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Maryland (State or jurisdiction of incorporation or organization) | 6531 (Primary Standard Industrial Classification Code Number) | 74-2830661 (I.R.S. Employer Identification) |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Proposed Maximum | Proposed Maximum | Amount of | ||||||||||
Title of Each Class of | Amount to be | Offering | Aggregate | Registration | ||||||||
Securities Registered | Registered(1) | Price per Security | Offering Price(2) | Fee(3)(4) | ||||||||
Common Stock, par value $0.01 | 43,823,600 | n/a | $3,489,900 | $248.83 | ||||||||
(1) | Represents the estimated maximum number of shares of the Company’s common stock issuable in connection with the exchange offer described in the proxy statement/consent solicitation/prospectus. | |
(2) | Computed pursuant to Rule 457(c) and 457(f)(1) and (f)(3) of the Securities Act of 1933. The proposed maximum aggregate offering price is equal to (i) the product of (a) $1.71, the average of the high and low prices per share of the Company’s 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 Company’s 8.90% Series C Cumulative Redeemable Preferred Stock that may be converted into the right to receive the Company’s common stock pursuant to the exchange offer, less (ii) $1,623,000, the estimated amount of cash that would be paid by the Registrant in the exchange offer. | |
(3) | Calculated in accordance with Section 6(b) of the Securities Act and SEC Fee Advisory #4 for Fiscal Year 2010 at a rate equal to 0.0000713 multiplied by the proposed maximum aggregate offering price. | |
(4) | Previously paid. |
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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. |
• | 3 shares of newly-issued common stock of the Company, par value $0.01 (the “Common Stock”), and $2.00 in cash (the“Cash-and-Stock Option”); or | |
• | 19 shares of newly-issued Common Stock (the “Stock-Only Option”). |
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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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The Company | NovaStar Financial, Inc. |
The Address and Phone Number of the Company’s Principal Executive Offices | 2114 Central Street Suite 600 Kansas City, Missouri 64108 (816) 237-7000 |
The Company’s Business | 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. | |
Common Stock | Common Stock, par value $0.01 per share (OTCQB: NOVS) | |
Series C Preferred Stock | 8.90% Series C Cumulative Redeemable Preferred Stock, par value $0.01 per share (OTCQB: NOVSP) |
Series C Offer | An offer to exchange each share of Series C Preferred Stock for, at the election of each holder, either: |
• 3 shares of newly-issued common stock of the Company, par value $0.01 (the “Common Stock”) and $2.00 in cash (the“Cash-and-Stock Option”); or | ||
• 19 shares of newly-issued Common Stock (the “Stock-Only Option”). |
Series C Holders’ elections will be subject to allocation and proration procedures intended to ensure that, in the aggregate, 43,823,600 newly-issued shares of Common Stock and $1,623,000 in cash (plus such other cash that is needed to cash out fractional shares) will be issued to Series C Holders (the “Offer Consideration”). 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.” |
Common Stock Outstanding Before theSeries C Offer | As of[ • ], 2011, the Company had 9,368,053 shares of Common Stock outstanding. | |
Common Stock Outstanding After theSeries C Offer | Assuming that 100% of the shares of Series C Preferred Stock are accepted for exchange in the Series C Offer, 43,823,600 shares of |
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Common Stock would be issued in the Series C Offer and 37,161,600 shares of Common Stock would be issued in the Series D Exchange. Therefore, 90,353,253 shares of our Common Stock would be outstanding after completion of the Series C Offer and the Series D Exchange. |
Outstanding Shares of Series C PreferredStock Prior to theSeries C Offer | 2,990,000 shares |
Consent Solicitation | As part of the Series C Offer, we are soliciting the consent of Series C Holders to the Series C Offer and the Series D Exchange. 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. |
Reasons for the Series C Offer | The Series C Offer is being conducted, along with the Series D Exchange, to eliminate the Company’s 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. | |
Offer Consideration | The total aggregate consideration offered is 43,823,600newly-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). | |
Trading and Related Matters | The Common Stock issuable pursuant to the Series C Offer is being registered under the Securities Act of 1933, as amended, and will be freely tradable, except by our affiliates. | |
Differences in Rights of Our Common Stock andSeries C PreferredStock | The Series C Preferred Stock and Common Stock have different rights. For more information about these differences, see “The Series C Offer and Consent Solicitation — Differences in Rights of Our Common Stock and Series C Preferred Stock.” | |
Market Price Information | The last reported sale price of shares of Common Stock as quoted by Pink OTC Markets’ inter-dealer quotation service on[ • ], 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 $[ • ]. | |
Series D Exchange | The Series D Exchange is the exchange of all issued and outstanding shares of the Company’s 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 | The Series C Offer and the Series D Exchange, together with the Amendments (defined below), are part of the Company’s plan of recapitalization to improve the Company’s capital structure. | |
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. |
Settlement Date | The settlement date in respect of Series C Preferred Stock validly surrendered and accepted for exchange in the Series C Offer will occur at closing of the Series C Offer. We expect the closing to be within three business days after the Expiration Date. |
How to Tender Series C Preferred Stock forExchange and DeliverConsents to the SeriesC Offer | For you to validly tender shares of Series C Preferred Stock pursuant to our Series C Offer and Consent Solicitation: | |
• a properly completed and duly executed Letter of Transmittal, along with any required signature guarantees, and any other required documents, 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 | ||
• a properly completed and duly executed proxy card indicating “Consent” should be returned in the accompanying return envelope. |
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 Company’s Common Stock will receive an amount in cash equal to the product obtained by multiplying the fractional share interest to which such Series C Holder would otherwise be entitled by the Common Stock’s average closing price over the10-day period preceding the Expiration Date. |
Partial Tenders | We will not accept partial tender of your shares. To participate in the Series C Offer, a Series C Holder must tender all Series C Preferred Stock held by that Series C Holder. | |
Withdrawal Rights | Your tender of shares of Series C Preferred Stock pursuant to the Series C Offer and Consent Solicitation is irrevocable, except that shares of Series C Preferred Stock tendered pursuant to the Series C Offer and Consent Solicitation may be withdrawn at any time prior to the Expiration Date, and after [ • ], 2011 for any tendered shares of Series C Preferred Stock not yet accepted for payments by that date. | |
For a withdrawal to be effective, a written or facsimile transmission notice of withdrawal must be timely received by the Exchange Agent at the address set forth on the Letter of Transmittal and must specify the name, address and social security number of the person having tendered the shares of Series C Preferred Stock to be withdrawn, the certificate number or numbers for such shares and the name of the |
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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.” | ||
Conditions Precedent to the Series C Offer | Our obligation to accept shares for exchange in the Series C Offer is conditioned upon, among other things: | |
• the completion of the Series D Exchange; |
• 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; |
• participation by the holders of at least two-thirds of the outstanding Series C Preferred Stock; and |
• the effectiveness of the registration statement of which the proxy statement/consent solicitation/prospectus is a part. | ||
For a description of all of the conditions to the Series C Offer, see “The Series C Offer and Consent Solicitation — Conditions to the Series Offer.” |
Consequences of Failure to Exchange OutstandingSeries C PreferredStock | 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 theCash-and-Stock Option for the other shares. The Series C Offer will not be consummated unless at leasttwo-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. |
Interest of Certain Persons in the Series COffer and ConsentSolicitation | 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. |
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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. |
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 management’s proposed slate of directors presented to the Company stockholders at the following annual stockholders’ 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 Company’s 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 Company’s Common Stock in exchange for their Series C Preferred Stock as they are eligible to receive. |
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.” |
Material U.S. Federal Income TaxConsiderations | 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 |
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consult your own tax advisors regarding the Series C Offer in light of your own particular circumstances. |
Plans and Proposals | Other than the Series C Offer and the Series D Exchange, we do not have any plans, proposals or negotiations that would result in any material change in our corporate structure or business, nor do we have any plans, proposals or negotiations which would relate to or result in our Common Stock becoming eligible for termination of registration under Section 12(g)(4) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). |
Exchange Agent | Computershare Trust Company, N.A. | |
Transfer Agent | Computershare Trust Company, N.A. | |
Information Agent | Georgeson Inc. | |
Regulatory Approvals | We are not aware of any other material regulatory approvals necessary to complete the Series C Offer, other than the obligation 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 forFair 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. UnderSection 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 Company’s current charter expressly reserves the power to amend the charter to alter the contract rights of existing stockholders. | |
Further Information | If you have questions regarding the Series C Offer or the Consent Solicitation or the procedures for exchanging your Series C Preferred Stock in the Series C Offer, or if you require additional Series C Offer materials, please contact: | |
Georgeson Inc. 199 Water Street, 26th Floor New York, NY 10038-3560 Banks and Brokers Call (212) 440-9800 All Others Call Toll-Free (866) 695-6074 |
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• | an amendment to the charter of the Company to eliminate the Series C Preferred Stock; |
• | an amendment to the charter of the Company to eliminate the Series D Preferred Stock; and |
• | 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. |
• | increase common shares outstanding by 43,823,600 for the full exchange of the Series C Preferred Stock effective as of the date of its original issuance on January 15, 2004; | |
• | increase common shares outstanding by 37,161,600 for the full exchange of the Series D Preferred Stock effective as of the date of its original issuance on July 16, 2007; and | |
• | exclude the accrued and unpaid dividends on the Series C Preferred Stock and Series D Preferred Stock because the effect of the pro forma adjustments is to reflect that neither the Series C Preferred Stock or Series D Preferred Stock were issued. |
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As of and for the Years Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Summary Historical Financial Information: | ||||||||||||||||||||
Weighted average common shares outstanding-basic | 9,337,207 | 9,368,053 | 9,338,131 | 9,332,405 | 8,552,911 | |||||||||||||||
Weighted average common shares outstanding-dilutive | 9,337,207 | 9,368,053 | 9,338,131 | 9,332,405 | 8,617,904 | |||||||||||||||
Book value per common share-basic | $ | (25.01 | ) | $ | (128.47 | ) | $ | (107.52 | ) | $ | (36.30 | ) | $ | 51.42 | ||||||
Book value per common share-dilutive | (25.01 | ) | (128.47 | ) | (107.52 | ) | (36.30 | ) | 51.04 | |||||||||||
Dividends declared per common share | — | — | — | — | 22.40 | |||||||||||||||
Income (loss) from continuing operations available to common stockholders per share-basic | 86.53 | (20.97 | ) | (74.81 | ) | (51.04 | ) | 5.70 | ||||||||||||
Income (loss) from continuing operations available to common stockholders per share-dilutive | 86.53 | (20.97 | ) | (74.81 | ) | (51.04 | ) | 5.66 | ||||||||||||
Summary Unaudited Pro Forma Historical Financial Information: | ||||||||||||||||||||
Weighted average common shares outstanding-basic | 90,322,407 | 90,353,253 | 90,323,331 | 70,188,405 | 52,376,511 | |||||||||||||||
Weighted average common shares outstanding-dilutive | 90,322,407 | 90,353,253 | 90,323,331 | 70,188,405 | 52,441,504 | |||||||||||||||
Book value per common share-basic | $ | (1.78 | ) | $ | (12.70 | ) | $ | (10.67 | ) | $ | (4.46 | ) | $ | 8.74 | ||||||
Book value per common share-dilutive | (1.78 | ) | (12.70 | ) | (10.67 | ) | (4.46 | ) | 8.73 | |||||||||||
Dividends declared per common share | — | — | — | — | 3.78 | |||||||||||||||
Income (loss) from continuing operations per share-basic | 10.92 | (2.00 | ) | (7.57 | ) | (6.66 | ) | 1.06 | ||||||||||||
Income (loss) from continuing operations per share-dilutive | 10.92 | (2.00 | ) | (7.57 | ) | (6.66 | ) | 1.06 |
For the Years Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Historical Ratio of Earnings to fixed charges | 46.7 | (A | ) | (A | ) | (A | ) | 1.4 | ||||||||||||
Pro Forma Ratio of Earnings to fixed charges | 210.4 | (B | ) | (B | ) | (B | ) | (B | ) |
(A) | 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. |
(B) | Item 503(d)(2)(B) ofRegulation S-K only allows the pro forma ratio to be shown for the most recent fiscal year and, if applicable, the latest interim period. |
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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. | |
• | 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. |
• | 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; | |
• | constraining our ability to obtain financing on satisfactory terms or at all; | |
• | making it more difficult for us to satisfy our financial obligations; | |
• | placing us at a competitive disadvantage as compared to competitors that have better access to liquid assetsand/or financing; | |
• | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and | |
• | 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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• | 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; | |
• | the value of our residual and subordinated securities and the income we receive from them are based primarily on LIBOR, and an increase in LIBOR increases funding costs which reduces the cash flow we receive from, and the value of, these securities; | |
• | existing borrowers with adjustable-rate mortgages or higher risk loan products may incur higher monthly payments as the interest rate increases, and consequently may experience higher delinquency and default rates; and | |
• | changes in prepayment rates may harm our earnings and the value of our mortgage securities. |
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• | actual or perceived changes in our ability to continue as a going concern; | |
• | actual or anticipated changes in the delinquency and default rates on mortgage loans, in general, and specifically on the loans we invest in through our mortgage securities; | |
• | actual or anticipated changes in residential real estate values; | |
• | actual or anticipated changes in market interest rates; | |
• | actual or anticipated changes in our earnings and cash flow; | |
• | general market and economic conditions, including the operations and stock performance of other industry participants; | |
• | developments in the subprime mortgage lending industry or the financial services sector generally; | |
• | the impact of new state or federal legislation or adverse court decisions; |
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• | the activities of investors who engage in short sales of Common Stock; |
• | actual or anticipated changes in financial estimates by securities analysts; |
• | sales, or the perception that sales could occur, of a substantial number of shares of Common Stock by insiders; |
• | additions or departures of senior management and key personnel; and | |
• | actions by institutional stockholders. |
• | 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; |
• | classify or reclassify any unissued shares of Common Stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares; and |
• | issue additional shares of Common Stock or preferred stock in exchange for outstanding securities, with the consent of the holders of those securities. |
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Q: | WHY IS THE COMPANY OFFERING TO EXCHANGE THE SERIES C PREFERRED STOCK? |
A: | The Series C Offer, along with the Series D Exchange, are part of our recapitalization to improve our capital structure. The Series C Preferred Stock was issued with an annual dividend equivalent to 8.9% and the Series D Preferred Stock was issued with an annual dividend equivalent to 9.0%. We have failed to make all dividend payments on the Series C Preferred Stock and Series D Preferred Stock since October 2007. Because we have not made all required dividend payments on the Series D Preferred Stock, the dividend rate increased to 13.0%, retroactive and compounded to the beginning of the first quarter in which the dividends were not paid. The unpaid dividends continue to accrue and have resulted in the large increase in unpaid dividends recorded in our consolidated balance sheets of $55.9 million as of April 15, 2011. Further, the aggregate liquidating preference of the Series C Preferred Stock and the Series D Preferred Stock, which does not include the accrued and unpaid dividends, is $74.8 million and $52.5 million, respectively as of April 15, 2011. Therefore, the aggregate obligation relating to the preferred stock as of April 15, 2011 was $183.2 million. All accrued and unpaid dividends on our preferred stock must be paid prior to any payments of dividends or other distributions on our Common Stock, and this recapitalization would have the result of removing this dividend priority favoring the preferred stock. If the Series C Offer and Series D Exchange are consummated, approximately $23.6 million in accrued and unpaid dividends on the Series C Preferred Stock and $32.3 million of accrued and unpaid dividends on the Series D Preferred Stock (through April 15, 2011) will be eliminated, and no further dividends on such preferred stock will accrue. Further, our obligation to pay the aggregate liquidating preference of the Series C Preferred Stock and the Series D Preferred Stock would be eliminated as well. |
Q: | WHY IS THE COMPANY SOLICITING CONSENTS OF THE SERIES C HOLDERS? | |
A: | We are soliciting consent to the Series C Offer and the Series D Exchange from all Series C Holders. The Articles Supplementary governing the Series C Preferred Stock contains certain conversion and exchange restrictions. Thus, we are soliciting your consent to complete the Series C Offer regardless of any applicable conversion or exchange restrictions. Further, such consent is required to pay cash in the Series D Exchange. | |
Q: | WHY IS THE COMPANY CALLING A SPECIAL MEETING? | |
A: | The Board of Directors is calling this special meeting in connection with our recapitalization involving the Series C Offer and Series D Exchange, together with a consent solicitation seeking consents to effectuate the Series C Offer and the Series D Exchange. One condition to both the Series C Offer and the Series D Exchange is that the five Proposals to be considered at the special meeting be approved by the requisite vote of our stockholders entitled to vote on each Proposal. | |
Q: | WHAT WILL I RECEIVE IN EXCHANGE FOR MY SHARES OF SERIES C PREFERRED STOCK? | |
A: | For each share of Series C Preferred Stock validly tendered and not properly withdrawn by you, you will receive, at your election, either (a) 3 shares of newly-issued Common Stock 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. |
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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: |
%of Series C Preferred Stock | What You Would Receive If You Own | |||||||||||||||||||||||||||||||||||||
% Series C Holders Electing | Shares Electing | Receiving Elected Option | 100 Series C Shares | |||||||||||||||||||||||||||||||||||
Cash-and- | Cash-and- | Cash-and- | If You Elected Cash | If You Elected | ||||||||||||||||||||||||||||||||||
Stock | Stock-Only | Stock | Stock-Only | Stock | Stock-Only | and Stock | Stock Only | |||||||||||||||||||||||||||||||
Consideration | Consideration | Consideration | Consideration | Consideration | Consideration | Common | Common | |||||||||||||||||||||||||||||||
Option | Option | Option | Option | Option | Option | Cash | Shares | Cash | Shares | |||||||||||||||||||||||||||||
0 | % | 100 | % | 0 | 2,990,000 | N/A | 73% | N/A | N/A | $ | 54.29 | 1,466 | ||||||||||||||||||||||||||
25 | % | 75 | % | 747,500 | 2,242,500 | 100% | 97% | $ | 200.00 | 300 | $ | 5.72 | 1,854 | |||||||||||||||||||||||||
50 | % | 50 | % | 1,495,000 | 1,495,000 | 54% | 100% | $ | 108.58 | 1,031 | $ | — | 1,900 | |||||||||||||||||||||||||
75 | % | 25 | % | 2,242,500 | 747,500 | 36% | 100% | $ | 72.39 | 1,321 | $ | — | 1,900 | |||||||||||||||||||||||||
100 | % | 0 | % | 2,990,000 | 0 | 27% | N/A | $ | 54.29 | 1,466 | N/A | N/A |
Q: | WHY SHOULD I PARTICIPATE IN THE SERIES C OFFER AND CONSENT SOLICITATION? | |
A. | If you participate in the Series C Offer and Consent Solicitation, you can choose the Stock-Only Option orCash-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. | |
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. | ||
Q: | HOW DO I PARTICIPATE IN THE SERIES C OFFER? | |
A: | 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: |
c/o Voluntary Corporate Actions
P.O. Box 43011
Providence, RI02940-3011
c/o Voluntary Corporate Actions
Suite V
250 Royall Street
Canton, MA 02021
If you desire to tender your shares of Series C Preferred Stock and your certificates are not immediately available or time will not permit your Letter of Transmittal, stock certificates or any other required documents to reach the Exchange Agent prior to the Expiration Date, your tender may nevertheless be effected if all the conditions are met, including the submission of a properly completed and duly executed |
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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.” |
Q: | MAY I MAKE ONE ELECTION TO RECEIVE ONE CONSIDERATION OPTION FOR SOME OF MY SHARES OF SERIES C PREFERRED STOCK AND ANOTHER ELECTION TO RECEIVE THE OTHER CONSIDERATION OPTION FOR OTHER SHARES? |
A: | No. You may choose to receive either the Stock-Only Option for your shares of Series C Preferred Stock or theCash-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.” |
Q: | CAN I TENDER ONLY SOME OF MY SERIES C PREFERRED STOCK? | |
A: | 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: | WHEN AND HOW CAN I WITHDRAW TENDERED SHARES? | |
A: | Shares of Series C Preferred Stock tendered in the Series C Offer and Consent Solicitation may be withdrawn by you at any time prior to the Expiration Date. Your withdrawal will only be effective if Computershare Trust Company, N.A. receives a written notice of withdrawal at Computershare Trust Company, N.A.,c/o Voluntary Corporate Actions, P.O. Box 43011, Providence, RI02940-3011, if by mail, or alternatively if by courier, at Computershare Trust Company, N.A.,c/o Voluntary Corporate Actions, Suite V, 250 Royall Street, Canton, MA 02021. The written notice must contain your name, address, social security number, the certificate number or numbers for such shares and the name of the registered holder of the shares, if different from the person who tendered the shares. | |
Q: | WHAT ARE THE CONDITIONS TO THE SERIES C OFFER? | |
A: | Our Series C Offer is subject to several conditions. The most significant conditions include: | |
• the completion of the Series D Exchange; |
• 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 Proposals to amend our charter; |
• participation by the holders of at least two-thirds of the outstanding Series C Preferred Stock; and |
• the effectiveness of the registration statement of which this proxy statement/consent solicitation/prospectus is a part. | ||
Q: | DO I HAVE ANY APPRAISAL RIGHTS IN CONNECTION WITH THE SERIES C OFFER AND CONSENT SOLICITATION? | |
A: | 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. UnderSection 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. | |
Q: | WHICH PROPOSALS WILL I BE ENTITLED TO VOTE ON AS A SERIES C HOLDER? | |
A: | As a Series C Holder, you will be entitled to vote on Proposal 1 (to amend the charter of the Company to eliminate the Series C Preferred Stock), Proposal 4 (to amend the charter of the Company to preserve the Company’s 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). |
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Q: | HOW DO I GIVE THE COMPANY MY PROXY? |
A: | You can give the Company your proxy by completing the proxy card that accompanies this proxy statement/consent solicitation/prospectus and returning it in the enclosed return envelope. |
Q: | HOW DO I CONSENT TO THE SERIES C OFFER AND SERIES D EXCHANGE? |
A: | 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. |
Q: | WHO CAN I CONTACT WITH QUESTIONS ABOUT THE SERIES C OFFER OR THE CONSENT SOLICITATION OR TO REQUEST ANOTHER COPY OF THE PROXY STATEMENT/CONSENT SOLICITATION/PROSPECTUS? | |
A: | You can contact the information agent engaged for Series C Offer and Consent Solicitation at: |
199 Water Street, 26th Floor
New York, NY 10038-3560
Banks and Brokers Call (212) 440-9800
All Others Call Toll-Free (866) 695-6074
Q: | WHO CAN I CONTACT WITH QUESTIONS ABOUT THE SPECIAL MEETING? | |
A: | You can contact the proxy solicitor engaged for this proxy solicitation at: |
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
• | to approve an amendment to the charter of the Company to eliminate the Series C Preferred Stock (“Proposal 1”); | |
• | to approve an amendment to the charter of the Company to eliminate the Series D Preferred Stock (“Proposal 2”); | |
• | to approve an amendment to the charter of the Company to increase the number of authorized shares of capital stock of the Company from 50,000,000 to 120,000,000 (“Proposal 3”); | |
• | to approve an amendment to the charter of the Company to preserve the Company’s net operating loss carryforwards (“Proposal 4”); |
• | 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 Company’s former status as a real estate investment trust (“Proposal 5”); and |
• | to transact such other business as may properly come before the special meeting and any postponement or adjournment thereof. |
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Series C Holder | Series D Holder | |||||||||||
Separate Approval (2/3 | Separate Approval (2/3 | |||||||||||
Aggregate Votes Entitled | Affirmative Vote of all | Affirmative Vote of all | ||||||||||
to be Cast (Majority | Outstanding Series C | Outstanding Series D | ||||||||||
Holder Threshold) | Preferred Stock) | Preferred Stock) | ||||||||||
Proposal 1 | 14,233,053 | Yes | No | |||||||||
Proposal 2 | 11,243,053 | No | Yes | |||||||||
Proposal 3 | 11,243,053 | No | Yes | |||||||||
Proposal 4 | 14,233,053 | Yes | Yes | |||||||||
Proposal 5 | 14,233,053 | Yes | Yes |
• | Shares of Series C Preferred Stock will be votedFORthe approval of the amendment to the charter to eliminate the Series C Preferred Stock; |
• | Shares of Series C Preferred Stock will be votedFORthe approval of the amendment to the charter to preserve the Company’s net operating loss carryforwards; and |
• | Shares of Series C Preferred Stock will be votedFORthe 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 Company’s former status as a real estate investment trust. |
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“FOR”
THE CHARTER AMENDMENT TO ELIMINATE THE SERIES C PREFERRED STOCK
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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 Company’s 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 | |
• | any transaction approved in advance by the Board of Directors. |
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• | There can be no assurance that the acquisition restrictions will be enforceable against all of the Company’s stockholders; and | |
• | The acquisition restrictions may be subject to challenge on equitable grounds. |
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• | no person may beneficially own or constructively own (a) more than 9.8% of the Company’s capital stock or (b) more than 9.8% of the Company’s issued Common Stock, subject to certain exceptions; |
• | no person may beneficially own or constructively own shares of capital stock to the extent that such ownership would result in the Company being “closely held” within the meaning of Section 856(h) of the Code or otherwise failing to qualify as a REIT; and |
• | any transfer of shares of capital stock that, if effective, would result in any person violating the ownership restrictions described above, or that would cause the Company to be owned by less than 100 persons, will be null and void ab initio. |
• | the reference to the original incorporator of the Company, previously found in Article One has been deleted; |
• | 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; |
• | removing references to directors appointed by outstanding preferred stock as no preferred stock will be outstanding; |
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• | deleting the Articles Supplementary for the unissued Series D2 Preferred Stock; |
• | updating the language in Articles Eight, Nine and Twelve related to director indemnification, director and officer personal liability, and majority voting to more closely track the current MGCL statutes; |
• | internal cross-references within the charter have been updated to reflect the proposed changes; and |
• | the exact amount of Common Stock and cash from the Remainder Consideration that allnon-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.” |
“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 COMPANY’S FORMER STATUS AS A REAL ESTATE INVESTMENT TRUST
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• | Gross and net margin for orders completed by StreetLinks; | |
• | Forecasted income and cash receipts on the Company’s mortgage securities; | |
• | Estimated costs of services, including cost of labor; | |
• | Interest rates; and | |
• | The cost of corporate overhead, most notably fees for professionals services including audit, tax and legal. |
2011 | 2012 | |||||||
Service fee income | $ | 149,850 | $ | 194,250 | ||||
Interest and other income | 7,146 | 7,240 | ||||||
Cost of services | (125,996 | ) | (161,833 | ) | ||||
Other expenses | (19,838 | ) | (22,192 | ) | ||||
Net income attributable to non-controlling interests | (2,088 | ) | (2,958 | ) | ||||
Net income | $ | 9,074 | $ | 14,507 | ||||
Net increase in cash and cash equivalents | $ | 14,051 | $ | 18,159 | ||||
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2011 | 2012 | |||||||
Service fee income | $ | 111,000 | $ | 111,000 | ||||
Interest and other income | 1,755 | 1,565 | ||||||
Cost of services | (93,625 | ) | (93,625 | ) | ||||
Other expenses | (15,514 | ) | (15,424 | ) | ||||
Net income attributable to non-controlling interests | (1,462 | ) | (1,462 | ) | ||||
Net income | $ | 2,254 | $ | 2,054 | ||||
Net increase in cash and cash equivalents | $ | 6,130 | $ | 5,485 | ||||
2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
Balance, January 1 | $ | 50,900 | $ | 68,746 | $ | 88,235 | $ | 109,370 | $ | 132,487 | ||||||||||
Unpaid dividends earned by stockholders | 17,846 | 19,489 | 21,135 | 23,117 | 25,371 | |||||||||||||||
Balance, December 31 | $ | 68,746 | $ | 88,235 | $ | 109,370 | $ | 132,487 | $ | 157,858 | ||||||||||
• | While the Company consolidates its two majority-owned operating subsidiaries, StreetLinks and Advent, cash and cash flow available to the Company’s operating subsidiaries may not be available to satisfy the Company’s 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 Company’s consolidated cash is shown gross of the minority ownership interest in both companies. Of the Company’s $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 Company’s $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 Company’s 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 Company’s investment in StreetLinks comprises 168% and 150% of the Company’s projected net income in 2011 and 2012, respectively, and projected increase in holding company cash and cash equivalents from the Company’s investment in StreetLinks comprises 104% and 116% of the Company’s projected increase in holding company cash and cash equivalents in 2011 and 2012, respectively. (As of December 31, 2010, projected net income from the Company’s investment in StreetLinks comprises 148% and 120% of the Company’s projected net income in 2011 and 2012, respectively, and projected increase in holding company cash and cash equivalents from the Company’s investment in StreetLinks comprises 135% and 89% of the Company’s 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 Company’s 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 management’s expectation of StreetLinks’ share of the appraisal |
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• | The Company’s 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 Company’s portfolio, there is a high degree of uncertainty in their projected future cash flows. |
• | Given the uncertainty in the Company’s 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 Company’s business, the Company believes that it is unlikely to produce cash flow before preferred dividends that exceeds its annual preferred dividend requirement. Likewise, the Company does not expect that it will be able to pay all of its accumulated and unpaid preferred dividends or pay amounts due to its Series D Holders when the Series D Preferred Stock converts. |
• | The Company believes that its access to new capital is currently restricted due to its financial outlook. The Company believes it is unlikely that it will be able to raise new capital to increase cash available to satisfy its preferred stock obligations. |
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• | 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 | ) | ||
• | 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 Company’s 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 Company’s NOLs, should be avoided. |
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• | 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; |
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• | 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 Company’s 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. |
• | 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 Company’s existing NOLs; and | |
• | the likelihood of obtaining the required percentage to consummate the contemplated recapitalization. |
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• | 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 Company’s ability to utilize its NOLs; | |
• | the short-term and long-term effects on the Company’s ability to access capital markets as a result of the recapitalization; and | |
• | whether the consideration offered as part of the Stock-Only Option or theCash-and-Stock Option reflect any premium over current market values for the Series C Preferred Stock. |
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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 theCash-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 Company’s 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. | |
• | 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. |
• | 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 Company’s cash flow is unlikely to exceed the Company’s 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 Company’s 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. |
• | 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. |
• | 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. |
• | 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). |
• | The Series C Offer was approved unanimously by all of the non-employee directors of the Company. |
• | 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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• | 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 theCash-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 Company’s 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. |
• | 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. |
• | 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. |
• | The Company has a large and growing obligation to its preferred stockholders, and the Company’s cash flow is unlikely to exceed the Company’s 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 Company’s 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. |
• | 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. |
• | 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. |
• | 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). |
• | The Series C Offer was approved unanimously by all of the non-employee directors of the Company. |
• | 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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• | the elimination of the accumulated but unpaid dividends, now and in the future, by eliminating the preferred stock; | |
• | the elimination of the liquidation preference associated with the preferred stock; and | |
• | the improvement to the Company’s adjusted book value per share of Common Stock on an adjusted pro forma basis. |
• | 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 Company’s ability to utilize its NOLs of approximately $324.4 million to offset future income may be limited; | |
• | the dilution of the Common Stock, as the number of outstanding shares of Common Stock would increase from 9,368,053 to 90,353,253 if the Series C Offer and the Series D Exchange are completed successfully; and | |
• | the liquidity impacts on the Company resulting from a cash expenditure of up to $3,000,000 to complete both the Series C Offer and the Series D Exchange. |
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• | reviewed and analyzed a draft copy of the proxy statement/consent solicitation/prospectus as of December 4, 2010; | |
• | reviewed and analyzed a draft copy of the Exchange Agreement as of November 15, 2010; | |
• | 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 Company’s Annual Report onForm 10-K for the year ended December 31, 2009; together with the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2010; | |
• | reviewed and analyzed certain other publicly available information concerning the Company, including the terms of the Series C Preferred Stock and Series D Preferred Stock; | |
• | reviewed certain non-publicly available information regarding the Company’s business plan and other internal financial statements and analyses relating to the Company’s business; | |
• | participated in certain discussions and negotiations among representatives of the Company, the Series C Preferred Stock and the Series D Preferred Stock regarding the terms of the recapitalization and the Exchange Agreement and other matters; |
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• | reviewed the reported prices and trading activity of the equity securities of the Company; | |
• | discussed the past and current operations, financial condition and future prospects of the Company with senior executives of the Company; |
• | analyzed certain publicly-available information concerning the terms of selected merger and acquisition transactions that it considered relevant to its analysis; |
• | reviewed and analyzed certain publicly-available financial and stock market data relating to selected public companies that it deemed relevant to its analysis; |
• | conducted such other financial studies, analyses and investigations and considered such other information as it deemed necessary or appropriate for purposes of Stifel’s opinion; and | |
• | took into account Stifel’s assessment of general economic, market and financial conditions and Stifel’s experience in other transactions, as well as Stifel’s experience in securities valuations and Stifel’s knowledge of the financial services industry generally. |
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• | The Series C Preferred Stock and the Series D Preferred Stock rank senior to all classes or series of the Company’s Common Stock with respect to dividend rights and the distribution of assets upon the Company’s 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 Company’s Common Shares. This obligation is expected to grow to $68.7 million, $88.1 million and $109.2 million in 2011, 2012 and 2013, respectively, which may impede the growth of any strategic options available to the Company, and which, if not impeded, could increase cash flow available to all stockholders in the future. Furthermore, the mandatory conversion of the Series D Preferred Stock in 2016 does not alleviate the requirement of the Company to pay the accrued and unpaid dividends on the Series D Preferred Stock in cash; |
• | Most sale transactions would trigger an “ownership change” under Section 382 of the Code, which would substantially limit the use of the Company’s tax loss carryforwards, which totaled approximately $324.4 million at September 30, 2010; | |
• | In order to achieve meaningful growth, the Company may need access to capital in the future, which may be restricted until the Company resolves its capital structure such that there is positive common equity; and |
• | Negotiation of the terms of any potential exchange would be influenced by the impact of an “ownership change” under Section 382 of the Code, and the preference of the preferred stockholders to receive some cash, balanced with management’s view of the Company’s liquidity needs, and the various stockholder approvals required to complete the recapitalization. |
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2011 | 2012 | |||||||
Middle Case Adjusted Per Share Estimates | ||||||||
Pro Forma Earnings (Loss) Per Share | $ | 0.12 | $ | 0.18 | ||||
Status Quo Earnings (Loss) Per Share | (0.94 | ) | (0.52 | ) | ||||
Stressed Case Adjusted Per Share Estimates | ||||||||
Pro Forma Earnings (Loss) Per Share | $ | 0.04 | $ | 0.04 | ||||
Status Quo Earnings (Loss) Per Share | (1.66 | ) | (1.85 | ) |
• | “Book Value Per Share”is defined as total equity less the aggregate liquidating preference of the Company’s preferred stock, divided by shares outstanding; | |
• | “Adjusted Book Value Per Share”is defined as total equity, less the aggregate liquidating preference of the Company’s preferred stock, plus an estimated range of value, in excess of carrying value, attributable to the Company’s investment in StreetLinks, plus an estimated range of the present value of the tax benefits attributable to the Company’s 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. Stifel’s range of value for the deferred tax asset was based on the financial projections supplied by the Company, as well as the Company’s estimates of realizable tax benefits and a range of discount rates; and | |
• | “Gross Deferred Tax Asset Per Share”is defined as the estimated nominal future tax benefits available to the Company based on the Company’s projections and management’s estimates, divided by shares outstanding. This figure is not adjusted for the valuation allowance held against the Company’s deferred tax asset. Under GAAP, the Company has provided a 100% valuation allowance against the deferred tax asset. |
Low | High | |||||||
Book Value Per Share | ||||||||
Pro Forma Book Value Per Share | $ | (0.66 | ) | $ | (0.66 | ) | ||
Status Quo Book Value Per Share | (24.54 | ) | (24.54 | ) | ||||
Adjusted Book Value Per Share | ||||||||
Pro Forma Adjusted Book Value Per Share | $ | (0.15 | ) | $ | 1.17 | |||
Status Quo Adjusted Book Value Per Share | (19.69 | ) | (6.90 | ) | ||||
Gross Deferred Tax Asset Per Share | ||||||||
Pro Forma Gross Deferred Tax Asset Per Share | $ | 1.16 | $ | 1.16 | ||||
Status Quo Gross Deferred Tax Asset Per Share | 11.21 | 11.21 |
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Low | High | |||||||
Value of the Company’s Common Equity (in 000s) | ||||||||
Pro Forma Liquidation Value of Common Equity* | $ | (21,801 | ) | $ | 71,179 | |||
Status Quo Liquidation Value of Common Equity* | (195,687 | ) | (102,707 | ) | ||||
Value of the Company’s Common Equity Per Share: | ||||||||
Pro Forma Liquidation Value Per Share of Common Equity* | $ | (0.24 | ) | $ | 0.79 | |||
Status Quo Liquidation Value Per Share of Common Equity* | (20.89 | ) | (10.96 | ) |
* | It should be noted that holders of Common Stock would receive $0 in the instance that the value to holders of Common Stock based on this analysis is less than $0. |
• | The impact of the underlying financial condition of the Company and the impact of the terms of the Company’s preferred stock on the financial terms of the recapitalization, which prevents a meaningful comparison to other recapitalization transactions; | |
• | The Company’s multiple and unique businesses, which, coupled with the Company’s liquidity, capital structure and profitability characteristics, prevent a meaningful comparison to other public companies; | |
• | Although the Company projects positive net income in 2011 and 2012, cash will not be available to holders of Common Stock unless and until the Company is able to pay approximately $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%; |
• | The Common Stock holders’ deficit per share; and |
• | The illiquidity and volatility in the Common Stock. |
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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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• | reviewed and analyzed the Exchange Agreement dated December 10, 2010; |
• | 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 Company’s Annual Report onForm 10-K for the year ended December 31, 2010; |
• | reviewed and analyzed certain other publicly available information concerning the Company, including the terms of the Series C Preferred Stock and Series D Preferred Stock; |
• | reviewed certain non-publicly available information regarding the Company’s business plan and other internal financial statements and analyses relating to the Company’s business; |
• | participated in certain discussions and negotiations among representatives of the Company, the Series C Preferred Stock and the Series D Preferred Stock regarding the terms of the recapitalization and the Exchange Agreement and other matters; |
• | reviewed the reported prices and trading activity of the equity securities of the Company; |
• | discussed the past and current operations, financial condition and future prospects of the Company with senior executives of the Company; |
• | analyzed certain publicly available information concerning the terms of selected merger and acquisition transactions that it considered relevant to its analysis; |
• | reviewed and analyzed certain publicly available financial and stock market data relating to selected public companies that it deemed relevant to its analysis; |
• | conducted such other financial studies, analyses and investigations and considered such other information as it deemed necessary or appropriate for purposes of Stifel’s bring-down opinion; and |
• | took into account Stifel’s assessment of general economic, market and financial conditions and Stifel’s experience in other transactions, as well as Stifel’s experience in securities valuations and Stifel’s knowledge of the financial services industry generally. |
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• | The Series C Preferred Stock and the Series D Preferred Stock rank senior to all classes or series of the Company’s Common Stock with respect to dividend rights and the distribution of assets upon the Company’s 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 Company’s 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 Company’s tax loss carryforwards, which totaled approximately $324.4 million at December 31, 2010; |
• | In order to achieve meaningful growth, the Company may need access to capital in the future, which may be restricted until the Company resolves its capital structure such that there is positive common equity; and |
• | Negotiation of the terms of any potential exchange would be influenced by the impact of an “ownership change” under Section 382 of the Code, and the preference of the preferred stockholders to receive some cash, balanced with management’s view of the Company’s liquidity needs, and the various stockholder approvals required to complete the recapitalization. |
2011 | 2012 | 2013 | ||||||||||
Expected Case Adjusted Per Share Estimates | ||||||||||||
Pro Forma Earnings (Loss) Per Share | $ | 0.08 | $ | 0.15 | $ | 0.22 | ||||||
Status Quo Earnings (Loss) Per Share | (1.14 | ) | (0.58 | ) | (0.13 | ) |
• | “Book Value Per Share”is defined as total equity less the aggregate liquidating preference of the Company’s preferred stock, divided by shares outstanding; |
• | “Adjusted Book Value Per Share”is defined as total equity, less the aggregate liquidating preference of the Company’s preferred stock, plus an estimated range of value, in excess of carrying value, attributable to the Company’s investment in Advent and StreetLinks, plus an estimated range of the present value of the tax benefits attributable to the Company’s 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. Stifel’s range of value for the deferred tax asset was based on the financial projections supplied by the Company, as well as the Company’s estimates of realizable tax benefits and a range of discount rates; and |
• | “Gross Deferred Tax Asset Per Share”is defined as the estimated nominal future tax benefits available to the Company based on the Company’s projections and management’s estimates, divided by shares outstanding. This figure is not adjusted for the valuation allowance held against the Company’s deferred tax asset. Under GAAP, the Company has provided a 100% valuation allowance against the deferred tax asset. |
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Low | High | |||||||
Book Value Per Share | ||||||||
Pro Forma Book Value Per Share | $ | (0.65 | ) | $ | (0.65 | ) | ||
Status Quo Book Value Per Share | (24.96 | ) | (24.96 | ) | ||||
Adjusted Book Value Per Share | ||||||||
Pro Forma Adjusted Book Value Per Share | $ | 0.11 | $ | 1.34 | ||||
Status Quo Adjusted Book Value Per Share | (17.63 | ) | (5.73 | ) | ||||
Gross Deferred Tax Asset Per Share | ||||||||
Pro Forma Gross Deferred Tax Asset Per Share | $ | 1.26 | $ | 1.26 | ||||
Status Quo Gross Deferred Tax Asset Per Share | 12.12 | 12.12 |
Low | High | |||||||
Value of the Company’s Common Equity (in 000s) | ||||||||
Pro Forma Liquidation Value of Common Equity* | $ | (24,491 | ) | $ | 78,989 | |||
Status Quo Liquidation Value of Common Equity* | (194,828 | ) | (91,348 | ) | ||||
Value of the Company’s Common Equity Per Share: | ||||||||
Pro Forma Liquidation Value Per Share of Common Equity* | $ | (0.27 | ) | $ | 0.87 | |||
Status Quo Liquidation Value Per Share of Common Equity* | (20.80 | ) | (9.75 | ) |
* | It should be noted that holders of Common Stock would receive $0 in the instance that the value to holders of Common Stock based on this analysis is less than $0. |
Pre-Announcement (12/10/10) | ||||||||||||||||||||
Per Share | Market Cap ($M) | |||||||||||||||||||
Exchange Offer | Market Value | |||||||||||||||||||
Consideration | of Exchange | |||||||||||||||||||
Security | Price | Value(1) | Premium(2) | Actual | Consideration(1) | |||||||||||||||
Series C Preferred Stock (Aggregate) | $ | 1.75 | $ | 10.36 | 492 | % | $ | 5.2 | $ | 31.0 | ||||||||||
Series D Preferred Stock(3) | 2.11 | 12.52 | N/A | 4.4 | 26.3 | |||||||||||||||
Common Stock | 0.67 | 0.67 | 6.3 | 6.3 |
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4/11/11 | ||||||||||||||||||||
Per Share | Market Cap ($M) | |||||||||||||||||||
Exchange Offer | Market Value | |||||||||||||||||||
Consideration | of Exchange | |||||||||||||||||||
Security | Price | Value(1) | Premium(2) | Actual | Consideration(1) | |||||||||||||||
Series C Preferred Stock (Aggregate) | $ | 5.15 | $ | 6.70 | 30 | % | $ | 15.4 | $ | 20.0 | ||||||||||
Series D Preferred Stock(3) | 6.32 | 8.09 | N/A | 13.3 | 17.0 | |||||||||||||||
Common Stock | 0.42 | 0.42 | 3.9 | 3.9 |
(1) | Market value of exchange consideration includes cash, which totals $3 million between the two series of preferred stock and Common Stock shares issued at the current market price. Series C Offer aggregate consideration value per share is the aggregate value to each class of stock divided by shares outstanding. |
(2) | Premium defined as the premium of the implied consideration to the current trading price of the security. |
(3) | Series D Preferred Stock price estimated based on relative liquidation preference and accrued dividends to the Series C Preferred Stock since Series D Preferred Stock is not a publicly-traded security. 12/10/10 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. |
• | The impact of the underlying financial condition of the Company and the impact of the terms of the Company’s preferred stock on the financial terms of the recapitalization, which prevents a meaningful comparison to other recapitalization transactions; |
• | The Company’s multiple and unique businesses, which, coupled with the Company’s liquidity, capital structure and profitability characteristics, prevent a meaningful comparison to other public companies; |
• | Although the Company projects positive net income in 2011 and 2012, cash will not be available to holders of Common Stock unless and until the Company is able to pay approximately $50.9 million in accrued and unpaid preferred dividends and meets an annual dividend service requirement on the preferred stock which is approximately $17.8 million annually, a portion of which continues to compound at a rate of 13%; |
• | The Company’s Common Stock holders’ deficit per share; and |
• | The illiquidity and volatility in the Common Stock. |
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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. | |
• | If the recapitalization is consummated, the Series C Offer, and the recapitalization as a whole, will be accretive to earnings per share, which will be beneficial to the holders of Common Stock. | |
• | The Company has a large and growing obligation to its preferred stockholders, and the Company’s cash flow is unlikely to exceed the Company’s 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 Company’s 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. |
• | 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 Company’s financial condition. |
• | While the holders of the Common Stock will not have the opportunity to consent to the Series C Offer itself, the holders of Common Stock will have the opportunity to vote on the Proposals. Approval of the Proposals is a condition to the closing of the Series C Offer. Assuming 100% of the classes eligible to vote are present at the meeting (whether in person or by proxy), there will be 14,233,053 aggregate votes entitled to vote on Proposal 1, Proposal 4 and Proposal 5, and there will be 11,243,053 aggregate votes entitled to vote on Proposal 2 and Proposal 3. Because there were 9,368,053 shares of Common Stock outstanding on the record date, the holders of Common Stock will control 65.8% of the vote on Proposal 1, Proposal 4 and Proposal 5, and the holders of Common Stock will control 83.3% of the vote on Proposal 2 and Proposal 3. Assuming 100% of the classes eligible to vote are present at the meeting (whether in person or by proxy) and assuming 100% of the Series C Holders and 100% of the Series D Holders vote to approve the Proposals to the extent they are entitled to vote on each Proposal, 24.0% of the shares of Common Stock outstanding on the record date must be voted for approval of Proposal 1, Proposal 4 and Proposal 5 for those proposals to be approved and 40.0% of the shares of Common Stock outstanding on the record date must be voted for approval of Proposal 2 and Proposal 3 for those proposals to be approved. |
• | The Series C Offer was approved unanimously by all of the non-employee directors of the Company. |
• | 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 Series C Offer, and the recapitalization as a whole, will be accretive to book value per Common Stock share, as well as liquidation value per Common Stock share, which will be beneficial to the holders of Common Stock. | |
• | If the recapitalization is consummated, the Series C Offer, and the recapitalization as a whole, will be accretive to earnings per share, which will be beneficial to the holders of Common Stock. | |
• | The Company has a large and growing obligation to its preferred stockholders, and the Company’s cash flow is unlikely to exceed the Company’s 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 Company’s 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. |
• | 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 Company’s financial condition. |
• | While the holders of the Common Stock will not have the opportunity to consent to the Series C Offer itself, the holders of Common Stock will have the opportunity to vote on the Proposals. Approval of the Proposals is a condition to the closing of the Series C Offer. Assuming 100% of the classes eligible to vote are present at the meeting (whether in person or by proxy), there will be 14,233,053 aggregate votes entitled to vote on Proposal 1, Proposal 4 and Proposal 5, and there will be 11,243,053 aggregate votes entitled to vote on Proposal 2 and Proposal 3. Because there were 9,368,053 shares of Common Stock outstanding on the record date, the holders of Common Stock will control 65.8% of the vote on Proposal 1, Proposal 4 and Proposal 5, and the holders of Common Stock will control 83.3% of the vote on Proposal 2 and Proposal 3. Assuming 100% of the classes eligible to vote are present at the meeting (whether in person or by proxy) and assuming 100% of the Series C Holders and 100% of the Series D Holders vote to approve the Proposals to the extent they are entitled to vote on each Proposal, 24.0% of the shares of Common Stock outstanding on the record date must be voted for approval of Proposal 1, Proposal 4 and Proposal 5 for those proposals to be approved and 40.0% of the shares of Common Stock outstanding on the record date must be voted for approval of Proposal 2 and Proposal 3 for those proposals to be approved. |
• | The Series C Offer was approved unanimously by all of the non-employee directors of the Company. |
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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 Company is not paying cumulative preferential cash dividends as part of the Series C Offer (which such dividends accrue regardless of whether the Company declares such dividends) to the Series C Holders. Sections 3(a) and 3(b) of the Series C Preferred Stock Articles Supplementary (the “C Articles”) provide that dividends shall accrue and cumulate at the rate of 8.9%. As of April 15, 2011, the Series C Preferred Stock had accumulated dividends of $23.6 million or $7.89 per share. By consenting to the Series C Offer and the Series D Exchange, you waive your right to current and future accumulated preferential cash dividends. |
• | The Series C Preferred Stock includes certain preferential liquidation rights, set forth in Section 6 of the C Articles, in the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company. As of April 15, 2011 the liquidation value of the Series C Preferred Stock is $74.8 million or $25.02 per share. By consenting to the Series C Offer and the Series D Exchange, you waive your right to any liquidation preference. |
• | 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 |
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dividend to any holders of the Company’s equity securities unless full cumulative dividends on the Series C Preferred Stock are paid. |
• | 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. |
• | 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. |
Voting Rights: | Common Stock: One vote per share on all matters submitted to stockholders. | |
Series C: No voting rights other than: |
• When dividends on the Series C Preferred Stock are in arrears for six or more quarterly periods (whether or not consecutive), the holders of Series C Preferred Stock (voting together as a single class with all other equity securities of the Company upon which like voting rights have been conferred and are exercisable) shall be entitled to elect a total of two additional directors to the Board of Directors until all dividends accumulated on the Series C Preferred Stock for the past dividend periods and the then current dividend period shall have been fully paid or authorized and a sum sufficient for the payment thereof set aside for payment; |
• When any action is to be taken to authorize, create or increase the authorized or issued amount of any class or series of equity securities ranking senior to the outstanding Series C Preferred Stock with respect to the payment of dividends or the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Company or to reclassify any authorized equity securities of the Company into any such senior equity securities, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such senior equity securities; and |
• 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: | Common Stock: The payment of dividends on our Common Stock is at the discretion of our Board of Directors. No dividends can be paid on any of our Common Stock until all accrued and unpaid dividends on our Series C Preferred Stock and Series D Preferred Stock are paid in full. We do not anticipate that any dividends will be declared or paid on shares of Common Stock in the foreseeable future. | |
Series C: Dividends on the Series C Preferred Stock are payable quarterly in cash and accrue at a rate of 8.90% annually. The Company has not paid dividends on the Series C Preferred Stock since October 2007. We do not anticipate that any dividends will be declared or paid on shares of Series C Preferred Stock in the foreseeable future. |
Optional Redemption: | Common Stock: We do not have right to redeem Common Stock. | |
Series C: The Company, at its option, upon giving notice to the Series C Holders, may redeem the Series C Preferred Stock, in whole or from time to time in part, for cash, at a redemption price of $25.00 per share, plus all accumulated and unpaid dividends thereon to the date of redemption, whether or not authorized. |
Mandatory Redemption: | Common Stock: Holders have no right to require redemption. | |
Series C: Holders have no right to require redemption. |
Optional Conversion: | Common Stock: Not convertible. | |
Series C: Not convertible. |
Forced Conversion: | Common Stock: We have no right to force conversion of Common Stock into another security. | |
Series C: We have no right to force a conversion of Series C Preferred Stock into another security. |
Liquidation: | Common Stock: Distributions only made to holders of Common Stock if liquidation preferences of preferred stock are satisfied. | |
Series C: Series C Holders are entitled to receive out of the assets of the Corporation available for distribution to stockholders an amount equal to $25.00 per share, plus any accumulated and unpaid dividends thereon to the date of payment, whether or not authorized, before any distribution of assets is made to holders of Common Stock and any other shares of equity securities of the Corporation that rank junior to the Series C Preferred Stock as to liquidation rights. |
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% of Series C Preferred Stock | What You Would Receive If You Own | |||||||||||||||||||||||||||||||||||||
% Series C Holders Electing | Shares Electing | Receiving Elected Option | 100 Series C Shares | |||||||||||||||||||||||||||||||||||
Cash-and- | Cash-and- | Cash-and- | If You Elected | If You Elected | ||||||||||||||||||||||||||||||||||
Stock | Stock-Only | Stock | Stock-Only | Stock | Stock-Only | Cash and Stock | Stock Only | |||||||||||||||||||||||||||||||
Consideration | Consideration | Consideration | Consideration | Consideration | Consideration | Common | Common | |||||||||||||||||||||||||||||||
Option | Option | Option | Option | Option | Option | Cash | Shares | Cash | Shares | |||||||||||||||||||||||||||||
0 | % | 100 | % | 0 | 2,990,000 | N/A | 73 | % | N/A | N/A | $ | 54.29 | 1,466 | |||||||||||||||||||||||||
25 | % | 75 | % | 747,500 | 2,242,500 | 100 | % | 97 | % | $ | 200.00 | 300 | $ | 5.72 | 1,854 | |||||||||||||||||||||||
50 | % | 50 | % | 1,495,000 | 1,495,000 | 54 | % | 100 | % | $ | 108.58 | 1,031 | $ | — | 1,900 | |||||||||||||||||||||||
75 | % | 25 | % | 2,242,500 | 747,500 | 36 | % | 100 | % | $ | 72.39 | 1,321 | $ | — | 1,900 | |||||||||||||||||||||||
100 | % | 0 | % | 2,990,000 | 0 | 27 | % | N/A | $ | 54.29 | 1,466 | N/A | N/A |
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• | any general suspension of, or limitation on prices for, trading in securities in the United States securities or financial markets, | |
• | any material adverse change in the price of the Series C Preferred Stock in the United States or financial markets, | |
• | a material impairment in the trading market for securities, | |
• | a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, | |
• | any limitation (whether or not mandatory) by any government or governmental, administrative or regulatory authority or agency, domestic or foreign, on, or other event that, in our reasonable judgment, might affect, the extension of credit by banks or other lending institutions, | |
• | a commencement of a war or armed hostilities or other national or international calamity directly or indirectly involving the United States, | |
• | 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. |
• | 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. |
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Filing Fees | $ | 500 | ||
Legal Fees | $ | 360,000 | ||
Accounting and Appraisal Fees | $ | 115,000 | ||
Soliciting Expenses | $ | 15,000 | ||
Financial Advisor Expenses (including fairness opinion preparation) | $ | 655,000 | ||
Printing Costs | $ | 100,000 | ||
Estimated Fees Total | $ | 1,245,500 |
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• | 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 15, 2011 was assumed in determining the difference between the fair value of the consideration transferred to the holders of the Series C Preferred Stock and Series D Preferred Stock and the carrying amount of the Series C Preferred Stock and Series D Preferred Stock to calculate a return to (from) the Series C Holders and Series D Holders. |
Pro Forma — Series C | ||||||||||||
Offer and | ||||||||||||
Pro Forma — 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 | 732,997 | 747,467 | |||||||||
Accumulated deficit | (898,195 | ) | (824,239 | ) | (811,158 | ) | ||||||
Accumulated other comprehensive income | 4,411 | 4,411 | 4,411 | |||||||||
Total NFI stockholders’ deficit | (106,276 | ) | (86,278 | ) | (58,376 | ) | ||||||
Noncontrolling interests | (267 | ) | (267 | ) | (267 | ) | ||||||
Total stockholders’ deficit | $ | (106,543 | ) | $ | (86,545 | ) | $ | (58,643 | ) | |||
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Pro Forma — Series C | ||||||||||||
Offer and | ||||||||||||
Pro Forma — 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 | — |
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2008 | High | Low | ||||||
First Quarter | $ | 3.44 | $ | 1.10 | ||||
Second Quarter | 2.03 | 1.00 | ||||||
Third Quarter | 1.99 | 0.28 | ||||||
Fourth Quarter | 1.01 | 0.22 |
2009 | High | Low | ||||||
First Quarter | $ | 0.65 | $ | 0.20 | ||||
Second Quarter | 1.74 | 0.55 | ||||||
Third Quarter | 1.35 | 0.75 | ||||||
Fourth Quarter | 1.28 | 0.80 |
2010 | High | Low | ||||||
First Quarter | $ | 1.01 | $ | 0.69 | ||||
Second Quarter | 1.04 | 0.80 | ||||||
Third Quarter | 0.99 | 0.52 | ||||||
Fourth Quarter | 0.91 | 0.25 |
2011 | High | Low | ||||||
First Quarter | $ | 0.51 | $ | 0.35 | ||||
Second Quarter (through April 15, 2011) | $ | 0.48 | $ | 0.39 |
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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 15, 2011) | $ | 5.39 | $ | 5.00 |
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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• | maintainingand/or generating adequate liquidity to allow us to take advantage of investment opportunities, and | |
• | generating income for our stockholders. |
(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 | ) |
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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. |
• | 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 |
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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. |
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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 | ) |
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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 | ) | ||||||
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(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. |
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(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 | — | ||||||
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(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 | ) |
• | 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 |
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• | We have lower than average balances of our mortgage securities— available-for-sale portfolio as the securities have paid down and we have not acquired new bonds. |
• | 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 |
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• | Overcollateralization which is designed to protect the primary bondholder from credit loss on the underlying loans. |
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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 |
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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 IVLLC(15) | — | — | — | — | 1,050,000 | 50.00 | % | 937,500 | 8.22 | % | ||||||||||||||||||||||
520 Madison Avenue, 12th Floor New York, NY 10022 |
* | Less than 1% | |
(1) | The mailing address of each beneficial owner is 2114 Central Street, Suite 600, Kansas City, Missouri 64108, unless otherwise shown. | |
(2) | 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 anynon-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 Company’s Common Stock outstanding, and one vote for each share of Common Stock into which outstanding shares of the Company’s 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. Anderson’s son which are deemed indirectly held by |
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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. |
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Name | Title | |
W. Lance Anderson | Chairman of the Board and Chief Executive Officer | |
Rodney E. Schwatken | Chief Financial Officer |
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. Schwatken’s bonus plan. | |
(2) | Represents quarterly retention bonuses of $25,000. | |
(3) | Represents the dollar amount recognized for financial reporting purposes for the fiscal years ended December 31, 2010 and 2009, in accordance with FASB ASC Topic 718 (disregarding estimates of forfeitures). The stock awards column includes amounts for restricted stock granted in 2005, 2006 and 2007. The option awards column includes amounts for stock option awards granted in 2005, 2006, 2007 and 2009. See Note 18 to the consolidated financial statements for the fiscal year ended December 31, 2009 for a discussion of the assumptions used in calculating these amounts. Substantially all of Mr. Anderson’s options awards were granted when the Company’s stock was trading at substantially higher prices and as a result, his option awards are “underwater” or “out of the money” (meaning the exercise price exceeds the market price of the Company’s stock). | |
(4) | All Other Compensation for the named executives is set forth in the following table. |
Forgiveness of | Tax | Total All Other | ||||||||||||||
Founders’ Notes | Gross-Ups | Compensation | ||||||||||||||
Name | Year | ($)(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. Anderson’s 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 taxgross-up on the forgiveness of the note received for 2010. During 2009, Mr. Anderson was paid for taxgross-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 $10,000 for any named executive officer for fiscal years 2008 and 2009 so the amounts have been excluded from the Summary Compensation Table. |
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Stock Awards | ||||||||||||||||||||||||
Option Awards | Number of | Market | ||||||||||||||||||||||
Number of | Number of | Shares or | Value of | |||||||||||||||||||||
Securities | Securities | Units of | Shares or | |||||||||||||||||||||
Underlying | Underlying | Stock That | Units of | |||||||||||||||||||||
Unexercised | Unexercised | Option | Option | Have Not | Stock That | |||||||||||||||||||
Options (#) | Options (#) | Exercise | Expiration | Vested | Have Not | |||||||||||||||||||
Name | Exercisable | Unexercisable | Price ($) | 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 Company’s 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 Company’s Common Stock on December 31, 2010 (the last trading day of 2010) was $0.42. |
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• | 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, |
• | 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 Optionee’s authority or integrity as an officer of the Company; |
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• | breach of fiduciary duties in any material respect; or | |
• | conviction or plea of guilty ornolo contendereto a felony or crime involving moral turpitude, misappropriation, embezzlement or fraud. |
• | except in connection with the Company’s termination of Optionee’s employment for Cause or as a result of Optionee’s death or disability: (i) a material (25% or more) reduction in Optionee’s 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 Company’s material breach of any of the provisions of this Agreement or of any other material agreement between the Company and Optionee concerning compensation. |
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• | breach of any of the terms of the employment agreement; | |
• | failure to perform material duties in accordance with the standards from time to time established by the Company; | |
• | neglect in performance or failure to attend to the performance of material duties; | |
• | insubordination or willful breach of policies and procedures of the Company; | |
• | breach of fiduciary duties; or | |
• | conduct that the Company determines in good faith may impair or tend to impair the integrity of the Company, including but not limited to commission of a felony, theft, misappropriation, embezzlement, dishonesty, or criminal misconduct. |
• | 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 Company’s termination of the executive’s 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 Company’s material breach of any of the provisions of the employment agreement. |
• | 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 byRule 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 Company’s then outstanding securities; |
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• | 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 Company’s 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 Company’s 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 Company’s assets. |
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Fees Earned or | Option | |||||||||||
Paid in Cash | Awards | Total | ||||||||||
Name | ($) | ($)(1) | ($) | |||||||||
Gregory T. Barmore | $ | 55,000 | $ | 1,018 | (2) | $ | 56,018 | |||||
Art N. Burtscher | 55,000 | 1,018 | (3) | 56,018 | ||||||||
Edward W. Mehrer | 60,000 | 1,018 | (4) | 61,018 | ||||||||
Donald M. Berman | 42,500 | 1,018 | (5) | 43,518 | ||||||||
Howard M. Amster | 45,500 | 2,389 | (6) | 47,889 | ||||||||
Barry A. Igdaloff | 45,500 | 2,389 | (7) | 47,889 |
(1) | Represents the dollar amount recognized for financial reporting purposes for the fiscal year ended December 31, 2010, in accordance with FASB ASC Topic 718 (disregarding estimates of forfeitures), and includes amounts from stock option awards granted in 2009 through 2010. See Note 18 to the consolidated financial statements for the fiscal year ended December 31, 2009 for a discussion of the relevant assumptions used in calculating these amounts. | |
(2) | Mr. Barmore received an Annual Grant of 1,250 fully-vested options in 2010. The grant date fair value of Mr. Barmore’s option award was $1,018. The aggregate number of option awards outstanding at December 31, 2010 for Mr. Barmore was 12,267. | |
(3) | Mr. Burtscher received an Annual Grant of 1,250 fully-vested options in 2010. The grant date fair value of Mr. Burtscher’s option award was $1,018. The aggregate number of option awards outstanding at December 31, 2010 for Mr. Burtscher was 16,250. | |
(4) | Mr. Mehrer received an Annual Grant of 1,250 fully-vested options in 2010. The grant date fair value of Mr. Mehrer’s option award was $1,018. The aggregate number of option awards outstanding at December 31, 2010 for Mr. Mehrer was 14,687. | |
(5) | Mr. Berman received an Annual Grant of 1,250 fully-vested options in 2010. The grant date fair value of Mr. Berman’s option award was $1,018. The aggregate number of option awards outstanding at December 31, 2010 for Mr. Mehrer was 8,216. | |
(6) | Represents the amortization of the vesting of Mr. Amster’s 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. Amster’s 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) | Represents the amortization of the vesting of Mr. Igdaloff’s 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. Igdaloff’s 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. |
• | 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 Company’s operations; | |
• | Review agendas for the Board of Directors and committee meetings; | |
• | Assess the quality, quantity and timeliness of the flow of information from management that is necessary for the independent directors to effectively and responsibly perform their duties, and although management is responsible for the preparation of materials for the Board of Directors, the Lead Independent Director may specifically request the inclusion of certain material; | |
• | Whenever appropriate, direct the retention of consultants who report directly to the Board of Directors; | |
• | Assist the Board of Directors and the Company’s 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; | |
• | Evaluate, along with the members of the Compensation Committee and the full Board of Directors, the Chief Executive Officer’s performance and meet with the Chief Executive Officer to discuss the Board of Directors’ evaluation; and | |
• | Review the membership and performance of the various committees of the Board of Directors and committee chairs. |
• | 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) ofRegulation S-K of the Exchange Act. During 2010, the Audit Committee met four times. |
• | 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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• | 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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RELATED PARTIES; RELATED PARTY TRANSACTIONS
• | Any executive officer, or any director or nominee for election as a director; | |
• | Any person who owns more than 5% of the Company’s voting securities; | |
• | Any immediate family member of any of the foregoing; or | |
• | Any entity in which any of the foregoing persons is employed or is a partner or principal or in a similar position or in which such person has a 10% beneficial ownership interest. |
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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; | |
• | reclassify any authorized equity securities into any such senior equity securities; | |
• | create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such senior equity securities; or | |
• | amend, alter or repeal the provisions of our charter (including the Articles Supplementary for the Series C Preferred Stock), whether by merger, consolidation or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of the Series C Preferred Stock or the holders thereof. |
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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; | |
• | approve or make any amendment to the terms of the Series D Preferred Stock or the corresponding Articles Supplementary; |
• | amend, alter, change, repeal or waive any provision of the charter or Bylaws of the Company, if such amendment, alteration, change, repeal or waiver adversely affects the rights of the Series D Preferred Stock; |
• | reclassify any authorized shares of the Company into any Series D Preferred Stock, or shares on parity or senior to Series D Preferred Stock, or any obligation or security convertible into or exercisable or exchangeable for, or evidencing a right to purchase any, Series D Preferred Stock, or shares on parity or senior to Series D Preferred Stock; |
• | consummate any transaction that could, or could reasonable be expected to, individually or in the aggregate, adversely affect or impair the rights, privileges or preferences of the Series D Holders in such capacity; or |
• | enter into any contract, agreement, commitment or understanding with respect to any of the foregoing. |
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• | an individual who is a citizen or resident of the United States; | |
• | a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any political subdivision thereof; | |
• | a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person; or | |
• | an estate the income of which is subject to U.S. federal income taxation regardless of its source. |
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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. | |
• | Your Interest in the Company is Terminated. The receipt of cash by you will be a complete redemption of your interest in us if, as a result of the exchange offer, you no longer actually or constructively own any of our outstanding shares of stock. | |
• | The Receipt of Cash by You is Not Essentially Equivalent to a Dividend. The receipt of cash by you will not be essentially equivalent to a dividend if the exchange offer results in a meaningful reduction of your proportionate interest in our stock. Whether the receipt of cash by you results in a meaningful reduction of your proportionate interest in our stock will depend on your particular facts and circumstances. However, in certain circumstances, in the case of a stockholder holding a small minority (e.g., less than 1%) of our stock, even a small reduction may satisfy this test. |
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• | fails to furnish a taxpayer identification number (“TIN”) within a reasonable time after a request therefore; | |
• | furnishes an incorrect TIN; | |
• | is notified by the IRS that it failed to report interest or dividends properly; or | |
• | fails, under certain circumstances, to provide a certified statement, signed under penalty of perjury, that the TIN provided is correct and that such U.S. holder is not subject to backup withholding. |
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• | the gain is considered effectively connected with your conduct of a trade or business within the United States; or | |
• | you are an individual who holds the Common Stock as a capital asset and are present in the United States for 183 or more days in the taxable year of the sale or other disposition. |
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F-2 | ||||
Audited Consolidated Financial Statements | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-8 |
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December 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in thousands, except share amounts) | ||||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 12,582 | $ | 7,104 | ||||
Mortgage securities (includes CDO securities of $1,198 and $959, respectively) | 5,778 | 7,990 | ||||||
Notes receivable, net of allowance of $1,047 and $300, respectively | 3,965 | 4,920 | ||||||
Service fee receivable, net of allowance of $42 and $22, respectively | 1,924 | 868 | ||||||
Other current assets (includes CDO other assets of $299 and $428, respectively) | 3,291 | 6,633 | ||||||
Total current assets | 27,540 | 27,515 | ||||||
Securitization Trust Assets | ||||||||
Mortgage loans —held-in-portfolio, net of allowance of $0 and $712,614, respectively | — | 1,289,474 | ||||||
Accrued interest receivable | — | 74,025 | ||||||
Real estate owned | — | 64,179 | ||||||
Total securitization trust assets | — | 1,427,678 | ||||||
Non-Current Assets | ||||||||
Property and equipment, net of depreciation | 4,821 | 1,803 | ||||||
Goodwill | 3,170 | — | ||||||
Other assets | 2,330 | 2,495 | ||||||
Total non-current assets | 10,321 | 4,298 | ||||||
Total assets | $ | 37,861 | $ | 1,459,491 | ||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
Liabilities: | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 4,590 | $ | 1,949 | ||||
Accrued expenses | 5,883 | 6,801 | ||||||
Dividends payable | 50,900 | 34,402 | ||||||
Other current liabilities (includes CDO debt and other liabilities of $1,497 and $1,396, respectively) | 2,103 | 2,962 | ||||||
Total current liabilities | 63,476 | 46,114 | ||||||
Securitization Trust Liabilities | ||||||||
Due to servicer | — | 136,855 | ||||||
Other securitization trust liabilities | — | 3,729 | ||||||
Asset-backed bonds secured by mortgage loans | — | 2,270,602 | ||||||
Total securitization trust liabilities | — | 2,411,186 | ||||||
Non-Current Liabilities | ||||||||
Junior subordinated debentures | 78,086 | 77,815 | ||||||
Other liabilities | 2,842 | 928 | ||||||
Total non-current liabilities | 80,928 | 78,743 | ||||||
Total liabilities | 144,404 | 2,536,043 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Shareholders’ deficit: | ||||||||
Capital stock, $0.01 par value, 50,000,000 shares authorized: | ||||||||
Redeemable preferred stock, $25 liquidating preference per share ($74,750 in total); 2,990,000 shares, issued and outstanding | 30 | 30 | ||||||
Convertible participating preferred stock, $25 liquidating preference per share $(52,500 in total); 2,100,000 shares, issued and outstanding | 21 | 21 | ||||||
Common stock, 9,368,053, shares issued and outstanding | 94 | 94 | ||||||
Additional paid-in capital | 787,363 | 786,989 | ||||||
Accumulated deficit | (898,195 | ) | (1,868,398 | ) | ||||
Accumulated other comprehensive income | 4,411 | 5,111 | ||||||
Other | — | (70 | ) | |||||
Total NovaStar Financial, Inc. (“NFI”) shareholders’ deficit | (106,276 | ) | (1,076,223 | ) | ||||
Noncontrolling interests | (267 | ) | (329 | ) | ||||
Total shareholders’ deficit | (106,543 | ) | (1,076,552 | ) | ||||
Total liabilities and shareholders’ deficit | $ | 37,861 | $ | 1,459,491 | ||||
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For the Year Ended December 31, | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands, except share amounts) | ||||||||
Income and Revenues: | ||||||||
Service fee income | $ | 75,168 | $ | 31,106 | ||||
Interest income — mortgage loans on securitization trusts | 10,848 | 131,301 | ||||||
Interest income — mortgage securities | 11,504 | 21,656 | ||||||
Total | 97,520 | 184,063 | ||||||
Costs and Expenses: | ||||||||
Cost of services | 66,475 | 32,221 | ||||||
Interest expense — asset-backed bonds | 1,416 | 21,290 | ||||||
Provision for credit losses on securitization trusts | 17,433 | 260,860 | ||||||
Servicing fees on securitization trusts | 731 | 10,639 | ||||||
Premiums for mortgage loan insurance on securitization trusts | 308 | 6,178 | ||||||
Selling, general and administrative expense | 19,314 | 20,777 | ||||||
Gain on derecognition of securitization trusts | (993,131 | ) | — | |||||
Other expense | 390 | 13,905 | ||||||
Total | (887,064 | ) | 365,870 | |||||
Other income | 787 | 887 | ||||||
Interest expense on trust preferred securities | (1,073 | ) | (1,128 | ) | ||||
Income (loss) before income tax expense | 984,298 | (182,048 | ) | |||||
Income tax (benefit) expense | (1,356 | ) | 1,108 | |||||
Net income (loss) | 985,654 | (183,156 | ) | |||||
Less: Net loss attributable to noncontrolling interests | (1,048 | ) | (2,054 | ) | ||||
Net income (loss) attributable to NFI | $ | 986,702 | $ | (181,102 | ) | |||
Earnings (Loss) Per Common Share attributable to NFI: | ||||||||
Basic | $ | 86.53 | $ | (20.97 | ) | |||
Diluted | $ | 86.53 | $ | (20.97 | ) | |||
Weighted average basic common shares outstanding | 9,337,207 | 9,368,053 | ||||||
Weighted average diluted common shares outstanding | 9,337,207 | 9,368,053 | ||||||
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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 founder’s 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 founder’s 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 | ) | |||||||||||||||
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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 loansheld-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 loansheld-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 | ||||||
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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 | ||||
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 | — |
F-7
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Note 1. | Basis of Presentation, Business Plan and Liquidity |
F-8
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Note 2. | Summary of Significant Accounting and Reporting Policies |
F-9
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2010 | 2009 | |||||||
Balance, beginning of period | $ | 300 | $ | — | ||||
Provision for credit losses | 747 | 300 | ||||||
Balance, end of period | $ | 1,047 | $ | 300 | ||||
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Note 3. | Business Combinations |
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 | ||
Note 4. | Derecognition of Securitization Trusts |
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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 |
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. |
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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 | ||||||
Loansheld-in-portfolio | 2,138,500 | 1,243,731 | 321,097 | |||||||||
Total loans securitized orheld-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. |
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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 | ||||
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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.” |
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. |
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(D) | Due to derecognition of securitization trusts during the year ended December 31, 2010, size/principal outstanding includes NHEL2006-1, NHEL 2006-MTA1 and NHEL2007-1 as of December 31, 2010. |
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 |
Note 6. | Mortgage Securities |
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 | ||||
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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. |
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. |
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Note 7. | Borrowings |
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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: | ||||||||||||||||||||
NHESSeries 2006-1 | $ | 475,360 | 0.52 | % | 72 | $ | 399,913 | 8.03 | % | |||||||||||
NHESSeries 2006-MTA1 | 602,068 | 0.48 | 51 | 532,696 | 3.84 | |||||||||||||||
NHESSeries 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. |
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Note 8. | Commitments and Contingencies |
Lease | ||||
Obligations | ||||
2011 | $ | 1,406 | ||
2012 | 969 | |||
2013 | 723 | |||
2014 | 73 | |||
2015 | — | |||
$ | 3,171 | |||
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Note 9. | Shareholders’ Equity |
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Note 10. | Comprehensive Income |
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 | ) | |||
Note 11. | Fair Value Accounting |
• | 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. |
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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 | ||||||||
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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 | |||||
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. |
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(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 Company’s consolidated balance sheets. As of December 31, 2010, the Company had no receivables from securitization trusts related to mortgage securitiesavailable-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 Company’s consolidated balance sheets. As of December 31, 2009, the Company had receivables from securitization trusts of $12.5 million, related to mortgage securitiesavailable-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. |
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. |
F-30
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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 | ) | |||||||
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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 |
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 | |||||
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Note 13. | Goodwill |
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. |
Note 14. | Segment Reporting |
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Table of Contents
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. |
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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. |
Note 15. | Earnings Per Share |
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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 | ) | |||
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 |
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Note 16. | Income Taxes |
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 | |||
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 | |||
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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 | $ | — | $ | — | ||||
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 | ||||
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Note 17. | Employee Benefit Plans |
Note 18. | Fair Value of Financial Instruments |
F-39
Table of Contents
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 | ) |
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Note 19. | Subsequent Events |
F-41
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F-42
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32 South Street
Baltimore, Maryland 21202
32 South Street
Baltimore, Maryland 21202
A-1
Table of Contents
A-2
Table of Contents
Gregory T. Barmore
Art N. Burtscher
Edward W. Mehrer
A-3
Table of Contents
A-4
Table of Contents
A-5
Table of Contents
A-6
Table of Contents
A-7
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A-8
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A-9
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A-10
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ATTEST: | NOVASTAR FINANCIAL, INC. | |
By: Name: Rodney Schwatken Title: Chief Financial Officer | By: (SEAL) Name: W. Lance Andersen Title: Chairman of the Board and Chief Executive Officer |
A-11
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NovaStar Financial, Inc.
2114 Central Street
Suite 600
Kansas City, MO 64108
B-1
Table of Contents
December 10, 2010
Page 2
B-2
Table of Contents
December 10, 2010
Page 3
B-3
Table of Contents
December 10, 2010
Page 4
B-4
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C-1
Table of Contents
April 14, 2011
Page 2
C-2
Table of Contents
April 14, 2011
Page 3
C-3
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April 14, 2011
Page 4
C-4
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EACH OUTSTANDING SHARE OF
8.90% SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK
OR
COMMON STOCK AND CASH
Table of Contents
Item 20. | Indemnification of Directors and Officers. |
II-1
Table of Contents
Item 21. | Exhibits and Financial Statement Schedules. |
(a) | Exhibit List |
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) |
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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 Company’s 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 | ||
99 | .242 | Letter of Transmittal for the Series C Offer. | ||
99 | .343 | Notice of Guaranteed Delivery for the Series C Offer. | ||
99 | .444 | Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for the Series C Offer. | ||
99 | .545 | Form of Client Letter for Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for the Series C Offer. | ||
99 | .646 | Letter from the Company to holders of Shares for the Series C Offer. |
* | Previously filed. | |
** | Filed herewith. | |
1 | Incorporated by reference to Exhibit 3.1 toForm 10-Q filed by the Registrant on August 9, 2007 (FileNo. 001-13533). |
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2 | Incorporated by reference to Exhibit 3.1 toForm 8-K filed by the Registrant with the SEC on May 26, 2005 (FileNo. 001-13533). | |
3 | Incorporated by reference to Exhibit 3.3.1 toForm 10-Q filed by the Registrant with the SEC on August 5, 2005 (FileNo. 001-13533). | |
4 | Incorporated by reference to Exhibit 3.2.1 toForm 8-K filed by the Registrant with the SEC on March 16, 2009 (FileNo. 001-13533). | |
5 | Incorporated by reference to Exhibit 4.1 toForm 10-Q filed by the Registrant with the SEC on August 5, 2005 (FileNo. 001-13533). | |
6 | Incorporated by reference to Exhibit 4.3 toForm 8-A/A filed by the Registrant with the SEC on January 20, 2004 (FileNo. 001-13533). | |
7 | Incorporated by reference to Exhibit 4.1 toForm 8-K filed by the Registrant with the SEC on March 21, 2011 (FileNo. 001-13533). | |
8 | Incorporated by reference to Exhibit 10.1 toForm 8-K/A filed by the Registrant with the SEC on January 10, 2008 (FileNo. 001-13533). | |
9 | Incorporated by reference to Exhibit 10.10 toForm 8-K filed by the Registrant with the SEC on November 16, 2005 (FileNo. 001-13533). | |
10 | Incorporated by reference to Exhibit 10.15 toForm S-8 filed by the Registrant with the SEC on June 30, 2004 (FileNo. 333-116998). | |
11 | Incorporated by reference to Exhibit 10.46 toForm 10-Q filed by the Registrant with the SEC on May 10, 2007 (FileNo. 001-13533). | |
12 | Incorporated by reference to Exhibit 10.25.1 toForm 8-K filed by the Registrant with the SEC on February 4, 2005 (FileNo. 001-13533). | |
13 | Incorporated by reference to Exhibit 10.25.2 toForm 8-K filed by the Registrant with the SEC on February 4, 2005 (FileNo. 001-13533). | |
14 | Incorporated by reference to Exhibit 10.25.3 toForm 8-K filed by the Registrant with the SEC on February 4, 2005 (FileNo. 001-13533). | |
15 | Incorporated by reference to Exhibit 10.26 toForm 8-K filed by the Registrant with the SEC on March 15, 2007 (FileNo. 001-13533). | |
16 | Incorporated by reference to Exhibit 10.30 toForm 8-K filed by the Registrant with the SEC on February 11, 2005 (FileNo. 001-13533). | |
17 | Incorporated by reference to Exhibit 10.34 toForm 8-K filed by the Registrant with the SEC on February 14, 2006 (FileNo. 001-13533). | |
18 | Incorporated by reference to Exhibit 10.1 toForm 8-K filed by the Registrant with the SEC on July 20, 2007 (FileNo. 001-13533). | |
19 | Incorporated by reference to Exhibit 10.2 toForm 8-K filed by the Registrant with the SEC on July 20, 2007 (FileNo. 001-13533). | |
20 | Incorporated by reference to Exhibit 10.3 toForm 8-K filed by the Registrant with the SEC on July 20, 2007 (FileNo. 001-13533). | |
21 | Incorporated by reference to Exhibit 10.4 toForm 8-K filed by the Registrant with the SEC on July 20, 2007 (FileNo. 001-13533). | |
22 | Incorporated by reference to Exhibit 10.5 toForm 8-K filed by the Registrant with the SEC on July 20, 2007 (FileNo. 001-13533). | |
23 | Incorporated by reference to Exhibit 10.6 toForm 8-K filed by the Registrant with the SEC on July 20, 2007 (FileNo. 001-13533). | |
24 | Incorporated by reference to Exhibit 10.55 toForm 10-Q filed by the Registrant with the SEC on April 27, 2009 (FileNo. 001-13533). |
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25 | Incorporated by reference to Exhibit 10.56 toForm 8-K filed by the Registrant with the SEC on February 24, 2009 (FileNo. 001-13533). | |
26 | Incorporated by reference to Exhibit 10.57 toForm 8-K filed by the Registrant with the SEC on February 24, 2009 (FileNo. 001-13533). | |
27 | Incorporated by reference to Exhibit 10.58 toForm 8-K filed by the Registrant with the SEC on February 24, 2009 (FileNo. 001-13533). | |
28 | Incorporated by reference to Exhibit 10.59 toForm 8-K filed by the Registrant with the SEC on February 24, 2009 (FileNo. 001-13533). | |
29 | Incorporated by reference to Exhibit 10.60 toForm 8-K filed by the Registrant with the SEC on February 24, 2009 (FileNo. 001-13533). | |
30 | Incorporated by reference to Exhibit 10.61 toForm 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 toForm 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 toForm 8-K filed by the Registrant with the SEC on July 1, 2009 (FileNo. 001-13533). | |
33 | Incorporated by reference to Exhibit (d)(1) to the Schedule TO/13E-3 filed by the Registrant on December 10, 2010 (FileNo. 005-52325). | |
34 | Incorporated by reference to Exhibit (d)(2) to the Schedule TO/13E-3 filed by the Registrant on December 10, 2010 (FileNo. 005-52325). | |
35 | Incorporated by reference to Exhibit 10.1 toForm 8-K filed by the Registrant with the SEC on March 21, 2011 (FileNo. 001-13533). | |
36 | Incorporated by reference to Exhibit 10.1 toForm 8-K filed by the Registrant with the SEC on March 22, 2011 (FileNo. 001-13533). | |
37 | Incorporated by reference to Exhibit 10.2 toForm 8-K filed by the Registrant with the SEC on March 22, 2011 (FileNo. 001-13533). | |
38 | Incorporated by reference to Exhibit 10.3 toForm 8-K filed by the Registrant with the SEC on March 22, 2011 (FileNo. 001-13533). | |
39 | Incorporated by reference to Exhibit 10.4 toForm 8-K filed by the Registrant with the SEC on March 22, 2011 (FileNo. 001-13533). | |
40 | Incorporated by reference to Exhibit 10.5 toForm 8-K filed by the Registrant with the SEC on March 22, 2011 (FileNo. 001-13533). | |
41 | See Note 15 to the consolidated financial statements. |
42 | Incorporated by reference to Exhibit (a)(1)(B) to Amendment No. 4 to the Schedule TO/13E-3 filed by the Registrant on April 21, 2011 (File No. 005-52325). |
43 | Incorporated by reference to Exhibit (a)(1)(C) to Amendment No. 4 to the Schedule TO/13E-3 filed by the Registrant on April 21, 2011 (File No. 005-52325). |
44 | Incorporated by reference to Exhibit (a)(1)(D) to Amendment No. 4 to the Schedule TO/13E-3 filed by the Registrant on April 21 2011 (File No. 005-52325). |
45 | Incorporated by reference to Exhibit (a)(1)(E) to Amendment No. 4 to the Schedule TO/13E-3 filed by the Registrant on April 21, 2011 (File No. 005-52325). |
46 | Incorporated by reference to Exhibit (a)(1)(F) to Amendment No. 4 to the Schedule TO/13E-3 filed by the Registrant on April 21, 2011 (File No. 005-52325). |
II-5
Table of Contents
(c) | Opinion of the Financial Advisor |
Item 22. | Undertakings. |
II-6
Table of Contents
II-7
Table of Contents
By: | /s/ Rodney E. Schwatken |
Name | Title | Date | ||||
* W. Lance Anderson | Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) | April 21, 2011 | ||||
/s/ Rodney E. Schwatken Rodney E. Schwatken | Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) | April 21, 2011 | ||||
* Edward W. Mehrer | Director | April 21, 2011 | ||||
* Gregory T. Barmore | Director | April 21, 2011 | ||||
* Art N. Burtscher | Director | April 21, 2011 | ||||
* Donald M. Berman | Director | April 21, 2011 | ||||
* Howard M. Amster | Director | April 21, 2011 |
Table of Contents
Name | Title | Date | ||||
* Barry A. Igdaloff | Director | April 21, 2011 |
*By: | /s/ Rodney E. Schwatken Rodney E. Schwatken Attorney-in-fact | April 21, 2011 |
Table of Contents
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 |