address,
social security number, the certificate number or numbers for
such shares and the name of the registered holder of the shares,
if different from the person who tendered the shares. |
|
Q: |
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WHAT ARE THE CONDITIONS TO THE SERIES C OFFER? |
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A: |
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Our Series C Offer is subject to several conditions. The
most significant conditions include: |
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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 to amend our charter;
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participation by the holders of at least two-thirds
of the outstanding Series C Preferred Stock; and
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the effectiveness of the registration statement of
which this proxy statement/consent solicitation/prospectus is a
part.
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Q: |
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DO I HAVE ANY APPRAISAL RIGHTS IN CONNECTION WITH THE
SERIES C OFFER AND CONSENT SOLICITATION? |
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A: |
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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. Under
Section 3-202(a)(4)
of 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 for
when the charter reserves the power to amend the charter to
alter contract rights. Article XV of our current charter
expressly reserves the power to amend the charter to alter the
contract rights of our existing stockholders. |
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Q: |
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WHICH PROPOSALS WILL I BE ENTITLED TO VOTE ON AS A
SERIES C HOLDER? |
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A: |
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As a Series C Holder, you will be entitled to vote on
Proposal 1 (to amend the charter of the Company to
eliminate the Series C Preferred Stock), Proposal 4
(to amend the charter of the Company to preserve the
Companys net operating loss carryforwards) and
Proposal 5 (to amend the charter of the Company to
incorporate certain technical amendments, 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). |
24
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Q: |
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HOW DO I GIVE THE COMPANY MY PROXY? |
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A: |
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You can give the Company your proxy by completing the proxy card
that accompanies this proxy statement/consent
solicitation/prospectus and returning it in the enclosed return
envelope. |
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Q: |
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HOW DO I CONSENT TO THE SERIES C OFFER AND SERIES D
EXCHANGE? |
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A: |
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You can consent to the Series C Offer and Series D
Exchange by completing the proxy card that accompanies this
proxy statement/consent solicitation/prospectus, marking
Consent where indicated, and returning it in the
enclosed return envelope. |
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Q: |
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WHO CAN I CONTACT WITH QUESTIONS ABOUT THE SERIES C
OFFER OR THE CONSENT SOLICITATION OR TO REQUEST ANOTHER COPY OF
THE PROXY STATEMENT/CONSENT SOLICITATION/PROSPECTUS? |
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A: |
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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
|
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|
Q: |
|
WHO CAN I CONTACT WITH QUESTIONS ABOUT THE SPECIAL
MEETING? |
|
A: |
|
You can contact the proxy solicitor engaged for this proxy
solicitation at: |
Georgeson
Inc.
199 Water Street,
26th
Floor
New York, NY 10038-3560
Banks and Brokers Call (212) 440-9800
All Others Call Toll-Free (866) 695-6074
THE
SPECIAL MEETING
Proposals
to Be Considered at the Special Meeting
The following proposals will be presented to the stockholders
entitled to vote thereon for consideration at the special
meeting:
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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 net operating loss carryforwards
(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.
25
As described in the subsections titled Record Date and
Voting Rights, Voting of Proxies and
Quorum and Votes Required for Approval of Proposals
below, as a Series C Holder you will be entitled to vote on
Proposal 1, Proposal 4 and Proposal 5, and
possibly other business properly brought before the special
meeting and you will not be entitled to vote on Proposal 2
or Proposal 3.
Reasons
for the Special Meeting and Consideration of the
Proposals
As described below in the Background of the Series C
Offer and Consent Solicitation subsection of this proxy
statement/consent solicitation/prospectus, the Series C
Offer, along with the Series D Exchange, are part of the
Companys recapitalization to improve the Companys
capital structure. If the Series C Offer and Series D
Exchange are consummated, approximately $23.5 million in
accrued and unpaid dividends on the Series C Preferred
Stock and $32.1 million of accrued and unpaid dividends on
the Series D Preferred Stock (through April 8,
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 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
Our Series C Preferred Stock is generally deemed a
non-voting security. However, as provided in the
Articles Supplementary to the charter governing the
Series C Preferred Stock, the Series C Holders are
entitled to vote their shares of Series C Preferred Stock
on limited items that may affect their rights. On
Proposal 1, Proposal 4, and Proposal 5 the
Series C Holders at the close of business on April 7,
2011, the record date, are entitled to vote at the special
meeting, and are thus entitled to notice thereof. As of the
record date, there were 2,990,000 shares of Series C
Preferred Stock outstanding.
Holders of shares of Common Stock and holders of Series D
Preferred Stock (the Series D Holders), in each
case at the close of business on April 7, 2011, the record
date, are entitled to notice of, and to vote on Proposal 1,
Proposal 2, Proposal 3, Proposal 4 and
Proposal 5 at the special meeting. On the record date,
9,368,053 shares of Common Stock and 2,100,000 shares
of Series D Preferred Stock were outstanding. This proxy
statement/consent solicitation/prospectus only solicits proxies
from the Series C Holders.
Each Series C Holder is entitled to one vote for each share
of Series C Preferred Stock held as of the record date.
Each holder of Common Stock is entitled to one vote for each
share of Common Stock held as of the record date. Each
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
26
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 Series C Preferred
Stock cannot be voted until either a signed proxy card is
returned to the Company or voting instructions are submitted by
using the Internet or by calling a specifically designated
telephone number. To give the Company the power to vote your
shares of Series C Preferred Stock at the special meeting,
the proxy card that accompanies this proxy statement/consent
solicitation/prospectus should be returned to the Company in the
enclosed return envelope. Specific instructions for record
holders of Series C Preferred Stock who wish to use the
Internet or telephone voting procedures are set forth on the
proxy card.
Shares of Series C Preferred 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 Series C Preferred Stock will be voted FOR
the approval of the amendment to the charter to eliminate
the Series C Preferred Stock;
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Shares of Series C Preferred Stock will be voted FOR
the approval of the amendment to the charter to preserve the
Companys net operating loss carryforwards; and
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Shares of Series C Preferred Stock will be voted FOR
the approval of certain technical amendments to the charter
in connection with the other Proposals, 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.
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The management and the Board of Directors know of no matters to
be brought before the special meeting other than as set forth
herein. To date, the Company has not received any stockholder
proposals. If any other matter of which the management and Board
of Directors are not now aware is properly presented to the
stockholders for action, it is the intention of the proxy
holders to vote in their discretion on all matters on which the
shares represented by such proxy are entitled to vote.
Revocability
of Proxy
The giving of your proxy does not preclude your right to vote in
person should you so desire. A proxy may be revoked at any time
prior to its exercise by delivering a written statement to the
Corporate Secretary that the proxy is revoked, by presenting a
later-dated proxy, or by attending the special meeting and
voting in person.
Broker
Non-Votes
If the shares you own are held in street name by a
bank, brokerage firm or other nominee, your nominee, as the
record holder of your shares, is required to vote your shares
according to your instructions. In order to vote your shares,
you will need to follow the directions your nominee provides to
you. If you do not
27
give instructions to your nominee, your nominee will not have
discretionary authority to vote your shares of Series C
Preferred 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 at the special meeting, and all
shares of the Series C Preferred Stock or Series D
Preferred Stock entitled to vote on certain proposals, a broker
non-vote will act as a vote against the Proposal(s)
for which you do not give instructions.
Quorum
and Votes Required for Approval of Proposals
The presence, in person or by proxy, of stockholders entitled to
cast a majority of all of the votes entitled to be cast
(including the Series D Preferred Stock on an as-converted
into Common Stock basis) constitutes a quorum for the
transaction of business at the special meeting. Both abstentions
and broker non-votes will be considered present and entitled to
vote for the purpose of determining the presence of a quorum.
Because there were 14,233,053 eligible votes as of the record
date, we will need at least 7,116,527 votes present in person or
by proxy at the special meeting for a quorum to exist.
Proposal 1: The affirmative vote of a
majority of all shares entitled to vote at the special meeting
(at which a quorum is present), which vote will include the
votes of the holders of our Common Stock, the Series C
Holders and the Series D Holders, and the affirmative vote
of 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 net
operating loss carryforwards.
Proposal 5: The affirmative vote of a
majority of all shares entitled to vote at the special meeting
(at which a quorum is present), which vote will include the
votes of the holders of our Common Stock, the Series C
Holders and the Series D Holders, and the affirmative vote
of 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
Neither the Series C Holders nor the Series D Holders
will 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. Under
Section 3-202(a)(4)
of the MGCL, stockholders generally have
28
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.
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.
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. 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 Special
Factors Background of the Series C Offer and
Consent Solicitation. 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.
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 or Proxy Statement, we will
promptly deliver it to you if you request it by writing to:
NovaStar Financial, Inc., Investor Relations, 2114 Central
Street, Suite 600, Kansas City, MO 64108. If you or another
stockholder of record with whom you share an address wish to
receive a separate Annual Report or Proxy Statement in the
future, you may telephone toll-free
1-800-884-4225
or write to Computershare, P.O. Box 43078, Providence, Rhode
Island
02940-3078.
Stockholders who currently receive multiple copies of the proxy
statement at their address and would like to request
householding of their communications should contact
their broker.
29
Solicitation
of Proxies
The costs of this solicitation of the Series C Holders and
of proxies of the Series C Holders by the Board of
Directors will be borne by the Company. Proxy solicitations will
be made by mail and also may be made by personal interview,
telephone, facsimile transmission and telegram. Banks, brokerage
house nominees and other fiduciaries are requested to forward
the proxy soliciting material to the beneficial owners and to
obtain authorization for the execution of proxies. 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
30
PROPOSAL 1
CHARTER AMENDMENT TO ELIMINATE THE SERIES C PREFERRED
STOCK
General
In connection with the Series C Offer, the Company has
determined to amend its charter to eliminate the Series C
Preferred Stock and the applicable Series C Preferred Stock
Articles Supplementary. The proposed Articles of Amendment
and Restatement attached to this proxy statement as
Appendix A implement such an amendment by deleting
from the Companys existing charter all references and the
terms applicable to the Series C Preferred Stock but for
conversion mechanics applicable to any shares Series C
Preferred Stock that are not tendered in the Series C
Offer. Such residual shares of Series C Preferred Stock
will be converted into the residual pro rata share of cash and
Common Stock remaining after completion of the Series C
Offer. The following description, which summarizes the amendment
to the Companys charter to eliminate the Series C
Preferred Stock and applicable Series C Preferred Stock
Articles Supplementary, is qualified in its entirety by
reference to the proposed Articles of Amendment and Restatement
attached to this proxy statement as Appendix A.
The Series C Offer and the other transactions contemplated
herein, including the Amendment and Restatement of the
Companys charter, will not occur if the charter amendment
to eliminate the Series C Preferred Stock is not approved
at the special meeting.
Elimination
of Series C Preferred Stock
If the Series C Offer and transactions contemplated thereby
are approved and effected, the holders of Series C
Preferred Stock electing to tender in the Series C Offer
will exchange their shares of Series C Preferred Stock for
3 shares of newly-issued Common Stock and $2.00 in cash
(the
Cash-and-Stock
Option) or 19 shares of newly-issued Common Stock
(the
Stock-Only
Option). The actual mix of cash and Common Stock a
Series C Holder will receive upon tender may be adjusted
according to the number of other Series C Holders who elect
the
Cash-and-Stock
Option and the number of other Series C Holders who elect
the Stock-Only Option. For more information regarding the
adjustment and the mix of Common Stock each Series C Holder
who tenders can anticipate receiving, see The
Series C Offer and Consent Solicitation
General and Series C Offer
Consideration Explanation and Examples.
Immediately following the completion of the Series C Offer,
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 electing the
Cash-and-Stock
Option that are tendered for exchange in the Series C
Offer, but in any event no more than 811,650.
Where Y equals the number of shares of Series C
Preferred Stock electing the Stock-Only Option that are tendered
for exchange in the Series C Offer, but in any event no
more than 2,178,350.
Each share of Series C Preferred Stock not tendered for exchange
will be automatically 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.
31
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 a majority of all shares entitled to
vote at the special meeting (at which a quorum is present),
which vote will include the votes of the holders of our Common
Stock, the Series C Holders and the Series D Holders,
and the affirmative vote of at least two-thirds of all
Series C Holders 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 charter amendment to the Companys
charter to eliminate the Series C Preferred Stock is
advisable and directed that it be submitted to the
Companys stockholders for their approval. The
Companys Board of Directors recommends that 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
contemplated herein, including the Amendment and Restatement of
the Companys charter, will not occur if the charter
amendment to eliminate the Series D Preferred Stock is not
approved at the special meeting.
Elimination
of Series D Preferred Stock
If the Series D Exchange and transactions contemplated
thereby are approved and effected, the holders of Series D
Preferred Stock will exchange all issued and outstanding shares
of the Series D Preferred Stock for an aggregate of
37,161,600 newly-issued shares of Common Stock and $1,377,000 in
cash. Under the Exchange Agreement 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, dated
December 10, 2010 (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.
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.
32
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 a majority of all shares entitled to
vote at the special meeting (at which a quorum is present),
which vote will include the votes of the holders of our Common
Stock and the Series D Holders, and the affirmative vote of
at least two-thirds of all Series D Holders is required to
approve the amendment to the charter to eliminate the terms of
the Series D Preferred Stock.
Board of
Directors Recommendation
As a Series C Holder, you will not be entitled to vote
on Proposal 2. The Board of Directors will recommend to the
holders of the Common Stock and the Series D Preferred
Stock that they vote for the charter Amendment to
eliminate the Series D Preferred Stock.
PROPOSAL 3
CHARTER AMENDMENT TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF CAPITAL STOCK OF THE COMPANY
General
In order to issue the number of shares of Common Stock called
for under the Series C Offer and the Series D
Exchange, the Companys charter must be amended to increase
the authorized capital stock. The proposed Articles of Amendment
and Restatement include such an amendment. The following
description, which summarizes the amendment to the
Companys charter to change the authorized capital stock,
is qualified in its entirety by reference to the proposed
Articles of Amendment and Restatement attached to this proxy
statement as Appendix A. Your attention is directed
to the Articles of Amendment and Restatement, generally, and
Article V thereof, specifically.
The Series C Offer, the Series D Exchange and the
other transactions contemplated herein, including the Amendment
and Restatement of the Companys charter, will not occur if
the charter amendment to increase the number of authorized
shares of capital stock of the Company is not approved at the
special meeting.
Changes
to Authorized Capital Stock
If approved, the amendment to the Companys charter to
change its authorized capital will provide that following the
filing of the Companys Articles of Amendment and
Restatement with the State Department of Assessments and
Taxation of Maryland, the Company will be authorized to issue an
aggregate of 120,000,000 shares of capital stock, par value
$0.01 per share, all of which initially will be classified as
Common Stock. The Board of Directors will, however, continue to
have the right to classify or reclassify any authorized but
unissued shares of capital stock.
Vote
Required
The affirmative vote of a majority of all shares entitled to
vote at the special meeting (at which a quorum is present),
which vote will include the votes of the holders of our Common
Stock and the Series D Holders, and the affirmative vote of
at least two-thirds of all Series D Holders 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
As a Series C Holder, you will not be entitled to vote
on Proposal 3. The Board of Directors will recommend to the
holders of the Common Stock and the Series D Preferred
Stock that they vote for the charter Amendment to
increase the number of authorized shares of Common Stock of the
Company.
33
PROPOSAL 4
CHARTER AMENDMENT TO PRESERVE THE COMPANYS NET OPERATING
LOSS CARRYFORWARDS
Description
of the Acquisition Restrictions
The following is a brief summary of the acquisition
restrictions, which are contained in Article Ten of the
Companys proposed Articles of Amendment and Restatement, a
copy of which is attached as Appendix A to this
document and is incorporated herein by reference. You are urged
to read the full text of the acquisition restrictions.
The proposed acquisition restrictions would generally apply
until the date that is 36 months and one day after
completion of the Series C Offer (or earlier, if the
Companys Board of Directors in good faith determines that
the acquisition restrictions are no longer in the best interests
of the Company and its 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 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
Company stock to the extent, generally, that exercise of the
option would 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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34
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 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 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, 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 Board of Directors determines to be in the best
interest of NFI and its stockholders, in light of all factors
deemed relevant, 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 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 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 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 Company stock or adversely affect the value of
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.
35
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.
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, 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. 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
36
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.
Vote
Required
The affirmative vote of a majority of all shares entitled to
vote at the special meeting (at which a quorum is present),
which vote will include the votes of the holders of our Common
Stock, the Series C Holders and the Series D Holders,
the affirmative vote of at least two-thirds of all Series C
Holders, and the affirmative vote of at least two-thirds of all
Series D Holders is required to approve the amendment to
the charter to preserve the Companys net operating loss
carryforwards.
Board 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 NET OPERATING LOSS CARRYFORWARDS
37
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
amendments to the Companys charter 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 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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38
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deleting the Articles Supplementary for the unissued
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 Maryland General Corporate Law statutes;
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internal cross-reference 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 amended and
restated charter 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 a majority of all shares entitled to
vote at the special meeting (at which a quorum is present),
which vote will include the votes of the holders of our Common
Stock and the Series D Holders, and the affirmative vote of
at least two-thirds of all Series D Holders 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.
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 is 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 Companys Board of Directors recommends
that stockholders vote in favor of the charter amendments in
connection with the other proposals and to remove provisions
previously required by the Companys former status as a
real estate investment trust.
YOUR
BOARD 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
39
OTHER
BUSINESS
The Board of Directors knows of no other matters which may be
presented for stockholder action at the meeting. However, if
other matters do properly come before the meeting, it is
intended that the persons named in the proxies will vote upon
them in accordance with their discretion.
STOCKHOLDER
PROPOSALS OR NOMINATIONS 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 of the Companys principal
executive offices regarding the requirements for making
stockholder proposals and nominating director candidates in the
future.
SPECIAL
FACTORS
Background
of the Series C Offer and Consent Solicitation
In 2007, to preserve liquidity, the Companys Board of
Directors suspended the payment of dividends on the
Companys Series C Preferred Stock and Series D
Preferred Stock. Since then, preferred dividends have accrued
and will continue to accrue at a rate of 8.90% per annum for the
Series C Preferred Stock and a default rate of 13.0%,
compounded quarterly, for the Series D Preferred Stock.
Dividends on the Series D Preferred Stock compound
quarterly, both with respect to the unpaid 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 8, 2011, the Company had $55.6 million in
accrued preferred dividends, $23.5 million of which related
to the Series C Preferred Stock and $32.1 million of
which related to the Series D Preferred Stock. As of
April 8, 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 8, 2011 was
$182.9 million.
The Company does not believe that it is likely to produce cash
flow before preferred dividends that 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 Series D Preferred Stock
mandatorily converts 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
40
be able to satisfy its obligation to its Series D Holders
at or before the conversion date, nor does it does 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:
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Gross and net margin for orders completed by StreetLinks;
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Forecasted income and cash receipts on the Companys
mortgage securities;
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Estimated costs of services, including cost of labor;
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Interest rates; and
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The cost of corporate overhead, most notably fees for
professionals services including audit, tax and legal.
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Projected
Operating Results Baseline Scenario (in
thousands):
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2011
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2012
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Service fee income
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$
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149,850
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$
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194,250
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Interest and other income
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7,146
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7,240
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Cost of services
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(125,996
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)
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(161,833
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Other expenses
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(19,838
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)
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(22,192
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)
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Net income attributable to non-controlling interests
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(2,088
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)
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(2,958
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)
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Net income
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$
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9,074
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$
|
14,507
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Net increase in cash and cash equivalents
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$
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14,051
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$
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18,159
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41
Projected
Operating Results Low Scenario (in
thousands):
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2011
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2012
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Service fee income
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$
|
111,000
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$
|
111,000
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Interest and other income
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1,755
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1,565
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Cost of services
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(93,625
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)
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(93,625
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Other expenses
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(15,514
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)
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(15,424
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)
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Net income attributable to non-controlling interests
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(1,462
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)
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(1,462
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)
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Net income
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$
|
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
|
|
|
17,486
|
|
|
|
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 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
|
42
|
|
|
|
|
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
Preferred 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
$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 Companys 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 Companys 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.
43
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 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 Internal Revenue Service (the
IRS) tax code, which would limit the value of the
Companys NOLs, should be avoided.
|
44
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 Special Factors 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 IRS 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;
|
45
|
|
|
|
|
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;
|
|
|
|
consideration of each factor above in light of a potential
transaction with the Series C Holders;
|
|
|
|
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
|
|
|
|
the conditions upon which the Series D Exchange would be
completed.
|
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 advisor, 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:
|
|
|
|
|
the proper amount of cash per share of Series C Preferred
Stock;
|
|
|
|
the proper number of shares of Common Stock to be issued for
each share of Series C Preferred Stock;
|
|
|
|
whether the mix of exchange consideration (cash and Common
Stock) would be fixed or variable;
|
|
|
|
|
|
whether to preserve continuity of the Board of Directors
following the recapitalization;
|
|
|
|
|
|
the elimination of the accumulated and unpaid dividends owed to
the outstanding Series D Preferred Stock;
|
|
|
|
consideration for preserving the Companys existing
NOLs; and
|
|
|
|
the likelihood of obtaining the required percentage to
consummate the contemplated recapitalization.
|
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 Special
Factors and the Fairness of the Series C Offer
to the Holders of Common Stock 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 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.
Note: Managements financial projections and liquidation
value estimates presented in this section and throughout the
proxy statement/consent solicitation/prospectus 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/consent solicitation/
46
prospectus 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/consent
solicitation/prospectus. 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
telephonically to review the terms of the proposed transaction.
The Special Committee reviewed and discussed the terms of the
Exchange Agreement, Voting Agreement, Registration Rights
Agreement, Articles of Amendment and Restatement, and the 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 the Fairness of the Series C
Offer to the Holders of Common Stock 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 14, 2011, and is incorporated
herein by reference.
On April 14, 2011, the Special Committee met telephonically 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
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 Fairness of the Series C Offer to the
Holders of Common Stock 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 14, 2011, and
is incorporated herein by reference.
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:
|
|
|
|
|
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.
|
47
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 Common 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 Offer to the Holders of Common Stock
section.
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.
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 telephonically
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.
Findings
and Conclusions of the Special Committee
After a thorough review of the above circumstances and factors
related to the Series C Offer 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 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 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 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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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
49
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 Fairness
of the Series C Offer to the Holders of Common Stock
section.
For the foregoing reasons and the reasons described in the
Fairness of the Series C Offer to the Holders of
Common Stock 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
After a thorough review of the circumstances and factors related
to the Series C Offer 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 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 Directors considered, and
conducted an independent review of, the following factors
related to the fairness of the Series C Offer to the
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
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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
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
51
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 Fairness of the Series C Offer to
the Holders of Common Stock section.
For the foregoing reasons and the reasons described in the
Fairness of the Series C Offer to the Holders of
Common Stock 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 to the
Series C Holders as to whether or not they should,
individually or in the aggregate, participate in the
Series C Offer.
FAIRNESS
OF THE SERIES C OFFER TO THE HOLDERS OF COMMON
STOCK
The fairness of the Series C Offer, and the
recapitalization as a whole, to the holders of Common Stock was
also an important consideration of the Special Committee and the
Board of Directors. 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 holders of Common
Stock from both substantive and a procedural points of view.
Though the Company will seek approval of the holders of the
Common Stock for the Proposals to be considered at the special
meeting, the Company will not seek consent from the holders of
the Companys Common Stock to approve the Series C
Offer or Series D Exchange. Nonetheless, the Board of Directors
recognizes that it owes important fiduciary duties to all of the
Companys stockholders. Further, the Company believes it is
important to present all material considerations by the Special
Committee and the Board of Directors to the Series C
Holders to allow the Series C Holders to make an informed
investment decision. Thus, the factors considered by the Special
Committee and the Board of Directors that relate to the fairness
of the Series C Offer to the holders of Common Stock are
set forth below.
Though the Series C Holders will hold Common Stock
immediately following the closing of the Series C Offer,
the fairness of the Series C Offer to the holders of Common
Stock is of limited relevance to the Series C Holders.
While the Special Committee and the Board of Directors each
concluded that the terms of the Series C Offer are fair to
the Companys unaffiliated Series C Holders and to the
holders of the Companys Common Stock, the interests of the
holders of the Common Stock may, in fact, be adverse to the
interests of the Series C Holders. The following section is
presented to provide the Series C Holders 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 Series C
Offer to the Board of Directors and before the Board of
Directors approved the Series C Offer.
52
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 met telephonically to review the terms of the
proposed recapitalization. At these meetings of the Special
Committee and the Board of Directors, the Special Committee and
the Board of Directors discussed certain factors that
specifically affected the fairness of recapitalization to the
holders of the Companys Common Stock.
On April 14, 2011, the Special Committee and the Board of
Directors each met telephonically 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 holders of the Companys Common Stock that were
discussed at the December 10, 2010 meetings.
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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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,
53
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/consent
solicitation/prospectus and is incorporated herein by reference.
Stifel has provided its consent to using such opinion in this
proxy statement/consent solicitation/prospectus. 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/consent
solicitation/prospectus. The summary of the opinion of Stifel
set forth in this proxy statement/consent
solicitation/prospectus 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 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 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 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, 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 and 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 and
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
55
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 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 or the Exchange Agreement other than the
recapitalization; (vii) any potential transaction by any
party to the proxy statement/consent solicitation/prospectus or
the Exchange Agreement which is not contemplated by the proxy
statement/consent solicitation/prospectus or the 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, 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
56
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 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 $324.4 million
at September 30, 2010;
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In order to achieve meaningful growth, the Company may need
access to capital in the future, which may be restricted until
the Company resolves its capital structure such that there is
positive common equity; and
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Negotiation of the terms of any potential exchange would be
influenced by the impact of an ownership change
under Section 382 of the Code, and the preference of the
preferred stockholders to receive some cash, balanced with
managements view of the Companys liquidity needs,
and the various stockholder approvals required to complete the
recapitalization.
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Financial Impact of the
Recapitalization. Stifel reviewed certain
estimated future operating and financial information based on
two cases of projected financial results developed by the
Company for the
12-month
periods ending December 31, 2011 and December 31, 2012
and the potential incremental financial impact of the
recapitalization which estimates are shown in the table below.
Based on this analysis, on a pro forma basis,
57
the recapitalization is forecasted to be accretive to the
Companys earnings per share for each of the
12-month
periods ending December 31, 2011 and December 31,
2012. The relevant estimates reviewed were as follows:
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2011
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2012
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Middle Case Adjusted Per Share Estimates
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Pro Forma Earnings (Loss) Per Share
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$
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0.12
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$
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0.18
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Status Quo Earnings (Loss) Per Share
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(0.94
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)
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(0.52
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Stressed Case Adjusted Per Share Estimates
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Pro Forma Earnings (Loss) Per Share
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$
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0.04
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$
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0.04
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Status Quo Earnings (Loss) Per Share
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(1.66
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)
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(1.85
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)
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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 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 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
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Book Value Per Share
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Pro Forma Book Value Per Share
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$
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(0.66
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)
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$
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(0.66
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Status Quo Book Value Per Share
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(24.54
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)
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(24.54
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Adjusted Book Value Per Share
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Pro Forma Adjusted Book Value Per Share
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$
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(0.15
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$
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1.17
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Status Quo Adjusted Book Value Per Share
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(19.69
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)
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(6.90
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Gross Deferred Tax Asset Per Share
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Pro Forma Gross Deferred Tax Asset Per Share
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$
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1.16
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$
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1.16
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Status Quo Gross Deferred Tax Asset Per Share
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11.21
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11.21
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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.
58
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
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High
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Value of the Companys Common Equity (in 000s)
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Pro Forma Liquidation Value of Common Equity*
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$
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(21,801
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$
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71,179
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Status Quo Liquidation Value of Common Equity*
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(195,687
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)
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(102,707
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)
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Value of the Companys Common Equity Per Share:
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Pro Forma Liquidation Value Per Share of Common Equity*
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$
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(0.24
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$
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0.79
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Status Quo Liquidation Value Per Share of Common Equity*
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(20.89
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)
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(10.96
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)
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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;
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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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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.
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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 respective affiliates
59
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. The Board of Directors requested a
bring-down opinion to be delivered on April 14, 2011
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/consent solicitation/prospectus and is
incorporated herein by reference. Stifel has provided its
consent to using such bring-down opinion in this proxy
statement/consent solicitation/prospectus. 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/consent
solicitation/prospectus. The summary of the bring-down opinion
of Stifel set forth in this proxy statement/consent
solicitation/prospectus 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:
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reviewed and analyzed a draft copy of the proxy
statement/consent solicitation/prospectus as of March 24,
2011;
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60
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reviewed and analyzed the Exchange Agreement dated
December 10, 2010;
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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;
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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
bring-down 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 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, the Exchange Agreement and the
recapitalization and other transactions and other matters
contained or contemplated therein.
61
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
and 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 and 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 letter. 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 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 or the Exchange Agreement other than the
recapitalization; (vii) any potential transaction by any
party to the proxy statement/consent solicitation/prospectus or
the Exchange Agreement which is not contemplated by the proxy
statement/consent solicitation/prospectus or the 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, 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 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,
62
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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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 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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63
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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 $324.4 million
at December 31, 2010;
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In order to achieve meaningful growth, the Company may need
access to capital in the future, which may be restricted until
the Company resolves its capital structure such that there is
positive common equity; and
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|
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Negotiation of the terms of any potential exchange would be
influenced by the impact of an ownership change
under Section 382 of the Code, and the preference of the
preferred stockholders to receive some cash, balanced with
managements view of the Companys liquidity needs,
and the various stockholder approvals required to complete the
recapitalization.
|
Financial Impact of the
Recapitalization. Stifel reviewed certain
estimated future operating and financial information based on
Managements Expected Case developed by the Company for the
12-month
periods ending December 31, 2011, December 31, 2012
and December 31, 2013 and the potential incremental
financial impact of the recapitalization which estimates are
shown in the table below. Based on this analysis, on a pro forma
basis, the recapitalization is forecasted to be accretive to the
Companys earnings per share for each of the
12-month
periods. The relevant estimates reviewed were as follows:
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2011
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2012
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2013
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Expected Case Adjusted Per Share Estimates
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Pro Forma Earnings (Loss) Per Share
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$
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0.08
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$
|
0.15
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|
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$
|
0.22
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|
Status Quo Earnings (Loss) Per Share
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(1.14
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)
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|
|
(0.58
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)
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|
|
(0.13
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)
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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 tax asset. Under GAAP, the Company
has provided a 100% valuation allowance against the deferred tax
asset.
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64
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Low
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High
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Book Value Per Share
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Pro Forma Book Value Per Share
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$
|
(0.65
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)
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$
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(0.65
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)
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Status Quo Book Value Per Share
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(24.96
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)
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|
(24.96
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)
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Adjusted Book Value Per Share
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Pro Forma Adjusted Book Value Per Share
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$
|
0.11
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|
$
|
1.34
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Status Quo Adjusted Book Value Per Share
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|
(17.63
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)
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|
(5.73
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)
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Gross Deferred Tax Asset Per Share
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Pro Forma Gross Deferred Tax Asset Per Share
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$
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1.26
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$
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1.26
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Status Quo Gross Deferred Tax Asset Per Share
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12.12
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12.12
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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
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High
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Value of the Companys Common Equity (in 000s)
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Pro Forma Liquidation Value of Common Equity*
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$
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(24,491
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)
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$
|
78,989
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Status Quo Liquidation Value of Common Equity*
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(194,828
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)
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(91,348
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)
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Value of the Companys Common Equity Per Share:
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Pro Forma Liquidation Value Per Share of Common Equity*
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$
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(0.27
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)
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$
|
0.87
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Status Quo Liquidation Value Per Share of Common Equity*
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|
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(20.80
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)
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|
|
(9.75
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)
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* |
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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 $0. |
Based on this analysis the recapitalization is expected to be
accretive or neutral to the Companys liquidation value per
common share.
Market Performance Summary. Stifel reviewed
the trading levels of the Common Stock and Series C
Preferred Stock during the period since the announcement of the
Series C Offer, as well as the implied aggregate value of
the equity securities of the Company.
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Pre-Announcement (12/10/10)
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Per Share
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Market Cap ($M)
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Exchange Offer
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Market Value
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Consideration
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of Exchange
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Security
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Price
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Value(1)
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|
Premium(2)
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Actual
|
|
Consideration(1)
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Series C Preferred Stock (Aggregate)
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|
$
|
1.75
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|
|
$
|
10.36
|
|
|
|
492
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%
|
|
$
|
5.2
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|
|
$
|
31.0
|
|
Series D Preferred Stock(3)
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|
2.11
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12.52
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N/A
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4.4
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26.3
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Common Stock
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0.67
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|
0.67
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6.3
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6.3
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|
65
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|
4/11/11
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Per Share
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|
Market Cap ($M)
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Exchange Offer
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Market Value
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|
Consideration
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|
of Exchange
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Security
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|
Price
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|
Value(1)
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|
Premium(2)
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Actual
|
|
Consideration(1)
|
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Series C Preferred Stock (Aggregate)
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|
$
|
5.15
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|
$
|
6.70
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|
30
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%
|
|
$
|
15.4
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$
|
20.0
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|
Series D Preferred Stock(3)
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|
|
6.32
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|
8.09
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N/A
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13.3
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|
17.0
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|
Common Stock
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|
|
0.42
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|
0.42
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|
3.9
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|
3.9
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(1) |
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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. |
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(2) |
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Premium defined as the premium of the implied consideration to
the current trading price of the security. |
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(3) |
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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 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:
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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;
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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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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%;
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The Companys Common Stock holders deficit per
share; and
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The illiquidity and volatility in the Common Stock.
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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
The Special Committee 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, and in the best interest of the Company and its
stockholders. In reaching this conclusion, the Special Committee
considered, and
66
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
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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.
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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.
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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 Common Stock
Holders
|
|
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|
|
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.
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Factors
Indicating Procedural Fairness to the Common Stock
Holders
|
|
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|
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.
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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 Common Stock
Holders
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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.
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The Special Committees conclusion that the Series C
Offer 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
Special Factors 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 Series C Offer to
the holders of Common Stock. In reaching its
67
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.
Findings
and Conclusions of the Board of Directors
The Board of Directors 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, 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
Series C Offer to the holders of the Common Stock:
Factors
Indicating Substantive Fairness to the Common Stock
Holders
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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.
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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.
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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 Common Stock
Holders
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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.
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Factors
Indicating Procedural Fairness to the Common Stock
Holders
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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.
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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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68
Factors
Indicating Procedural Non-Fairness to the Common Stock
Holders
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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.
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The Board of Directors conclusion that the Series C
Offer 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
Special Factors 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
Series C Offer to the holders of the Common Stock. 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
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 and is qualified in its
entirety by references to the full text of the Letter of
Transmittal which is incorporated herein by reference to this
proxy statement/consent solicitation/prospectus. Stockholders
are urged to read carefully the Letter of Transmittal.
General
We hereby offer, upon the terms and subject to the conditions of
the exchange offer described in this proxy statement/consent
solicitation/prospectus and the related Letter of Transmittal,
to exchange each share of our Series C Preferred Stock
validly tendered on or prior to the Expiration Date and not
withdrawn, for, at your election, either: (a) 3 shares
of newly-issued Common Stock and $2.00 in cash (the
Cash-and-Stock Option), or (b) 19 shares
of newly-issued Common Stock (the Stock-Only
Option). The
Cash-and-Stock
Option and the Stock-Only Option are the Consideration
Options.
The total aggregate consideration offered under this
Series C Offer is 43,823,600 newly-issued shares of Common
Stock and $1,623,000 in cash (plus any additional cash needed to
cash out the fractional shares of Common Stock) (the Offer
Consideration). Regardless of the number of Series C
Preferred Stock tendered for each Consideration Option, the
Company will not issue more than 43,823,600 shares of
Common Stock or pay out more than $1,623,000 in cash, other than
any cash needed to cash out fractional shares which total
includes the remaining Offer Consideration distributed to
non-tendering Series C Holders, if any. If you participate
in the Series C Offer, you must elect to receive either the
Cash-and-Stock
Option or the
Stock-Only
Option. You may not elect to tender some of your Series C
Preferred Stock for one option and some of your Series C
Preferred Stock for the other. If you otherwise properly submit
a Letter of Transmittal, but you do not elect either the
Cash-and-Stock Option or the Stock-Only
Option, you 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
69
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 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
your consent to complete the Series C Offer regardless of
any applicable conversion or exchange restrictions. Further,
such consent is required to pay cash in the Series D
Exchange. See The Series C Offer and Consent
Solicitation Consent Solicitation Provisions
for a list of the provisions requiring the consent. Consent can
be given to the Series C Offer and the Series D
Exchange by completing the proxy card accompanying this proxy
statement/consent solicitation/prospectus, marking
Consent where indicated, and returning it in the
enclosed return envelope.
We reserve the right to amend the Series C Offer or
Consent Solicitation, including the composition or amount of the
Offer Consideration, for any reason. If we so amend the
Series C Offer or Consent Solicitation, we will extend the
Series C Offer and Consent Solicitation for a period of ten
business days if the Series C Offer or Consent Solicitation
is scheduled to expire prior thereto.
The term Expiration Date means 12:00 midnight,
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 of which this proxy
statement/consent solicitation/prospectus is a part), extend the
Series C Offer and Consent Solicitation for a period of ten
business days if the Series C Offer and Consent
Solicitation are scheduled to
70
expire prior thereto and thereafter exchange all tendered
shares of Series C Preferred Stock; or (c) terminate
the Series C Offer and Consent Solicitation and exchange
none of the Series C Preferred Stock and return all
tendered shares of Series C Preferred Stock. We will not
accept for exchange any shares of Series C Preferred Stock
pursuant to the Series C Offer and Consent Solicitation
until such time as the registration statement has become
effective. See The Series C Offer and Consent
Solicitation Exchange of Shares; Offer
Consideration and Conditions of the
Series C Offer and Consent Solicitation
Effective Registration Statement. We expect that the
Series C Offer and Consent Solicitation will close promptly
after all of these conditions have been satisfied and after
approval of the Proposals at the special meeting, assuming such
approval is received.
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 your consent 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 to the Series C Offer and the
Series D Exchange by marking the box labeled
Consent on the proxy card accompanying this proxy
statement/consent solicitation/prospectus and mailing it to the
Company in the enclosed return envelope. You can withhold your
consent to the transactions by marking the box labeled
Consent Withheld on the accompanying proxy card.
Series C Holders who indicate Consent Withheld
to the Series C Offer and the Series D Exchange may
not participate in the Series C Offer whether or not such
Series C Holders otherwise properly submit a Letter of
Transmittal and surrender their Series C Preferred Stock. Series
C Holders who properly submit a Letter of Transmittal and
surrender their Series C Preferred Stock for exchange in the
Series C Offer (and who have not indicated Consent
Withheld) will be deemed to have consented to the Series C
Offer and Series D Exchange.
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 8, 2011, the
Series C Preferred Stock had accumulated dividends of
$23.5 million or $7.86 per share. By consenting to the
Series C Offer and the Series D Exchange, you waive
your right 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 8, 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, you waive your right 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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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.
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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 Corporation upon which like voting rights have
been conferred and are exercisable) shall be entitled to elect a
total of two additional directors to the Corporations
Board of Directors until all dividends accumulated on the
Series C Preferred Stock for the past dividend periods and
the then current dividend period shall have been fully paid or
authorized and a sum sufficient for the payment thereof set
aside for payment;
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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
Corporation or to reclassify any authorized equity securities of
the Corporation 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 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.
73
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.
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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% of Series C Preferred Stock
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What You Would Receive If You Own
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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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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 You Elected
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If You Elected
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Stock
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Stock
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Stock
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Stock
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Stock
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Stock
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Cash and Stock
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Stock Only
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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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2,990,000
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|
|
N/A
|
|
|
|
73
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
54.29
|
|
|
|
1,466
|
|
|
25
|
%
|
|
|
75
|
%
|
|
|
747,500
|
|
|
|
2,242,500
|
|
|
|
100
|
%
|
|
|
97
|
%
|
|
$
|
200.00
|
|
|
|
300
|
|
|
$
|
5.72
|
|
|
|
1,854
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
1,495,000
|
|
|
|
1,495,000
|
|
|
|
54
|
%
|
|
|
100
|
%
|
|
$
|
108.58
|
|
|
|
1,031
|
|
|
$
|
|
|
|
|
1,900
|
|
|
75
|
%
|
|
|
25
|
%
|
|
|
2,242,500
|
|
|
|
747,500
|
|
|
|
36
|
%
|
|
|
100
|
%
|
|
$
|
72.39
|
|
|
|
1,321
|
|
|
$
|
|
|
|
|
1,900
|
|
|
100
|
%
|
|
|
0
|
%
|
|
|
2,990,000
|
|
|
|
0
|
|
|
|
27
|
%
|
|
|
N/A
|
|
|
$
|
54.29
|
|
|
|
1,466
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Assumes all Series C Shares are tendered.
Fractional
Shares
Fractional shares of Common Stock will not be tendered in
exchange for Series C Preferred Stock. Instead, each
Series C Holder who otherwise would have been entitled to
receive a fraction of a share of the Companys Common Stock
will receive an amount in cash equal to the product obtained by
multiplying the fractional share interest to which such
Series C Holder would otherwise be entitled by the
Companys average closing price over the
10-day
period preceding the Expiration Date.
Partial
Tenders
Partial tenders will not be accepted. To participate in the
Series C Offer, a Series C Holder must tender all
Series C Preferred Stock held by that Series C Holder.
Extension,
Termination and Amendment
We expressly reserve the right, in our sole discretion, at any
time on or prior to the Expiration Date, to extend the period of
time during which the Series C Offer and Consent
Solicitation are to remain open by giving written notice of such
extension to the holders of Series C Preferred Stock. There
can be no assurance that we will exercise our rights to extend
the Expiration Date and this Series C Offer and Consent
Solicitation. If we amend the Series C Offer and Consent
Solicitation, we will extend the Expiration Date and this
Series C 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,
74
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
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. 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. We expect the closing
to be within three business days after the special meeting at
which the Proposals will be considered. 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, prorata 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. The
Series C Offer will not be consummated unless at least
two-thirds of the Series C Holders participate in the
Series C Offer.
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
75
received by the Exchange Agent listed on the Letter of
Transmittal. Because you must consent to the Series C Offer
and the Series D Exchange to participate in the
Series C offer, you must complete the proxy card that
accompanies this proxy statement/consent
solicitation/prospectus, marking Consent where
indicated, and return it in the envelope provided therewith.
Alternatively, if you do not submit a proxy card indicating
Consent, you will be deemed to have consented if you
properly submit a Letter of Transmittal and tender your Series C
Preferred Stock. If, however, you return your proxy card and you
indicate Consent Withheld you may not participate in
the Series C Offer. 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.
If you have already properly tendered your Series C
Preferred Stock for the Stock-Only Option or
Cash-and-Stock
Option, you do not need to take any further action to receive
your portion of the Offer Consideration (unless you indicated
Consent Withheld on a submitted proxy card). If you
wish to revoke your prior tender, you may do so by following the
instructions set forth above under Withdrawal
Rights. Any holder who withdraws a prior tender may tender
for different Offer Consideration by submitting a new Letter of
Transmittal to the Exchange Agent 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 Securities Exchange Act of 1934, as amended (each of
the foregoing being an Eligible Institution), in
cases where shares of Series C Preferred Stock are tendered
by a registered holder of Series C Preferred Stock who has
completed either the box entitled Special Payment
Instructions or the box entitled Special Delivery
Instructions on the Letter of Transmittal. If the
certificates are registered in the name of a person other than
the signer of the Letter of Transmittal, the certificates must
be endorsed or accompanied by appropriate stock powers, signed
exactly as the name or names of the registered owner or owners
appear on the certificates, with the signature(s) on the
certificates or stock powers guaranteed as described above.
If a Series C Holder desires to tender shares of
Series C Preferred Stock pursuant to the Series C
Offer, and such Series C Holders certificates are not
immediately available or time will not permit his, her or its
Letter of Transmittal, stock certificates or any other required
documents to reach the Exchange Agent prior to the Expiration
Date, that Series C Holders tender may nevertheless
be effected if all 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 five business days after the date of
execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be mailed 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
76
subject to backup federal income tax withholding by completing
the Substitute
Form W-9
included in the Letter of Transmittal.
All questions as to the validity, form, eligibility (including
time of receipt) and acceptance of any tender of Series C
Preferred Stock will be determined by us in our sole discretion,
and our determination will be final and binding. We reserve the
absolute right to reject any or all tenders determined by 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 should write to or telephone us at the
address or telephone number listed below about procedures for
obtaining a replacement certificate for such Series C
Preferred Stock.
Computershare Trust Company N.A.
P.O. Box 43078
Providence, Rhode Island
02940-3078
1-800-884-4225
Attention: Lost Securities
77
Conditions
of the Series C Offer and Consent Solicitation
Our obligation to accept Series C Preferred Stock pursuant
to the Series C Offer and Consent Solicitation is subject
to a number of conditions, which are described below:
Effective registration statement: The
Series C Offer is conditioned upon the Registration
Statement, of which this proxy statement/consent
solicitation/prospectus is a part, becoming effective. This is a
non-waivable
condition of the Series C Offer and Consent Solicitation.
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 this document if at any time on or
after the date of this Series C Offer and Consent
Solicitation and before the Expiration Date, any of the
following conditions have occurred:
An Adverse Proceeding. There shall have been
instituted or threatened or be pending any action or proceeding
before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other
person, in connection with the Series C Offer or Consent
Solicitation that is, or is reasonably likely to be, in our
reasonable judgment, materially adverse to our business,
operations, properties, condition (financial or otherwise),
assets, liabilities or prospects.
A Material Adverse Development in
Proceedings. There shall have occurred any
material adverse development, in our reasonable judgment, with
respect to any action or proceeding concerning us.
An Adverse Order or Law. An order, statute,
rule, regulation, executive order, stay, decree, judgment or
injunction shall have been proposed, enacted, entered, issued or
promulgated by any court or administrative agency or
instrumentality that, in our reasonable judgment, would or might
prohibit, prevent, restrict or delay consummation of the
Series C Offer or Consent Solicitation that is, or is
reasonably likely to be, materially adverse to our business,
operations, properties, condition (financial or otherwise),
assets, liabilities or prospects.
A Suspension of Trading, the Commencement of Hostilities, or
Other Serious Event. There shall have occurred:
|
|
|
|
|
any general suspension of, or limitation on prices for, trading
in securities in the United States securities or financial
markets,
|
|
|
|
any material adverse change in the price of the Series C
Preferred Stock in the United States or financial markets,
|
|
|
|
a material impairment in the trading market for securities,
|
78
|
|
|
|
|
a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States,
|
|
|
|
any limitation (whether or not mandatory) by any government or
governmental, administrative or regulatory authority or agency,
domestic or foreign, on, or other event that, in our reasonable
judgment, might affect, the extension of credit by banks or
other lending institutions,
|
|
|
|
a commencement of a war or armed hostilities or other national
or international calamity directly or indirectly involving the
United States,
|
|
|
|
any imposition of a general suspension or limitation of prices
quoted by Pink OTC Markets
inter-dealer
quotation service, or
|
|
|
|
in the case of any of the foregoing that exist on the date of
this document, a material acceleration or worsening of such
event.
|
The foregoing conditions are for our sole benefit and may be
asserted by us on or before the Expiration Date regardless of
the circumstances giving rise to any such conditions or may be
waived on or before the Expiration Date by us in whole or in
part, except to the extent that any such conditions arise out of
any action or inaction by us or any of our affiliates. The
failure by us to exercise any of the foregoing rights will not
be deemed a waiver of any such right, and each such right will
be deemed a continuing right which may be asserted at any time
and from time to time on or before the Expiration Date.
Waiver of
Conditions
We reserve the absolute right (but are not obligated), subject
to the rules and regulations of the SEC, to waive on or before
the Expiration Date any of the conditions of the Series C
Offer other than the condition regarding the effectiveness of
the registration statement.
If any of the waivable conditions are not satisfied prior to the
Expiration Date, we may, subject to applicable law:
|
|
|
|
|
terminate the Series C Offer and Consent Solicitation and
return all shares of Series C Preferred Stock to tendering
holders;
|
|
|
|
extend the Series C Offer and Consent Solicitation and
retain all tendered Series C Preferred Stock until the
extended Expiration Date;
|
|
|
|
amend the terms of the Series C Offer or Consent
Solicitation or modify the consideration to be paid by us
pursuant to the Series C Offer; or
|
|
|
|
waive the unsatisfied conditions with respect to the
Series C Offer and Consent Solicitation and accept all
Series C Preferred Stock tendered pursuant to the
Series C Offer and Consent Solicitation.
|
Source of
Funds
We intend to fund all cash payments to Series C Holders pursuant
to the Series C Offer, including any payments for
fractional shares of Common Stock, with cash on hand.
Fees and
Expenses
The Company will pay all expenses of the Series C Offer
including, but not limited to, the following estimated fees
incurred or to be incurred in the transaction:
|
|
|
|
|
Filing Fees
|
|
$
|
500
|
|
Legal Fees
|
|
$
|
260,000
|
|
Accounting and Appraisal Fees
|
|
$
|
60,000
|
|
Soliciting Expenses
|
|
$
|
15,000
|
|
Financial Advisor Expenses (including fairness opinion
preparation)
|
|
$
|
555,000
|
|
Printing Costs
|
|
$
|
100,000
|
|
|
|
|
|
|
Estimated Fees Total
|
|
$
|
990,500
|
|
79
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 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 Special
Factors Background of the Series C Offer and
Consent Solicitation. 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.
80
Appraisal
Rights and the Right to Petition for Fair Value
Neither the Series C Holders nor the Series D Holders
will 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. Under
Section 3-202(a)(4)
of 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 for
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.
Exchange
Agent
We have engaged Computershare Trust Company, N.A. to act as the
Exchange Agent for the Series C Offer and Consent
Solicitation.
81
CAPITALIZATION
The following table sets forth our capitalization as of
December 31, 2010 (in thousands):
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis to give effect to the Series C Offer
(assuming 27.15% of the outstanding shares of Series C
Preferred Stock (811,650 shares) are each exchanged for
$2.00 in cash and 3 shares of Common Stock and 72.85% of
the outstanding shares of Series C Preferred Stock
(2,178,350 shares) are each exchanged for 19 shares of
Common Stock); and
|
|
|
|
on a pro forma basis to give effect to (i) the
Series C Offer (assuming 27.15% of the outstanding shares
of Series C Preferred Stock (811,650 shares) are each
exchanged for $2.00 in cash and 3 shares of Common Stock
and 72.85% of the outstanding shares of Series C Preferred Stock
(2,178,350 shares) are each exchanged for 19 shares of
Common Stock) and (ii) the Series D Exchange (assuming
100% of the outstanding shares of Series D Preferred Stock
(2,100,000 shares) are each exchanged for $0.656 in cash
and 17.7 shares of Common Stock); and
|
|
|
|
|
|
the Common Stock value on April 8, 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.
|
You should read this information together with our financial
statements and the notes to those statements appearing elsewhere
in this proxy statement/consent solicitation/prospectus. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma Series C
|
|
|
|
|
|
|
|
|
|
Offer and
|
|
|
|
|
|
|
Proforma Series C
|
|
|
Series D
|
|
|
|
Actual
|
|
|
Offer Only
|
|
|
Exchange
|
|
|
Series C Preferred Stock (redeemable preferred stock, $25
liquidating preference per share, 2,990,000, 0, 0 shares,
issued and outstanding)
|
|
$
|
30
|
|
|
$
|
|
|
|
$
|
|
|
Series D Preferred Stock (convertible participating
preferred stock, $25 liquidating preference per share;
2,100,000, 2,100,000, 0 shares, issued and outstanding)
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
Common stock, 9,368,053, 53,191,653 and 90,353,253 issued and
outstanding
|
|
|
94
|
|
|
|
532
|
|
|
|
904
|
|
Additional paid-in capital
|
|
|
787,363
|
|
|
|
734,312
|
|
|
|
749,840
|
|
Accumulated deficit
|
|
|
(898,195
|
)
|
|
|
(825,554
|
)
|
|
|
(813,532
|
)
|
Accumulated other comprehensive income
|
|
|
4,411
|
|
|
|
4,411
|
|
|
|
4,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NFI stockholders deficit
|
|
|
(106,276
|
)
|
|
|
(86,278
|
)
|
|
|
(58,377
|
)
|
Noncontrolling interests
|
|
|
(267
|
)
|
|
|
(267
|
)
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
$
|
(106,543
|
)
|
|
$
|
(86,545
|
)
|
|
$
|
(58,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
The following table sets forth the actual accrued and unpaid
dividends and the aggregate liquidating preferences of the
Series C Preferred Stock and Series D Preferred Stock
on the same bases as the preceding table. The accrued and unpaid
dividends on the Series C Preferred Stock and the Series D
Preferred Stock are assumed to be forgiven when giving effect to
the Series C Offer and Series D Exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma Series C
|
|
|
|
|
|
|
Offer and
|
|
|
|
|
Proforma Series C
|
|
Series D
|
|
|
Actual
|
|
Offer Only
|
|
Exchange
|
|
Accrued and unpaid dividends on the Series C Preferred Stock
|
|
$
|
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
|
|
|
|
|
|
83
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 8, 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 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.
84
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
|
|
|
$
|
4.91
|
|
Second Quarter (through April 8, 2011)
|
|
$
|
5.34
|
|
|
$
|
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.
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.
85
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to our financial
condition and results of operations for the relevant periods and
is based on, and should be read in conjunction with, our
financial statements appearing elsewhere in this prospectus. The
following discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these
forward-looking statements as a result of a number of factors,
including those set forth under Risk Factors. See
Cautionary Note Regarding Forward-Looking Statements
for cautionary statements concerning
forward-looking
statements.
Executive
Overview
Corporate Overview, Background and Strategy
We are a Maryland corporation formed on September 13, 1996.
We own 88% of StreetLinks 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 March 10, 2011, Advents business
originated approximately 300,000 settlement products on behalf
of its distribution partners, principally independent income tax
preparation businesses. Advent has received approximately
$5.9 million in gross fees relating to these products,
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 receiving
deposits
86
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
stockholders). 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 stockholders.
|
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 stockholders, 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
87
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
have $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
stockholders 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. 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.
88
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-
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
|
|
|
|
MTA1
|
|
|
NHEL 2006-1
|
|
|
NHEL 2007-1
|
|
|
(A)
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
held-in-portfolio
|
|
$
|
528,388
|
|
|
$
|
399,507
|
|
|
$
|
1,033,296
|
|
|
$
|
(8,003
|
)
|
|
$
|
1,953,188
|
|
Allowance for loan losses
|
|
|
(147,147
|
)
|
|
|
(115,191
|
)
|
|
|
(440,563
|
)
|
|
|
|
|
|
|
(702,901
|
)
|
Accrued interest receivable
|
|
|
6,176
|
|
|
|
20,521
|
|
|
|
46,028
|
|
|
|
|
|
|
|
72,725
|
|
Real estate owned
|
|
|
11,842
|
|
|
|
17,919
|
|
|
|
25,548
|
|
|
|
|
|
|
|
55,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
399,259
|
|
|
|
322,756
|
|
|
|
664,309
|
|
|
|
(8,003
|
)
|
|
|
1,378,321
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed bonds
|
|
|
588,434
|
|
|
|
465,164
|
|
|
|
1,175,608
|
|
|
|
6,427
|
|
|
|
2,235,633
|
|
Due to servicer
|
|
|
17,298
|
|
|
|
32,835
|
|
|
|
81,639
|
|
|
|
|
|
|
|
131,772
|
|
Other liabilities
|
|
|
9,432
|
|
|
|
12,368
|
|
|
|
24,017
|
|
|
|
(41,770
|
)
|
|
|
4,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
615,164
|
|
|
|
510,367
|
|
|
|
1,281,264
|
|
|
|
(35,343
|
)
|
|
|
2,371,452
|
|
Gain on derecognition of securitization trusts
|
|
$
|
215,905
|
|
|
$
|
187,611
|
|
|
$
|
616,955
|
|
|
$
|
(27,340
|
)
|
|
$
|
993,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
89
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.
90
Total Stockholders 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
stockholders 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 As
discussed previously in this report under the heading
Impact of Derecognition of Securitized Mortgage Assets on
Our Financial Statements significant events that occurred
related to three securitized loan trusts. Prior to 2010, we
consolidated the financial statements of these trusts. Upon
derecognition during the first quarter of 2010, all assets and
liabilities of the trusts were removed from our 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.
91
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 October 18, 2010, as required by the Dodd-Frank Act, the
Federal Reserve Board issued an interim final rule which amended
Regulation Z under the Truth in Lending Act (the
Appraisal Rule). The Appraisal Rule was subject to a
public comment period until December 27, 2010. Compliance
with the Appraisal Rule, as amended to account for comments
received, becomes mandatory as of April 1, 2011. New
requirements under the Dodd-Frank Act and the Appraisal Rule
specific to residential real estate appraisals will likely
include, but not be limited to, the following:
appraisers must be paid customary and
reasonable compensation,
regulatory agencies must implement uniform appraisal
standards for all federal appraisals,
appraisal management companies must register with state
agencies, and
regulatory agencies must implement certain quality control
standards for automated valuation models.
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. Any impact of the
Dodd-Frank Act on the Company will not be fully determined until
all rules and regulations thereunder, including the Appraisal
Rule, have been fully implemented.
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.
92
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 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 1
|
|
|
|
|
|
|
|
|
After 5
|
|
Contractual Obligations
|
|
Total
|
|
|
Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
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
93
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 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 Item 3.
Legal Proceedings in this report, we are the subject of
various legal proceedings, the outcome of which is uncertain. We
may also face demands in the future that are unknown to us today
related to our legacy lending and servicing operations.
If the cash flows from StreetLinks and our mortgage securities
are less than currently anticipated, it would negatively affect
our results of operations, financial condition, liquidity and
business prospects. However management believes that its current
operations and its cash availability are sufficient for the
Company to discharge its liabilities and meet its commitments in
the normal course of business.
Overview
of Cash Flow for the Year ended December 31, 2010
Following are the primary and simplified sources of cash
receipts and disbursements, excluding the impact of the
securitization trusts. We have provided a summary of the cash
flow for the securitization trusts under Assets and
Liabilities of Consolidated 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
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 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:
|
|
|
|
|
As short-term interest rates declined and continue to remain
low, the net spread to us has increased and remains high;
|
|
|
|
Higher credit losses have decreased cash available to distribute
with respect to our securities; and
|
95
|
|
|
|
|
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.
|
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. 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:
|
|
|
|
|
The interest spread between the coupon net of servicing fees on
the underlying loans, the cost of financing, mortgage insurance,
payments or receipts on or from derivative contracts and bond
administrative costs;
|
|
|
|
Prepayment penalties received from borrowers who pay off their
loans early in their life; and
|
96
|
|
|
|
|
Overcollateralization which is designed to protect the primary
bondholder from credit loss on the underlying loans.
|
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
stockholders 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 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:
97
cumulative losses in recent years, losses expected in future
years, a history of operating losses or tax credits
carryforwards expiring, and adverse industry trends.
The weight given to the potential effect of negative and
positive evidence should be commensurate with the extent to
which it can be objectively verified. Accordingly, the more
negative evidence that exists requires more positive evidence to
counter, thus making it more difficult to support a conclusion
that a valuation allowance is not needed for all or some of the
deferred tax assets. A cumulative loss in recent years is
significant negative evidence that is difficult to overcome when
determining the need for a valuation allowance. Similarly,
cumulative earnings in recent years represent significant
positive objective evidence. If the weight of the positive
evidence is sufficient to support a conclusion that it is more
likely than not that a deferred tax asset will be realized, a
valuation allowance should not be recorded.
We examine and weigh all available evidence (both positive and
negative and both historical and forecasted) in the process of
determining whether it is more likely than not that a deferred
tax asset will be realized. We consider the relevancy of
historical and forecasted evidence when there has been a
significant change in circumstances. Additionally, we evaluate
the realization of our recorded deferred tax assets on an
interim and annual basis. We do not record a valuation allowance
if the weight of the positive evidence exceeds the negative
evidence and is sufficient to support a conclusion that it is
more likely than not that our deferred tax asset will be
realized.
If the weighted positive evidence is not sufficient to support a
conclusion that it is more likely than not that all or some of
our deferred tax assets will be realized, we consider all
alternative sources of taxable income identified in determining
the amount of valuation allowance to be recorded. Alternative
sources of taxable income identified in income taxes guidance
include the following: 1) taxable income in prior carryback
year, 2) future reversals of existing taxable temporary
differences, 3) future taxable income exclusive of
reversing temporary differences and carryforwards, and
4) tax planning strategies.
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 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.
98
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.
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.
99
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
100
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 8, 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 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, 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 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
101
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:
|
|
|
|
|
|
|
Name
|
|
Position With NovaStar Financial
|
|
Age
|
|
W. Lance Anderson
|
|
Chairman of the Board and Chief Executive Officer
|
|
|
50
|
|
Rodney E. Schwatken
|
|
Senior Vice President and Chief Financial Officer
|
|
|
47
|
|
Gregory T. Barmore
|
|
Director
|
|
|
69
|
|
Donald M. Berman
|
|
Director
|
|
|
59
|
|
Art N. Burtscher
|
|
Director
|
|
|
60
|
|
Edward W. Mehrer
|
|
Director
|
|
|
72
|
|
Howard M. Amster
|
|
Director
|
|
|
63
|
|
Barry A. Igdaloff
|
|
Director
|
|
|
56
|
|
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 Resource Mortgage Capital, Inc., a New York Stock
Exchange-listed real estate investment trust
(Dynex). In
102
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, 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. 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. McCarthy Group Advisors was acquired
by Westwood Holdings Group, Inc. (Westwood) in
November
103
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, the Company will be
comprised four classified directors (Messrs. Anderson,
Barmore, Burtscher and Mehrer) and Messrs. Amster and
Igdaloff will no longer serve on the Board of Directors.
Immediately following the filing of the Articles of
104
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.
105
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 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
|
|
Beneficial
|
|
|
|
|
Beneficial
|
|
Ownership of
|
|
Ownership of
|
|
|
|
|
Ownership of
|
|
Series C
|
|
Series D
|
|
|
|
|
Name and Address of
|
|
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)
|
|
|
272,904
|
|
|
|
2.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272,904
|
|
|
|
2.91
|
%
|
Rodney E. Schwatken(6)
|
|
|
49,438
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,438
|
|
|
|
*
|
|
Edward W. Mehrer(7)
|
|
|
40,288
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,288
|
|
|
|
*
|
|
Gregory T. Barmore(8)
|
|
|
26,270
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,270
|
|
|
|
*
|
|
Art N. Burtscher(9)
|
|
|
23,440
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,440
|
|
|
|
*
|
|
Donald M. Berman(10)
|
|
|
8,216
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,216
|
|
|
|
*
|
|
Howard M. Amster(11)
|
|
|
1,875
|
|
|
|
*
|
|
|
|
218,766
|
|
|
|
7.32
|
%
|
|
|
|
|
|
|
|
|
|
|
1,875
|
|
|
|
*
|
|
Barry A. Igdaloff(12)
|
|
|
1,875
|
|
|
|
*
|
|
|
|
307,774
|
|
|
|
10.29
|
%
|
|
|
|
|
|
|
|
|
|
|
1,875
|
|
|
|
*
|
|
All current directors and executive officers as a group
(8 persons)(13)
|
|
|
424,306
|
|
|
|
4.53
|
%
|
|
|
526,540
|
|
|
|
17.61
|
%
|
|
|
|
|
|
|
|
|
|
|
424,306
|
|
|
|
4.53
|
%
|
Massachusetts Mutual Life Insurance Company(14)
|
|
|
192,950
|
|
|
|
2.03
|
%
|
|
|
|
|
|
|
|
|
|
|
1,050,000
|
|
|
|
50.00
|
%
|
|
|
1,130,450
|
|
|
|
9.92
|
%
|
1295 State Street
Springfield, MA 01111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jefferies Capital Partners IV
LLC(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,050,000
|
|
|
|
50.00
|
%
|
|
|
937,500
|
|
|
|
8.22
|
%
|
520 Madison Avenue, 12th Floor New York, NY 10022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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 |
106
|
|
|
|
|
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. |
|
(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. |
107
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:
|
|
|
Name
|
|
Title
|
|
W. Lance Anderson
|
|
Chairman of the Board and Chief Executive Officer
|
Rodney E. Schwatken
|
|
Chief Financial Officer
|
Summary
Compensation Table
The following table sets forth the compensation of our Named
Executive Officers during the fiscal year ended
December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $10,000 for any named executive officer for
fiscal years 2008 and 2009 so the amounts have been excluded
from the Summary Compensation Table. |
108
Outstanding
Equity Awards at Fiscal Year-End 2010
The following table sets forth the outstanding stock options and
stock awards for each of our Named Executive Officers as of
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
Option Awards
|
|
|
Number of
|
|
|
Market
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
Value of
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Shares or
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Stock That
|
|
|
Units of
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
Have Not
|
|
|
Stock That
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Vested
|
|
|
Have Not
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Date
|
|
|
(#)(3)
|
|
|
Vested ($)(3)(4)
|
|
|
W. Lance Anderson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,375
|
(1)
|
|
|
|
|
|
|
48.88
|
|
|
|
12/18/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
3,465
|
|
|
|
|
|
|
|
168.52
|
|
|
|
2/7/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
6,101
|
|
|
|
|
|
|
|
124.84
|
|
|
|
2/8/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
32,927
|
|
|
|
|
|
|
|
16.72
|
|
|
|
3/14/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,999
|
|
|
|
9,660
|
|
Rodney E. Schwatken
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
168.52
|
|
|
|
2/7/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
124.84
|
|
|
|
2/8/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
643
|
|
|
|
|
|
|
|
16.72
|
|
|
|
3/14/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
|
|
|
112,500
|
(2)
|
|
|
0.97
|
|
|
|
11/10/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523
|
|
|
|
220
|
|
|
|
|
(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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant
|
|
|
Shares
|
|
|
|
Name
|
|
Date
|
|
|
Outstanding
|
|
|
Vesting Schedule
|
|
W. Lance Anderson
|
|
|
2/7/2005
|
|
|
|
1,100
|
|
|
100% on 2/7/2015
|
|
|
|
3/14/2007
|
|
|
|
19,221
|
|
|
100% on 3/14/2012
|
Rodney E. Schwatken
|
|
|
2/7/2005
|
|
|
|
44
|
|
|
100% on 2/7/2015
|
|
|
|
3/14/2007
|
|
|
|
376
|
|
|
100% on 3/14/2012
|
|
|
|
(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
109
of $2,500,000. For purposes of the bonus, Cash
Earnings means consolidated cash and cash equivalents as
of end of year, on an unrestricted basis, minus
|
|
|
|
|
consolidated cash and cash equivalents as of beginning of year,
on an unrestricted basis,
|
|
|
|
|
|
any cash transferred during the year from restricted to
unrestricted (such as cash serving as collateral for surety
bonds),
|
|
|
|
|
|
cash received on legacy mortgage securities, and
|
|
|
|
|
|
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 the
Companys 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:
|
|
|
|
|
failure, in any material respect, to perform his primary duties
as Chief Executive Officer in accordance with reasonable
standards established by the Company;
|
|
|
|
|
|
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;
|
110
|
|
|
|
|
breach of fiduciary duties in any material respect; or
|
|
|
|
|
|
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 Directors or any successor to the
Company, 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.
111
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:
|
|
|
|
|
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
|
|
|
|
the Companys material breach of any of the provisions of
the employment agreement.
|
Change in control shall be deemed to have
occurred if any of the conditions set forth below shall have
been satisfied:
|
|
|
|
|
any person as such term is used in
Sections 13(d) and 14(d) of the 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;
|
112
|
|
|
|
|
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
|
|
|
|
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.
|
113
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
$5,000, respectively.
All directors receive reimbursement of reasonable
out-of-pocket
expenses incurred in connection with meetings of the Board of
Directors. No director who is an employee of NovaStar Financial
will receive separate compensation for services rendered as a
director.
The following table sets forth the compensation for each of our
non-employee directors for the fiscal year ended
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
Option
|
|
|
|
|
|
|
Paid in Cash
|
|
|
Awards
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)(1)
|
|
|
($)
|
|
|
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)
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61,018
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Donald M. Berman
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42,500
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1,018
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(5)
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43,518
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Howard M. Amster
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45,500
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2,389
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(6)
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47,889
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Barry A. Igdaloff
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45,500
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2,389
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(7)
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47,889
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(1) |
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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. |
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(2) |
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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. |
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(3) |
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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. |
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(4) |
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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. |
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(5) |
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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. |
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(6) |
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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. |
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(7) |
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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 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 Special Factors Background
of the Series C Offer and Consent Solicitation. 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
116
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.
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
117
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 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.
118
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.
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
119
private placement not registered under the Securities Act of
1933, as amended (the Securities Act). MassMutual
and Jefferies Capital Partners each purchased 50% of such
securities and, as a result, each holds securities having more
than 5% of the total outstanding voting rights of the
Companys securities.
In connection with the Investors purchase of the
Series D Preferred Stock, the Company and the Investors
entered into a Standby Purchase Agreement (the Standby
Purchase Agreement), pursuant to which the Investors
committed to purchase up to $101,175,000 of the Companys
9.00% Series D2 Mandatory Convertible Preferred Stock (the
Series D2 Preferred Stock) upon completion of a
planned rights offering of such shares by the Company (the
Rights Offering). The Standby Purchase Agreement
terminated prior to issuance of any Series D2 Preferred
Stock as a result of the Companys cancellation of the
planned Rights Offering.
Also in connection with the Investors purchase of the
Series D Preferred Stock, the Company and the Investors
entered into a Registration Rights and Shareholders Agreement
(the Terminating Registration Rights Agreement).
Certain rights under the Terminating Registration Rights
Agreement relate to the Series 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 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
120
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.
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 Series D Exchange). The
shares of Common Stock issued in the Series D Exchange will
be issued pursuant to an exemption from registration under
Regulation D of the Securities Act and therefore will be
restricted securities. In the Exchange Agreement,
the Series D Holders have agreed to consent to and vote
their Series D Preferred Stock in favor of the Proposals.
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 NOLs, (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) (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 in the form as attached to the
Exchange Agreement (the Registration Rights
Agreement). The Registration Rights Agreement will
obligate the Company to register
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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 a voting agreement
with the Company (Voting Agreement). Under the terms
of the Voting Agreement, the Committed Directors have agreed to
be present, in person or by proxy, at each and every 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 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.
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Subject to our charter restrictions on the transfer of our
capital stock, each outstanding share of Common Stock entitles
the holder to one vote on all matters submitted to a vote of
stockholders, including the election of directors. Except as
provided with respect to any other class or series of capital
stock, the holders of our Common Stock, along with the holders
of our Series D Preferred Stock, will possess the exclusive
voting power. There is no cumulative voting in the election of
directors, which means that the holders of a majority of the
outstanding shares of Common Stock and Series D Preferred
Stock can elect all of the directors then standing for election,
and the holders of the remaining shares will not be able to
elect any directors.
Holders of our Common Stock have no preference, conversion,
exchange, sinking fund or redemption rights and have no
preemptive rights to subscribe for any of our securities.
Subject to our charter restrictions on the transfer of our
capital stock, all shares of Common Stock will have equal
dividend, liquidation and other rights.
Holders of our Common Stock are entitled to receive dividends
if, as and when authorized and declared by our Board of
Directors out of assets legally available for the payment of
dividends. Distributions to stockholders will generally be
subject to tax as ordinary income, although a portion of the
distributions may be designated by us as capital gain or may
constitute a tax-free return of capital. We generally do not
intend to declare dividends that would result in a return of
capital for tax purposes. Annually, our transfer agent will
furnish to each of our stockholders a statement of distributions
paid during the preceding year and their characterization as
ordinary income, capital gains or return of capital.
Power to
Reclassify Shares of Our Capital Stock; Issuance of Additional
Shares
Our charter authorizes our Board of Directors to classify and
reclassify from time to time any unissued shares of our capital
stock into other classes or series of capital stock, including
preferred stock, and to cause the issuance of such shares. Prior
to issuance of shares of each class or series of capital stock,
our Board of Directors is required by Maryland law and by our
charter to set, subject to our charter restrictions on the
transfer of our capital stock, the terms, preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each
class or series. When issued, all shares of our capital stock
offered by this proxy statement/prospectus will be duly
authorized, fully paid and nonassessable.
We believe that the power to issue additional shares of Common
Stock or preferred stock and to classify or reclassify unissued
shares of common or preferred stock and thereafter to issue the
classified or reclassified shares provides us with increased
flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. These
actions can be taken without stockholder approval, unless
stockholder approval is required by applicable law or the rules
of any national securities exchange or automated quotation
system on which our securities may be listed or traded. Although
we have no present intention of doing so, we could issue a class
or series of capital stock that could delay, defer or prevent a
transaction or a change in control of us that might involve a
premium price for holders of Common Stock or otherwise be in
their best interest.
Preferred
Stock
Our charter authorizes our Board of Directors to classify from
time to time any unissued shares of capital stock in one or more
classes or series of preferred stock and to reclassify any
previously classified but unissued preferred stock of any class
or series, in one or more classes or series. As of the date of
this prospectus, there are two classes of preferred stock
authorized and outstanding: our 8.90% Series C Cumulative
Redeemable 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.
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The Series C Preferred Stock, with respect to dividend and
distribution rights, ranks (a) senior to all classes or
series of our Common Stock and to all equity securities the
terms of which specifically provide that such equity securities
rank junior to the Series C Preferred Stock; (b) on a
parity with all equity securities issued by us other than those
referred to in clauses (a) and (c); and (c) junior to
all equity securities issued by us the terms of which
specifically provide that such equity securities rank senior to
such Series C Preferred Stock.
Upon our liquidation, dissolution or winding up, holders of
Series C Preferred Stock are entitled to receive from our
assets available for distribution an amount equal to $25.00 per
share, plus accumulated and unpaid dividends.
Holders of Series C Preferred Stock are entitled to
receive, when, as and if authorized and declared by our Board of
Directors out of assets legally available for the payment of
dividends, cumulative preferential cash dividends at the rate of
8.90% of the liquidation preference per annum (which is
equivalent to $2.225 per share). Dividends on the Series C
Preferred Stock are payable quarterly in arrears, generally on
the last calendar day of each March, June, September and
December. To the extent that dividends on the Series C
Preferred Stock have not been paid, no dividends may be
authorized or paid on, and generally, we may not redeem,
purchase or otherwise acquire for consideration, equity
securities ranking junior to or on parity with the Series C
Preferred Stock, including our Common Stock. We have not paid
dividends on our Series C Preferred Stock since October
2007. Accrued and unpaid dividends payable related to the Series
C Preferred Stock were approximately $23.5 million as of
April 8, 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.
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After 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 Five 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 the
Companys Common Stock at any time at the option of holders
of Series D Preferred Stock. Moreover, The Series D
Preferred Stock will convert into shares of 9.00% Series D2
Mandatory Convertible Preferred Stock, par value $0.01 per share
(the Series D2 Preferred Stock) automatically
on the date the requisite stockholders of the Company approve
certain anti-dilution protection for the Series D Preferred
Stock and Series D2 Preferred Stock that, upon such
stockholder approval, would apply in the event the we issue
additional Common Stock for a price below the price at which the
Series D Preferred Stock (or the Series D2 Preferred
Stock into which the Series D Preferred Stock has been
converted, if any) may be converted into Common Stock.
We may elect to convert all of the Series D Preferred Stock
(or the Series D2 Preferred Stock into which the
Series D Preferred Stock has been converted, if any) into
Common Stock, if at such time, the Companys Common Stock
is publicly traded and the Common Stock price is greater than
200% of the then-existing conversion price for 40 of 50
consecutive trading days preceding delivery of the forced
conversion notice. Adjusting for the
one-for-four
reverse stock split on July 27, 2007, the existing
conversion price of the Series D Preferred Stock is $28.00.
Given the current share price of the Companys Common
Stock, it is 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
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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 to the
distribution such holder would have been entitled to receive if
such holder had exercised its right to convert all of its
Series D Preferred Stock for shares of Common Stock.
Our Board of Directors has suspended the payment of dividends on
the Companys Series D Preferred Stock. We have not
paid dividends on our Series D Preferred Stock since July
2007. As a result, dividends continue to accrue on the
Series D Preferred Stock, and a dividend rate of 13.0%,
compounded quarterly, effective October 16, 2007 with
respect to all unpaid dividends and subsequently accruing
dividends. Accrued and unpaid dividends payable related to the
Series D Preferred Stock were approximately
$32.1 million as of April 8, 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 Company, if such amendment, alteration,
change, repeal or waiver adversely affects the rights of the
Series D Preferred Stock; or
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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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MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Tax
Consequences to Holders of Series C Preferred Stock
The following discussion sets forth the material United States
federal income tax consequences to holders of our Series C
Preferred Stock that participate in the Series C Offer.
This discussion is based upon the provisions of the Code, the
final, temporary and proposed Treasury Regulations promulgated
thereunder, and administrative rulings and judicial decisions
now in effect, all of which are subject to change (possibly with
retroactive effect) or different interpretations. This
discussion does not purport to deal with all aspects of
U.S. federal income taxation that may be relevant to an
investors decision to participate in the Series C
Offer, nor any tax consequences arising under the laws of any
state, local or foreign jurisdiction. This discussion is not
intended to be applicable to all categories of investors, such
as: dealers in securities or currency, financial institutions,
insurance companies, tax-exempt organizations, persons that hold
the preferred stock through an entity treated as a partnership
or other pass-through entities for United States federal
income tax purposes or as part of a straddle, hedging or
conversion transaction, or deemed sold via constructive sale, or
holders subject to the alternative minimum tax, which may be
subject to special rules.
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In addition, this discussion is limited to persons who hold our
Series C Preferred Stock as a capital asset
(generally, property held for investment) within the meaning of
Section 1221 of the Code.
As used herein, the term U.S. holder means a
beneficial owner of Series C Preferred Stock, that is, for
U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
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a corporation, or other entity taxable as a corporation for
U.S. federal income tax purposes, created or organized in
or under the laws of the United States or any political
subdivision thereof;
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a trust if it (1) is subject to the primary supervision of
a court within the United States and one or more
U.S. persons have the authority to control all substantial
decisions of the trust or (2) has a valid election in
effect under applicable U.S. Treasury Regulations to be
treated as a U.S. person; or
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an estate the income of which is subject to U.S. federal
income taxation regardless of its source.
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As used herein, the term
non-U.S. holder
means a beneficial owner of Series C Preferred Stock that
is neither a U.S. holder nor a partnership or an entity
treated as a partnership for U.S. federal income tax
purposes.
If a partnership (including any entity treated as a partnership
for U.S. federal income tax purposes) is a beneficial owner
of Series C Preferred Stock, the tax treatment of a partner
in the partnership generally will depend upon the status of the
partner and the activities of the partnership. A beneficial
owner that is a partnership and partners in such a partnership
should consult their tax advisors about the U.S. federal
income tax consequences of the Series C Offer.
This summary does not address any tax consequences under any
state, local or foreign laws or U.S. federal tax or other
laws other than those pertaining to the U.S. federal income
tax that may apply to holders.
Holders are urged to consult their own tax advisors with
respect to the application of the U.S. federal income tax
laws to their particular situations as well as any tax
consequences arising under the U.S. federal estate or gift
or other rules or under the laws of any state, local or foreign
taxing jurisdiction or under any applicable tax treaty.
This discussion is not binding on the IRS. We have not sought,
and will not seek, any ruling from the IRS with respect to the
statements made in the following discussion, applicable to
Holders of our Series C Preferred Stock that participate in
the Series C Offer, and there can be no assurance that the
IRS will not take a position contrary to such statements or that
any such contrary position taken by the IRS would not be
sustained by a court. There can be no assurance and none is
given that the IRS or the courts will not adopt a position that
is contrary to the statements contained in this discussion.
Accordingly, we urge you to consult your own tax advisor to
determine the specific consequences of participating in the
Series C Offer.
Consequences of Receiving Common Stock and Cash, if any, in
the Series C Offer.
General. The receipt of shares of our Common
Stock pursuant to the Stock-Only Option and Common Stock and
cash pursuant to the
Cash-and-Stock
Option, for shares of our Series C Preferred Stock, will be
treated as a recapitalization for U.S. federal income tax
purposes. Notwithstanding such treatment, as described below,
you may recognize taxable income as a result of the
Series C Offer.
Loss. As a result of the exchange being
treated as a recapitalization, a holder of Series C
Preferred Stock will not be entitled to recognize any loss
realized as a result of the Series C Offer.
Your tax basis in the shares of our Common Stock you receive
will be the same as the adjusted tax basis of the shares of
Series C Preferred Stock exchanged therefor, reduced by the
amount of any cash you receive in the Series C Offer. Your
holding period for the shares of Common Stock you receive will
include the holding period during which you held the shares of
our Series C Preferred Stock.
Recognized Gain. As a result of the exchange
being treated as a recapitalization, you will recognize gain
(Recognized Gain), if any, equal to the lesser of
(i) the amount of cash, if any, you receive in the
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Series C Offer; and (ii) the amount of gain
realized in the transaction. The amount of gain you
will realize will equal the amount by which
(a) the cash, if any, you receive in the Series C
Offer plus the fair market value of the shares of our Common
Stock you receive, exceeds (b) your adjusted tax basis in
your shares of Series C Preferred Stock. Your Recognized
Gain, if any, will be taxed either as a capital gain or a
dividend, as described in Dividends below. Your tax
basis in the shares of our Common Stock you receive will be the
same as the adjusted tax basis of the shares of Series C
Preferred Stock exchanged therefor, increased by your Recognized
Gain, if any, and reduced by the amount of any cash you receive
in the Series C Offer. Your holding period for the shares
of Common Stock you receive will include the holding period
during which you held the shares of our Series C Preferred
Stock. If you exchange more than one block of our
Series C Preferred Stock (that is, groups of Series C
Preferred Stock that you purchased at different times or at
different prices), you must calculate your Recognized Gain
separately on each block, and the results for each block may not
be netted in determining your overall Recognized Gain. Instead,
you will recognize gain on those shares on which gain is
realized.
Treatment of Recognized Gain. If you have
Recognized Gain as a result of your participation in the
Series C Offer, such Recognized Gain may be treated either
as dividend income or capital gain for U.S. federal income
tax purposes. The treatment of your Recognized Gain depends on a
determination of whether the cash you receive pursuant to the
exchange offer has the effect of a dividend distribution for
U.S. federal income tax purposes. In order to make this
determination, you will be treated under Section 356(a)(2)
of the Code as if (i) you had not participated in the
Series C Offer and you instead exchanged all of your shares
of Series C Preferred Stock for shares of our Common Stock
and (ii) immediately thereafter we redeemed a portion of
your shares of our Common Stock in exchange for cash (in an
amount equal to the cash you received in the Series C
Offer). The cash you receive in this deemed redemption will be
taxed as capital gain if the cash you receive (a) is
substantially disproportionate with respect to you,
(b) results in a complete redemption of your
interest in us or (c) is not essentially equivalent
to a dividend with respect to you. These tests (the
Section 302 tests) are explained more fully
below.
If this deemed redemption does not meet any of the
Section 302 tests, you will be treated as receiving a
dividend equal to the amount of your Recognized Gain, assuming
that your ratable share of our earnings and profits exceeds such
Recognized Gain. See Dividends below. If your
Recognized Gain exceeds your ratable share of our earnings and
profits, if any, such excess will first reduce your basis in the
Common Stock, and any further excess will be taxed as a capital
gain.
Dividends. The amount of gain or deemed
distribution, if any, that is characterized as a dividend to an
exchanging holder is limited to the extent we have current or
accumulated earnings and profits. The calculation of earnings
and profits for federal income tax purposes involves difficult
factual and legal determinations. We do not believe we had
accumulated earnings and profits for the taxable periods through
December 31, 2009 and have not yet determined whether we
had earnings and profits for the taxable year which ended on
December 31, 2010. For these purposes, current earnings and
profits means our earnings and profits for the current taxable
year which will not end until December 31, 2011. We are
unable to predict whether we will have earnings and profits for
2011. Accordingly, if there is gain that is characterized as a
dividend or an amount treated as a deemed distribution, we are
unable to determine how much, if any, will be taxable as a
dividend.
Under current law, if you are an individual holder of our
Series C Preferred Stock, and you are treated as receiving
a dividend, as described above, such dividend generally will
qualify for a special 15% tax rate on qualified dividend
income through December 31, 2012. If you are a
corporate holder of our Series C Preferred Stock, and you
are treated as receiving a dividend, as described above, you may
be permitted to deduct from gross income, subject to certain
limitations (relating to, among other things, your holding
period for your shares of our preferred stock and whether you
financed your purchase of such preferred stock with debt),
70 percent of the amount of cash you receive (the
dividend received deduction). However,
Section 1059(e) of the Code may cause the entire amount of
cash received by you to be treated as an extraordinary
dividend, with the result that, to the extent you take a
dividend received deduction with respect to the cash you
receive, you will be required to reduce the tax basis of your
shares of our common
128
stock (but not below zero) by the amount of the dividend
received deduction. If the amount of your dividend received
deduction were to exceed the basis of your remaining shares of
Common Stock, the excess generally would be taxed to you as gain
on the sale of such stock.
Section 302 Tests. One of the following
tests must be satisfied in order for the receipt of cash
pursuant to the deemed redemption, as described above, to be
taxed as capital gain, rather than as a dividend distribution,
for U.S. federal income tax purposes.
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The Receipt of Cash is Substantially Disproportionate as to
You. The receipt of cash by you will be
substantially disproportionate with respect to you if
(i) your percentage of our total outstanding voting shares
that you actually and constructively own immediately following
the exchange offer is less than 80% of the percentage of our
total outstanding voting shares that you actually and
constructively own immediately before the exchange offer and
(ii) you have a similar reduction in your percentage
ownership of our total outstanding Common Stock.
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Your Interest in the Company is
Terminated. The receipt of cash by you will be a
complete redemption of your interest in us if, as a result of
the exchange offer, you no longer actually or constructively own
any of our outstanding shares of stock.
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The Receipt of Cash by You is Not Essentially Equivalent to a
Dividend. The receipt of cash by you will not be
essentially equivalent to a dividend if the exchange offer
results in a meaningful reduction of your proportionate interest
in our stock. Whether the receipt of cash by you results in a
meaningful reduction of your proportionate interest in our stock
will depend on your particular facts and circumstances. However,
in certain circumstances, in the case of a stockholder holding a
small minority (e.g., less than 1%) of our stock, even a small
reduction may satisfy this test.
|
Constructive Ownership of Our Stock. In
determining whether any of the Section 302 tests is
satisfied, you must take into account not only shares of our
stock that you actually own, but also shares of our stock that
you constructively own within the meaning of Section 318 of
the Code. Under Section 318 of the Code, you may
constructively own shares of our stock actually owned, and in
some cases constructively owned, by certain related individuals
and certain entities in which you have an interest, or that have
an interest in you.
Contemporaneous Dispositions and Acquisitions of Our
Stock. Contemporaneous dispositions or
acquisitions of shares by you (or persons or entities related to
you) may be deemed to be part of a single integrated transaction
which will be taken into account in determining whether any of
the Section 302 tests has been satisfied with respect to
shares of our preferred stock exchanged pursuant to the exchange
offer. For example, if you sell shares of our preferred stock to
persons other than us at or about the time you participate in
the exchange offer, and these transactions are part of an
overall plan to reduce or terminate your proportionate interest
in our stock, then the sales to persons other than us may, for
U.S. federal income tax purposes, be integrated with your
exchange of shares of our preferred stock pursuant to the
exchange offer and, if integrated, should be taken into account
in determining whether you satisfy any of the Section 302
tests described above.
If you are contemplating participating in the exchange offer, we
urge you to consult your tax advisors regarding the
Section 302 tests, including the effect of the attribution
rules and the possibility that a substantially contemporaneous
sale of shares of our preferred stock to persons other than us
may assist in satisfying one or more of the Section 302
tests.
Treatment of Accrued and Unpaid Dividends on Series C
Preferred Stock. As noted above, the receipt of
shares of our Common Stock and cash pursuant to the
Series C Offer for shares of our Series C Preferred
Stock will be treated as a recapitalization for
U.S. federal income tax purposes. At the time of the
Series C Offer, our Series C Preferred Stock will have
accrued but unpaid dividends (a dividend arrearage).
U.S. Treasury regulations provide that despite the fact
that the exchange of Series C Preferred Stock for Common Stock
is a tax-free recapitalization it may nonetheless result in a
deemed distribution if (i) the recapitalization is
conducted pursuant to a plan to periodically increase a
stockholders proportionate interest in the assets or
earnings and profits of the Company or (ii) a stockholder
owning preferred stock with dividends in arrears exchanges the
preferred stock for other stock in a recapitalization and the
exchange results in a proportionate increase in the exchanging
preferred stockholders interest in the assets or earnings
and
129
profits of the corporation. We do not believe the
recapitalization would be considered to meet (i) above. With
respect to (ii), under U.S. Treasury regulations, such
proportionate increase occurs where either the fair market value
or liquidation preference of the stock received exceeds the
issue price of the Series C Preferred Stock surrendered.
The amount of such deemed distribution is equal to the lesser of
(i) the excess of the fair market value or the liquidation
preferences of the stock received over the issue price of the
stock surrendered or (ii) the amount of the dividends in
arrears. Any such distribution is treated as a dividend
distribution to the extent of the Companys earnings and
profits and then as a tax-free return of basis. To the extent
that the amount of the deemed distribution exceeds basis, the
excess would be taxed as a capital gain. For a more detailed
explanation of the taxation of distributions, see
Consequences of Ownership of Shares of our Common
Stock, below.
Consequences
of Ownership of Shares of Our Common Stock
Distributions paid by us out of our current or accumulated
earnings and profits (as determined for U.S. federal income
tax purposes) on Common Stock received as part of the
Series C Offer will constitute a dividend and will be
includible in your income when received. For a more detailed
explanation of the taxation of dividends, see
Dividends above. Distributions in excess of our
current or accumulated earnings and profits will be treated as a
return of capital to the extent of your basis in your Common
Stock and thereafter, as capital gain.
Upon a disposition of our Common Stock, you generally will
recognize capital gain or loss equal to the difference between
the amount realized and your adjusted tax basis in the Common
Stock. Such capital gain or loss generally will be long-term
capital gain or loss if you held such Common Stock for more than
one year on the date of such disposition. Long-term capital
gains of a U.S. holder that is an individual are eligible
for reduced rates of taxation. The deductibility of capital
losses is subject to limitations.
Backup
Withholding and Information Reporting
Generally, U.S. holders will be subject to information
reporting on the cash received in the Series C Offer unless
such U.S. holder is a corporation or other exempt
recipient. In addition, unless a U.S. holder is a
corporation or other exempt recipient, backup withholding
(currently at a rate of 28%) may apply with respect to the
amount of cash received if the U.S. holder:
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fails to furnish a taxpayer identification number
(TIN) within a reasonable time after a request
therefore;
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furnishes an incorrect TIN;
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is notified by the IRS that it failed to report interest or
dividends properly; or
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fails, under certain circumstances, to provide a certified
statement, signed under penalty of perjury, that the TIN
provided is correct and that such U.S. holder is not
subject to backup withholding.
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Backup withholding is not an additional tax. Any amount withheld
from a payment to a U.S. holder under these rules will be
allowed as a credit against such holders U.S. federal
income tax liability and may entitle such holder to a refund,
provided that the required information is furnished to the IRS
in a timely manner.
Certain penalties apply for failure to furnish correct
information and for failure to include reportable payments in
income. Each holder should consult with such holders own
tax advisor as to such holders qualification for exemption
from backup withholding and the procedure for obtaining such
exemption. Tendering holders of Shares, that are
U.S. persons, may be able to prevent backup withholding by
completing the Substitute
Form W-9
included in the Letter of Transmittal.
Non-U.S.
Holders Participating in the Series C Offer
The following discussion applies to you if you are a
non-U.S. holder
of our Series C Preferred Stock that participates in the
exchange offer. Special rules may apply to you and the tax
consequences of participating in
130
the Series C Offer may be materially different than those
described below if you are a controlled foreign
corporation or a passive foreign investment
company, or you own more than five percent of our
Series C Preferred Stock, own more than five percent of our
Common Stock or are otherwise subject to special treatment under
the Code. If you are or may be subject to these special rules,
you are strongly encouraged to consult your own tax advisor to
determine the particular U.S. federal, state and local and
other tax consequences applicable to you of participating in the
exchange offer.
Participation in the Series C Offer. If
you are a
non-U.S. holder,
we or our withholding agent will withhold 30% of the amount of
any cash proceeds you receive in the Series C Offer in
order to satisfy certain withholding requirements, unless you
certify your
non-U.S. status
under penalties of perjury (i.e., by providing the appropriate
properly executed IRS
Form W-8),
or otherwise establish an exemption. Backup withholding is
required only on payments that are subject to the information
reporting requirements, discussed above, and only if other
requirements are satisfied. Backup withholding is not an
additional tax. Any amount withheld from a payment to a
non-U.S. holder
under these rules will be allowed as a credit against such
holders U.S. federal income tax liability and may
entitle such holder to a refund, provided that the required
information is furnished timely to the IRS.
Disposition of Common Stock. You generally
will not be subject to U.S. federal income tax on any gain
recognized on the sale or other disposition of Common Stock
unless:
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|
the gain is considered effectively connected with your conduct
of a trade or business within the United States; or
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you are an individual who holds the Common Stock as a capital
asset and are present in the United States for 183 or more
days in the taxable year of the sale or other disposition.
|
Information Reporting and Backup Withholding
Tax. We must report annually to the IRS and to
each of you the amount of dividends paid to you and the tax
withheld with respect to those dividends, regardless of whether
withholding was required. Copies of the information returns
reporting those dividends and withholding may also be made
available to the tax authorities in the country in which you
reside under the provisions of an applicable tax treaty or other
applicable agreements.
You generally will be subject to backup withholding tax
(currently at a rate of 30%) with respect to dividends paid on
shares of our stock unless you certify your
non-U.S. status.
The payment of proceeds of a sale of Common Stock effected by or
through a U.S. office of a broker also is subject to both
backup withholding and information reporting unless you certify
your
non-U.S. status
or you otherwise establish an exemption. You generally can
satisfy the certification requirement by providing the
appropriate
Form W-8,
as applicable. In general, backup withholding and information
reporting will not apply to the payment of the proceeds of a
sale of shares of our stock by or through a foreign office of a
broker. If, however, such broker is, for U.S. federal
income tax purposes, a United States person, a controlled
foreign corporation, a foreign person that derives 50% or more
of its gross income for certain periods from the conduct of a
trade or business in the United States, or a foreign partnership
that at any time during its tax year either is engaged in the
conduct of a trade or business in the United States or has as
partners one or more United States persons that, in the
aggregate, hold more than 50% of the income or capital interest
in the partnership, such payments will be subject to information
reporting, but not backup withholding, unless such broker has
documentary evidence in its records that you are a
non-U.S. Holder
and certain other conditions are met or you otherwise establish
an exemption.
The amount of any backup withholding from a payment to you will
be allowed as a credit against your U.S. federal income tax
liability and may entitle you to a refund, provided that the
required information is furnished to the IRS.
Tax
Consequences to the Company
Net Operating Loss Carryforwards. Federal and
state tax laws impose restrictions on the utilization of net
operating loss and tax credit carryforwards in the event of an
ownership change for tax purposes as defined by
Section 382 of the Code. Under Section 382 of the
Code, if a corporation undergoes an ownership change
(generally defined as greater than 50% increase (by value) in
the stock ownership of 5-percent
131
stockholders over a three year period), the corporations
ability to use its
pre-change
net operating loss carryforwards, recognized built-in losses and
other pre-change tax attributes to offset its post-change income
may be limited. The Company has received a private letter ruling
from the IRS to apply the hold constant principle with respect
to the Series D Exchange resulting in the Common Stock
received in the Series D Exchange retaining the same
hold-constant characteristics as the surrendered Series D
Preferred Stock. Relying on this private letter ruling, we
believe the Series C Offer and Series D Exchange will
not result in an ownership change, however, future stock
issuances, redemptions or transactions by 5-percent stockholders
or acquisitions could result in an ownership change.
LEGAL
MATTERS
The legality of the securities offered by this proxy
statement/consent solicitation/prospectus will be passed upon
for us by Bryan Cave LLP, Kansas City, Missouri.
EXPERTS
The financial statements as of December 31, 2010 and 2009,
and for each of the two years in the period ended
December 31, 2010, included in this proxy statement/consent
solicitation/prospectus have been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report appearing
herein and elsewhere in the Registration Statement. Such
financial statements are included in reliance upon the report of
such firm given upon their authority as experts in accounting
and auditing.
132
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
|
Current Assets
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Cash and cash equivalents
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|
$
|
12,582
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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
|
|
Notes receivable, net of allowance of $1,047 and $300,
respectively
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|
|
3,965
|
|
|
|
4,920
|
|
Service fee receivable, net of allowance of $42 and $22,
respectively
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|
|
1,924
|
|
|
|
868
|
|
Other current assets (includes CDO other assets of $299 and
$428, respectively)
|
|
|
3,291
|
|
|
|
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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|
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Mortgage loans
held-in-portfolio,
net of allowance of $0 and $712,614, respectively
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1,289,474
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Accrued interest receivable
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|
|
|
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|
74,025
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Real estate owned
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|
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|
|
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64,179
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|
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|
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Total securitization trust assets
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|
|
|
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|
1,427,678
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Non-Current Assets
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|
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|
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Property and equipment, net of depreciation
|
|
|
4,821
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|
|
|
1,803
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|
Goodwill
|
|
|
3,170
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|
|
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Other assets
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2,330
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|
|
|
2,495
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|
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Total non-current assets
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|
10,321
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|
|
|
4,298
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Total assets
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$
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37,861
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$
|
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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|
$
|
4,590
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|
|
$
|
1,949
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Accrued expenses
|
|
|
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
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|
|
46,114
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Securitization Trust Liabilities
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Due to servicer
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136,855
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Other securitization trust liabilities
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|
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3,729
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Asset-backed bonds secured by mortgage loans
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2,270,602
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Total securitization trust liabilities
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2,411,186
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Non-Current Liabilities
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|
|
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|
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Junior subordinated debentures
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|
|
78,086
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|
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77,815
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Other liabilities
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2,842
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|
928
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|
|
|
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|
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Total non-current liabilities
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80,928
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|
|
|
78,743
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Total liabilities
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144,404
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2,536,043
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Commitments and contingencies (Note 8)
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Shareholders deficit:
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Capital stock, $0.01 par value, 50,000,000 shares
authorized:
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Redeemable preferred stock, $25 liquidating preference per share
($74,750 in total); 2,990,000 shares, issued and outstanding
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30
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30
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Convertible participating preferred stock, $25 liquidating
preference per share $(52,500 in total); 2,100,000 shares,
issued and outstanding
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21
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21
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Common stock, 9,368,053, shares issued and outstanding
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|
94
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|
94
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Additional paid-in capital
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787,363
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786,989
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Accumulated deficit
|
|
|
(898,195
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)
|
|
|
(1,868,398
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)
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Accumulated other comprehensive income
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|
|
4,411
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|
|
|
5,111
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Other
|
|
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|
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|
|
(70
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)
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|
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Total NovaStar Financial, Inc. (NFI)
shareholders deficit
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|
|
(106,276
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)
|
|
|
(1,076,223
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)
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Noncontrolling interests
|
|
|
(267
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)
|
|
|
(329
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)
|
|
|
|
|
|
|
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Total shareholders deficit
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|
(106,543
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)
|
|
|
(1,076,552
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)
|
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Total liabilities and shareholders deficit
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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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See notes to consolidated financial statements.
F-3
NOVASTAR
FINANCIAL, INC.
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|
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For the Year Ended December 31,
|
|
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|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands, except share amounts)
|
|
|
Income and Revenues:
|
|
|
|
|
|
|
|
|
Service fee income
|
|
$
|
75,168
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|
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$
|
31,106
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|
Interest income mortgage loans on securitization
trusts
|
|
|
10,848
|
|
|
|
131,301
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Interest income mortgage securities
|
|
|
11,504
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|
|
|
21,656
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|
|
|
|
|
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|
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Total
|
|
|
97,520
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|
|
|
184,063
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|
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
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|
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
F-9
to the 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
F-11
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 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. |
F-19
|
|
|
(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. |
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
F-20
sponsored by the Company, but did not include the NMFT
Series 2007-2
residual security, which was designated as trading. Residual
securities consist of interest-only, prepayment penalty and
overcollateralization bonds. Management estimates the fair value
of the residual securities by discounting the expected future
cash flows of the collateral and bonds.
The following table presents certain information on the
Companys portfolio of mortgage securities
available-for-sale
as of 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
F-24
claims has not commenced. 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.
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, limitations as to dividends, qualifications or
terms or
A-1
conditions of redemption of such shares of Capital Stock. All
persons who acquire shares of Capital Stock or securities
exercisable for or convertible into shares of Capital Stock
shall acquire such shares subject to the provisions of the
Charter (including Article X) and Bylaws of the
Corporation. Immediately upon the effectiveness of these
Articles of Amended and Restatement (the Effective
Time), and without any further action on the part of the
Corporation or its stockholders, each share of 8.90%
Series C Cumulative Redeemable Preferred Stock, par value
$0.01 per share, issued and outstanding immediately prior to the
Effective Time (the Series C Preferred Stock)
shall be 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.
(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.
A-2
(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.
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
A-3
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.
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
A-4
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).
(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
A-5
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
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.
A-6
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 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
A-7
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 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
A-8
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.
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,
A-9
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.
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.
A-10
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.
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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|
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ATTEST:
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NOVASTAR FINANCIAL, INC.
|
|
|
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By:
Name: Rodney
Schwatken
Title: Chief Financial Officer
|
|
By:
(SEAL)
Name: W. Lance Andersen
Title: Chairman of the Board and
Chief Executive Officer
|
A-11
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 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
B-2
Board of
Directors NovaStar Financial, Inc.
December 10, 2010
Page 3
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.
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
B-3
Board of
Directors NovaStar Financial, Inc.
December 10, 2010
Page 4
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 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
C-2
Board of
Directors NovaStar Financial, Inc.
April 14, 2011
Page 3
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.
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
C-3
Board of
Directors NovaStar Financial, Inc.
April 14, 2011
Page 4
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
NOVASTAR
FINANCIAL, INC.
OFFER TO
EXCHANGE
EACH OUTSTANDING SHARE OF
8.90% SERIES C CUMULATIVE REDEEMABLE PREFERRED
STOCK
FOR, AT
THE ELECTION OF THE HOLDER,
COMMON
STOCK ONLY
OR
COMMON STOCK AND CASH
AND
CONSENT SOLICITATION RELATING TO THE RECAPITALIZATION
PROXY
STATEMENT/CONSENT SOLICITATION/PROSPECTUS
Information
Agent and Proxy Solicitor
199 Water Street,
26th Floor
New York, NY
10038-3560
Banks and Brokers Call
(212) 440-9800
All Others Call Toll-Free
(866) 695-6074
April [ ],
2011
PART II
INFORMATION
NOT REQUIRED IN PROXY STATEMENT/CONSENT
SOLICITATION/PROSPECTUS
|
|
Item 20.
|
Indemnification
of Directors and Officers.
|
The Maryland General Corporation Law (MGCL) permits
a Maryland corporation to include in its charter a provision
limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for
liability resulting from (a) actual receipt of an improper
benefit or profit in money, property or services or
(b) active and deliberate dishonesty established by a final
judgment as being material to the cause of action. The charter
of the Company contains such a provision which eliminates such
liability to the maximum extent permitted by Maryland law.
The charter of the Company requires it, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a
proceeding to our present and former directors and officers,
whether serving us or any other entity at our request, from and
against any claim or liability to which such person may become
subject or which such person may incur by reason of his or her
service in any such capacity. The bylaws of the Company
establish certain procedures for indemnification and advancement
of expenses pursuant to Maryland law and the Companys
charter.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Companys charter does not) to
indemnify a director or officer who has been successful, on the
merits or otherwise, in the defense of any proceeding to which
he or she is made, or threatened to be made, a party by reason
of his or her service in that capacity. The MGCL permits a
corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made, or
threatened to be made, a party by reason of their service in
those or other capacities unless it is established that
(a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and
(i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money,
property or services, or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. However, under
the MGCL, a Maryland corporation may not indemnify for an
adverse judgment in a suit by or in the right of the corporation
or for a judgment of liability on the basis that personal
benefit was improperly received, unless in either case a court
orders indemnification, and then only for expenses. In addition,
the MGCL permits a corporation to advance reasonable expenses to
a director or officer upon the corporations receipt of
(x) a written affirmation by the director or officer of his
or her good faith belief that he or she has met the standard of
conduct necessary for indemnification by the corporation and
(y) a written undertaking by him or her or on his or her
behalf to repay the amount paid or reimbursed by the corporation
if it shall ultimately be determined that the standard of
conduct was not met.
The Company has entered into indemnification agreements with
certain of its directors and officers. Under the indemnification
agreements, the Company will indemnify each indemnitee to the
maximum extent permitted by Maryland law for liabilities and
expenses arising out of the indemnitees service to the
Company or other entity for which such indemnitee is or was
serving at the request of the Company. The indemnification
agreements also provide (a) for the advancement of expenses
by the Company, subject to certain conditions, (b) a
procedure for determining an indemnitees entitlement to
indemnification and (c) for certain remedies for the
indemnitee. In addition, the indemnification agreements require
the Company to use its reasonable best efforts to obtain
directors and officers liability insurance on terms and
conditions deemed appropriate by the Board of Directors.
The Company maintains insurance for its directors and officers
against certain liabilities, including liabilities under the
Securities Act, under insurance policies, the premiums of which
are paid by the Company. The effect of these insurance policies
is to indemnify any directors or officers of the Company against
expenses, judgments, attorneys fees and other amounts paid
in settlements incurred by a director or officer upon a
determination that such person acted in accordance with the
requirements of such insurance policy.
II-1
|
|
Item 21.
|
Exhibits
and Financial Statement Schedules.
|
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
3
|
.11
|
|
Articles of Amendment and Restatement of NovaStar Financial,
Inc. (including all amendments and applicable
Articles Supplementary)
|
|
3
|
.1.12
|
|
Certificate of Amendment of the Registrant
|
|
3
|
.23
|
|
Amended and Restated Bylaws of the Registrant, adopted
July 27, 2005
|
|
3
|
.2.14
|
|
Amendment to the Amended and Restated Bylaws of the Registrant
|
|
4
|
.15
|
|
Specimen Common Stock Certificate
|
|
4
|
.26
|
|
Specimen Preferred Stock Certificate
|
|
4
|
.37
|
|
Registration Rights Agreement, dated March 15, 2011,
between the Company and W. Lance Anderson
|
|
5
|
.1*
|
|
Legal Opinion of Bryan Cave LLP
|
|
8
|
.1*
|
|
Tax Opinion of Bryan Cave LLP
|
|
10
|
.18
|
|
Employment Agreement, dated as of January 7, 2008, by and
between NovaStar Financial, Inc. and
Rodney E. Schwatken.
|
|
10
|
.29
|
|
Form of Indemnification Agreement for Officers and Directors of
NovaStar Financial, Inc. and its Subsidiaries
|
|
10
|
.310
|
|
NovaStar Financial Inc. 2004 Incentive Stock Plan
|
|
10
|
.411
|
|
Amendment One to the NovaStar Financial, Inc. 2004 Incentive
Stock Option Plan
|
|
10
|
.512
|
|
Stock Option Agreement under NovaStar Financial, Inc. 2004
Incentive Stock Plan
|
|
10
|
.613
|
|
Restricted Stock Agreement under NovaStar Financial, Inc. 2004
Incentive Stock Plan
|
|
10
|
.714
|
|
Performance Contingent Deferred Stock Award Agreement under
NovaStar Financial, Inc. 2004 Incentive Stock Plan
|
|
10
|
.815
|
|
NovaStar Financial, Inc. Executive Bonus Plan
|
|
10
|
.916
|
|
2005 Compensation Plan for Independent Directors
|
|
10
|
.1017
|
|
NovaStar Financial, Inc. Long Term Incentive Plan
|
|
10
|
.1118
|
|
Securities Purchase Agreement, dated July 16, 2007, by and
among NovaStar Financial, Inc., Massachusetts Mutual Life
Insurance Company, Jefferies Capital Partners IV L.P.,
Jefferies Employee Partners IV LLC and JCP Partners IV
LLC
|
|
10
|
.1219
|
|
Standby Purchase Agreement, dated July 16, 2007, by and
among NovaStar Financial, Inc., Massachusetts Mutual Life
Insurance Company, Jefferies Capital Partners IV L.P.,
Jefferies Employee Partners IV LLC and JCP Partners IV
LLC
|
|
10
|
.1320
|
|
Registration Rights and Shareholders Agreement, dated
July 16, 2007, by and among NovaStar Financial, Inc.,
Massachusetts Mutual Life Insurance Company, Jefferies Capital
Partners IV L.P., Jefferies Employee Partners IV LLC
and JCP Partners IV LLC
|
|
10
|
.1421
|
|
Letter Agreement, dated July 16, 2007, by and among
NovaStar Financial, Inc., Massachusetts Mutual Life Insurance
Company, Jefferies Capital Partners IV L.P., Jefferies
Employee Partners IV LLC and JCP Partners IV LLC, and
Scott Hartman
|
|
10
|
.1522
|
|
Letter Agreement, dated July 16, 2007, by and among
NovaStar Financial, Inc., Massachusetts Mutual Life Insurance
Company, Jefferies Capital Partners IV L.P., Jefferies
Employee Partners IV LLC and JCP Partners IV LLC, and
Lance Anderson
|
|
10
|
.1623
|
|
Letter Agreement, dated July 16, 2007, by and among
NovaStar Financial, Inc., Massachusetts Mutual Life Insurance
Company, Jefferies Capital Partners IV L.P., Jefferies
Employee Partners IV LLC and JCP Partners IV LLC, and
Mike Bamburg
|
|
10
|
.1724
|
|
Confidential Settlement Term Sheet Agreement, dated
March 17, 2008, between American Interbanc Mortgage LLC,
NovaStar Financial, Inc., NovaStar Mortgage, Inc., NFI Holding
Corp., and NovaStar Home Mortgage, Inc. (Complete Agreement
Filed Due to Expiration of Confidential Treatment Request)
|
|
10
|
.1825
|
|
Amended and Restated Trust Agreement, dated as of
February 18, 2009, by and among, NovaStar Mortgage, Inc.,
The Bank of New York Mellon Trust Company, National
Association, BNY Mellon Trust of Delaware and certain
administrative trustees (including the form of Preferred
Securities Certificate) (I/B)
|
II-2
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
10
|
.1926
|
|
Junior Subordinated Indenture, dated as of February 18,
2009, between NovaStar Mortgage, Inc. and The Bank of New York
Mellon Trust Company, National Association (I/B)
|
|
10
|
.2027
|
|
Parent Guarantee Agreement, dated as of February 18, 2009,
between NovaStar Financial, Inc. and The Bank of New York Mellon
Trust Company, National Association (I/B)
|
|
10
|
.2128
|
|
Amended and Restated Trust Agreement, dated as of
February 18, 2009, by and among, NovaStar Mortgage, Inc.,
The Bank of New York Mellon Trust Company, National
Association, BNY Mellon Trust of Delaware and certain
administrative trustees (including the form of Preferred
Securities Certificate) (II/B)
|
|
10
|
.2229
|
|
Junior Subordinated Indenture, dated as of February 18,
2009, between NovaStar Mortgage, Inc. and The Bank of New York
Mellon Trust Company, National Association (II/B)
|
|
10
|
.2330
|
|
Parent Guarantee Agreement, dated as of February 18, 2009,
between NovaStar Financial, Inc. and The Bank of New York Mellon
Trust Company, National Association (II/B)
|
|
10
|
.2431
|
|
Securities Purchase Agreement, dated as of April 26, 2009,
by and among NovaStar Financial, Inc., Advent Financial
Services, LLC and Mark A. Ernst
|
|
10
|
.2532
|
|
Release and Settlement Agreement dated as of June 30, 2009
by and between NovaStar Financial, Inc. and EHMD, LLC, EHD
Holdings, LLC and EHD Properties, LLC
|
|
10
|
.2633
|
|
Voting agreement, dated December 10, 2010, between the Company
and Howard M. Amster and Barry A. Igdaloff
|
|
10
|
.2734
|
|
Exchange Agreement, dated December 10, 2010, between the Company
and the holders of the Companys 9.0% Series D1 Mandatory
Convertible Preferred Stock, par value $0.01 per share
|
|
10
|
.2835
|
|
Stock Option Agreement, dated March 15, 2011, between the
Company and W. Lance Anderson
|
|
10
|
.2936
|
|
Exchange Agreement, dated as of March 22, 2011, by and among
NovaStar Financial, Inc., NovaStar Capital Trust I/B, NovaStar
Capital Trust II/B, Taberna Preferred Funding I, Ltd. and
Kodiak CDO I, Ltd.
|
|
10
|
.3037
|
|
First Amendment to The Second Amended and Restated Trust
Agreement, dated as of March 22, 2011, by and among NovaStar
Mortgage, Inc., The Bank of New York Mellon Trust Company,
National Association, BNY Mellon Trust of Delaware, certain
administrative trustees and Taberna Preferred Funding II, Ltd.
|
|
10
|
.3138
|
|
Series 1 Senior Notes Indenture, dated as of March 22, 2011, by
and among NovaStar Financial, Inc. and The Bank Of New York
Mellon Trust Company, National Association
|
|
10
|
.3239
|
|
Series 2 Senior Notes Indenture, dated as of March 22, 2011, by
and among NovaStar Financial, Inc. and The Bank Of New York
Mellon Trust Company, National Association
|
|
10
|
.3340
|
|
Series 3 Senior Notes Indenture, dated as of March 22, 2011, by
and among NovaStar Financial, Inc. and The Bank Of New York
Mellon Trust Company, National Association
|
|
11
|
.141
|
|
Statement Regarding Computation of Per Share Earnings
|
|
12
|
.1*
|
|
Statement Regarding Computation of Ratios
|
|
21
|
.1*
|
|
Subsidiaries of the Registrant
|
|
23
|
.1**
|
|
Consent of Deloitte & Touche LLP
|
|
99
|
.1**
|
|
Form of Proxy and Consent
|
|
|
|
* |
|
Previously filed. |
|
** |
|
Filed herewith. |
|
1 |
|
Incorporated by reference to Exhibit 3.1 to
Form 10-Q
filed by the Registrant on August 9, 2007 (File
No. 001-13533). |
|
2 |
|
Incorporated by reference to Exhibit 3.1 to
Form 8-K
filed by the Registrant with the SEC on May 26, 2005 (File
No. 001-13533). |
|
3 |
|
Incorporated by reference to Exhibit 3.3.1 to
Form 10-Q
filed by the Registrant with the SEC on August 5, 2005
(File
No. 001-13533). |
|
4 |
|
Incorporated by reference to Exhibit 3.2.1 to
Form 8-K
filed by the Registrant with the SEC on March 16, 2009
(File
No. 001-13533). |
II-3
|
|
|
5 |
|
Incorporated by reference to Exhibit 4.1 to
Form 10-Q
filed by the Registrant with the SEC on August 5, 2005
(File
No. 001-13533). |
|
6 |
|
Incorporated by reference to Exhibit 4.3 to
Form 8-A/A
filed by the Registrant with the SEC on January 20, 2004
(File
No. 001-13533). |
|
|
|
7 |
|
Incorporated by reference to Exhibit 4.1 to
Form 8-K
filed by the Registrant with the SEC on March 21, 2011
(File
No. 001-13533). |
|
|
|
8 |
|
Incorporated by reference to Exhibit 10.1 to
Form 8-K/A
filed by the Registrant with the SEC on January 10, 2008
(File
No. 001-13533). |
|
9 |
|
Incorporated by reference to Exhibit 10.10 to
Form 8-K
filed by the Registrant with the SEC on November 16, 2005
(File
No. 001-13533). |
|
10 |
|
Incorporated by reference to Exhibit 10.15 to
Form S-8
filed by the Registrant with the SEC on June 30, 2004 (File
No. 333-116998). |
|
11 |
|
Incorporated by reference to Exhibit 10.46 to
Form 10-Q
filed by the Registrant with the SEC on May 10, 2007 (File
No. 001-13533). |
|
12 |
|
Incorporated by reference to Exhibit 10.25.1 to
Form 8-K
filed by the Registrant with the SEC on February 4, 2005
(File
No. 001-13533). |
|
13 |
|
Incorporated by reference to Exhibit 10.25.2 to
Form 8-K
filed by the Registrant with the SEC on February 4, 2005
(File
No. 001-13533). |
|
14 |
|
Incorporated by reference to Exhibit 10.25.3 to
Form 8-K
filed by the Registrant with the SEC on February 4, 2005
(File
No. 001-13533). |
|
15 |
|
Incorporated by reference to Exhibit 10.26 to
Form 8-K
filed by the Registrant with the SEC on March 15, 2007
(File
No. 001-13533). |
|
16 |
|
Incorporated by reference to Exhibit 10.30 to
Form 8-K
filed by the Registrant with the SEC on February 11, 2005
(File
No. 001-13533). |
|
17 |
|
Incorporated by reference to Exhibit 10.34 to
Form 8-K
filed by the Registrant with the SEC on February 14, 2006
(File
No. 001-13533). |
|
18 |
|
Incorporated by reference to Exhibit 10.1 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
19 |
|
Incorporated by reference to Exhibit 10.2 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
20 |
|
Incorporated by reference to Exhibit 10.3 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
21 |
|
Incorporated by reference to Exhibit 10.4 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
22 |
|
Incorporated by reference to Exhibit 10.5 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
23 |
|
Incorporated by reference to Exhibit 10.6 to
Form 8-K
filed by the Registrant with the SEC on July 20, 2007 (File
No. 001-13533). |
|
24 |
|
Incorporated by reference to Exhibit 10.55 to
Form 10-Q
filed by the Registrant with the SEC on April 27, 2009
(File
No. 001-13533). |
|
25 |
|
Incorporated by reference to Exhibit 10.56 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
26 |
|
Incorporated by reference to Exhibit 10.57 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
27 |
|
Incorporated by reference to Exhibit 10.58 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
II-4
|
|
|
28 |
|
Incorporated by reference to Exhibit 10.59 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
29 |
|
Incorporated by reference to Exhibit 10.60 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File
No. 001-13533). |
|
30 |
|
Incorporated by reference to Exhibit 10.61 to
Form 8-K
filed by the Registrant with the SEC on February 24, 2009
(File No. 001-13533). |
|
31 |
|
Incorporated by reference to Exhibit 10.62 to
Form 8-K
filed by the Registrant with the SEC on April 30, 2009
(File No. 001-13533). |
|
32 |
|
Incorporated by reference to Exhibit 10.1 to
Form 8-K
filed by the Registrant with the SEC on July 1, 2009 (File
No. 001-13533). |
|
33 |
|
Incorporated by reference to Exhibit (d)(1) to the
Schedule TO/13E-3 filed by the Registrant on
December 10, 2010 (File
No. 005-52325). |
|
34 |
|
Incorporated by reference to Exhibit (d)(2) to the
Schedule TO/13E-3 filed by the Registrant on
December 10, 2010 (File
No. 005-52325). |
|
35 |
|
Incorporated by reference to Exhibit 10.1 to
Form 8-K
filed by the Registrant with the SEC on March 21, 2011
(File
No. 001-13533). |
|
36 |
|
Incorporated by reference to Exhibit 10.1 to
Form 8-K
filed by the Registrant with the SEC on March 22, 2011
(File
No. 001-13533). |
|
37 |
|
Incorporated by reference to Exhibit 10.2 to
Form 8-K
filed by the Registrant with the SEC on March 22, 2011
(File
No. 001-13533). |
|
38 |
|
Incorporated by reference to Exhibit 10.3 to
Form 8-K
filed by the Registrant with the SEC on March 22, 2011
(File
No. 001-13533). |
|
39 |
|
Incorporated by reference to Exhibit 10.4 to
Form 8-K
filed by the Registrant with the SEC on March 22, 2011
(File
No. 001-13533). |
|
40 |
|
Incorporated by reference to Exhibit 10.5 to
Form 8-K
filed by the Registrant with the SEC on March 22, 2011
(File
No. 001-13533). |
|
41 |
|
See Note 15 to the consolidated financial statements. |
|
|
(c)
|
Opinion
of the Financial Advisor
|
A copy of the opinion of Stifel, Nicolaus & Company,
Incorporated, the Companys financial advisor, addressing
the fairness to the Companys Common Stock holders, from a
financial point of view, of the financial terms of the
Series C Offer and Series D Exchange will be filed by
amendment.
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in the
amount of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) under the Securities Act if, in the aggregate,
the changes in amount and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the
effective registration statement;
II-5
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering;
(4) That, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser: if the Company is
subject to Rule 430C, each prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to
an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in
the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such date of first use; and
(5) That, for the purpose of determining liability of the
Company under the Securities Act of 1933 to any purchaser in the
initial distribution of the securities, the undersigned Company
undertakes that in a primary offering of securities of the
undersigned Company pursuant to this registration statement,
regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or
sold to such purchaser by means of any of the following
communications, the undersigned Company will be a seller to the
purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned Company relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned Company or used or
referred to by the undersigned Company;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned Company or its securities provided by or on
behalf of the undersigned Company; and
(iv) Any other communication that is an offer in the
offering made by the undersigned Company to the purchaser.
(b)(1) The undersigned Company hereby undertakes as follows:
that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Company undertakes that every prospectus
(i) that is filed pursuant to paragraph (a)(1) immediately
preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to
Rule 415, will be filed as part of an amendment to the
registration statement and will not be used until such an
amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors,
officers, and controlling persons of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as
II-6
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment of the Company
of expenses incurred or paid by a director, officer, or
controlling person of the Company in the successful defense of
any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by the Company is against public
policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond
to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13
of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the
request.
(e) The undersigned Company hereby undertakes to supply by
means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration
statement when it became effective.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Company has duly caused this Amendment No. 4 to the
Registration Statement on
Form S-4
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Kansas City, Missouri, on
April 14, 2011.
NOVASTAR FINANCIAL, INC.
|
|
|
|
By:
|
/s/ Rodney
E. Schwatken
|
Rodney E. Schwatken
Chief Financial Officer
and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of
1933, this Amendment No. 4 to the Registration Statement
has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
W.
Lance Anderson
|
|
Chairman of the Board of Directors and Chief Executive Officer
(Principal Executive Officer)
|
|
April 14, 2011
|
|
|
|
|
|
/s/ Rodney
E. Schwatken
Rodney
E. Schwatken
|
|
Chief Financial Officer and
Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
April 14, 2011
|
|
|
|
|
|
*
Edward
W. Mehrer
|
|
Director
|
|
April 14, 2011
|
|
|
|
|
|
*
Gregory
T. Barmore
|
|
Director
|
|
April 14, 2011
|
|
|
|
|
|
*
Art
N. Burtscher
|
|
Director
|
|
April 14, 2011
|
|
|
|
|
|
*
Donald
M. Berman
|
|
Director
|
|
April 14, 2011
|
|
|
|
|
|
*
Howard
M. Amster
|
|
Director
|
|
April 14, 2011
|
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
Barry
A. Igdaloff
|
|
Director
|
|
April 14, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Rodney
E. Schwatken
Rodney
E. Schwatken
Attorney-in-fact
|
|
|
|
April 14, 2011
|
EXHIBIT INDEX
|
|
|
|
|
|
5
|
.1*
|
|
Legal Opinion of Bryan Cave LLP
|
|
8
|
.1*
|
|
Tax Opinion of Bryan Cave LLP
|
|
12
|
.1*
|
|
Statement Regarding Computation of Ratios
|
|
21
|
.1*
|
|
Subsidiaries of the Registrant
|
|
23
|
.1**
|
|
Consent of Deloitte and Touche LLP
|
|
99
|
.1**
|
|
Form of Proxy and Consent
|
* Previously filed.
** Filed herewith.