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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 8-K
Current Report
Pursuant To Section 13 Or 15(D) Of The
Securities Exchange Act Of 1934
March 30, 1999
Date of Report (Date of earliest event reported)
NOVASTAR FINANCIAL, INC.
------------------------
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
Maryland 001-13533 74-2830661
-------- ---------- ----------
<S> <C> <C>
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer Identification No.)
(of Incorporation)
</TABLE>
1901 West 47th Place
Suite 105
Westwood, Kansas 66205
----------------------
(Address of Principal Executive Offices)
(913) 362-1090
--------------
(Registrant's Telephone Number,
Including Area Code)
Not Applicable
--------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
Item 5. OTHER EVENTS
------------
On March 29, 1999, NovaStar Financial, Inc. completed the
issuance of 4,285,714 shares (approximately $30 million) of Class B 7%
Cumulative Convertible Preferred Stock offered at $7.00 per share
pursuant to a private placement memorandum dated March 8, 1999. The
preferred stock, par value $.01 per share, is convertible, at the
option of the holder, into one share of common stock and may be
redeemable by NovaStar Financial, Inc. at any time after March 31,
2002. Approximately $25 million was acquired by Walter Weitz &
Company. Stifel, Nicolaus & Company, Incorporated served as placement
agent. In connection with the issuance of the shares of preferred
stock, a Registration Rights Agreement was entered into March 25,
1999, by and between NovaStar Financial and Stifel, Nicolaus &
Company, Incorporated.
This issuance of the preferred stock and the earlier issuance of
warrants in connection with financing arrangements entered into with
First Union and GMAC/Residential Funding Corporation will result in a
reduction of the effective exercise price for holders of NovaStar's
December 9, 1996 warrants to acquire common stock at $15.00 per share.
Pursuant to anti-dilution provisions contained in the 1996 warrants,
each warrant exercised at $15.00 will purchase 1.29 shares of common
stock, which represents an effective exercise price of $11.62 per
share. This new effective exercise price is in effect without any
further action required on the part of warrantholders.
<PAGE>
Item 7(c). Exhibit
-------
3.4 Articles Supplementary of NovaStar Financial, Inc. dated
as of March 24, 1999, as filed with the Maryland
Department of Assessments and Taxation.
4.3 Specimen certificate for preferred stock.
10.24 Warrant Agreement, dated as of March 10, 1999, by and
between NovaStar Financial, Inc. and Residential Funding
Corporation, and related Guaranty Warrant, Tag Along
Warrant and Registration Rights Agreement.
10.25 Registration Rights Agreement, with respect to the
preferred stock, dated as of March 25, 1999, by and
between NovaStar Financial, Inc. and Stifel, Nicolaus &
Company, Incorporated.
99.2 Press Release from NovaStar Financial, Inc. dated 3/30/99.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
Date: April 5, 1999
NOVASTAR FINANCIAL, INC.
By: /s/ Mark J. Kohlrus
------------------------------------
Mark J. Kohlrus
Senior Vice President, Treasurer
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number
- --------------
3.4 Articles Supplementary of NovaStar Financial, Inc.
dated as of March 24, 1999, as filed with the Maryland
Department of Assessments and Taxation.
4.3 Specimen certificate for preferred stock.
10.24 Warrant Agreement, dated as of March 10, 1999, by and
between NovaStar Financial, Inc. and Residential Funding
Corporation, and related Guaranty Warrant, Tag Along
Warrant, and Registration Rights Agreement.
10.25 Registration Rights Agreement, with respect to the
preferred stock, dated as of March 25, 1999, by and between
NovaStar Financial, Inc. and Residential Funding
Corporation.
99.2 Press Release from NovaStar Financial, Inc. dated 3/30/99.
<PAGE>
EXHIBIT 3.4
ARTICLES SUPPLEMENTARY
NOVASTAR FINANCIAL, INC.
CLASS B 7.00% CUMULATIVE CONVERTIBLE PREFERRED STOCK
(PAR VALUE $.01 PER SHARE)
NovaStar Financial, Inc., a Maryland corporation (hereinafter called the
"Corporation"), having its principal office at 1901 West 47th Place, Suite 105,
Westwood, Kansas, hereby certifies to the Department of Assessments and Taxation
of the State of Maryland that:
FIRST: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by Article VI of the Charter of the Corporation, the Board of
Directors has duly divided and classified Four Million Three Hundred Thousand
(4,300,000) authorized but unissued shares of the capital stock of the
Corporation into a class designated as Class B 7.00% Cumulative Convertible
Preferred Stock and has provided for the issuance of such class.
SECOND: The reclassification increases the number of shares classified as
Class B 7.00% Cumulative Convertible Preferred Stock, par value $.01 per share,
from no shares immediately prior to the reclassification to 3,471,429 shares
immediately after the reclassification. The reclassification decreases the
number of shares classified as Common Stock, par value $.01 per share, from
50,000,000 shares immediately prior to the reclassification to 46,428,571 shares
immediately after the reclassification. The number of shares classified as Class
B 7.00% Cumulative Convertible Preferred Stock may be decreased pursuant to
Section 6 of Article Third of these Articles Supplementary upon reacquisition
thereof in any manner, or by retirement thereof, by the Corporation.
THIRD: The terms of the Class B 7.00% Cumulative Convertible Preferred
Stock (including the preferences, conversions or other rights, voting powers,
restrictions, limitations as to dividends and other distributions,
qualifications, or terms or conditions of redemption) as set by the Board of
Directors are as follows:
1. Number of Shares and Designation.
This class of Preferred Stock shall be designated as Class B 7.00%
Cumulative Convertible Preferred Stock (the "Class B Preferred Stock") and Four
Million Three Hundred Thousand (4,300,000) shall be the authorized number of
shares of such Class B Preferred Stock constituting such class.
2. Definitions.
For purposes of the Class B Preferred Stock, the following terms shall have
the meanings indicated:
"Act" shall mean the Securities Act of 1933, as amended.
"affiliate" of a Person means a Person that directly, or indirectly through
one or more intermediaries, controls or is controlled by, or is under
common control with, the Person specified.
"Board of Directors" shall mean the Board of Directors of the Corporation
or any committee authorized by such Board of Directors to perform any of
its responsibilities with respect to the Class B Preferred Stock.
"Business Day" shall mean any day other than a Saturday, Sunday or a day on
which state or federally chartered banking institutions in New York, New
York are not required to be open.
"Call Date" shall have the meaning set forth in paragraph (b) of Section 5
hereof.
"Charter" shall mean the Articles of Incorporation of the Corporation, as
amended to-date.
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"Class B Preferred Stock" shall have the meaning set forth in Section 1
hereof
"Common Stock" shall mean the common stock, $.01 par value per share, of
the Corporation or such shares of the Corporation's Capital Stock into
which outstanding shares of Common Stock shall be reclassified.
"Conversion Price" shall mean the conversion price per share of Common
Stock for which each share of Class B Preferred Stock is convertible, as
such Conversion Price may be adjusted pursuant to paragraph (d) of Section
7. The initial Conversion Price shall be $7.00 (equivalent to an initial
conversion rate of one share of Common Stock for each share of Class B
Preferred Stock).
"Current Market Price" of publicly traded shares of Common Stock or any
other class or series of Capital Stock or other security of the Corporation
or of any similar security of any other issuer for any day shall mean the
closing price, regular way on such day, or, if no sale takes place on such
day, the average of the reported closing bid and asked prices regular way
on such day, in either case as reported on the National Market of the
National Association of Securities Dealers, Inc. Automated Quotations
System ("NASDAQ") or, if such security is not quoted on such National
Market, on the principal national securities exchange on which such
securities are listed or admitted for trading, or if not so quoted, listed
or admitted, the average of the closing bid and asked prices on such day in
the over-the-counter market as reported by NASDAQ or, if bid and asked
prices for such security on such day shall not have been reported through
NASDAQ, the average of the bid and asked prices on such day as furnished by
any New York Stock Exchange or National Association of Securities Dealers,
Inc. member firm regularly making a market in such security selected for
such purpose by the Chief Executive Officer or the Board of Directors or if
any class or series of securities are not publicly traded, the fair value
of the shares of such class as determined reasonably and in good faith by
the Board of Directors of the Corporation.
"Distribution" shall have the meaning set forth in paragraph (d)(iii) of
Section 7 hereof.
"Dividend Payment Date" shall mean, with respect to each Dividend Period,
the tenth (10th) day of January, May, August and November, in each year,
commencing on May 10, 1999 with respect to the period commencing on the
Issue Date and ending March 31, 1999; provided, however, that if any
Dividend Payment Date falls on any day other than a Business Day, the
dividend payment payable on such Dividend Payment Date shall be paid on the
Business Day immediately following such Dividend Payment Date.
"Dividend Periods" shall mean quarterly dividend periods commencing on
January 1, April 1, July 1 and October 1 of each year and ending on and
including the day preceding the first day of the next succeeding Dividend
Period (other than the initial Dividend Period, which shall commence on the
Issue Date and end on and include March 31, 1999).
"Fair Market Value" shall mean the average of the daily Current Market
Prices of a share of Common Stock during five (5) consecutive Trading Days
selected by the Corporation commencing not more than twenty (20) Trading
Days before, and ending not later than, the earlier of the day in question
and the day before the "ex" date with respect to the issuance or
distribution requiring such computation. The term "'ex' date," when used
with respect to any issuance or distribution, means the first day on which
the share of Common Stock trades regular way, without the right to receive
such issuance or distribution, on the exchange or in the market, as the
case may be, used to determine that day's Current Market Price.
"Issue Date" shall mean March 25, 1999.
"Junior Stock" shall mean the Common Stock and any other class or series of
Capital Stock of the Corporation over which the shares of Class B Preferred
Stock have preference or priority in the payment of dividends or in the
distribution of assets on any liquidation, dissolution or winding up of the
Corporation.
"Parity Stock" shall have the meaning set forth in paragraph (b) of Section
8 hereof.
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"Person" shall mean any individual, firm, partnership, corporation or other
entity and shall include any successor (by merger or otherwise) of such
entity.
"set apart for payment" shall be deemed to include, without any action
other than the following, the recording by the Corporation in its
accounting ledgers of any accounting or bookkeeping entry which indicates,
pursuant to a declaration of dividends or other distribution by the Board
of Directors, the allocation of funds to be so paid on any series or class
of Capital Stock of the Corporation; provided, however, that if any funds
for any class or series of Junior Stock or any class or series of Parity
Stock are placed in a separate account of the Corporation or delivered to a
disbursing, paying or other similar agent, then "set apart for payment"
with respect to the Class B Preferred Stock shall mean placing such funds
in a separate account or delivering such funds to a disbursing, paying or
other similar agent.
"Trading Day", as to any securities, shall mean any day on which such
securities are traded on the National Market of NASDAQ or, if such
securities are not listed or admitted for trading on the National Market of
NASDAQ, on the principal national securities exchange on which such
securities are listed or admitted or, if such securities are not listed or
admitted for trading on any national securities exchange, in the securities
market in which such securities are traded.
"Transaction" shall have the meaning set forth in paragraph (e) of Section
7 hereof.
"Transfer Agent" means UMB Bank, N.A., or such other transfer agent as may
be designated by the Board of Directors or their designee as the transfer
agent for the Class B Preferred Stock.
"Voting Preferred Stock" shall have the meaning set forth in Section 9
hereof.
3. Dividends.
(a) The holders of Class B Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors out of funds legally
available for that purpose, cumulative dividends payable in cash in an amount
per share of Class B Preferred Stock equal to the greater of (i) the base
dividend of $0.1225 per quarter (the "Base Rate") or (ii) the cash dividends
declared on the number of shares of Common Stock, or portion thereof, into which
a share of Class B Preferred Stock is convertible. The initial Dividend Period
shall commence on the Issue Date and end on March 31, 1999. The dividends
payable with respect to the portion of the initial Dividend Period commencing on
the Issue Date and ending on March 31, 1999, shall be determined solely by
reference to the Base Rate. The amount referred to in clause (ii) of this
paragraph (a) with respect to each succeeding Dividend Period shall be
determined as of the applicable Dividend Payment Date by multiplying the number
of shares of Common Stock, or portion thereof calculated to the fourth decimal
point, into which a share of Class B Preferred Stock would be convertible at the
opening of business on such Dividend Payment Date (based on the Conversion Price
then in effect) by the aggregate cash dividends payable or paid for such
Dividend Period in respect of a share of Common Stock outstanding as of the
record date for the payment of dividends on the Common Stock with respect to
such Dividend Period or, if different, with respect to the most recent quarterly
period for which dividends with respect to the Common Stock have been declared.
Such dividends shall be cumulative from the Issue Date, whether or not in any
Dividend Period or Periods such dividends shall be declared or there shall be
funds of the Corporation legally available for the payment of such dividends,
and shall be payable quarterly in arrears on the Dividend Payment Dates,
commencing on the first Dividend Payment Date after the Issue Date. Each such
dividend shall be payable in arrears to the holders of record of the Class B
Preferred Stock, as they appear on the stock records of the Corporation at the
close of business on a record date fixed by the Board of Directors which shall
be not more than 60 days prior to the applicable Dividend Payment Date and,
within such 60 day period, shall be the same date as the record date for the
regular quarterly dividend payable with respect to the Common Stock for the
Dividend Period to which such Dividend Payment Date relates (or, if there is no
such record date for Common Stock, then such date as the Board of Directors may
fix). Accumulated, accrued and unpaid dividends for any past Dividend Periods
may be declared and paid at any time,
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without reference to any regular Dividend Payment Date, to holders of record on
such date, which date shall not precede by more than 45 days the payment date
thereof, as may be fixed by the Board of Directors.
Upon a final administrative determination by the Internal Revenue
Service that the Corporation does not qualify as a real estate investment trust
in accordance with Section 856 of the Internal Revenue Code of 1986 (the
"Code"), the Base Rate set forth in (a)(i) will be increased to $0.16 until such
time as the Corporation regains its status as a real estate investment trust;
provided, however, that if (i) the Corporation voluntarily terminates its real
estate investment trust status pursuant to the vote of a majority of the Board
of Directors, the Base Rate shall not be increased or (ii) the Corporation
contests its loss of real estate investment trust status in Federal Court,
following its receipt of an opinion of nationally recognized tax counsel to the
effect that there is a reasonable basis to contest such loss of status, the Base
Rate shall not be increased during the pendency of such judicial proceeding;
provided further, however, that upon a final judicial determination in Federal
Tax Court, Federal District Court or the Federal Claims Court that the
Corporation does not qualify as a real estate investment trust, the Base Rate
will be increased as stated above.
(b) The amount of dividends payable per share of Class B Preferred
Stock for the portion of the initial Dividend Period commencing on the Issue
Date and ending and including March 31, 1999, or any other period shorter than a
full Dividend Period, shall be computed ratably on the basis of twelve 30-day
months and a 360-day year. Holders of Class B Preferred Stock shall not be
entitled to any dividends, whether payable in cash, property or stock, in excess
of cumulative dividends, as herein provided, on the Class B Preferred Stock. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on the Class B Preferred Stock that may be in
arrears.
(c) So long as any of the shares of Class B Preferred Stock are
outstanding, except as described in the immediately following sentence, no
dividends shall be declared or paid or set apart for payment by the Corporation
and no other distribution of cash or other property shall be declared or made
directly or indirectly by the Corporation with respect to any class or series of
Parity Stock for any period unless dividends equal to the full amount of
accumulated, accrued and unpaid dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof has
been or contemporaneously is set apart for such payment on the Class B Preferred
Stock for all Dividend Periods terminating on or prior to the Dividend Payment
Date with respect to such class or series of Parity Stock. When dividends are
not paid in full or a sum sufficient for such payment is not set apart, as
aforesaid, all dividends declared upon the Class B Preferred Stock and all
dividends declared upon any other class or series of Parity Stock shall be
declared ratably in proportion to the respective amounts of dividends
accumulated, accrued and unpaid on the Class B Preferred Stock and accumulated,
accrued and unpaid on such Parity Stock.
(d) So long as any of the shares of Class B Preferred Stock are
outstanding, no dividends (other than dividends or distributions paid in shares
of or options, warrants or rights to subscribe for or purchase shares of Junior
Stock) shall be declared or paid or set apart for payment by the Corporation and
no other distribution of cash or other property shall be declared or made
directly or indirectly by the Corporation with respect to any shares of Junior
Stock, nor shall any shares of Junior Stock be redeemed, purchased or otherwise
acquired (other than a redemption, purchase or other acquisition of Common Stock
made for purposes of an employee incentive or benefit plan of the Corporation or
any subsidiary) for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
directly or indirectly by the Corporation (except by conversion into or exchange
for Junior Stock), nor shall any other cash or other property otherwise be paid
or distributed to or for the benefit of any holder of shares of Junior Stock in
respect thereof, directly or indirectly, by the Corporation unless in each case
(i) the full cumulative dividends (including all accumulated, accrued and unpaid
dividends) on all outstanding shares of Class B Preferred Stock and any other
Parity Stock of the Corporation shall have been paid or such dividends have been
declared and set apart for payment for all past Dividend Periods with respect to
the Class B Preferred Stock and all past dividend periods with respect to such
Parity Stock and (ii) sufficient funds shall have been paid or set apart for the
payment of the full dividend for the current Dividend Period with respect to the
Class B Preferred Stock and the current dividend period with respect to such
Parity Stock.
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4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, before any payment or
distribution of the Corporation (whether capital or surplus) shall be made to or
set apart for the holders of Junior Stock, the holders of shares of Class B
Preferred Stock shall be entitled to receive Seven Dollars ($7.00) per share of
Class B Preferred Stock (the "Liquidation Preference"), plus an amount equal to
all dividends (whether or not earned or declared) accumulated, accrued and
unpaid thereon to the date of final distribution to such holders; but such
holders shall not be entitled to any further payment. Until the holders of the
Class B Preferred Stock have been paid the Liquidation Preference in full, plus
an amount equal to all dividends (whether or not earned or declared)
accumulated, accrued and unpaid thereon to the date of final distribution to
such holders, no payment will be made to any holder of Junior Stock upon the
liquidation, dissolution or winding up of the Corporation. If, upon any
liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation, or proceeds thereof, distributable among the holders of Class B
Preferred Stock and any class or series of Parity Stock shall be insufficient to
pay in full the preferential amount aforesaid and liquidating payments on any
other shares of any class or series of Parity Stock, then such assets, or the
proceeds thereof, shall be distributed among the holders of Class B Preferred
Stock and any such other Parity Stock ratably in the same proportion as the
respective amounts that would be payable on such Class B Preferred Stock and any
such other Parity Stock if all amounts payable thereon were paid in full. For
the purposes of this Section 4, (i) a consolidation or merger of the Corporation
with one or more corporations, (ii) a sale or transfer of all or substantially
all of the Corporation's assets, or (iii) a statutory share exchange shall not
be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, of the Corporation.
(b) Subject to the rights of the holders of any shares of Parity
Stock, upon any liquidation, dissolution or winding up of the Corporation, after
payment shall have been made in full to the holders of Class B Preferred Stock
and any Parity Stock, as provided in this Section 4, any other series or class
or classes of Junior Stock shall, subject to the respective terms thereof, be
entitled to receive any and all assets remaining to be paid or distributed, and
the holders of the Class B Preferred Stock and any Parity Stock shall not be
entitled to share therein.
5. Redemption at the Option of the Corporation.
(a) Shares of Class B Preferred Stock shall not be redeemable by the
Corporation prior to March 31, 2002. Shares of Class B Preferred Stock may be
redeemed, in whole or in part, at the option of the Corporation at any time on
or after March 31, 2002 out of funds legally available therefor at a redemption
price payable in cash equal to $7.00 per share of Class B Preferred Stock (plus
all accumulated, accrued and unpaid dividends as provided below). The
Corporation shall pay in cash all cumulative, accrued and unpaid dividends for
all Dividend Periods ending prior to the Dividend Period in which the redemption
occurs, plus the dividend (determined by reference to the Base Rate if the Call
Date precedes the date on which the dividend on the Common Stock is declared for
such Dividend Period) accrued from the beginning of the Dividend Period in which
the redemption occurs and ending on the Call Date, provided, however, that if
such Call Date is on or after the record date for such Dividend Period, each
holder of Class B Preferred Stock at the close of business on such dividend
record date shall be entitled to the dividend payable on such shares on the
corresponding Dividend Payment Date notwithstanding the redemption of such
shares prior to such Dividend Payment Date. Except as provided above, the
Corporation shall make no payment or allowance for accumulated or accrued
dividends on shares of Class B Preferred Stock called for redemption or on the
shares of Common Stock issued upon such redemption.
(b) Shares of Class B Preferred Stock shall be redeemed by the
Corporation on the date specified in the notice to holders required under
paragraph (d) of this Section 5 (the "Call Date"). The Call Date shall be
selected by the Corporation, shall be specified in the notice of redemption and
shall be not less than 30 days nor more than 60 days after the date notice of
redemption is sent by the Corporation.
(c) If full cumulative dividends on all outstanding shares of Class B
Preferred Stock and any other class or series of Parity Stock of the Corporation
have not been paid or declared and set apart for payment, no shares of Class B
Preferred Stock may be redeemed unless all outstanding shares of Class B
Preferred Stock are simultaneously redeemed and neither the Corporation nor any
affiliate of the Corporation may purchase or acquire
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shares of Class B Preferred Stock, otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of shares of Class B
Preferred Stock.
(d) Notice of the Corporation's redemption of shares of Class B
Preferred Stock shall be given to each holder of record of the shares to be
redeemed by first class mail, postage prepaid, at such holder's address as the
same appears on the stock records of the Corporation, or by publication in The
Wall Street Journal or The New York Times, or if neither such newspaper is then
being published, any other daily newspaper of national circulation not less than
30 nor more than 60 days prior to the Call Date. If the Corporation elects to
provide such notice by publication, it shall also promptly mail notice of such
redemption to the holders of the shares of Class B Preferred Stock to be
redeemed. Neither the failure to mail any notice required by this paragraph (d),
nor any defect therein or in the mailing thereof to any particular holder, shall
affect the sufficiency of the notice or the validity of the proceedings for
redemption with respect to the other holders. Any notice which was mailed in the
manner herein provided shall be conclusively presumed to have been duly given on
the date mailed whether or not the holder receives the notice. Each such mailed
or published notice shall state, as appropriate: (1) the Call Date; (2) the
number of shares of Class B Preferred Stock to be redeemed and, if fewer than
all such shares held by such holder are to be redeemed, the number of such
shares to be redeemed from such holder; (3) that the redemption will be for cash
pursuant to paragraph (a) of this Section 5; (4) the place or places at which
certificates for such shares are to be surrendered for certificates representing
shares of Common Stock; and (5) the then-current Conversion Price. Notice having
been published or mailed as aforesaid, from and after the Call Date (unless the
Corporation shall fail to make available the amount of cash necessary to effect
such redemption), (i) except as otherwise provided herein, dividends on the
shares of Class B Preferred Stock so called for redemption shall cease to
accumulate or accrue on the shares of Class B Preferred Stock called for
redemption (except that, in the case of a Call Date after a dividend record date
and prior to the related Dividend Payment Date, holders of Class B Preferred
Stock on the dividend record date will be entitled on such Dividend Payment Date
to receive the dividend payable on such shares), (ii) said shares shall no
longer be deemed to be outstanding, and (iii) all rights of the holders thereof
as holders of Class B Preferred Stock of the Corporation shall cease (except the
rights to receive cash payable upon such redemption, without interest thereon,
upon surrender and endorsement of their certificates if so required and to
receive any dividends payable thereon). The Corporation's obligation to provide
cash in accordance with the preceding sentence shall be deemed fulfilled if, on
or before the Call Date, the Corporation shall deposit with a bank or trust
company (which may be an affiliate of the Corporation) that has, or is an
affiliate of a bank or trust company that has, a capital and surplus of at least
$50,000,000, the amount of cash as is necessary for such redemption, in trust,
with irrevocable instructions that such cash be applied to the redemption of the
shares of Class B Preferred Stock so called for redemption. No interest shall
accrue for the benefit of the holders of shares of Class B Preferred Stock to be
redeemed on any cash so set aside by the Corporation. Subject to applicable
escheat laws, any such cash unclaimed at the end of two years from the Call Date
shall revert to the general funds of the Corporation, after which reversion the
holders of shares of Class B Preferred Stock so called for redemption shall look
only to the general funds of the Corporation for the payment of such cash.
As promptly as practicable after the surrender in accordance with said
notice of the certificates for any such shares so redeemed (properly endorsed or
assigned for transfer, if the Corporation shall so require and if the notice
shall so state), such certificates shall be exchanged for cash (without interest
thereon) for which such shares have been redeemed in accordance with such
notice. If fewer than all the outstanding shares of Class B Preferred Stock are
to be redeemed, shares to be redeemed shall be selected by the Corporation from
outstanding shares of Class B Preferred Stock not previously called for
redemption by lot or, with respect to the number of shares of Class B Preferred
Stock held of record by each holder of such shares, pro rata (as nearly as may
be) or by any other method as may be determined by the Board of Directors in its
discretion to be equitable. If fewer than all the shares of Class B Preferred
Stock represented by any certificate are redeemed, then a new certificate
representing the unredeemed shares shall be issued without cost to the holders
thereof.
6. Stock To Be Retired.
All shares of Class B Preferred Stock which shall have been issued and
reacquired in any manner by the Corporation shall be restored to the status of
authorized, but unissued shares of Common Stock, par value $.01 per share. The
Corporation may also retire any unissued shares of Class B Preferred Stock, and
such shares shall then be restored to the status of authorized but unissued
shares of Common Stock, par value $.01 per share.
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7. Conversion.
Holders of shares of Class B Preferred Stock shall have the right to
convert all or a portion of such shares into shares of Common Stock, as follows:
(a) Subject to and upon compliance with the provisions of this
Section 7, a holder of shares of Class B Preferred Stock shall have the right,
at such holder's option, at any time to convert such shares, in whole or in
part, into the number of fully paid and non-assessable shares of authorized but
previously unissued shares of Common Stock per each share of Class B Preferred
Stock obtained by dividing the Liquidation Preference (excluding any
accumulated, accrued and unpaid dividends) per share of Class B Preferred Stock
by the Conversion Price (as in effect at the time and on the date provided for
in the last subparagraph of paragraph (b) of this Section 7) and by surrendering
such shares to be converted, such surrender to be made in the manner provided in
paragraph (b) of this Section 7; provided, however, that the right to convert
shares of Class B Preferred Stock called for redemption pursuant to Section 5
shall terminate at the close of business on the Call Date fixed for redemption,
unless the Corporation shall default in making payment of cash upon such
redemption under Section 5 hereof.
(b) In order to exercise the conversion right, the holder of each
share of Class B Preferred Stock to be converted shall surrender the certificate
representing such share, duly endorsed or assigned to the Corporation or in
blank, at the office of the Transfer Agent, accompanied by written notice to the
Corporation that the holder thereof elects to convert such share of Class B
Preferred Stock. Unless the shares issuable on conversion are to be issued in
the same name as the name in which such share of Class B Preferred Stock is
registered, each share surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Corporation, duly executed
by the holder or such holder's duly authorized attorney and an amount sufficient
to pay any transfer or similar tax (or evidence reasonably satisfactory to the
Corporation demonstrating that such taxes have been paid).
Holders of shares of Class B Preferred Stock at the close of business on a
dividend payment record date shall be entitled to receive the dividend payable
on such shares on the corresponding Dividend Payment Date notwithstanding the
conversion thereof following such dividend payment record date and prior to such
Dividend Payment Date. Except as provided above, the Corporation shall make no
payment or allowance for unpaid dividends, whether or not in arrears, on
converted shares or for dividends on the shares of Common Stock issued upon such
conversion.
As promptly as practicable after the surrender of certificates for shares
of Class B Preferred Stock as aforesaid, the Corporation shall issue and shall
deliver at such office to such holder, or send on such holder's written order, a
certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of such shares of Class B Preferred Stock in
accordance with provisions of this Section 7, and any fractional interest in
respect of a share of Common Stock arising upon such conversion shall be settled
as provided in paragraph (c) of this Section 7.
Each conversion shall be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for shares of Class
B Preferred Stock shall have been surrendered and such notice received by the
Corporation as aforesaid, and the Person or Persons in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become the holder or holders of record
of the shares represented thereby at such time and on such date and such
conversion shall be at the Conversion Price in effect at such time on such date
unless the stock transfer books of the Corporation shall be closed on that date,
in which event such Person or Persons shall be deemed to have become such holder
or holders of record at the close of business on the next succeeding day on
which such stock transfer books are open, but such conversion shall be at the
Conversion Price in effect on the date on which such shares shall have been
surrendered and such notice received by the Corporation. If the dividend payment
record date for the Class B Preferred Stock and Common Stock do not coincide,
and the preceding sentence does not operate to ensure that a holder of shares of
Class B Preferred Stock whose shares are converted into Common Stock does not
receive dividends on both the shares of Class B Preferred Stock and the Common
Stock into which such shares are converted for the same Dividend Period, then
notwithstanding anything herein to the contrary, it is the intent, and the
Transfer Agent is authorized to ensure that no conversion after the earlier of
such record dates will be accepted until after the latter of such record dates.
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(c) No fractional share of Common Stock or scrip representing
fractions of a share of Common Stock shall be issued upon conversion of the
shares of Class B Preferred Stock. Instead of any fractional interest in a share
of Common Stock that would otherwise be deliverable upon the conversion of
shares of Class B Preferred Stock, the Corporation shall pay to the holder of
such share an amount in cash based upon the Current Market Price of the Common
Stock on the Trading Day immediately preceding the date of conversion. If more
than one share shall be surrendered for conversion at one time by the same
holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Class B Preferred Stock so surrendered.
(d) The Conversion Price shall be adjusted from time to time as
follows:
(i) If the Corporation shall after the Issue Date (A) pay a
dividend or make a distribution on its Capital Stock in shares of Common
Stock, (B) subdivide its outstanding Common Stock into a greater number of
shares, (C) combine its outstanding Common Stock into a smaller number of
shares or (D) issue any shares of Capital Stock by reclassification of its
outstanding Common Stock, the Conversion Price in effect at the opening of
business on the day following the date fixed for the determination of
stockholders entitled to receive such dividend or distribution or at the
opening of business on the day following the day on which such subdivision,
combination or reclassification becomes effective, as the case may be,
shall be adjusted so that the holder of any share of Class B Preferred
Stock thereafter surrendered for conversion shall be entitled to receive
the number of shares of Common Stock (or fraction of a share of Common
Stock) that such holder would have owned or have been entitled to receive
after the happening of any of the events described above had such share of
Class B Preferred Stock been converted immediately prior to the record date
in the case of a dividend or distribution or the effective date in the case
of a subdivision, combination or reclassification. An adjustment made
pursuant to this paragraph (d)(i) of this Section 7 shall become effective
immediately after the opening of business on the day next following the
record date (except as provided in paragraph (h) below) in the case of a
dividend or distribution and shall become effective immediately after the
opening of business on the day next following the effective date in the
case of a subdivision, combination or reclassification.
(ii) If the Corporation shall issue after the Issue Date rights,
options or warrants to all holders of Common Stock entitling them (for a
period expiring within 45 days after the record date described below in
this paragraph (d)(ii) of this Section 7) to subscribe for or purchase
Common Stock at a price per share less than the Fair Market Value per share
of the Common Stock on the record date for the determination of
stockholders entitled to receive such rights, options or warrants, then the
Conversion Price in effect at the opening of business on the day next
following such record date shall be adjusted to equal the price determined
by multiplying (A) the Conversion Price in effect immediately prior to the
opening of business on the day following the date fixed for such
determination by (B) a fraction, the numerator of which shall be the sum of
(X) the number of shares of Common Stock outstanding on the close of
business on the date fixed for such determination and (Y) the number of
shares that could be purchased at such Fair Market Value from the aggregate
proceeds to the Corporation from the exercise of such rights, options or
warrants for Common Stock, and the denominator of which shall be the sum of
(XX) the number of shares of Common Stock outstanding on the close of
business on the date fixed for such determination and (YY) the number of
additional shares of Common Stock offered for subscription or purchase
pursuant to such rights, options or warrants. Such adjustment shall become
effective immediately after the opening of business on the day next
following such record date (except as provided in paragraph (h) below). In
determining whether any rights, options or warrants entitle the holders of
Common Stock to subscribe for or purchase Common Stock at less than such
Fair Market Value, there shall be taken into account any consideration
received by the Corporation upon issuance and upon exercise of such rights,
options or warrants, the value of such consideration, if other than cash,
to be determined in good faith by the Board of Directors.
(iii) If the Corporation shall after the Issue Date make a
distribution on its Common Stock other than in cash or shares of Common
Stock (including any distribution in securities other than rights, options
or warrants as set forth below) (each of the foregoing being referred to
herein as a "distribution"), then the Conversion Price in effect at the
opening of business on the next day following the record date for
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determination of stockholders entitled to receive such distribution shall
be adjusted to equal the price determined by multiplying (A) the Conversion
Price in effect immediately prior to the opening of business on the day
following the record date by (B) a fraction, the numerator of which shall
be the difference between (X) the number of shares of Common Stock
outstanding on the close of business on the record date and (Y) the number
of shares determined by dividing (aa) the aggregate value of the property
being distributed by (bb) the Fair Market Value per share of Common Stock
on the record date, and the denominator of which shall be the number of
shares of Common Stock outstanding on the close of business on the record
date. Such adjustment shall become effective immediately after the opening
of business on the day next following such record date (except as provided
below). The value of the property being distributed shall be as determined
in good faith by the Board of Directors. Neither the issuance by the
Corporation of rights, options or warrants to subscribe for or purchase
securities of the Corporation nor the exercise thereof shall be deemed a
distribution under this paragraph. Notwithstanding the foregoing
provisions of this paragraph, the Corporation will not make any
distribution that, when taken together with all prior distributions after
the Issue Date, would result in an aggregate adjustment constituting 50% or
more of the Conversion Price on the Issue Date without obtaining prior
consent by the affirmative vote of at least 66 2/3% of the votes entitled
to be cast by the holders of Class B Preferred Stock and any other class or
series of outstanding Parity Stock, voting together as a single class,
given in Person or by proxy, either in writing without a meeting or by vote
at any meeting called for the purpose.
(iv) No adjustment in the Conversion Price shall be required
unless such adjustment would require a cumulative increase or decrease of
at least 1% in such price; provided, however, that any adjustments that by
reason of this paragraph (d)(iv) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment until
made; and provided, further, that any adjustment shall be required and made
in accordance with the provisions of this Section 7 (other than this
paragraph (d)(iv)) not later than such time as may be required in order to
preserve the tax-free nature of a distribution to the holders of shares of
Common Stock. Notwithstanding any other provisions of this Section 7, the
Corporation shall not be required to make any adjustment of the Conversion
Price for the issuance of (A) any shares of Common Stock pursuant to any
plan providing for the reinvestment of dividends or interest payable on
securities of the Corporation and the investment of optional amounts in
shares of Common Stock under such plan or (B) any options, rights or shares
of Common Stock pursuant to any stock option, stock purchase or other
stock-based plan maintained by the Corporation. All calculations under this
Section 7 shall be made to the nearest cent (with $.005 being rounded
upward) or to the nearest one-tenth of a share (with .05 of a share being
rounded upward), as the case may be. Anything in this paragraph (d) of this
Section 7 to the contrary notwithstanding, the Corporation shall be
entitled, to the extent permitted by law, to make such reductions in the
Conversion Price, in addition to those required by this paragraph (d), as
it in its discretion shall determine to be advisable in order that any
stock dividends, subdivision of shares, reclassification or combination of
shares, distribution of rights or warrants to purchase stock or securities,
or a distribution of other assets (other than cash dividends) hereafter
made by the Corporation to its stockholders shall not be taxable, or if
that is not possible, to diminish any income taxes that are otherwise
payable because of such event.
(e) If the Corporation shall be a party to any transaction (including
without limitation a merger, consolidation, statutory share exchange, issuer or
self tender offer for all or a substantial portion of the shares of Common Stock
outstanding, sale of all or substantially all of the Corporation's assets or
recapitalization of the Common Stock, but excluding any transaction as to which
paragraph (d)(i) of this Section 7 applies) (each of the foregoing being
referred to herein as a "Transaction"), in each case as a result of which shares
of Common Stock shall be converted into the right to receive stock, securities
or other property (including cash or any combination thereof), each share of
Class B Preferred Stock which is not converted into the right to receive stock,
securities or other property in connection with such Transaction shall thereupon
be convertible into the kind and amount of shares of stock, securities and other
property (including cash or any combination thereof) receivable upon such
consummation by a holder of that number of shares of Common Stock into which one
share of Class B Preferred Stock was convertible immediately prior to such
Transaction. The Corporation shall not be a party to any Transaction unless the
terms of such Transaction are consistent with the provisions of this paragraph
(e), and it shall not consent or agree to the occurrence of any Transaction
until the Corporation has entered into an agreement with the successor or
purchasing entity, as the case may be, for the benefit of the holders of the
Class B Preferred Stock that will contain provisions enabling the holders of the
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Class B Preferred Stock that remain outstanding after such Transaction to
convert into the consideration received by holders of Common Stock at the
Conversion Price in effect immediately prior to such Transaction. The provisions
of this paragraph (e) shall similarly apply to successive Transactions.
(f) If:
(i) the Corporation shall declare a dividend (or any other
distribution) on the Common Stock (other than cash dividends and cash
distributions); or
(ii) the Corporation shall authorize the granting to all holders
of the Common Stock of rights or warrants to subscribe for or purchase any
shares of any class or series of Capital Stock or any other rights or
warrants; or
(iii) there shall be any reclassification of the outstanding
Common Stock or any consolidation or merger to which the Corporation is a
party and for which approval of any stockholders of the Corporation is
required, or a statutory share exchange, or an issuer or self tender offer
by the Corporation for all or a substantial portion of its outstanding
shares of Common Stock (or an amendment thereto changing the maximum number
of shares sought or the amount or type of consideration being offered
therefor) or the sale or transfer of all or substantially all of the assets
of the Corporation as an entirety; or
(iv) there shall occur the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation,
then the Corporation shall cause to be filed with the Transfer Agent and shall
cause to be mailed to each holder of shares of Class B Preferred Stock at such
holder's address as shown on the stock records of the Corporation, as promptly
as possible, but at least 15 days prior to the applicable date hereinafter
specified, a notice stating (A) the record date for the payment of such
dividend, distribution or rights or warrants, or, if a record date is not
established, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution or rights or warrants are to be
determined or (B) the date on which such reclassification, consolidation,
merger, statutory share exchange, sale, transfer, liquidation, dissolution or
winding up is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property, if any,
deliverable upon such reclassification, consolidation, merger, statutory share
exchange, sale, transfer, liquidation, dissolution or winding up or (C) the date
on which such tender offer commenced, the date on which such tender offer is
scheduled to expire unless extended, the consideration offered and the other
material terms thereof (or the material terms of any amendment thereto).
Failure to give or receive such notice or any defect therein shall not affect
the legality or validity of the proceedings described in this Section 7.
(g) Whenever the Conversion Price is adjusted as herein provided, the
Corporation shall promptly file with the Transfer Agent an officer's certificate
setting forth the Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment which certificate shall
be conclusive evidence of the correctness of such adjustment absent manifest
error. Promptly after delivery of such certificate, the Corporation shall
prepare a notice of such adjustment of the Conversion Price setting forth the
adjusted Conversion Price and the effective date such adjustment becomes
effective and shall mail such notice of such adjustment of the Conversion Price
to each holder of shares of Class B Preferred Stock at such holder's last
address as shown on the stock records of the Corporation.
(h) In any case in which paragraph (d) of this Section 7 provides
that an adjustment shall become effective on the day next following the record
date for an event, the Corporation may defer until the occurrence of such event
(A) issuing to the holder of any share of Class B Preferred Stock converted
after such record date and before the occurrence of such event the additional
Common Stock issuable upon such conversion by reason of the adjustment required
by such event over and above the Common Stock issuable upon such conversion
before giving effect to such adjustment and (B) paying to such holder any amount
of cash in lieu of any fraction pursuant to paragraph (c) of this Section 7.
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(i) There shall be no adjustment of the Conversion Price in case of
the issuance of any Capital Stock of the Corporation in a reorganization,
acquisition or other similar transaction except as specifically set forth in
this Section 7.
(j) If the Corporation shall take any action affecting the Common
Stock, other than action described in this Section 7, that in the opinion of the
Board of Directors would materially adversely affect the conversion rights of
the holders of Class B Preferred Stock, the Conversion Price for the Class B
Preferred Stock may be adjusted, to the extent permitted by law, in such manner,
if any, and at such time as the Board of Directors, in its sole discretion, may
determine to be equitable under the circumstances.
(k) The Corporation shall at all times reserve and keep available,
free from preemptive rights, out of the aggregate of its authorized but unissued
Common Stock solely for the purpose of effecting conversion of the Class B
Preferred Stock, the full number of shares of Common Stock deliverable upon the
conversion of all outstanding shares of Class B Preferred Stock not theretofore
converted into Common Stock. For purposes of this paragraph (k), the number of
shares of Common Stock that shall be deliverable upon the conversion of all
outstanding shares of Class B Preferred Stock shall be computed as if at the
time of computation all such outstanding shares were held by a single holder
(and without regard to the Aggregate Stock Ownership Limit or the Common Stock
Ownership Limit set forth in the Charter of the Corporation).
The Corporation covenants that any shares of Common Stock issued upon
conversion of the shares of Class B Preferred Stock shall be validly issued,
fully paid and nonassessable.
The Corporation shall use its best efforts to list the shares of Common
Stock required to be delivered upon conversion of the shares of Class B
Preferred Stock, prior to such delivery, upon each national securities exchange,
if any, upon which the outstanding shares of Common Stock are listed at the time
of such delivery.
(l) The Corporation will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
Common Stock or other securities or property on conversion or redemption of
shares of Class B Preferred Stock pursuant hereto; provided, however, that the
Corporation shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issue or delivery of shares of Common Stock or
other securities or property in a name other than that of the holder of the
shares of Class B Preferred Stock to be converted or redeemed, and no such issue
or delivery shall be made unless and until the Person requesting such issue or
delivery has paid to the Corporation the amount of any such tax or established,
to the reasonable satisfaction of the Corporation, that such tax has been paid.
8. Ranking.
Any class or series of Capital Stock of the Corporation shall be deemed to
rank:
(a) prior or senior to the Class B Preferred Stock, as to the payment
of dividends and as to distribution of assets upon liquidation, dissolution or
winding up, if the holders of such class or series shall be entitled to the
receipt of dividends or of amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in preference or priority to the holders of
Class B Preferred Stock;
(b) on a parity with the Class B Preferred Stock, as to the payment
of dividends and as to distribution of assets upon liquidation, dissolution or
winding up, whether or not the dividend rates, dividend payment dates or
redemption or liquidation prices per share thereof be different from those of
the Class B Preferred Stock, if the holders of such class of stock or series and
the Class B Preferred Stock shall be entitled to the receipt of dividends and of
amounts distributable upon liquidation, dissolution or winding up in proportion
to their respective amounts of accrued and unpaid dividends per share or
liquidation preferences, without preference or priority one over the other
("Parity Stock"); and
(c) junior to the Class B Preferred Stock, as to the payment of
dividends or as to the distribution of assets upon liquidation, dissolution or
winding up, if such stock or series shall be Common Stock or if the holders of
Class B
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Preferred Stock shall be entitled to receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may be,
in preference or priority to the holders of shares of such class or series
("Junior Stock").
9. Voting.
(a) If and whenever (i) six quarterly dividends (whether or not
consecutive) payable on the Class B Preferred Stock or any series or class of
Parity Stock shall be in arrears (which shall, with respect to any such
quarterly dividend, mean that any such dividend has not been paid in full),
whether or not earned or declared, or (ii) the consolidated shareholders' equity
of the Corporation (determined in accordance with generally accepted accounting
principles and giving effect to any adjustment for the net unrealized gain or
loss on assets available for sale) at the end of any calendar quarter is less
than 150% of the aggregate Liquidation Preference (excluding any accumulated,
accrued and unpaid dividends) of the then outstanding Class B Preferred Stock
and the aggregate liquidation preference (excluding any accumulated, accrued and
unpaid dividends) of any then outstanding Parity Stock, the number of directors
then constituting the Board of Directors shall be increased by two (if not
already increased by reason of similar types of provisions with respect to
Voting Preferred Stock (as defined below)) and the holders of shares of Class B
Preferred Stock, together with the holders of shares of every other series or
class of Parity Stock (any other such series, the "Voting Preferred Stock"),
voting as a single class regardless of series, shall be entitled to elect the
two additional directors to serve on the Board of Directors at any annual
meeting of stockholders or special meeting held in place thereof, or at a
special meeting of the holders of the Class B Preferred Stock and the Voting
Preferred Stock called as hereinafter provided. Notwithstanding anything herein
to the contrary, if any class or series of Voting Preferred Stock (with which
the Class B Preferred Stock is entitled to vote as a single class) is entitled
to elect two directors as a result of a failure to maintain a specified level of
consolidated shareholders' equity required by the terms of such Voting Preferred
Stock, then when such entitlement is triggered, the separate entitlement to
elect two directors pursuant to Section 9(a)(ii) hereof shall be suspended.
Whenever the entitlement pursuant to Section 9(a)(ii) of the Class B Preferred
Stock (together with holders of Voting Preferred Stock voting as a single class
regardless of series) to vote is suspended as described in the preceding
sentence, the terms of office of all Persons elected as directors pursuant to
Section 9(a)(ii) shall terminate upon the election of the two directors elected
pursuant to a vote of the Class B Preferred Stock and Voting Preferred Stock
voting as a single class as a result of a failure to maintain a specified level
of consolidated shareholders' equity required by the terms of such class or
series of Voting Preferred Stock. Whenever (1) in the case of an arrearage in
dividends described in clause (i), all arrears in dividends on the Class B
Preferred Stock and the Voting Preferred Stock then outstanding shall have been
paid and dividends thereon for the current quarterly dividend period shall have
been paid or declared and set apart for payment, or (2) in the case of a
shortfall in the Corporation's consolidated shareholders' equity described in
clause (ii), the consolidated shareholders' equity of the Corporation
(determined in accordance with generally accepted accounting principles and
giving effect to any adjustment for the net unrealized gain or loss on assets
available for sale) at the end of any subsequent calendar quarter equals or
exceeds 150% of the aggregate Liquidation Preference (excluding any accumulated,
accrued and unpaid dividends) of the then outstanding Class B Preferred Stock
and the aggregate liquidation preference (excluding any accumulated, accrued and
unpaid dividends) of the then outstanding Parity Stock, then the right of the
holders of the Class B Preferred Stock and the Voting Preferred Stock to elect
such additional two directors shall cease (but subject always to the same
provision for the vesting of such voting rights in the case of any similar
future arrearages in six quarterly dividends or shortfall in consolidated
shareholders' equity), and the terms of office of all Persons elected as
directors by the holders of the Class B Preferred Stock and the Voting Preferred
Stock shall forthwith terminate and the number of directors constituting the
Board of Directors shall be reduced accordingly. At any time after such voting
power shall have been so vested in the holders of Class B Preferred Stock and
the Voting Preferred Stock, if applicable, the Secretary of the Corporation may,
and upon the written request of any holder of Class B Preferred Stock (addressed
to the Secretary at the principal office of the Corporation) shall, call a
special meeting of the holders of the Class B Preferred Stock and of the Voting
Preferred Stock for the election of the two Directors to be elected by them as
herein provided, such call to be made by notice similar to that provided in the
Bylaws of the Corporation for a special meeting of the stockholders or as
required by law. If any such special meeting required to be called as above
provided shall not be called by the Secretary within 20 days after receipt of
any such request, then any holder of Class B Preferred Stock may call such
meeting, upon the notice above provided, and for that purpose shall have access
to the stock books of the Corporation. The Directors elected at any such special
meeting shall hold office until the next annual meeting of the stockholders or
special meeting held in lieu thereof if such office shall not have previously
terminated as above
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provided. If any vacancy shall occur among the Directors elected by the holders
of the Class B Preferred Stock and the Voting Preferred Stock, a successor shall
be elected by the Board of Directors, upon the nomination of the then-remaining
Director elected by the holders of the Class B Preferred Stock and the Voting
Preferred Stock or the successor of such remaining Director, to serve until the
next annual meeting of the stockholders or special meeting held in place thereof
if such office shall not have previously terminated as provided above.
(b) So long as any shares of Class B Preferred Stock are outstanding,
in addition to any other vote or consent of stockholders required by law or by
the Articles of Incorporation, as amended, the affirmative vote of at least 66
2/3% of the votes entitled to be cast by the holders of the Class B Preferred
Stock, given in Person or by proxy, either in writing without a meeting or by
vote at any meeting called for the purpose, shall be necessary for effecting or
validating:
(i) Any amendment, alteration or repeal of any of the
provisions of these Articles Supplementary to the Articles of
Incorporation, the Articles of Incorporation or the Bylaws of the
Corporation that materially adversely affects the voting powers, rights or
preferences of the holders of the Class B Preferred Stock; provided,
however, that the amendment of the provisions of the Articles of
Incorporation so as to authorize or create, or to increase the authorized
amount of, any Junior Stock or any shares of any class ranking on a parity
with the Class B Preferred Stock shall not be deemed to materially
adversely affect the voting powers, rights or preferences of the holders of
Class B Preferred Stock; or
(ii) The authorization or creation of, or the increase in the
authorized amount of, any shares of any class or any security convertible
into shares of any class ranking prior or senior to the Class B Preferred
Stock in the distribution of assets on any liquidation, dissolution or
winding up of the Corporation or in the payment of dividends; provided,
however, that no such vote of the holders of Class B Preferred Stock shall
be required if, at or prior to the time when such amendment, alteration or
repeal is to take effect, or when the issuance of any such prior shares or
convertible security is to be made, as the case may be, provision is made
for the redemption of all shares of Class B Preferred Stock at the time
outstanding unless all or a portion of the redemption price is to come from
proceeds of the issuance of such prior shares or convertible securities.
For purposes of the foregoing provisions and all other voting rights under
these Articles Supplementary, each share of preferred stock shall have one (1)
vote per share, except that when any class or series of Parity Stock shall have
the right to vote with the Class B Preferred Stock as a single class on any
matter, then the Class B Preferred Stock and such other class or series shall
have with respect to such matters one (1) vote per $7.00 of stated liquidation
preference. Except as otherwise required by applicable law or as set forth
herein, the Class B Preferred Stock shall not have any relative, participating,
optional or other special voting rights and powers other than as set forth
herein, and the consent of the holders thereof shall not be required for the
taking of any corporate action.
10. Record Holders.
The Corporation and the Transfer Agent may deem and treat the record holder
of any share of Class B Preferred Stock as the true and lawful owner thereof for
all purposes, and neither the Corporation nor the Transfer Agent shall be
affected by any notice to the contrary.
11. ERISA-Related Ownership Restrictions.
(a) Commencing on the Effective Date and terminating on the ERISA-
Restriction Termination Date, no Benefit Plan Investor may beneficially acquire
or beneficially own any shares of Class B Preferred Stock. Prior to the ERISA-
Restriction Termination Date, transfers of Class B Preferred Stock to a Benefit
Plan Investor will be void ab initio. In addition, in the event that the any
share of Class B Preferred Stock, but for the operation of this Section 11,
would be beneficially owned by a Benefit Plan Investor (i) the shares of Class B
Preferred Stock purportedly held by such Benefit Plan Investor shall be
transferred automatically and by operation of law to the Trust (as described in
Section 11.3.1 of Article XI of the Company's Charter) to be held in accordance
with this Section 11 and otherwise in accordance with the applicable provisions
of Article XI, Section 11.3 of the Company's Charter, provided that any
references therein to ownership limitations shall be deemed to be references
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to the ownership limitations set forth in this Section 11, and (ii) the Benefit
Plan Investor purportedly owning such shares shall submit such shares for
registration in the name of the Trust. Such transfer to Trust shall be effective
as of the close of business on the business day prior to the date of the event
that otherwise would have caused the Benefit Plan Investor to beneficially own
Class B Preferred Stock.
(b) Prior to the sale by the Trust of shares held by it as provided
in Section 11.3 of Article XI of the Charter, any transfer of Class B Preferred
Stock by a Benefit Plan Investor to a non-Benefit Plan Investor (a "Permitted
Transferee") shall reduce the number of shares held by the Trust on a one-for-
one basis, and such shares shall be returned to the Permitted Transferee,
effective at exactly the time of the purported transfer to the Permitted
Transferee, automatically and without further action by the Corporation, the
Trustee or the Benefit Plan Investor.
(c) On the ERISA-Restriction Termination Date, (i) this Section 11
shall cease to apply to the Class B Preferred Stock and (ii) all shares that
were held by the Trust pursuant to this Section 11 shall be returned,
automatically and by operation of law, to their purported owners.
(d) In case of any ambiguity in the application of any of the
provisions of this Section 11, including any definition contained in Section
11(g), the Board of Directors shall have the power to determine the
applicability of the provisions of this Section 11 with respect to any situation
based on the facts known to it (subject, however, to the provisions of Section
11(e)).
(e) Nothing in this Section 11 shall be interpreted to preclude the
settlement of any transaction entered into through the facilities of the New
York Stock Exchange, the American Stock Exchange, any other national securities
exchange or NASDAQ, but the shares which are the subject of such transaction
shall continue to be subject to the terms of this Section 11 subsequent to such
settlement.
(f) Each certificate for Class B Preferred Stock shall bear
substantially the following legend in addition, without limitation, to any other
legends required by the Charter or to comply with federal and state securities
laws:
The securities represented by this certificate are
subject to ERISA-Related ownership restrictions. Prior to
the ERISA-Restriction Termination Date, no Benefit Plan
Investor may beneficially acquire or beneficially own any
shares of Class B Preferred Stock and transfers of Class B
Preferred Stock to a Benefit Plan Investor will be void ab
initio. In addition, in the event that any share of Class B
Preferred Stock, but for the operation of Section 11 of the
Articles Supplementary governing the Class B Preferred
Stock, would be beneficially owned by a Benefit Plan
Investor (i) the shares of Class B Preferred Stock
purportedly held by such Benefit Plan Investor shall be
transferred automatically and by operation of law to the
Trust (as described in Section 11.3.1 of Article XI of the
Company's Charter) to be held in accordance with Section 11
and otherwise in accordance with the applicable provisions
of Article XI, Section 11.3 of the Company's Charter,
provided that any references therein to ownership
limitations shall be deemed to be references to the
ownership limitations set forth in Section 11 of the
Articles Supplementary, and (ii) the Benefit Plan Investor
purportedly owning such shares shall submit such shares for
registration in the name of the Trust. All capitalized terms
of this legend have the meanings defined in the Articles
Supplementary governing the Class B Preferred Stock and the
Charter of the Company, as the same may be amended from time
to time, a copy of which, including the restrictions on
transfer and ownership, will be furnished to each holder of
Capital Stock of the Company on request and without charge.
(g) For purposes of this Section 11 the following terms shall have
the meanings indicated:
(i) "Benefit Plan Investor" shall mean (i) an employee benefit
plan as described in Section 3(3) of ERISA, whether or not it is subject to
the provisions of ERISA (an "ERISA Plan"); (ii) any
14
<PAGE>
plan described in Section 4975 of the Code, including an individual
retirement account, individual retirement annuity or Keogh plan (together
with ERISA Plans, a "Plan"); or (iii) any entity whose underlying assets
are deemed to include assets of a Plan by reason of a Plan's investment in
the entity under the Plan Asset Regulation.
(ii) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(iii) "Effective Date" shall mean the time the Maryland State
Department of Assessments and Taxation accepts these Articles Supplementary
for record.
(iv) "ERISA" shall mean the U.S. Employee Retirement Income
Security Act of 1974, as amended from time to time.
(v) "ERISA-Restriction Termination Date" shall mean the
earlier to occur of (A) the date on which the Board of Directors determines
that the Class B Preferred Stock qualifies as a Publicly-Offered Security
or (B) the date on which the Board of Directors determines that another
exception to the Look-Through Rule (other than the exception for
insignificant Benefit Plan Investor equity participation in the Company)
applies to the Class B Preferred Stock or the Company as a whole.
(vi) "Look-Through Rule" shall mean the provisions of paragraph
(a)(2) of the Plan Asset Regulation.
(vii) "Plan Asset Regulation" shall mean the plan asset
regulation promulgated by the U.S. Department of Labor under ERISA at 29
C.F.R. 2510.3-101.
(viii) "Publicly Offered Security" shall have the meaning set
forth in paragraph (b)(2) of the Plan Asset Regulation.
FOURTH: These Articles Supplementary shall be effective at the time the
Maryland State Department of Assessments and Taxation accepts these Articles
Supplementary for record.
IN WITNESS WHEREOF, the Corporation has caused these presents to be signed
in its name and on its behalf by its President and witnessed by its Secretary on
March __, 1999.
WITNESS: NOVASTAR FINANCIAL, INC.
____________________________________ ____________________________________
Rodney Schwatken Mark J. Kohlrus
Vice President and Controller Senior Vice President, Chief
Financial Officer and Assistant
Secretary
THE UNDERSIGNED, Senior Vice President, Chief Financial Officer and
Assistant Secretary of NovaStar Financial, Inc., who executed on behalf of the
Corporation the Articles Supplementary of which this Certificate is made a part,
hereby acknowledges in the name and on behalf of said Corporation the foregoing
Articles Supplementary to be the corporate act of said Corporation and hereby
certifies that the matters and facts set forth herein with respect to the
authorization and approval thereof are true in all material respects under the
penalties of perjury.
____________________________________
Mark J. Kohlrus
Senior Vice President, Chief
Financial Officer and Assistant
Secretary
15
<PAGE>
Preferred Stock Preferred Stock
NUMBER SHARES
----------------- ----------------
B-
----------------------------------------------------------------------------
NOVASTAR FINANCIAL, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
----------------------------------------------------------------------------
This Certifies that _______________________________________________ is the
registered holder of ______________________________________________ Shares
of fully paid and non-assessable Class B 7% Convertible Preferred Stock, par
value $0.01 per share transferable only on the books of the Corporation by the
holder hereof in person or by Attorney upon surrender of this Certificate
properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ________________ day of _______________ A.D. _____
__________________________________ ________________________________
Rodney Schwatken, Vice President Mark J. Kohlrus, Senior Vice
and Controller President, Chief Financial
Officer and Assistant Secretary
<PAGE>
THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED,
SOLD,ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR
OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE. THE "RESALE RESTRICTION
TERMINATION DATE," WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATED PERSON OF THE
COMPANY WAS THE OWNER OF THIS SECURITY, OR ANY PREDECESSOR OF SUCH SECURITY ONLY
(A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES
ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A. TO A PERSON IT REASONABLY
BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE INVESTOR ACCOUNT OF
A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS
BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED
INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (A)(2), (A)(3) OR (A)(7)
OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN
ACCOUNT OR FOR THE INVESTOR ACCOUNT OF SUCH AN INSTITUTIONAL OF SUCH AN
INSTITUTIONAL "ACCREDITED INVESTOR" FOR INVESTMENT PURPOSES AND NOT WITH A VIEW
TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF
THE SECURITIES ACT, (E) TO AN INDIVIDUAL "ACCREDITED INVESTOR" AS DEFINED IN
SUBPARAGRAPH (A)(4), (A)(5) OR (A)(6) OF RULE 501 UNDER THE SECURITIES ACT THAT
IS RESIDING IN ONE OF THE JURISDICTIONS AUTHORIZED BY THE COMPANY AND WHO IS
ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT FOR INVESTMENT PURPOSES AND NOT WITH
A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN
VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE
COMPANY'S OR OTHER TRANSFER AGENT'S RIGHT, AS THE CASE MAY BE, PRIOR TO ANY SUCH
OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE
DELIVERY OF AN OPINION OF COUNSEL CERTIFICATION AND/OR OTHER INFORMATION
REASONABLY SATISFACTORY TO IT, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE
OF TRANSFER IN THE FORM APPEARING ON THE SECURITY COMPLETED AND DELIVERED BY THE
TRANSPEROR TO THE COMPANY OR OTHER TRANSFER AGENT, AS THE CASE MAY BE, IN
ADDITION, PRIOR TO THE TIME THE CLASS OF STOCK EVIDENCED BY THIS SECURITY IS
LISTED ON A NATIONAL SECURITIES EXCHANGE OR THE NASDAQ NATIONAL MARKET, THIS
SECURITY MAY NOT BE TRANSFERRED TO ANY "BENEFIT PLAN INVESTOR" AS SUCH TERM IS
DEFINED IN 29 C.F.R. (S)2510.3-101 UNLESS THE PROPOSED TRANSFEREE PROVIDES A
DISCLOSURE AND ACKNOWLEDGEMENT FORM AND THE AGGREGATE PERCENTAGE OF THE CLASS OF
STOCK EVIDENCED HEREBY AND PROPOSED TO BE TRANSFERRED, TAKEN TOGETHER WITH ALL
OTHER SHARES OF SUCH CLASS OWNED BY BENEFIT PLAN INVESTORS, WOULD NOT EQUAL OR
EXCEED 25% OF SUCH CLASS OUTSTANDING. THIS LEGEND WILL BE REMOVED UPON THE
REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
BENEFICIAL OWNERSHIP AND CONSTRUCTIVE OWNERSHIP AND TRANSFER FOR THE PURPOSE OF
THE CORPORATION'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE INVESTMENT TRUST
UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). SUBJECT TO
CERTAIN FURTHER RESTRICTIONS AND EXCEPT AS EXPRESSLY PROVIDED IN THE
CORPORATION'S CHARTER, (I) NO PERSON MAY BENEFICIALLY OWN OR CONSTRUCTIVELY OWN
SHARES OF THE CORPORATION'S COMMON STOCK IN EXCESS OF 9.8 PERCENT (IN VALUE OR
NUMBER OF SHARES) OF THE OUTSTANDING SHARES OF COMMON STOCK OF THE CORPORATION
UNLESS SUCH PERSON IS AN EXCEPTED HOLDER (IN WHICH CASE THE EXCEPTED HOLDER
LIMIT SHALL BE APPLICABLE): (II) NO PERSON MAY BENEFICIALLY OWN OR
CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK OF THE CORPORATION IN EXCESS OF 9.8
PERCENT OF THE VALUE OF THE TOTAL OUTSTANDING SHARES OF CAPITAL STOCK OF THE
CORPORATION, UNLESS SUCH PERSON IS AN EXCEPTED HOLDER (IN WHICH CASE THE
EXCEPTED HOLDER LIMIT SHALL BE APPLICABLE); (III) NO PERSON MAY BENEFICIALLY OR
CONSTRUCTIVELY OWN CAPITAL STOCK THAT WOULD RESULT IN THE CORPORATION BEING
"CLOSELY HELD" UNDER SECTION 856(H) OF THE CODE OR OTHERWISE CAUSE THE
CORPORATION TO FAIL TO QUALIFY AS A REIT; AND (IV) NO PERSON MAY TRANSFER SHARES
OF CAPITAL STOCK IF SUCH TRANSFER WOULD RESULT IN THE CAPITAL STOCK OF THE
CORPORATION BEING OWNED BY FEWER THAN 100 PERSONS. ANY PERSON WHO BENEFICIALLY
OWNS OR CONSTRUCTIVELY OWNS OR ATTEMPTS TO BENEFICIALLY OWN OR CONSTRUCTIVELY
OWN SHARES OF CAPITAL STOCK WHICH CAUSES OR WILL CAUSE A PERSON WHO A PERSON TO
BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK IN EXCESS OR IN
VIOLATION OF THE ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE CORPORATION.
ATTEMPTED TRANSFERS OF OWNERSHIP IN VIOLATION OF THESE RESTRICTIONS SHALL BE
NULL AND VOID AB INITIO. IN ADDITION, IF ANY OF THE RESTRICTIONS ON TRANSFER OR
---------
OWNERSHIP ARE VIOLATED, THE SHARES OF CAPITAL STOCK REPRESENTED HEREBY MAY BE
AUTOMATICALLY TRANSFERRED TO A TRUSTEE OF A TRUST FOR THE BENEFIT OF ONE OR MORE
CHARITABLE BENEFICIARIES. IN ADDITION, UPON THE OCCURRENCE OF CERTAIN EVENTS,
ATTEMPTED TRANSFERS IN VIOLATION OF THE RESTRICTIONS DESCRIBED ABOVE MAY BE VOID
AB INITIO. ALL CAPITALIZED TERMS IN THE LEGEND HAVE THE MEANINGS DEFINED IN THE
- ---------
CHARTER OF THE CORPORATION, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY
OF WHICH, INCLUDING THE RESTRICTIONS ON TRANSFER AND OWNERSHIP, WILL BE
FURNISHED TO EACH HOLDER OF CAPITAL STOCK OF THE CORPORATION ON REQUEST AND
WITHOUT CHARGE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO ERISA-RELATED
OWNERSHIP RESTRICTIONS. PRIOR TO THE ERISA-RESTRICTION TERMINATION DATE, NO
BENEFIT PLAN INVESTOR MAY BENEFICIALLY ACQUIRE OR BENEFICIALLY OWN ANY SHARES OF
CLASS B PREFERRED STOCK AND TRANSFERS OF CLASS B PREFERRED STOCK TO A BENEFIT
PLAN INVESTOR WILL BE VOID AB INITIO. IN ADDITION, IN THE EVENT THAT ANY SHARE
OF CLASS B PREFERRED STOCK, BUT FOR THE OPERATION OF SECTION 11 OF THE ARTICLES
SUPPLEMENTARY GOVERNING THE CLASS B PREFERRED STOCK, WOULD BE BENEFICIALLY OWNED
BY A BENEFIT PLAN INVESTOR (I) THE SHARES OF CLASS B PREFERRED STOCK
PURPORTEDLY HELD BY SUCH BENEFIT PLAN INVESTOR SHALL BE TRANSFERRED
AUTOMATICALLY AND BY OPERATION OF LAW TO THE TRUST (AS DESCRIBED IN SECTION
11.3.1 OF ARTICLE XI OF THE COMPANY'S CHARTER) TO BE HELD IN ACCORDANCE WITH
SECTION 11 AND OTHERWISE IN ACCORDANCE WITH THE APPLICABLE PROVISIONS OF ARTICLE
XI, SECTION 11.3 OF THE COMPANY'S CHARTER, PROVIDED THAT ANY REFERENCES THEREIN
TO OWNERSHIP LIMITATIONS SHALL BE DEEMED TO BE REFERENCES TO THE OWNERSHIP
LIMITATIONS SET FORTH IN SECTION 11 OF THE ARTICLES SUPPLEMENTARY, AND (II) THE
BENEFIT PLAN INVESTOR PURPORTEDLY OWNING SUCH SHARES SHALL SUBMIT SUCH SHARES
FOR REGISTRATION IN THE NAME OF THE TRUST. ALL CAPITALIZED TERMS OF THIS LEGEND
HAVE THE MEANINGS DEFINED IN THE ARTICLES SUPPLEMENTARY GOVERNING THE CLASS B
PREFERRED STOCK AND THE CHARTER OF THE COMPANY, AS THE SAME MAY BE AMENDED FROM
TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON TRANSFER AND
OWNERSHIP, WILL BE FURNISHED TO EACH HOLDER OF CAPITAL STOCK OF THE COMPANY ON
REQUEST AND WITHOUT CHARGE.
IN ADDITION, THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER ON REQUEST AND
WITHOUT CHARGE A FULL STATEMENT OR SUMMARY OF THE DESIGNATIONS AND ANY
PREFERENCES, CONVERSION AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS,
LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS AND TERMS AND CONDITIONS OF
REDEMPTION OF THE STOCK OF EACH CLASS WHICH THE CORPORATION IS AUTHORIZED TO
ISSUE AND THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE
SHARES OF EACH SERIES. IF ANY, TO THE EXTENT THEY HAVE BEEN SET, AND OF THE
AUTHORITY OF THE BOARD OF DIRECTORS TO SET THE RELATIVE RIGHTS AND PREFERENCES
OF SUBSEQUENT SERIES SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE
CORPORATION.
For Value Received, _________ hereby sell, assign and transfer unto
______________________________________________________________________
_________________________________________ Shares represented by the within
Certificate, and do hereby irrevocably constitute and appoint
_________________________________________ Attorney to transfer the said Shares
on the books of the within named Corporation with full power of substitution
in the premises.
Dated ____________________
In presence of
___________________________ ____________________________
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
EXHIBIT 10.24
WARRANT AGREEMENT
BY AND BETWEEN
NOVASTAR FINANCIAL, INC.
AND
RESIDENTIAL FUNDING CORPORATION
DATED AS OF MARCH 10, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Issuance and Delivery............................................................. 1
---------------------
2. Additional Agreements of the Company.............................................. 2
------------------------------------
2A. Registration Rights Agreement................................................ 2
-----------------------------
2B. Securities Law Compliance.................................................... 2
-------------------------
2C. Opinion of the Company's Counsel............................................. 2
--------------------------------
2D. Issuance Documents........................................................... 2
-------------------
2E. Proceedings.................................................................. 3
-----------
2F. Expenses..................................................................... 3
--------
3. Covenants......................................................................... 3
---------
3A. Information.................................................................. 3
-----------
3B. Inspection................................................................... 3
----------
3C. Compliance with Agreements and Resolutions................................... 4
------------------------------------------
3D. Current Public Information................................................... 4
--------------------------
3E. Reservation of Common Stock.................................................. 4
---------------------------
3F. Exemption from Maryland Business Combination Statute and Maryland
-----------------------------------------------------------------
Control Share Acquisition Statute............................................ 4
---------------------------------
3G. Exemption from Ownership Limitations......................................... 5
------------------------------------
3H. First Refusal Rights......................................................... 5
--------------------
3I. Repricing or Amendment of Original Warrants.................................. 6
-------------------------------------------
3J. Waiver of Registration Rights Priority by Five Percent Purchasers............ 7
-----------------------------------------------------------------
3K. Cooperation.................................................................. 7
-----------
4. Transfer of Restricted Securities................................................. 7
---------------------------------
4A. General Provisions........................................................... 7
------------------
4B. Opinion Delivery............................................................. 7
----------------
4C. Rule 144A.................................................................... 7
---------
4D. Legend Removal............................................................... 8
--------------
5. Representations and Warranties of the Company..................................... 8
---------------------------------------------
5A. Organization, Corporate Power and Licenses................................... 8
------------------------------------------
5B. Capital Stock and Related Matters............................................ 8
---------------------------------
5C. Authorization; No Breach..................................................... 10
------------------------
5D. Brokerage.................................................................... 10
---------
5E. Governmental Consent, etc.................................................... 10
-------------------------
5F. Disclosure................................................................... 10
----------
5G. Closing Time................................................................. 11
------------
5H. Reports Filed with the Securities and Exchange Commission.................... 11
---------------------------------------------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
5I. Maryland Business Combination Statute and Maryland Control
----------------------------------------------------------
Share Acquisition Statute.................................................... 11
-------------------------
5J. Ownership Limits............................................................. 11
----------------
5K. Knowledge.................................................................... 12
---------
6. Definitions........................................................................ 12
-----------
7. Miscellaneous...................................................................... 14
-------------
7A. Expenses..................................................................... 14
--------
7B. Remedies..................................................................... 14
--------
7C. Investment Representations................................................... 14
--------------------------
7D. Consent to Amendments........................................................ 15
---------------------
7E. Survival of Representations and Warranties................................... 15
------------------------------------------
7F. Successors and Assigns....................................................... 15
----------------------
7G. Severability................................................................. 15
------------
7H. Counterparts................................................................. 16
------------
7I. Descriptive Headings; Interpretation......................................... 16
------------------------------------
7J. Governing Law................................................................ 16
-------------
7K. Notices...................................................................... 16
-------
7L. No Strict Construction....................................................... 17
----------------------
7M. Indemnification.............................................................. 17
---------------
</TABLE>
ii
<PAGE>
Schedules and Exhibits
- ----------------------
List of Exhibits
List of Disclosure Schedules
iii
<PAGE>
WARRANT AGREEMENT
-----------------
THIS AGREEMENT is made as of March 10, 1999, by and between NovaStar
Financial, Inc., a Maryland corporation (the "Company"), and Residential Funding
-------
Corporation, a Delaware corporation ("Investor"). Except as otherwise indicated
--------
herein, capitalized terms used herein are defined in Section 6 hereof.
WHEREAS, NovaStar Certificates Financing Corporation, a Delaware
corporation and a wholly owned subsidiary of the Company, as Borrower (the
"Borrower"), and Investor, as Lender, are parties to that certain Term Loan and
--------
Security Agreement, dated as of October 13, 1998 (as amended, the "Loan
----
Agreement"); and
- ---------
WHEREAS, the Company, as Guarantor, and Investor are parties to that
certain Guaranty, dated as of October 13, 1998 (as amended, the "Guaranty"); and
--------
WHEREAS, the execution and delivery of the Guaranty was a condition
precedent to the making of the initial Advance (as defined in the Loan
Agreement) under the Loan Agreement; and
WHEREAS, as additional consideration for Investor to enter into the
Loan Agreement, the Company agreed to issue the Warrants (as defined below) to
Investor;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
Section 1. Issuance and Delivery. In accordance with Section 23 of
---------------------
the Guaranty, the Company shall issue and deliver to Investor an instrument
evidencing a Stock Purchase Warrant to acquire an aggregate of 812,731 shares of
the Company's Common Stock (as defined in the Guaranty Warrant) containing the
terms and conditions and in the form set forth in Exhibit A attached hereto (the
---------
"Guaranty Warrant"). In addition, the Company issue and deliver to Investor an
----------------
instrument evidencing a Stock Purchase Warrant (the "Tag Along Warrant") to
-----------------
acquire an aggregate of 364,982 shares of Company's Common Stock containing the
terms and conditions and in the form set forth in Exhibit B attached hereto. The
---------
parties acknowledge that the Investor has no right to any additional warrants
for any additional shares. Both the Guaranty Warrant and the Tag Along Warrant
shall be registered in the name of Investor or its nominee's name, at the
offices of Kirkland & Ellis at 10:00 a.m. on March 10, 1999 (the "Closing
-------
Time"), or at such other place or at such other time and on such other date as
- ----
may be mutually agreeable to the Company and Investor. For purposes of this
Agreement, "Warrants" shall mean the Guaranty Warrant and the Tag Along Warrant
--------
initially issued hereunder and any Stock Purchase Warrant representing a portion
of the rights under such initially issued Guaranty Warrant or Tag Along Warrant.
<PAGE>
Section 2. Additional Agreements of the Company. The Company hereby
------------------------------------
agrees as follows:
2A. Registration Rights Agreement. At or prior to the Closing Time,
-----------------------------
the Company shall enter into a registration rights agreement in form and
substance as set forth in Exhibit C attached hereto (the "Registration Rights
--------- -------------------
Agreement").
- ---------
2B. Securities Law Compliance. At or prior to the Closing Time, the
-------------------------
Company shall make all filings under all applicable federal and state securities
laws necessary to consummate the issuance of the Warrants pursuant to this
Agreement in compliance with such laws.
2C. Opinion of the Company's Counsel. At or prior to the Closing Time,
--------------------------------
the Company shall cause to be delivered to Investor an opinion from Tobin &
Tobin, P.C., counsel for the Company, with respect to the matters set forth in
Exhibit D attached hereto, which shall be addressed to Investor, dated the date
- ---------
of the Closing Time and in form and substance satisfactory to Investor.
2D. Issuance Documents. At or prior to the Closing Time, the Company
------------------
shall deliver to Investor all of the following documents:
(i) an Officer's Certificate, dated the date of the Closing
Time, stating that the Company has fully complied with the agreements
specified in Section 1 and paragraphs 2A through 2F, inclusive;
(ii) certified copies of the resolutions duly adopted by the
Company's board of directors (A) authorizing the execution, delivery and
performance of this Agreement, the Registration Rights Agreement and each
of the other agreements contemplated hereby, (B) granting waivers to
Investor, GMAC RF, Inc., a Michigan corporation, GMAC Mortgage Group, Inc.,
a Michigan corporation, General Motors Acceptance Corporation, a Delaware
corporation, General Motors Corporation, a Delaware corporation ("GM"), and
--
any other Subsidiaries of GM (collectively, the "Investor Entities") of the
-----------------
Aggregate Stock Ownership Limit (as defined in the Company's Articles of
Incorporation, as amended (including any Articles Supplementary thereto,
the "Charter")) and the Common Stock Ownership Limit (as defined in the
-------
Charter), (C) exempting Investor and the Investor Entities from Section 3-
602 of the Corporations and Associations Article of the Annotated Code of
Maryland (the "Corporations Code") and (D) authorizing the issuance of the
-----------------
Warrants, the reservation for issuance upon exercise of (i) the Guaranty
Warrant of an aggregate of 812,731 shares of Common Stock and (ii) the Tag
Along Warrant of an aggregate of 364,982 shares of Common Stock, and the
consummation of all other transactions contemplated by this Agreement;
<PAGE>
(iii) certified copies of the Charter (including all Articles
Supplementary thereto) and the Company's Bylaws (the "Bylaws"), each as in
------
effect at the Closing Time;
(iv) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of the
transactions hereunder (including, without limitation, all blue sky law
filings and waivers of all preemptive rights and rights of first refusal);
and
(v) such other documents relating to the transactions
contemplated by this Agreement as Investor or its special counsel may
reasonably request.
2E. Proceedings. At or prior to the Closing Time, the Company shall
-----------
take all corporate and other proceedings required to be taken by the Company in
connection with the transactions contemplated hereby, and all documents incident
thereto shall be satisfactory in form and substance to Investor and its special
counsel.
2F. Expenses. At the Closing Time, the Company shall reimburse
--------
Investor for the fees and expenses of its special counsel as provided in
paragraph 7A hereof.
Section 3. Covenants.
---------
3A. Information. The Company shall deliver to Investor (so long as
-----------
Investor holds any Warrants or at least 5% of the Underlying Common Stock) and
to each holder (excluding Affiliates of Investor) of at least 25% of the
Underlying Common Stock:
(i) within five days after transmission thereof, copies of
all financial statements, proxy statements, reports and any other general
written communications which the Company sends to its stockholders and
copies of all regular, special or periodic reports which it files, or (to
its knowledge) any of its officers, directors or beneficial owners of the
Common Stock file with respect to the Company (including under Section 13
and Section 16 of the Securities Exchange Act) with the Securities and
Exchange Commission or with any securities exchange on which any of its
securities are then listed, and copies of all press releases and other
statements made available generally by the Company to the public concerning
material developments in the Company's and its Subsidiaries' businesses;
and
(ii) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any Person
entitled to receive information under this paragraph 3A may reasonably
request.
For purposes of this Agreement and the Registration Rights Agreement, all
holdings of Underlying Common Stock by Persons who are Affiliates of each other
shall be aggregated for purposes of meeting any threshold tests under this
Agreement and Registration Rights Agreement.
3
<PAGE>
3B. Inspection. The Company shall permit Investor and any
----------
representative designated by Investor (so long as Investor holds any Warrants or
at least 5% of the Underlying Common Stock) or any holder (excluding Affiliates
of Investor) of at least 25% of the Underlying Common Stock and any
representative designated by any such holder to (i) visit and inspect any of the
properties of the Company and its Subsidiaries and (ii) examine the corporate
and financial records of the Company and its Subsidiaries and make copies
thereof, in each such case to the same extent as stockholders of the Company are
so permitted under the applicable provisions of the Corporations Code.
3C. Compliance with Agreements and Resolutions. The Company shall
------------------------------------------
perform and observe (i) all of its obligations to each holder of the Underlying
Common Stock set forth in the Charter or the Bylaws, (ii) all of its obligations
to each holder of a Warrant set forth therein, (iii) all of its obligations to
each holder of Registrable Securities set forth in the Registration Rights
Agreement and (iv) all of its obligations in all resolutions adopted by the
Company's board of directors relating hereto or to Section 23 of the Guaranty.
3D. Current Public Information. The Company shall file all reports
--------------------------
required to be filed by it under the Securities Act and the Securities Exchange
Act and the rules and regulations adopted by the Securities and Exchange
Commission thereunder and shall take such further action as any holder or
holders of Restricted Securities may reasonably request, all to the extent
required to enable such holders to sell Restricted Securities pursuant to Rule
144 adopted by the Securities and Exchange Commission under the Securities Act
(as such rule may be amended from time to time) or any similar rule or
regulation hereafter adopted by the Securities and Exchange Commission. Upon
request, the Company shall deliver to any holder of Restricted Securities a
written statement as to whether it has complied with such requirements.
3E. Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Capital
Stock designated as Common Stock, solely for the purpose of issuance upon the
exercise of the Warrant(s), such number of shares of Common Stock issuable upon
the exercise of all outstanding Warrants. All shares of Common Stock which are
so issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Company shall take
all such actions as may be necessary to assure that all such shares of Common
Stock may be so issued without violation of any applicable law or governmental
regulation or any requirements of any domestic securities exchange upon which
shares of Common Stock may be listed (except for official notice of issuance
which shall be immediately transmitted by the Company upon issuance).
4
<PAGE>
3F. Exemption from Maryland Business Combination Statute and Maryland
-----------------------------------------------------------------
Control Share Acquisition Statute.
- ---------------------------------
(i) The Company shall not make any amendment to the Charter or
the Bylaws, and the Company's board of directors shall not adopt any
resolution containing any provisions, relating to the exemption from
Section 3-602 of the Corporations Code granted to each of Investor and the
Investor Entities which would adversely affect or otherwise impair the
rights of Investor or any Investor Entity thereunder.
(ii) The Company shall not make any amendment to the Charter or
the Bylaws, and the Company's board of directors shall not adopt any
resolution containing any provisions, relating to the exemption from
Sections 3-701 to 3-709 of the Corporations Code contained in Section 3 of
Section IX of the Bylaws which would adversely affect or otherwise impair
the rights of the current or future holders of the Underlying Common Stock
thereunder.
(iii) Upon the reasonable request of Investor, the Investor
Entities and any successors or assigns of Investor or the Investor
Entities, the Company shall grant an exemption from Section 3-602 of the
Corporations Code to any proposed transferee of Underlying Common Stock.
3G. Exemption from Ownership Limitations.
------------------------------------
(i) The Company shall not make any amendment to the Charter or
the Bylaws, and the Company's board of directors shall not adopt any
resolution containing any provisions, relating to the waiver of the
Aggregate Stock Ownership Limit and the Common Stock Ownership Limit
granted to each of Investor and the Investor Entities which would adversely
affect or otherwise impair the rights of Investor or any Investor Entity
thereunder.
(ii) Upon the reasonable request of Investor, the Investor
Entities and any successors or assigns of Investor or the Investor
Entities, the Company shall grant a waiver of the Aggregate Stock Ownership
Limit and the Common Stock Ownership Limit on the same terms, and subject
to the same conditions, as that certain waiver granted to Investor by a
resolution adopted by the Company's board of directors on October 12, 1998,
to any proposed transferee of Underlying Common Stock; provided that the
--------
Company may require that any such proposed transferee make the
representations and undertakings specified in Section 11.2.7(a)(i), (ii)
and (iii) of the Charter.
3H. First Refusal Rights.
--------------------
(i) Except for issuances of (A) Common Stock (1) to the
Company's directors, officers or employees under any stock option plan or
employee stock ownership plan, (2) upon the exercise of a Warrant (or
portion thereof) or any options, warrants or rights
5
<PAGE>
to acquire any shares of Common Stock, (3) in connection with the
acquisition (whether by a purchase of assets, purchase of stock, merger or
otherwise) of another company or business by the Company or any of its
Subsidiaries, (4) pursuant to a public offering registered under the
Securities Act (including a dividend reinvestment plan or a direct stock
purchase plan), (5) pursuant to purchase rights which are offered to all
holders of Warrants or (6) upon the conversion of dividend equivalent
rights or (B) options, warrants or rights to acquire any shares of Common
Stock (including, but not limited to, dividend equivalent rights) which
trigger an adjustment to the Exercise Price (as defined in the Warrants)
pursuant to Section 2 of the Warrants, if the Company authorizes after the
date hereof the issuance or sale of any shares of Common Stock or any
securities convertible into or containing options, warrants or rights to
acquire any shares of Common Stock (other than as a dividend on the
outstanding Common Stock) (an "Issuance"), subject to the rules of the New
York Stock Exchange the Company shall first offer to sell to each holder of
Underlying Common Stock a portion of the stock or securities comprising
such Issuance equal to the quotient determined by dividing (1) the number
of shares of Underlying Common Stock held by such holder by (2) the sum of
the total number of shares of Underlying Common Stock on a fully diluted
basis giving effect to all options, warrants and convertible securities and
the number of shares of Common Stock outstanding which are not shares of
Underlying Common Stock. Each holder of Underlying Common Stock shall be
entitled to purchase such stock or securities at the most favorable price
and on the most favorable terms as such stock or securities are to be
offered to any other Persons. The purchase price for all stock and
securities offered to the holders of the Underlying Common Stock shall be
payable in cash or, to the extent otherwise required hereunder, notes
issued by such holders.
(ii) In order to exercise its purchase rights hereunder, a
holder of Underlying Common Stock must within 15 days after receipt of
written notice from the Company describing in reasonable detail the stock
or securities being offered, the purchase price thereof, the payment terms
and such holder's percentage allotment deliver a written notice to the
Company describing its election hereunder. If all of the stock and
securities offered to the holders of Underlying Common Stock is not fully
subscribed by such holders, the remaining stock and securities shall be
reoffered by the Company to the holders purchasing their full allotment
upon the terms set forth in this paragraph, except that such holders must
exercise their purchase rights within five days after receipt of such
reoffer.
(iii) Upon the expiration of the offering periods described
above, the Company shall be entitled to sell such stock or securities which
the holders of Underlying Common Stock have not elected to purchase during
the 90 days following such expiration on terms and conditions no more
favorable to the purchasers thereof than those offered to such holders. Any
stock or securities offered or sold by the Company after such 90-day period
must be reoffered to the holders of Underlying Common Stock pursuant to the
terms of this paragraph.
6
<PAGE>
(iv) The provisions of this paragraph 3H shall not apply to the
issuance of Class B convertible preferred stock in March 1999 and shall
terminate automatically and be of no further force and effect upon the
termination of the Exercise Period (as defined in the Warrants).
3I. Repricing or Amendment of Original Warrants. So long as they are
-------------------------------------------
outstanding, if the Company reprices, adjusts or amends in any manner the
warrants issued pursuant to the Warrant Agreement dated as of December 9, 1996
between the Company and the holders of such warrants (the "Original Warrants"),
-----------------
the Company shall offer to make an identical change to the Tag Along Warrants at
the same time as the Original Warrants and upon the request of any such holder,
shall promptly so amend such holder's Tag Along Warrant. A true, correct and
complete copy of the form of the Original Warrant and the Warrant Agreement
dated as of December 9, 1996 are attached hereto as Exhibit E and Exhibit F,
--------- ---------
respectively.
3J. Waiver of Registration Rights Priority by Five Percent
------------------------------------------------------
Purchasers. Both prior and subsequent to the Closing Time, the Company will
- ----------
use its best efforts to obtain from the Five Percent Purchasers waivers of
certain preferential registration rights as provided in Exhibit G hereto.
---------
3K. Cooperation. In addition to any other agreements or covenants of
-----------
the Company hereunder or under the Warrants or the Registration Rights
Agreement, the Company shall take all appropriate action in connection with any
transfer or proposed transfer of the Warrants (or any portion thereof) or any
Underlying Common Stock as Investor, the Investor Entities and any successors or
assigns of Investor or the Investor Entities may reasonably request.
Section 4. Transfer of Restricted Securities.
---------------------------------
4A. General Provisions. Restricted Securities are transferable only
------------------
pursuant to (i) public offerings registered under the Securities Act, (ii) Rule
144 or Rule 144A of the Securities and Exchange Commission (or any similar rule
or rules then in force) if such rule is available and (iii) subject to the
conditions specified in paragraph 4B below, any other legally available means of
transfer.
4B. Opinion Delivery. In connection with the transfer of any
---------------
Restricted Securities (other than a transfer described in paragraph 4A(i) or
(ii) above), the holder thereof shall deliver written notice to the Company
describing in reasonable detail the transfer or proposed transfer, together with
an opinion of counsel which (to the Company's reasonable satisfaction) is
knowledgeable in securities law matters to the effect that such transfer of
Restricted Securities may be effected without registration of such Restricted
Securities under the Securities Act. In addition, if the holder of the
Restricted Securities delivers to the Company an opinion of counsel that no
subsequent transfer of such Restricted Securities shall require registration
under the Securities Act, the Company shall promptly upon such contemplated
transfer deliver new certificates for such Restricted Securities which do not
bear the Securities Act legend set forth in paragraph 7C. If the
7
<PAGE>
Company is not required to deliver new certificates for such Restricted
Securities not bearing such legend, the holder thereof shall not transfer the
same until the prospective transferee has confirmed to the Company in writing
its agreement to be bound by the conditions contained in this paragraph and
paragraph 7C.
4C. Rule 144A. Upon the request of Investor, the Company shall
---------
promptly supply to Investor or its prospective transferees all information
regarding the Company required to be delivered in connection with a transfer
pursuant to Rule 144A of the Securities and Exchange Commission.
4D. Legend Removal. If any Restricted Securities become eligible for
--------------
sale pursuant to Rule 144(k), the Company shall, upon the request of the holder
of such Restricted Securities, remove the legend set forth in paragraph 7C from
the certificates for such Restricted Securities.
Section 5 Representations and Warranties of the Company. As a material
---------------------------------------------
inducement to Investor to enter into this Agreement, the Company hereby
represents and warrants that:
5A. Organization, Corporate Power and Licenses. The Company is a
------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of Maryland and is qualified to do business in every jurisdiction in which its
ownership of property or conduct of business requires it to qualify. The Company
possesses all requisite corporate power and authority and all material licenses,
permits and authorizations necessary to own and operate its properties, to carry
on its businesses as now conducted and presently proposed to be conducted and to
carry out the transactions contemplated by this Agreement. The copies of the
Charter (including the Articles Supplementary thereto) and the Bylaws which have
been furnished to Investor's special counsel reflect all amendments made thereto
(and all Articles Supplementary to the Charter) at any time prior to the date of
this Agreement and are correct and complete.
5B. Capital Stock and Related Matters.
---------------------------------
(i) As of October 13, 1998, the authorized capital stock of the
Company consisted of 50,000,000 shares of Capital Stock, all of which were
classified as Common Stock, (a) of which 8,127,314 shares were issued and
outstanding and (b) none of which were treasury shares. As of October 13,
1998, neither the Company nor any of its Subsidiaries had outstanding any
stock or securities convertible or exchangeable for any shares of the
Company's Capital Stock or containing any profit participation features,
nor did it have outstanding any rights or options to subscribe for or to
purchase the Company's Capital Stock or any stock or securities convertible
into or exchangeable for the Company's Capital Stock or any stock
appreciation rights or phantom stock plans, except as set forth on the
attached "October 13 Capitalization Schedule." The October 13
Capitalization Schedule accurately sets forth the following information
with respect to all outstanding options and
8
<PAGE>
rights to acquire the Company's Capital Stock (both before and after giving
effect to the issuance of the Warrants): the holder, the number of shares
covered, the exercise price and the expiration date. As of October 13,
1998, neither the Company nor any of its Subsidiaries was subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of the Company's Capital Stock or any warrants, options
or other rights to acquire the Company's Capital Stock, except as set forth
on the October 13 Capitalization Schedule. As of October 13, 1998, all of
the outstanding shares of the Company's Capital Stock were validly issued,
fully paid and nonassessable.
(ii) As of the Closing Time and immediately thereafter, the
authorized Capital Stock of the Company shall consist of 50,000,000 shares
of Capital Stock, of which 50,000,000 shares shall be classified as Common
Stock, of which 8,160,039 shares of Common Stock shall be issued and
outstanding, 3,463,151 shares shall be reserved for issuance upon exercise
of the Original Warrants, 350,000 shares shall be reserved for issuance
upon exercise of the First Union Warrants, 383,820 shares shall be reserved
for issuance upon exercise of employee stock options outstanding (including
unvested options) and 1,177,713 shares shall be reserved for issuance upon
exercise of the Guaranty Warrant and the Tag Along Warrant. As of the
Closing Time, neither the Company nor any of its Subsidiaries shall have
outstanding any stock or securities convertible or exchangeable for any
shares of the Company's Capital Stock or containing any profit
participation features, nor shall it have outstanding any rights or options
to subscribe for or to purchase the Company's Capital Stock or any stock or
securities convertible into or exchangeable for the Company's Capital Stock
or any stock appreciation rights or phantom stock plans, except for the
Warrants and except as set forth on the attached "Closing Time
Capitalization Schedule." The Closing Time Capitalization Schedule
accurately sets forth the following information with respect to all
outstanding options and rights to acquire the Company's Capital Stock: the
holder, the number of shares covered, the exercise price and the expiration
date. As of the Closing Time, neither the Company nor any of its
Subsidiaries shall be subject to any obligation (contingent or otherwise)
to repurchase or otherwise acquire or retire any shares of the Company's
Capital Stock or any warrants, options or other rights to acquire the
Company's Capital Stock, except as set forth on the Closing Time
Capitalization Schedule. As of the Closing Time, all of the outstanding
shares of the Company's Capital Stock shall be validly issued, fully paid
and nonassessable.
(iii) There are no statutory or, to the best of the Company's
knowledge, contractual stockholders preemptive rights or rights of refusal
with respect to the issuance of the Warrants hereunder or the issuance of
the Common Stock upon exercise of the Warrants or any other issuance of
Common Stock (or options, warrants or rights to acquire any shares of
Common Stock). The Company has not violated any applicable federal or
state securities laws in connection with the offer, sale or issuance of any
of its Capital Stock, and the offer, sale and issuance of the Warrants
hereunder do not require registration under the Securities Act or any
applicable state securities laws. There are no agreements between the
Company and its stockholders with respect to the registration of shares of
the Company's
9
<PAGE>
stock under the Securities Act (other than any agreements under which no
further registrations of shares are required), except for (a) the
Registration Rights Agreement dated December 9, 1996 between the Company
and Stifel, Nicolaus & Company, Incorporated, (b) the Founders Registration
Rights Agreement dated December 9, 1996 by and among the Company, W. Lance
Anderson and Scott F. Hartman and (c) the Warrant Agreement dated February
12, 1999 between the Company and First Union Corporation providing for the
issuance of warrants to acquire up to 350,000 shares of the Company's
Common Stock (subject to adjustment) (the "First Union Warrants"). To the
--------------------
best of the Company's knowledge, there are no agreements between the
Company's stockholders with respect to the voting or transfer of the
Company's Capital Stock or with respect to any other aspect of the
Company's affairs, except for (a) the Purchase Terms Agreement dated
December 6, 1996 and (b) the Supplement to Subscription and Purchase
Agreement made between the Company and General Electric Capital Corporation
as of December 4, 1996.
5C. Authorization; No Breach. The execution, delivery and performance
------------------------
of this Agreement, the Registration Rights Agreement, the Warrants and all other
agreements and instruments contemplated hereby to which the Company is a party
have been duly authorized by the Company. This Agreement, the Registration
Rights Agreement, the Warrants and all other agreements and instruments
contemplated hereby to which the Company is a party each constitutes a valid and
binding obligation of the Company, enforceable in accordance with its terms. The
execution and delivery by the Company of this Agreement, the Registration Rights
Agreement, the Warrants and all other agreements and instruments contemplated
hereby to which the Company is a party, the offering, sale and issuance of the
Warrants hereunder, the issuance of the Common Stock upon exercise of the
Warrant(s) and the fulfillment of and compliance with the respective terms
hereof and thereof by the Company, do not and shall not (i) conflict with or
result in a breach of the terms, conditions or provisions of, (ii) constitute a
default under, (iii) result in the creation of any lien, security interest,
charge or encumbrance upon the Company's or any Subsidiary's capital stock or
assets pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of, or (vi) require
any authorization, consent, approval, exemption or other action by or notice or
declaration to, or filing with, any court or administrative or governmental body
or agency pursuant to, the charter or bylaws of the Company or any of its
Subsidiaries, or any law, statute, rule or regulation to which the Company or
any of its Subsidiaries is subject, or any agreement, instrument, order,
judgment or decree to which the Company or any of its Subsidiaries is subject
(except to the extent of any Five Percent Purchaser rights not waived).
5D. Brokerage. There are no claims for brokerage commissions,
---------
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company or any of its Subsidiaries. The Company shall pay, and hold
Investor harmless against, any liability, loss or expense (including, without
limitation, reasonable attorneys' fees and out-of-pocket expenses) arising in
connection with any such claim.
10
<PAGE>
5E. Governmental Consent, etc... No permit, consent, approval or
-------------------------
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby, except as expressly contemplated herein or in the exhibits hereto.
5F. Disclosure. Neither this Agreement nor any of the exhibits,
----------
schedules, attachments, written statements, documents, certificates or other
items prepared or supplied to Investor by or on behalf of the Company with
respect to the transactions contemplated hereby contain any untrue statement of
a material fact or omit a material fact necessary to make each statement
contained herein or therein not misleading. There is no fact which the Company
has not disclosed to Investor in writing and of which any of its officers,
directors or executive employees is aware and which has had or would reasonably
be expected to have a material adverse effect upon the existing or expected
financial condition, operating results, assets, customer or supplier relations,
employee relations or business prospects of the Company and its Subsidiaries
taken as a whole.
5G. Closing Time. The representations and warranties of the Company
------------
contained in this Section 5 and elsewhere in this Agreement and all information
contained in any exhibit, schedule or attachment hereto or in any certificate or
other writing delivered by, or on behalf of, the Company to Investor shall be
true and correct in all material respects on the date of the Closing Time as
though then made, except as affected by the transactions expressly contemplated
by this Agreement.
5H. Reports Filed with the Securities and Exchange Commission.
---------------------------------------------------------
The Company has furnished Investor with complete and accurate copies of its
annual report on Form 10-K for its most recent fiscal year, all other reports or
documents required to be filed by the Company pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act since the end of its most recent fiscal year and
its most recent annual report to its stockholders. Such reports and filings do
not contain any material false statements or any misstatement of any material
fact and do not omit to state any fact necessary to make the statements set
forth therein not misleading. The Company has made all filings with the
Securities and Exchange Commission (the "SEC") which it is required to make, and
---
the Company has not received any request from the SEC to file any amendment or
supplement to any of the reports described in this paragraph (except for the
comment letters from the SEC dated February 3, 1999 and March 5, 1999).
5I. Maryland Business Combination Statute and Maryland Control Share
----------------------------------------------------------------
Acquisition Statute.
- --------------------
(i) The Company has taken all action required under Section 3-603
of the Corporations Code necessary to irrevocably exempt each of Investor
and the Investor Entities from the provisions of Section 3-602 of the
Corporations Code, and such exemptions are in full force and effect.
11
<PAGE>
(ii) As of the date hereof, all shares of capital stock of the
Company now or hereafter outstanding are exempt to the fullest extent
permitted by the Corporations Code from Sections 3-701 to 3-709 of the
Corporations Code.
5J. Ownership Limits.
----------------
(i) The Company has taken all action required under the Charter
necessary to grant a waiver of the Aggregate Stock Ownership Limit and the
Common Stock Ownership Limit to each of Investor and the Investor Entities,
and such waivers are in full force and effect.
(ii) With respect to each of Investor and the Investor Entities,
as of and from October 1, 1998 to and including the respective dates on
which the Company granted the waivers specified in subparagraph (i) above,
neither Investor nor any Investor Entity was in violation of any provision
of Section 11 of the Charter.
5K. Knowledge. As used in this Section 5, the terms "knowledge" or
---------
"aware" shall mean and include (i) the actual knowledge or awareness of the
Company and its Subsidiaries (which shall include the actual knowledge and
awareness of the officers, directors and key employees of the Company and its
Subsidiaries and the general managers of each facility of the Company and its
Subsidiaries) and (ii) the knowledge or awareness which a prudent business
person would have obtained in the conduct of his business after making
reasonable inquiry and reasonable diligence with respect to the particular
matter in question.
Section 6 Definitions. For the purposes of this Agreement, the
-----------
following terms have the meanings set forth below:
"Affiliate" of any particular Person means any other Person
---------
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"Capital Stock" means all classes or series of stock of the
-------------
Corporation, including, without limitation, Common Stock and Preferred Stock.
"Five Percent Purchasers" means those Persons that purchased 5% or
-----------------------
more of the units sold by the Company in December 1996 and have registration
rights under the Registration Rights Agreement of the Company, dated December 9,
1996, including the Lindner Dividend Fund, General Electric Capital Corporation,
First Financial Fund, Inc., Bay Pond Partners, L.P. and Wallace R. Weitz &
Company.
"Officer's Certificate" means a certificate signed by the Company's
---------------------
president or its chief financial officer, stating that (i) the officer signing
such certificate has made or has caused to
12
<PAGE>
be made such investigations as are necessary in order to permit him to verify
the accuracy of the information set forth in such certificate and (ii) to such
officer's knowledge, such certificate does not misstate any material fact and
does not omit to state any fact necessary to make the certificate not
misleading.
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Restricted Securities" means (i) the Warrants issued hereunder and
---------------------
any Warrants representing portions of the rights under the Warrants issued
hereunder, (ii) the Common Stock issued upon exercise of the Warrant(s) and
(iii) any securities issued with respect to the securities referred to in
clauses (i) or (ii) above by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular Restricted Securities, such
securities shall cease to be Restricted Securities when they have (a) been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) been distributed to the
public through a broker, dealer or market maker pursuant to Rule 144 (or any
similar provision then in force) under the Securities Act or become eligible for
sale pursuant to Rule 144(k) (or any similar provision then in force) under the
Securities Act or (c) been otherwise transferred and new certificates for them
not bearing the Securities Act legend set forth in paragraph 7C have been
delivered by the Company in accordance with Section 4. Whenever any particular
securities cease to be Restricted Securities, the holder thereof shall be
entitled to receive from the Company, without expense, new securities of like
tenor not bearing a Securities Act legend of the character set forth in
paragraph 7C.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar federal law then in force.
"Securities and Exchange Commission" includes any governmental body or
----------------------------------
agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
-----------------------
as amended, or any similar federal law then in force.
"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to
13
<PAGE>
have a majority ownership interest in a limited liability company, partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of limited liability company, partnership, association or
other business entity gains or losses or shall be or control any managing
director or general partner of such limited liability company, partnership,
association or other business entity.
"Underlying Common Stock" means (i) the Common Stock issued or
-----------------------
issuable upon exercise of any Warrant and (ii) any Common Stock issued or
issuable with respect to the securities referred to in clause (i) above by way
of stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. For purposes
of this Agreement, any Person who holds a Warrant shall be deemed to be the
holder of the Underlying Common Stock obtainable upon exercise of such Warrant
in connection with the transfer thereof or otherwise regardless of any
restriction or limitation on the exercise of such Warrant, such Underlying
Common Stock shall be deemed to be in existence, and such Person shall be
entitled to exercise the rights of a holder of Underlying Common Stock
hereunder. As to any particular shares of Underlying Common Stock, such shares
shall cease to be Underlying Common Stock when they have been (a) effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them, (b) distributed to the public through a
broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or
any similar provision then in force) or (c) repurchased by the Company or any of
its Subsidiaries thereof.
Section 7 Miscellaneous.
-------------
7A. Expenses. The Company shall pay, and hold each of Investor, the
--------
Investor Entities and all other holders of Warrants and Underlying Common Stock
harmless against liability for the payment of, (i) the fees and expenses of
their counsel arising in connection with the negotiation and execution of this
Agreement, the Warrants and the agreements and instruments contemplated hereby
and the consummation of the transactions contemplated hereby which shall be
payable at the Closing Time or, if not then paid, upon demand, (ii) the fees and
expenses incurred with respect to any amendments or waivers (whether or not the
same become effective) under or in respect of this Agreement, the Warrant(s) and
the agreements and instruments contemplated hereby, (iii) stamp and other taxes
which may be payable in respect of the execution and delivery of this Agreement
or the issuance, delivery or acquisition of any Warrant or any shares of Common
Stock issuable exercise of the Warrant(s), (iv) the fees and expenses incurred
with respect to the enforcement of the rights granted under this Agreement, the
Warrants, the agreements or instruments contemplated hereby and the Charter and
(v) the fees and expenses incurred by each such Person in any filing with any
governmental agency with respect to its investment in the Company or in any
other filing with any governmental agency with respect to the Company which
mentions such Person.
7B. Remedies. Each holder of Underlying Common Stock shall have all
--------
rights and remedies set forth in this Agreement, the Warrants and all rights and
remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights
14
<PAGE>
which such holders have under any law. Any Person having any rights under any
provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law.
7C. Investment Representations. Investor hereby represents that it
--------------------------
is acquiring the Restricted Securities purchased hereunder or acquired pursuant
hereto for its own account with the present intention of holding such securities
for purposes of investment, and that it has no intention of selling such
securities in a public distribution in violation of the federal securities laws
or any applicable state securities laws; provided that nothing contained herein
--------
shall prevent Investor and subsequent holders of Restricted Securities from
transferring such securities in compliance with the provisions of Section 4
hereof. Each certificate or instrument representing Restricted Securities shall
be imprinted with a legend in substantially the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
transfer of the securities represented by this certificate is
subject to the conditions specified in the Warrant Agreement,
dated as of March 10, 1999, and as amended and modified from
time to time, between the issuer (the "Company") and the initial
holder hereof, and the Company reserves the right to refuse the
transfer of such securities until such conditions have been
fulfilled with respect to such transfer. A copy of such
conditions shall be furnished by the Company to the holder hereof
upon written request and without charge."
7D. Consent to Amendments. Except as otherwise expressly provided
---------------------
herein, the provisions of this Agreement may be amended and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders of a majority of the Warrants and the Underlying Common Stock (on a
combined basis). No other course of dealing between the Company and the holder
of any Warrant or Underlying Common Stock or any delay in exercising any rights
hereunder or under the Warrant(s) or the Charter shall operate as a waiver of
any rights of any such holders. For purposes of this Agreement, Warrants or
Underlying Common Stock held by the Company or any Subsidiaries shall not be
deemed to be outstanding. If the Company pays any consideration to any holder of
Underlying Common Stock for such holder's consent to any amendment, modification
or waiver hereunder, the Company shall also pay each other holder granting its
consent hereunder equivalent consideration computed on a pro rata basis.
7E. Survival of Representations and Warranties. All representations
------------------------------------------
and warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, regardless of any
investigation made by Investor or on its behalf.
7F. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, this Agreement (other than those provisions relating to the rights of
holders of the Warrant(s) or Underlying Common Stock) is not assignable without
the prior written consent of the Company and
15
<PAGE>
the Investor. Except as otherwise expressly provided herein, all covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. In addition, and
whether or not any express assignment has been made, the provisions of this
Agreement which are for Investor's benefit as a holder of the Warrant(s) or
Underlying Common Stock are also for the benefit of, and enforceable by, any
subsequent holder of any such Warrant or Underlying Common Stock.
7G. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
7H. Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
7I. Descriptive Headings; Interpretation. The descriptive headings of
------------------------------------
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
7J. Governing Law. The corporate law of the State of Maryland shall
-------------
govern all issues and questions concerning the relative rights and obligations
of the Company and its stockholders. All other issues and questions concerning
the construction, validity, enforcement and interpretation of this Agreement and
the exhibits and schedules hereto shall be governed by, and construed in
accordance with, the laws of the State of Minnesota, without giving effect to
any choice of law or conflict of law rules or provisions (whether of the State
of Minnesota or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Minnesota.
7K. Notices. All notices, demands or other communications to be given
-------
or delivered under or by reason of the provisions of this Agreement shall be in
writing, shall be delivered personally, sent by reputable overnight courier
service (charges prepaid) or sent by registered or certified mail, return
receipt requested, postage prepaid, and shall be deemed to have been given when
personally delivered, the first business day after being sent by reputable
overnight courier service or the fifth business day after being deposited in the
U.S. Mail (i) to the Company, at its principal executive offices and (ii) to
Investor at the address indicated below:
Residential Funding Corporation
8400 Normandale Lake Boulevard
Bloomington, MN 55437
Attention: Kevin Miller
16
<PAGE>
with copies to:
--------------
GMAC Mortgage Group, Inc.
c/o General Motors Corporation Legal Staff
3031 West Grand Boulevard
Detroit, MI 48202
Attention: General Counsel
and
---
Residential Funding Corporation
8400 Normandale Lake Boulevard
Bloomington, MN 55437
Attention: Office of the General Counsel
or to such other address or to the attention of such other person as the
recipient party (including any successors or assigns of the Company or Investor)
has specified by prior written notice to the sending party.
7L. No Strict Construction. The parties hereto have participated
----------------------
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
7M. Indemnification. In consideration of Investor's execution and
---------------
delivery of this Agreement hereunder and in addition to all of the Company's
other obligations under this Agreement, the Company shall defend, protect,
indemnify and hold harmless each of Investor and the Investor Entities, and each
other holder of Warrants and Underlying Common Stock, and all of their officers,
directors, employees and agents (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnitees") from and against any and all actions, causes
-----------
of action, suits, claims, losses, costs, penalties, fees, and liabilities and
damages (including, but not limited to, any and all actions, causes of action,
suits, claims, losses, costs, penalties, fees, and liabilities and damages
under, as a result of, arising out of, or relating to Section 11 of the Charter
or Section 3-602 of the Corporations Code), and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), including reasonable attorneys' fees
(including, but not limited to, allocated costs of internal counsel) and
disbursements (the "Indemnified Liabilities"), incurred by the Indemnitees or
-----------------------
any of them as a result of, or arising out of, or relating to, directly or
indirectly (including in connection with any other transaction or event), the
execution, delivery, performance or enforcement of this Agreement, the Guaranty
(to the extent a result of, arising out of, or relating to Section 23 thereof),
the Warrants and any other instrument, document or agreement
17
<PAGE>
executed pursuant hereto or in connection herewith, the acquisition or exercise
of the Warrants (or any portion thereof), the ownership of the Warrants or the
Underlying Common Stock. To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.
* * * * * *
18
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Warrant
Agreement on the date first written above.
NOVASTAR FINANCIAL, INC.
By: _______________________________
Name: _______________________________
Its: _______________________________
RESIDENTIAL FUNDING CORPORATION
By: ______________________________
Name: ______________________________
Its: ______________________________
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit A - Form of Guaranty Warrant
Exhibit B - Form of Tag Along Warrant
Exhibit C - Registration Rights Agreement
Exhibit D - Opinion of Counsel
Exhibit E - Original Warrant
Exhibit F - Warrant Agreement dated as of December 9, 1996
Exhibit G - Registration Rights Agreement dated December 9, 1996 and proposed
waivers thereto
<PAGE>
LIST OF DISCLOSURE SCHEDULES
----------------------------
Closing Time Capitalization Schedule
October 13 Capitalization Schedule
<PAGE>
CLOSING TIME CAPITALIZATION SCHEDULE
------------------------------------
Attached hereto
<PAGE>
OCTOBER 13 CAPITALIZATION SCHEDULE
----------------------------------
Attached hereto
<PAGE>
This Warrant and the securities obtainable upon exercise
thereof are subject to restrictions on Beneficial and
Constructive Ownership and Transfer for the purpose of the
Corporation's maintenance of its status as a Real Estate
Investment Trust under the Internal Revenue Code of 1986, as
amended (the "Code"). Subject to certain further
----
restrictions and except as expressly provided in the
Corporation's Charter, (i) no Person may Beneficially or
Constructively Own shares of the Corporation's Common Stock
in excess of 9.8 percent (in value or number of shares) of
the outstanding shares of Common Stock of the Corporation
unless such Person is an Excepted Holder (in which case the
Excepted Holder Limit shall be applicable); (ii) no Person
may Beneficially or Constructively Own shares of Capital
Stock of the Corporation in excess of 9.8 percent of the
value of the total outstanding shares of Capital Stock of
the Corporation, unless such Person is an Excepted Holder
(in which case the Excepted Holder Limit shall be
applicable); (iii) no Person may Beneficially or
Constructively Own Capital Stock that would result in the
Corporation being "closely held" under Section 856(h) of the
Code or otherwise cause the Corporation to fail to qualify
as a REIT; and (iv) no Person may Transfer shares of Capital
Stock if such Transfer would result in the Capital Stock of
the Corporation being owned by fewer than 100 Persons. Any
Person who Beneficially or Constructively Owns or attempts
to Beneficially or Constructively Own shares of Capital
Stock which causes or will cause a Person to Beneficially or
Constructively Own shares of Capital Stock in excess or in
violation of the above limitations must immediately notify
the Corporation. Attempted transfers of ownership in
violation of these restrictions shall be null and void ab
initio. In addition, if any of the restrictions on transfer
or ownership are violated, this Warrant and the shares of
Capital Stock obtainable upon exercise thereof may be
automatically transferred to a Trustee of a Trust for the
benefit of one or more Charitable Beneficiaries. In
addition, upon the occurrence of certain events, attempted
Transfers in violation of the restrictions described above
may be void ab initio. All capitalized terms in this legend
have the meanings defined in the Charter of the Corporation,
as the same may be amended from time to time, a copy of
which, including the restrictions on transfer and ownership,
will be furnished to each holder of Capital Stock of the
Corporation on request and without charge.
<PAGE>
The issuance of this Warrant was not registered under the
Securities Act of 1933, as amended. The transfer of this
Warrant and the securities obtainable upon exercise thereof
is subject to the conditions on transfer specified in the
Warrant Agreement, dated as of March 10, 1999 (as amended
and modified from time to time), between the issuer hereof
(the "Company") and the initial holder hereof, and the
Company reserves the right to refuse the transfer of such
security until such conditions have been fulfilled with
respect to such transfer. Upon written request, a copy of
such conditions shall be furnished by the Company to the
holder hereof without charge.
In addition, the Company will furnish to any warrantholder
on request and without charge a full statement or summary of
the designations and preferences, conversion and other
rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of
redemption of the stock of each class which the Company is
authorized to issue and the differences in the relative
rights and preferences between such shares of each series,
if any, to the extent they have been set, and of the
authority of the Board of Directors to set the relative
rights and preferences of subsequent series. Such request
may be made to the Secretary of the Company.
NOVASTAR FINANCIAL INC.
STOCK PURCHASE WARRANT
----------------------
Certificate No. W-___________
FOR VALUE RECEIVED, NovaStar Financial, Inc., a Maryland corporation
(the "Company"), hereby grants to Residential Funding Corporation ("RFC") or its
------- ---
registered assigns (the "Registered Holder") the right to purchase from the
-----------------
Company 812,731 shares of the Company's Common Stock at a price per share of
$4.5625 (as adjusted from time to time hereunder, the "Exercise Price"). This
--------------
Warrant is subject to the Warrant Agreement, dated as of March 10, 1999, by and
between the Company and RFC (the "Warrant Agreement"). Certain capitalized
-----------------
terms used herein are defined in Section 5 hereof. The amount and kind of
securities obtainable pursuant to the rights granted hereunder and the purchase
price for such securities are subject to adjustment pursuant to the provisions
contained in this Warrant.
2
<PAGE>
This Warrant is subject to the following provisions:
Section 1. Exercise of Warrant.
-------------------
1A. Exercise Period. The Registered Holder may exercise, in whole
---------------
or in part (but not as to a fractional share of Common Stock), the purchase
rights represented by this Warrant at any time prior to October 13, 2003 (the
"Exercise Period"). The Company shall give the Registered Holder written notice
---------------
of the termination of the Exercise Period at least 30 days but not more than 90
days prior to the end of the Exercise Period.
1B. Exercise Procedure.
------------------
(i) This Warrant shall be deemed to have been exercised when the
Company has received all of the following items (the "Exercise Time"):
-------------
(a) a completed Exercise Agreement, as described in paragraph
1C below, executed by the Person exercising all or part of the purchase
rights represented by this Warrant (the "Purchaser");
---------
(b) this Warrant;
(c) if this Warrant is not registered in the name of the
Purchaser, an Assignment or Assignments in the form set forth in Exhibit II
----------
hereto evidencing the assignment of this Warrant to the Purchaser, in which
case the Registered Holder shall have complied with the provisions set
forth in Section 7 hereof; and
(d) either (1) a check payable to the Company in an amount
equal to the product of the Exercise Price multiplied by the number of
shares of Common Stock being purchased upon such exercise (the "Aggregate
---------
Exercise Price"), (2) the surrender to the Company of debt or equity
--------------
securities of the Company or any of its wholly owned Subsidiaries having a
Market Price equal to the Aggregate Exercise Price of the Common Stock
being purchased upon such exercise (provided that for purposes of this
subparagraph, the Market Price of any note or other debt security or any
preferred stock shall be deemed to be equal to the aggregate outstanding
principal amount or liquidation value thereof plus all accrued and unpaid
interest thereon or accrued or declared and unpaid dividends thereon) or
(3) a written notice to the Company that the Purchaser is exercising the
Warrant (or a portion thereof) by authorizing the Company to withhold from
issuance a number of shares of Common Stock issuable upon such exercise of
the Warrant which when multiplied by the Market Price of the Common Stock
is equal to the Aggregate Exercise Price (and such withheld shares shall no
longer be issuable under this Warrant).
(ii) Certificates for shares of Common Stock purchased upon exercise
of this Warrant shall be delivered by the Company to the Purchaser within three
business days after the date
3
<PAGE>
of the Exercise Time. Unless this Warrant has expired or all of the purchase
rights represented hereby have been exercised, the Company shall prepare a new
Warrant, substantially identical hereto, representing the rights formerly
represented by this Warrant which have not been exercised and shall within such
three-day period, deliver such new Warrant to the Person designated for delivery
in the Exercise Agreement.
(iii) The Common Stock issuable upon the exercise of this Warrant
shall be deemed to have been issued to the Purchaser at the opening of business
on the date on which the Exercise Time occurs, and the Purchaser shall be deemed
for all purposes to have become the record holder of such Common Stock at the
Exercise Time.
(iv) The issuance of certificates for shares of Common Stock upon
exercise of this Warrant shall be made without charge to the Registered Holder
or the Purchaser for any issuance tax in respect thereof or other cost incurred
by the Company in connection with such exercise and the related issuance of
shares of Common Stock.
(v) The Company shall not close its books against the transfer of
this Warrant or of any share of Common Stock issued or issuable upon the
exercise of this Warrant in any manner which interferes with the timely exercise
of this Warrant. The Company shall from time to time take all such action as may
be necessary to assure that the par value per share of the unissued Common Stock
acquirable upon exercise of this Warrant is at all times equal to or less than
the Exercise Price then in effect.
(vi) The Company shall assist and cooperate with any Registered
Holder or Purchaser required to make any governmental filings or obtain any
governmental approvals prior to or in connection with any exercise of this
Warrant (including, without limitation, making any filings required to be made
by the Company).
(vii) Notwithstanding any other provision hereof, if an exercise of
any portion of this Warrant is to be made in connection with a registered public
offering or the sale of the Company, the exercise of any portion of this Warrant
may, at the election of the holder hereof, be conditioned upon the consummation
of the public offering or sale of the Company in which case such exercise shall
not be deemed to be effective until the consummation of such transaction.
(viii) The Company shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock solely for the purpose of
issuance upon the exercise of the Warrants, such number of shares of Common
Stock then issuable upon the exercise of all outstanding Warrants. All shares
of Common Stock which are so issuable shall, when issued upon payment of the
Exercise Price therefor, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Company shall
take all such actions as may be necessary to assure that all such shares of
Common Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Common Stock may be listed (except for official notice of
issuance which
4
<PAGE>
shall be immediately delivered by the Company upon each such issuance). The
Company shall not take any action which would cause the number of authorized but
unissued shares of Common Stock to be less than the number of such shares
required to be reserved hereunder for issuance upon exercise of the Warrants.
1C. Exercise Agreement. Upon any exercise of this Warrant, the
------------------
Exercise Agreement shall be substantially in the form set forth in Exhibit I
---------
hereto, except that if the shares of Common Stock are not to be issued in the
name of the Person in whose name this Warrant is registered, the Exercise
Agreement shall also state the name of the Person to whom the certificates for
the shares of Common Stock are to be issued, and if the number of shares of
Common Stock to be issued does not include all the shares of Common Stock
purchasable hereunder, it shall also state the name of the Person to whom a new
Warrant for the unexercised portion of the rights hereunder is to be delivered.
Such Exercise Agreement shall be dated the actual date of execution thereof.
1D. Fractional Shares. If a fractional share of Common Stock would,
-----------------
but for the provisions of paragraph 1A, be issuable upon exercise of the rights
represented by this Warrant, the Company shall, within three business days after
the date of the Exercise Time, deliver to the Purchaser a check payable to the
Purchaser in lieu of such fractional share in an amount equal to the difference
between Market Price of such fractional share as of the date of the Exercise
Time and the Exercise Price of such fractional share.
Section 2. Adjustment of Exercise Price and Number of Shares. In
-------------------------------------------------
order to prevent dilution of the rights granted under this Warrant, the Exercise
Price shall be subject to adjustment from time to time as provided in this
Section 2, and the number of shares of Common Stock obtainable upon exercise of
this Warrant shall be subject to adjustment from time to time as provided in
this Section 2.
2A. Adjustment of Exercise Price and Number of Shares upon Issuance
---------------------------------------------------------------
of Common Stock. If and whenever on or after the Date of Issuance the Company
- ---------------
issues or sells, or in accordance with paragraph 2B is deemed to have issued or
sold, any share of Common Stock for a consideration per share less than the
greater of (i) $4.5625 and (ii) the Market Price per share of such Common Stock
(such greater amount being hereinafter referred to as the "Base Rate"), then
---------
immediately upon such issue or sale the Exercise Price shall be reduced to the
Exercise Price determined by multiplying (A) the Exercise Price in effect
immediately prior to such issue or sale by (B) a fraction, the numerator of
which shall be the sum of (x) the number of shares of Common Stock Deemed
Outstanding immediately prior to such issue or sale and (y) the number of shares
that could be purchased at the Base Rate from the aggregate proceeds to the
Company from the issuance of such new shares of Common Stock, and the
denominator of which shall be the number of shares of Common Stock Deemed
Outstanding immediately after such issue or sale. Upon each such adjustment of
the Exercise Price hereunder, the number of shares of Common Stock acquirable
upon exercise of this Warrant shall be adjusted to the number of shares
determined by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of shares of Common
5
<PAGE>
Stock acquirable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
2B. Effect on Exercise Price of Certain Events. For purposes of
------------------------------------------
determining the adjusted Exercise Price under paragraph 2A, the following shall
be applicable:
(i) Issuance of Rights or Options. If the Company in any manner
-----------------------------
grants or sells any Options and the price per share for which Common Stock is
issuable upon the exercise of such Options, or upon conversion or exchange of
any Convertible Securities issuable upon exercise of such Options, is less than
the Base Rate in effect immediately prior to the time of the granting or sale of
such Options, then the total maximum number of shares of Common Stock issuable
upon the exercise of such Options, or upon conversion or exchange of the total
maximum amount of such Convertible Securities issuable upon the exercise of such
Options, shall be deemed to be outstanding and to have been issued and sold by
the Company at the time of the granting or sale of such Options for such price
per share. For purposes of this paragraph, the "price per share for which Common
Stock is issuable upon the exercise of such Options or upon conversion or
exchange of any Convertible Securities" is determined by dividing (A) the total
amount, if any, received or receivable by the Company as consideration for the
granting or sale of such Options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the exercise of all such
Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Company upon the issuance or sale of such Convertible Securities
and the conversion or exchange thereof, by (B) the total maximum number of
shares of Common Stock issuable upon exercise of such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options. No further adjustment of the Exercise Price shall be
made upon the actual issuance of such Common Stock or of such Convertible
Securities upon the exercise of such Options or upon the actual issuance of such
Common Stock upon conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon conversion or exchange thereof is less than
the Base Rate in effect immediately prior to the time of such issue or sale,
then the maximum number of shares of Common Stock issuable upon conversion or
exchange of such Convertible Securities shall be deemed to be outstanding and to
have been issued and sold by the Company at the time of the issue or sale of
such Convertible Securities for such price per share. For the purposes of this
paragraph, the "price per share for which Common Stock is issuable upon
conversion or exchange thereof" is determined by dividing (A) the total amount
received or receivable by the Company as consideration for the issue or sale of
such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (B) the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities. No further
adjustment of the Exercise Price shall be made upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible Securities, and if
any such issue or sale of such Convertible Securities is made upon exercise of
any Options for which adjustments
6
<PAGE>
of the Exercise Price had been or are to be made pursuant to other provisions of
this paragraph 2B, no further adjustment of the Exercise Price shall be made by
reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any Options, the additional consideration, if any, payable
upon the issue, conversion or exchange of any Convertible Securities, or the
rate at which any Convertible Securities are convertible into or exchangeable
for Common Stock changes at any time, the Exercise Price in effect at the time
of such change shall be adjusted immediately to the Exercise Price which would
have been in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold and the number of shares of Common Stock
issuable hereunder shall be correspondingly adjusted; provided that no such
--------
change shall at any time cause the Exercise Price hereunder to be increased.
For purposes of this paragraph 2B, if the terms of any Option or Convertible
Security which was outstanding as of the Date of Issuance are changed in the
manner described in the immediately preceding sentence, then such Option or
Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change; provided that no such change shall at any time cause the
--------
Exercise Price hereunder to be increased.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. The expiration of any Option or the termination of any right to
- ----------
convert or exchange any Convertible Securities without the exercise of such
Option or right shall not cause any adjustment to the Exercise Price then in
effect.
(v) Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor shall be deemed to
be the net amount received by the Company therefor. In case any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by the
Company shall be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration
received by the Company shall be the Market Price thereof as of the date of
receipt. In case any Common Stock, Options or Convertible Securities are issued
to the owners of the non-surviving entity in connection with any merger in which
the Company is the surviving corporation, the amount of consideration therefor
shall be deemed to be the Fair Market Value of such portion of the net assets
and business of the non-surviving entity as is attributable to such Common
Stock, Options or Convertible Securities, as the case may be.
(vi) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options shall be deemed to
have been issued without consideration.
7
<PAGE>
(vii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time does not include shares owned or held by or for
the account of the Company or any Subsidiary, and the disposition of any shares
so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Company takes a record of the holders of
-----------
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (B) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
(ix) Liquidating Dividends. In case the Company shall fix a record
---------------------
date for making a distribution to any holders of the shares of Common Stock
(including any such distribution made in connection with a consolidation or
merger in which the Company is the continuing corporation) of shares of stock
other than Common Stock, other securities, evidences of indebtedness, cash or
assets or property of whatever nature, including rights to purchase any of the
foregoing (excluding cash dividends consistent with past practice), (i) the
number of shares of Common Stock for which a Warrant is exercisable shall be
adjusted to equal the product of the number of shares of Common Stock for which
a Warrant is exercisable immediately prior to such adjustment multiplied by a
fraction (A) the numerator of which shall be the Fair Market Value per share of
Common Stock immediately prior to such record date and (B) the denominator of
which shall be such Fair Market Value per share of Common Stock minus the amount
allocable to one share of Common Stock of any such cash so distributable and of
the Fair Market Value of any and all such shares of stock, other securities,
evidences of indebtedness, or assets or property so distributable, and (ii) the
Exercise Price to be in effect after such record date shall be determined by
multiplying the Exercise Price in effect immediately prior to such record date
by a fraction, of which the numerator shall be the current Fair Market Value per
share of Common Stock immediately prior to such record date minus the amount
allocable to one share of Common Stock of any such cash so distributable and of
the Fair Market Value of any and all such shares of stock, other securities,
evidences of indebtedness, or assets of property so distributable, and of which
the denominator shall be such current Fair Market Value per share of Common
Stock immediately prior to such record date. Such adjustment shall be made
successively whenever such a record date is fixed; and, if such distribution is
not so made, the Exercise Price shall again be adjusted to be the Exercise Price
which would then be in effect if such record date had not been fixed.
2C. Subdivision or Combination of Common Stock. If the Company at
------------------------------------------
any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of shares of Common
Stock acquirable upon exercise of this Warrant shall be proportionately
increased. If the Company at any time combines (by reverse stock split or
otherwise) one or more classes of its
8
<PAGE>
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination shall be proportionately
increased and the number of shares of Common Stock acquirable upon exercise of
this Warrant shall be proportionately decreased.
2D. Reorganization, Reclassification, Consolidation, Merger or
----------------------------------------------------------
Sale. In the case of any capital reorganization of the Company, or of any
- ----
reclassification of the shares of Common Stock, or in case of the consolidation
of the Company with or the merger of the Company with or into any other Person
(where the Company is not the surviving corporation or Person) or of the sale of
the properties and assets of the Company as, or substantially as, an entirety to
any other Person, each Warrant shall after such capital reorganization,
reclassification of shares of Common Stock, consolidation, merger, or sale be
exercisable, upon the terms and conditions specified herein, for the number of
shares of Common Stock (or Other Securities outstanding) for which a Warrant is
exercisable immediately prior to such event; and in any such case, if necessary,
the provisions set forth in this Section 2 with respect to the rights thereafter
of the holders shall be appropriately adjusted so as to be applicable, as nearly
as may reasonably be, to any shares of stock or other securities or assets
thereafter deliverable on the exercise of the Warrants. The subdivision or
combination of the shares of Common Stock at any time outstanding into a greater
or lesser number of units or any other event covered by Section 2C shall not be
deemed to be a reclassification of the shares of Common Stock for the purposes
of this Section 2D. The Company shall not effect any such consolidation, merger
or sale, unless prior to or simultaneously with the consummation thereof, the
successor Person resulting from such consolidation or merger or the Person
purchasing such assets shall assume, by written agreement, the obligation to
deliver to each holder the shares of stock, cash, other securities or assets to
which, in accordance with the foregoing provisions, each holder may be entitled
and shall assume all other obligations of the Company under this Warrant and the
Warrant Agreement.
2E. Certain Events. If any event occurs of the type contemplated
--------------
by the provisions of this Section 2 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's board of directors shall make an appropriate adjustment in the
Exercise Price and the number of shares of Common Stock acquirable upon exercise
of this Warrant so as to protect the rights of the holders of the Warrants;
provided that no such adjustment shall increase the Exercise Price or decrease
- --------
the number of shares of Common Stock acquirable upon exercise of this Warrant as
otherwise determined pursuant to this Section 2.
2F. Notices.
-------
(i) Immediately upon any adjustment of the Exercise Price, the
Company shall give written notice thereof to the Registered Holder, setting
forth in reasonable detail and certifying the calculation of such adjustment.
(ii) The Company shall give written notice to the Registered Holder
at least 20 days prior to the date on which the Company closes its books or
takes a record (A) with respect to
9
<PAGE>
any dividend or distribution upon the Common Stock, (B) with respect to any pro
rata subscription offer to holders of Common Stock or (C) for determining rights
to vote with respect to any transaction described in Section 2D, dissolution or
liquidation.
(iii) The Company shall also give written notice to the Registered
Holders at least 20 days prior to the date on which any transaction described in
Section 2D, dissolution or liquidation shall take place.
Section 3. [Reserved]
Section 4. Definitions. The following terms have meanings set forth
-----------
below:
"Common Stock" means the Company's Common Stock, $0.01 par value, and
------------
except for purposes of the number of shares of Common Stock acquirable upon
exercise of this Warrant, any capital stock of any class of the Company
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Company.
"Common Stock Deemed Outstanding" means, at any given time, the number
-------------------------------
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to paragraphs 2B(i) and
2B(ii) hereof regardless of whether the Options or Convertible Securities are
actually exercisable at such time, but excluding the number of shares of Common
Stock acquirable upon exercise of any Warrant.
"Convertible Securities" means any stock or securities (directly or
----------------------
indirectly) convertible into or exchangeable for Common Stock.
"Fair Market Value" In order to determine Fair Market Value for
-----------------
purposes of this Warrant Agreement, the Company and a representative (the
"Representative") designated by a majority of the Registered Holders shall
- ---------------
attempt to agree upon such Fair Market Value. If the Company and the
Representatives are unable to agree upon the Fair Market Value within 20 days
after notification of the event requiring such a determination, the Company and
the Representative shall agree on an appraiser to be appointed by the Company to
determine the Fair Market Value. In the event that the parties cannot agree
upon an appraiser in the foregoing period, then the determination of Fair Market
Value shall be conducted by two appraisers, one of whom shall be selected by the
Company, and one of whom shall be selected by the Representative. If either of
such two determinations of Fair Market Value is within ten percent (10%) of the
other determination of Fair Market Value, then the Fair Market Value shall be
the average of such two determinations. The Company shall pay the expenses of
each such appraiser. If neither of such two determinations of Fair Market Value
is within ten percent (10%) of the other determination of Fair Market Value, a
third appraiser shall be selected by the other two appraisers. The third
appraiser shall make its own independent final determination of Fair Market
Value. The Company shall pay the expenses of such
10
<PAGE>
third appraiser. All appraisal reports shall be in writing, shall be signed by
the appraisers and shall be delivered to the Company and the Registered Holders.
The Fair Market Value determined in the above manner shall be final and binding
upon the Company and the Registered Holders.
"Market Price" means as to any security the average of the closing
------------
prices of such security's sales on all domestic securities exchanges on which
such security may at the time be listed, or, if there have been no sales on any
such exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any day
such security is not quoted in the NASDAQ System, the average of the highest bid
and lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over the period of 10
consecutive business days ending on the business day immediately prior to the
day as of which "Market Price" is being determined; provided that if such
--------
security is listed on any domestic securities exchange the term "business days"
as used in this sentence means business days on which such exchange is open for
trading. If at any time such security is not listed on any domestic securities
exchange or quoted in the NASDAQ System or the domestic over-the-counter market,
the "Market Price" shall be the fair value thereof determined jointly by the
Company and the Registered Holders of Warrants representing a majority of the
Common Stock purchasable upon exercise of all the Warrants then outstanding;
provided that if such parties are unable to reach agreement within a reasonable
- --------
period of time, such fair value shall be determined by an appraiser jointly
selected by the Company and the Registered Holders of Warrants representing a
majority of the Common Stock purchasable upon exercise of all the Warrants then
outstanding. The determination of such appraiser shall be final and binding on
the Company and the Registered Holders of the Warrants, and the fees and
expenses of such appraiser shall be paid by the Company.
"Options" means any rights or options to subscribe for or purchase
-------
Common Stock or Convertible Securities.
"Other Securities" shall mean any securities (other than shares of
----------------
Common Stock) of the Company or any other Person which the Registered Holders at
any time shall be entitled to receive, or shall have received, upon the exercise
of the Warrants, in lieu of or in addition to the Underlying Common Stock or
which at any time shall be issuable or shall have been issued to holders of the
Underlying Common Stock in exchange for, in addition to or in replacement of,
the Underlying Common Stock.
"Person" means an individual, a partnership, a joint venture, a
------
corporation, a limited liability company, a trust, an unincorporated
organization and a government or any department or agency thereof.
Other capitalized terms used in this Warrant but not defined herein
shall have the meanings set forth in the Warrant Agreement.
11
<PAGE>
Section 5. No Voting Rights; Limitations of Liability. This Warrant
------------------------------------------
shall not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Registered Holder to purchase Common Stock, and no enumeration
herein of the rights or privileges of the Registered Holder shall give rise to
any liability of such holder for the Exercise Price of Common Stock acquirable
by exercise hereof or as a stockholder of the Company.
Section 6. Warrant Transferable. Subject to the transfer conditions
--------------------
referred to in the legend endorsed hereon, this Warrant and all rights hereunder
are transferable, in whole or in part, without charge to the Registered Holder,
upon surrender of this Warrant with a properly executed Assignment (in the form
of Exhibit II hereto) at the principal office of the Company.
----------
Section 7. Warrant Exchangeable for Different Denominations. This
------------------------------------------------
Warrant is exchangeable, upon the surrender hereof by the Registered Holder at
the principal office of the Company, for new Warrants of like tenor representing
in the aggregate the purchase rights hereunder, and each of such new Warrants
shall represent such portion of such rights as is designated by the Registered
Holder at the time of such surrender. October 13, 1998 shall be deemed to be
the "Date of Issuance" hereof regardless of the number of times new certificates
representing the unexpired and unexercised rights formerly represented by this
Warrant shall be issued. All Warrants representing portions of the rights
hereunder are referred to herein as the "Warrants."
Section 8. Replacement. Upon receipt of evidence reasonably
-----------
satisfactory to the Company (an affidavit of the Registered Holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing this Warrant, and in the case of any such loss, theft
or destruction, upon receipt of indemnity reasonably satisfactory to the Company
(provided that if the holder is the original holder hereof or any Affiliate
thereof or a financial institution or other institutional investor its own
agreement shall be satisfactory), or, in the case of any such mutilation upon
surrender of such certificate, the Company shall (at its expense) execute and
deliver in lieu of such certificate a new certificate of like kind representing
the same rights represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 9. Notices. Except as otherwise expressly provided herein,
-------
all notices referred to in this Warrant shall be in writing and shall be
delivered personally, sent by reputable overnight courier service (charges
prepaid) or sent by registered or certified mail, return receipt requested,
postage prepaid, and shall be deemed to have been given when personally
delivered, the first business day after being sent by reputable overnight
courier service or the fifth business day after being deposited in the U.S. Mail
(i) to the Company, at its principal executive offices and (ii) to the
Registered Holder of this Warrant, at such holder's address as it appears in the
records of the Company (unless otherwise indicated by any such holder).
Section 10. Amendment and Waiver. Except as otherwise provided
--------------------
herein, the provisions of the Warrants may be amended and the Company may take
any action herein
12
<PAGE>
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company has obtained the written consent of the Registered Holders
of Warrants representing a majority of the shares of Common Stock obtainable
upon exercise of the Warrants; provided that no such action may change the
--------
Exercise Price of the Warrants or the number of shares or class of stock
obtainable upon exercise of each Warrant without the written consent of the
Registered Holders of Warrants representing at least a majority of the shares of
Common Stock obtainable upon exercise of the Warrants.
Section 11. Descriptive Headings; Governing Law. The descriptive
-----------------------------------
headings of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporation
laws of the State of Maryland shall govern all issues concerning the relative
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal law of the State of Minnesota, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
Minnesota or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of Minnesota.
* * * * * *
13
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
and attested by its duly authorized officers under its corporate seal and to be
dated as of the Date of Issuance hereof.
NOVASTAR FINANCIAL, INC.
By: __________________________________
Name: __________________________________
Its: __________________________________
[Corporate Seal]
Attest:
______________________________
Title: ______________________
<PAGE>
EXHIBIT I
EXERCISE AGREEMENT
------------------
To: Dated: ____________
The undersigned, pursuant to the provisions set forth in the attached
Warrant (Certificate No. W-____________), hereby agrees to subscribe for the
purchase of ____________ shares of the Common Stock covered by such Warrant and
makes payment herewith in full therefor at the price per share provided by such
Warrant.
Signature: _____________________
Address: _______________________
<PAGE>
EXHIBIT II
ASSIGNMENT
----------
FOR VALUE RECEIVED, ______________________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrant (Certificate No. W-____________) with respect to the number of shares of
the Common Stock covered thereby set forth below, unto:
Names of Assignee Address No. of Shares
----------------- ------- -------------
Signature: _____________________
Witness: _______________________
<PAGE>
This Warrant and the securities obtainable upon exercise thereof are
subject to restrictions on Beneficial and Constructive Ownership and
Transfer for the purpose of the Corporation's maintenance of its
status as a Real Estate Investment Trust under the Internal Revenue
Code of 1986, as amended (the "Code"). Subject to certain further
----
restrictions and except as expressly provided in the Corporation's
Charter, (i) no Person may Beneficially or Constructively Own shares
of the Corporation's Common Stock in excess of 9.8 percent (in value
or number of shares) of the outstanding shares of Common Stock of the
Corporation unless such Person is an Excepted Holder (in which case
the Excepted Holder Limit shall be applicable); (ii) no Person may
Beneficially or Constructively Own shares of Capital Stock of the
Corporation in excess of 9.8 percent of the value of the total
outstanding shares of Capital Stock of the Corporation, unless such
Person is an Excepted Holder (in which case the Excepted Holder Limit
shall be applicable); (iii) no Person may Beneficially or
Constructively Own Capital Stock that would result in the Corporation
being "closely held" under Section 856(h) of the Code or otherwise
cause the Corporation to fail to qualify as a REIT; and (iv) no Person
may Transfer shares of Capital Stock if such Transfer would result in
the Capital Stock of the Corporation being owned by fewer than 100
Persons. Any Person who Beneficially or Constructively Owns or
attempts to Beneficially or Constructively Own shares of Capital Stock
which causes or will cause a Person to Beneficially or Constructively
Own shares of Capital Stock in excess or in violation of the above
limitations must immediately notify the Corporation. Attempted
transfers of ownership in violation of these restrictions shall be
null and void ab initio. In addition, if any of the restrictions on
transfer or ownership are violated, this Warrant and the shares of
Capital Stock obtainable upon exercise thereof may be automatically
transferred to a Trustee of a Trust for the benefit of one or more
Charitable Beneficiaries. In addition, upon the occurrence of certain
events, attempted Transfers in violation of the restrictions described
above may be void ab initio. All capitalized terms in this legend
have the meanings defined in the Charter of the Corporation, as the
same may be amended from time to time, a copy of which, including the
restrictions on transfer and ownership, will be furnished to each
holder of Capital Stock of the Corporation on request and without
charge.
<PAGE>
The issuance of this Warrant was not registered under the Securities
Act of 1933, as amended. The transfer of this Warrant and the
securities obtainable upon exercise thereof is subject to the
conditions on transfer specified in the Warrant Agreement, dated as
March 10, 1999 (as amended and modified from time to time), between
the issuer hereof (the "Company") and the initial holder hereof, and
the Company reserves the right to refuse the transfer of such security
until such conditions have been fulfilled with respect to such
transfer. Upon written request, a copy of such conditions shall be
furnished by the Company to the holder hereof without charge.
In addition, the Company will furnish to any warrantholder on request
and without charge a full statement or summary of the designations and
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions
of redemption of the stock of each class which the Company is
authorized to issue and the differences in the relative rights and
preferences between such shares of each series, if any, to the extent
they have been set, and of the authority of the Board of Directors to
set the relative rights and preferences of subsequent series. Such
request may be made to the Secretary of the Company.
NOVASTAR FINANCIAL INC.
STOCK PURCHASE WARRANT
----------------------
Certificate No. W-_______
FOR VALUE RECEIVED, NovaStar Financial, Inc., a Maryland corporation
(the "Company"), hereby grants to Residential Funding Corporation ("RFC") or its
------- ---
registered assigns (the "Registered Holder") the right to purchase from the
-----------------
Company 364,982 shares of the Company's Common Stock at a price per share of
$15.00 (as adjusted from time to time hereunder, the "Exercise Price"). This
--------------
Warrant is subject to the Warrant Agreement, dated as of March 10, 1999, by and
between the Company and RFC (the "Warrant Agreement"). Certain capitalized
-----------------
terms used herein are defined in Section 5 hereof. The amount and kind of
securities obtainable pursuant to the rights granted hereunder and the purchase
price for such securities are subject to adjustment pursuant to the provisions
contained in this Warrant.
2
<PAGE>
This Warrant is subject to the following provisions:
Section 1. Exercise of Warrant.
-------------------
1A. Exercise Period. The Registered Holder may exercise, in whole or
---------------
in part (but not as to a fractional share of Common Stock), the purchase rights
represented by this Warrant at any time and from time to time after the Closing
Time (the "Date of Issuance") to and including the expiration date of the
----------------
Original Warrants, which is February 3, 2001 (the "Exercise Period"). The
---------------
Company shall give the Registered Holder written notice of the termination of
the Exercise Period at least 30 days but not more than 90 days prior to the end
of the Exercise Period.
1B. Exercise Procedure.
------------------
(i) This Warrant shall be deemed to have been exercised when the
Company has received all of the following items (the "Exercise Time"):
-------------
(a) a completed Exercise Agreement, as described in paragraph 1C
below, executed by the Person exercising all or part of the purchase rights
represented by this Warrant (the "Purchaser");
---------
(b) this Warrant;
(c) if this Warrant is not registered in the name of the
Purchaser, an Assignment or Assignments in the form set forth in Exhibit II
----------
hereto evidencing the assignment of this Warrant to the Purchaser, in which
case the Registered Holder shall have complied with the provisions set
forth in Section 7 hereof; and
(d) either (1) a check payable to the Company in an amount equal
to the product of the Exercise Price multiplied by the number of shares of
Common Stock being purchased upon such exercise (the "Aggregate Exercise
------------------
Price"), (2) the surrender to the Company of debt or equity securities of
-----
the Company or any of its wholly owned Subsidiaries having a Market Price
equal to the Aggregate Exercise Price of the Common Stock being purchased
upon such exercise (provided that for purposes of this subparagraph, the
Market Price of any note or other debt security or any preferred stock
shall be deemed to be equal to the aggregate outstanding principal amount
or liquidation value thereof plus all accrued and unpaid interest thereon
or accrued or declared and unpaid dividends thereon) or (3) a written
notice to the Company that the Purchaser is exercising the Warrant (or a
portion thereof) by authorizing the Company to withhold from issuance a
number of shares of Common Stock issuable upon such exercise of the Warrant
which when multiplied by the Market Price of the Common Stock is equal to
the Aggregate Exercise Price (and such withheld shares shall no longer be
issuable under this Warrant).
3
<PAGE>
(ii) Certificates for shares of Common Stock purchased upon exercise
of this Warrant shall be delivered by the Company to the Purchaser within three
business days after the date of the Exercise Time. Unless this Warrant has
expired or all of the purchase rights represented hereby have been exercised,
the Company shall prepare a new Warrant, substantially identical hereto,
representing the rights formerly represented by this Warrant which have not been
exercised and shall within such three-day period, deliver such new Warrant to
the Person designated for delivery in the Exercise Agreement.
(iii) The Common Stock issuable upon the exercise of this Warrant
shall be deemed to have been issued to the Purchaser at the opening of business
on the date on which the Exercise Time occurs, and the Purchaser shall be deemed
for all purposes to have become the record holder of such Common Stock at the
Exercise Time.
(iv) The issuance of certificates for shares of Common Stock upon
exercise of this Warrant shall be made without charge to the Registered Holder
or the Purchaser for any issuance tax in respect thereof or other cost incurred
by the Company in connection with such exercise and the related issuance of
shares of Common Stock.
(v) The Company shall not close its books against the transfer of
this Warrant or of any share of Common Stock issued or issuable upon the
exercise of this Warrant in any manner which interferes with the timely exercise
of this Warrant. The Company shall from time to time take all such action as may
be necessary to assure that the par value per share of the unissued Common Stock
acquirable upon exercise of this Warrant is at all times equal to or less than
the Exercise Price then in effect.
(vi) The Company shall assist and cooperate with any Registered
Holder or Purchaser required to make any governmental filings or obtain any
governmental approvals prior to or in connection with any exercise of this
Warrant (including, without limitation, making any filings required to be made
by the Company).
(vii) Notwithstanding any other provision hereof, if an exercise of
any portion of this Warrant is to be made in connection with a registered public
offering or the sale of the Company, the exercise of any portion of this Warrant
may, at the election of the holder hereof, be conditioned upon the consummation
of the public offering or sale of the Company in which case such exercise shall
not be deemed to be effective until the consummation of such transaction.
(viii) The Company shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock solely for the purpose of
issuance upon the exercise of the Warrants, such number of shares of Common
Stock then issuable upon the exercise of all outstanding Warrants. All shares
of Common Stock which are so issuable shall, when issued upon payment of the
Exercise Price therefor, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Company shall
take all such actions as may be necessary to assure that all such shares of
Common Stock may be so issued without violation of any
4
<PAGE>
applicable law or governmental regulation or any requirements of any domestic
securities exchange upon which shares of Common Stock may be listed (except for
official notice of issuance which shall be immediately delivered by the Company
upon each such issuance). The Company shall not take any action which would
cause the number of authorized but unissued shares of Common Stock to be less
than the number of such shares required to be reserved hereunder for issuance
upon exercise of the Warrants.
1C. Exercise Agreement. Upon any exercise of this Warrant, the
------------------
Exercise Agreement shall be substantially in the form set forth in Exhibit I
---------
hereto, except that if the shares of Common Stock are not to be issued in the
name of the Person in whose name this Warrant is registered, the Exercise
Agreement shall also state the name of the Person to whom the certificates for
the shares of Common Stock are to be issued, and if the number of shares of
Common Stock to be issued does not include all the shares of Common Stock
purchasable hereunder, it shall also state the name of the Person to whom a new
Warrant for the unexercised portion of the rights hereunder is to be delivered.
Such Exercise Agreement shall be dated the actual date of execution thereof.
1D. Fractional Shares. If a fractional share of Common Stock would,
-----------------
but for the provisions of paragraph 1A, be issuable upon exercise of the rights
represented by this Warrant, the Company shall, within three business days after
the date of the Exercise Time, deliver to the Purchaser a check payable to the
Purchaser in lieu of such fractional share in an amount equal to the difference
between Market Price of such fractional share as of the date of the Exercise
Time and the Exercise Price of such fractional share.
Section 2. Adjustment of Exercise Price and Number of Shares.
-------------------------------------------------
2A. Adjustment of Exercise Price and Number of Shares. In order to
-------------------------------------------------
prevent dilution of the rights granted under this Warrant, the Exercise and the
number of shares of Common Stock obtainable upon exercise of this Warrant shall
be subject to adjustment from time to time as provided in the Original Warrants.
Such adjustment shall continue to be made as so provided regardless of whether
any Original Warrants remain outstanding.
2B. Subdivision or Combination of Common Stock. If the Company at
------------------------------------------
any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of shares of Common
Stock acquirable upon exercise of this Warrant shall be proportionately
increased. If the Company at any time combines (by reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price in effect immediately prior to such
combination shall be proportionately increased and the number of shares of
Common Stock acquirable upon exercise of this Warrant shall be proportionately
decreased.
2C. Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
In the case of any capital reorganization of the Company, or of any
reclassification of the shares of Common
5
<PAGE>
Stock, or in case of the consolidation of the Company with or the merger of the
Company with or into any other Person (where the Company is not the surviving
corporation or Person) or of the sale of the properties and assets of the
Company as, or substantially as, an entirety to any other Person, each Warrant
shall after such capital reorganization, reclassification of shares of Common
Stock, consolidation, merger, or sale be exercisable, upon the terms and
conditions specified herein, for the number of shares of Common Stock (or Other
Securities outstanding) for which a Warrant is exercisable immediately prior to
such event; and in any such case, if necessary, the provisions set forth in this
Section 2 with respect to the rights thereafter of the holders shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any shares of stock or other securities or assets thereafter deliverable on
the exercise of the Warrants. The subdivision or combination of the shares of
Common Stock at any time outstanding into a greater or lesser number of units or
any other event covered by Section 2B shall not be deemed to be a
reclassification of the shares of Common Stock for the purposes of this Section
2C. The Company shall not effect any such consolidation, merger or sale, unless
prior to or simultaneously with the consummation thereof, the successor Person
resulting from such consolidation or merger or the Person purchasing such assets
shall assume, by written agreement, the obligation to deliver to each holder the
shares of stock, cash, other securities or assets to which, in accordance with
the foregoing provisions, each holder may be entitled and shall assume all other
obligations of the Company under this Warrant and the Warrant Agreement.
2D. Certain Events. If any event occurs of the type contemplated by
--------------
the provisions of this Section 2 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's board of directors shall make an appropriate adjustment in the
Exercise Price and the number of shares of Common Stock acquirable upon exercise
of this Warrant so as to protect the rights of the holders of the Warrants;
provided that no such adjustment shall increase the Exercise Price or decrease
- --------
the number of shares of Common Stock acquirable upon exercise of this Warrant as
otherwise determined pursuant to this Section 2.
2E. Notices.
-------
(i) Immediately upon any adjustment of the Exercise Price, the
Company shall give written notice thereof to the Registered Holder, setting
forth in reasonable detail and certifying the calculation of such adjustment.
(ii) The Company shall give written notice to the Registered Holder
at least 20 days prior to the date on which the Company closes its books or
takes a record (A) with respect to any dividend or distribution upon the Common
Stock, (B) with respect to any pro rata subscription offer to holders of Common
Stock or (C) for determining rights to vote with respect to any transaction
described in Section 2C, dissolution or liquidation.
(iii) The Company shall also give written notice to the Registered
Holders at least 20 days prior to the date on which any Section 2C, dissolution
or liquidation shall take place.
6
<PAGE>
Section 3. Definitions. The following terms have meanings set forth
-----------
below:
"Common Stock" means the Company's Common Stock, $0.01 par value, and
------------
except for purposes of the number of shares of Common Stock acquirable upon
exercise of this Warrant, any capital stock of any class of the Company
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Company.
"Market Price" means as to any security the average of the closing
------------
prices of such security's sales on all domestic securities exchanges on which
such security may at the time be listed, or, if there have been no sales on any
such exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any day
such security is not quoted in the NASDAQ System, the average of the highest bid
and lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over the period of 10
consecutive business days ending on the business day immediately prior to the
day as of which "Market Price" is being determined; provided that if such
--------
security is listed on any domestic securities exchange the term "business days"
as used in this sentence means business days on which such exchange is open for
trading. If at any time such security is not listed on any domestic securities
exchange or quoted in the NASDAQ System or the domestic over-the-counter market,
the "Market Price" shall be the fair value thereof determined jointly by the
Company and the Registered Holders of Warrants representing a majority of the
Common Stock purchasable upon exercise of all the Warrants then outstanding;
provided that if such parties are unable to reach agreement within a reasonable
- --------
period of time, such fair value shall be determined by an appraiser jointly
selected by the Company and the Registered Holders of Warrants representing a
majority of the Common Stock purchasable upon exercise of all the Warrants then
outstanding. The determination of such appraiser shall be final and binding on
the Company and the Registered Holders of the Warrants, and the fees and
expenses of such appraiser shall be paid by the Company.
"Other Securities" shall mean any securities (other than shares of
----------------
Common Stock) of the Company or any other Person which the Registered Holders at
any time shall be entitled to receive, or shall have received, upon the exercise
of the Warrants, in lieu of or in addition to the Underlying Common Stock or
which at any time shall be issuable or shall have been issued to holders of the
Underlying Common Stock in exchange for, in addition to or in replacement of,
the Underlying Common Stock.
"Person" means an individual, a partnership, a joint venture, a
------
corporation, a limited liability company, a trust, an unincorporated
organization and a government or any department or agency thereof.
7
<PAGE>
Other capitalized terms used in this Warrant but not defined herein
shall have the meanings set forth in the Warrant Agreement.
Section 4. No Voting Rights; Limitations of Liability. This Warrant
------------------------------------------
shall not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Registered Holder to purchase Common Stock, and no enumeration
herein of the rights or privileges of the Registered Holder shall give rise to
any liability of such holder for the Exercise Price of Common Stock acquirable
by exercise hereof or as a stockholder of the Company.
Section 5. Warrant Transferable. Subject to the transfer conditions
--------------------
referred to in the legend endorsed hereon, this Warrant and all rights hereunder
are transferable, in whole or in part, without charge to the Registered Holder,
upon surrender of this Warrant with a properly executed Assignment (in the form
of Exhibit II hereto) at the principal office of the Company.
----------
Section 6. Warrant Exchangeable for Different Denominations. This
------------------------------------------------
Warrant is exchangeable, upon the surrender hereof by the Registered Holder at
the principal office of the Company, for new Warrants of like tenor representing
in the aggregate the purchase rights hereunder, and each of such new Warrants
shall represent such portion of such rights as is designated by the Registered
Holder at the time of such surrender. The Closing Time shall be deemed to be
the "Date of Issuance" hereof regardless of the number of times new certificates
representing the unexpired and unexercised rights formerly represented by this
Warrant shall be issued. All Warrants representing portions of the rights
hereunder are referred to herein as the "Warrants."
Section 7. Replacement. Upon receipt of evidence reasonably
-----------
satisfactory to the Company (an affidavit of the Registered Holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing this Warrant, and in the case of any such loss, theft
or destruction, upon receipt of indemnity reasonably satisfactory to the Company
(provided that if the holder is the original holder hereof or any Affiliate
thereof or a financial institution or other institutional investor its own
agreement shall be satisfactory), or, in the case of any such mutilation upon
surrender of such certificate, the Company shall (at its expense) execute and
deliver in lieu of such certificate a new certificate of like kind representing
the same rights represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 8. Notices. Except as otherwise expressly provided herein,
-------
all notices referred to in this Warrant shall be in writing and shall be
delivered personally, sent by reputable overnight courier service (charges
prepaid) or sent by registered or certified mail, return receipt requested,
postage prepaid, and shall be deemed to have been given when personally
delivered, the first business day after being sent by reputable overnight
courier service or the fifth business day after being deposited in the U.S. Mail
(i) to the Company, at its principal executive offices and (ii) to the
Registered Holder of this Warrant, at such holder's address as it appears in the
records of the Company (unless otherwise indicated by any such holder).
8
<PAGE>
Section 9. Amendment and Waiver. Except as otherwise provided
--------------------
herein, the provisions of the Warrants may be amended and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
Registered Holders of Warrants representing a majority of the shares of Common
Stock obtainable upon exercise of the Warrants; provided that no such action may
--------
change the Exercise Price of the Warrants or the number of shares or class of
stock obtainable upon exercise of each Warrant without the written consent of
the Registered Holders of Warrants representing at least a majority of the
shares of Common Stock obtainable upon exercise of the Warrants.
Section 10. Descriptive Headings; Governing Law. The descriptive
-----------------------------------
headings of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporation
laws of the State of Maryland shall govern all issues concerning the relative
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal law of the State of Minnesota, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
Minnesota or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of Minnesota.
* * * * * *
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
and attested by its duly authorized officers under its corporate seal and to be
dated as of the Date of Issuance hereof.
NOVASTAR FINANCIAL, INC.
By: _________________________________
Name:_________________________________
Its: _________________________________
[Corporate Seal]
Attest:
______________________________
Title: ______________________
<PAGE>
EXHIBIT I
EXERCISE AGREEMENT
------------------
To: Dated: ____________
The undersigned, pursuant to the provisions set forth in the attached
Warrant (Certificate No. W-____________), hereby agrees to subscribe for the
purchase of ____________ shares of the Common Stock covered by such Warrant and
makes payment herewith in full therefor at the price per share provided by such
Warrant.
Signature: ____________________
Address: ______________________
<PAGE>
EXHIBIT II
ASSIGNMENT
----------
FOR VALUE RECEIVED, ______________________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrant (Certificate No. W-____________) with respect to the number of shares of
the Common Stock covered thereby set forth below, unto:
Names of Assignee Address No. of Shares
----------------- ------- -------------
Signature: ____________________
Witness: ______________________
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS AGREEMENT is made as of March 10, 1999, by and between NovaStar
Financial, Inc., a Maryland corporation (the "Company"), and Residential Funding
-------
Corporation, a Delaware corporation ("Investor"). Unless otherwise provided in
--------
this Agreement, capitalized terms used herein shall have the meanings set forth
in paragraph 9 hereof.
The parties to this Agreement are parties to a Warrant Agreement of
even date herewith (the "Warrant Agreement"). In order to induce Investor to
-----------------
enter into the Warrant Agreement, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Company has
agreed to provide the registration rights set forth in this Agreement.
The parties hereto agree as follows:
1. Demand Registrations.
--------------------
(a) Requests for Registration. At any time, the holders of at least a
-------------------------
majority of the Registrable Securities may request registration under the
Securities Act of all or any portion of their Registrable Securities on Form S-
11 or any similar long-form registration ("Long-Form Registrations") or, if
-----------------------
available, on Form S-2 or Form S-3 or any similar short-form registration
("Short-Form Registrations"). All registrations requested pursuant to this
- --------------------------
paragraph 1(a) are referred to herein as "Demand Registrations." Each request
--------------------
for a Demand Registration shall specify the approximate number of Registrable
Securities requested to be registered and the intended method or methods of
disposition of such Registrable Securities. Within ten days after receipt of
any such request, the Company shall give written notice of such requested
registration to all other holders of Registrable Securities and shall include in
such registration all Registrable Securities with respect to which the Company
has received written requests for inclusion therein within 15 days after the
receipt of the Company's notice.
(b) Long-Form Registrations. Subject to the second sentence of
-----------------------
subparagraph (c) below, the holders of Registrable Securities shall be entitled
to request four (4) Long-Form Registrations in which the Company shall pay all
Registration Expenses (as defined in paragraph 5). A registration shall not
count as one of the permitted Long-Form Registrations until it has become
effective, and the last Long-Form Registration shall not count as one of the
permitted Long-Form Registrations unless the holders of Registrable Securities
are able to register and sell at least 90% of the Registrable Securities
requested to be included in such registration; provided that in any event the
--------
Company shall pay all Registration Expenses in connection with any Long-Form
Registration whether or not it has become effective and whether or not such
registration has counted as one of the permitted Long-Form Registrations.
<PAGE>
(c) Short-Form Registrations. In addition to the Long-Form
------------------------
Registrations provided pursuant to paragraph 1(b), the holders of Registrable
Securities shall be entitled to request an unlimited number of Short-Form
Registrations in which the Company shall pay all Registration Expenses. Demand
Registrations shall be Short-Form Registrations whenever the Company is
permitted to use any applicable short form. The Company shall use its best
efforts to make Short-Form Registrations available for the sale of Registrable
Securities. With respect to any Demand Registration, the requesting holders of
Registrable Securities may request that the Company effect a registration of
Registrable Securities under a registration statement on Form S-3 or S-11
pursuant to Rule 415 under the Securities Act (or any successor form or rule) (a
"Shelf Registration"), under which such holders may sell Registrable Securities
------------------
from time to time in underwritten or non-underwritten offerings. The holders of
Registrable Securities may request an unlimited number of underwritten offerings
of any Registrable Securities registered under a Shelf Registration and any such
request shall be considered a Demand Registration for purposes of this Agreement
(including paragraph 4 hereof).
(d) Priority on Demand Registrations. If a Demand Registration is an
--------------------------------
underwritten offering and the managing underwriters advise the Company in
writing that, in their opinion, the number of Registrable Securities and other
securities requested to be included in such offering exceeds the number of
Registrable Securities and other securities, if any, which can be sold in an
orderly manner in such offering within a price range acceptable to the holders
of a majority of the Registrable Securities initially requesting registration,
the Company shall include in such registration prior to the inclusion of any
securities which are not Registrable Securities (including securities held by
the Five Percent Purchasers) the number of Registrable Securities requested to
be included which in the opinion of such underwriters can be sold in an orderly
manner within the price range of such offering, pro rata among the respective
holders thereof on the basis of the amount of Registrable Securities owned by
each such holder.
(e) Restrictions on Demand Registrations. The Company may postpone
------------------------------------
for up to 120 days (from the date of the request) the filing or the
effectiveness of a registration statement for a Demand Registration or the
commencement of a Demand Registration under a Shelf Registration if the
Company's board of directors believes that such Demand Registration would
reasonably be expected to have a material adverse effect on any proposal or plan
by the Company or any of its Subsidiaries to engage in any acquisition of assets
(other than in the ordinary course of business) or any stock purchase, merger,
consolidation, tender offer, reorganization or similar transaction; provided
--------
that in such event, the holders of Registrable Securities initially requesting
such Demand Registration shall be entitled to withdraw such request and, if such
request is withdrawn, such Demand Registration shall be treated as if it had
never been made in the first instance, and the Company shall pay all
Registration Expenses in connection with such registration. The Company may
delay a Demand Registration hereunder only once in any 12-month period.
(f) Selection of Underwriters. The holders of a majority of the
-------------------------
Registrable Securities initially requesting a Demand Registration hereunder
shall have the right to select the
2
<PAGE>
investment banker(s) and manager(s) to administer the offering (including an
underwritten offering under a Shelf Registration).
2. Piggyback Registrations.
-----------------------
(a) Right to Piggyback. Whenever the Company proposes (i) to register
------------------
any of its securities under the Securities Act (other than pursuant to a Demand
Registration (which is addressed in paragraph 1 above rather than in this
paragraph 2) or a registration on Form S-4 or Form S-8 or any similar or
successor forms or in connection with a dividend reinvestment or direct stock
purchase plan) and the registration form to be used may be used for the
registration of Registrable Securities or (ii) to effect an underwritten public
offering under a shelf registration statement (each of (i) and (ii) being a
"Piggyback Registration"), the Company shall give prompt written notice to all
- -----------------------
holders of Registrable Securities of its intention to effect such a registration
or offering and, subject to paragraphs 2(c) and 2(d) below, shall include in
such registration or offering all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within 20 days
after the receipt of the Company's notice; provided that with respect to any
--------
Piggyback Registration, the holders of a majority of the Registrable Securities
shall have the right to waive and forego, as against all holders of Registrable
Securities, the inclusion of any Registrable Securities in such Piggyback
Registration.
(b) Piggyback Expenses. The Registration Expenses of the holders of
------------------
Registrable Securities shall be paid by the Company in all Piggyback
Registrations.
(c) Priority on Primary Registrations. If a Piggyback Registration is
---------------------------------
an underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing (with a copy to each holder
requesting registration of Registrable Securities) that, in their opinion, the
number of securities requested to be included in such registration or offering
exceeds the number which can be sold in such offering without adversely
affecting the marketability of such offering, the Company shall include in such
registration (i) first, the securities the Company proposes to sell and (ii)
second, the Registrable Securities requested to be included in such registration
and other securities requested to be included in such registration (including
securities held by the Five Percent Purchasers), pro rata among the holders of
such Registrable Securities and other securities on the basis of the number of
securities requested to be included therein.
(d) Priority on Secondary Registrations. If a Piggyback Registration
-----------------------------------
is an underwritten secondary registration on behalf of holders of the Company's
securities (it being understood that secondary registrations on behalf of
holders of Registrable Securities are addressed in paragraph 1 above rather than
in this paragraph 2(d)), and the managing underwriters advise the Company in
writing that, in their opinion, the number of securities requested to be
included in such registration exceeds the number which can be sold in such
offering without adversely affecting the marketability of the offering, the
Company shall include in such registration (i) first, the securities requested
to be included therein by the holders requesting such registration and (ii)
second, the
3
<PAGE>
Registrable Securities requested to be included in such registration and other
securities requested to be included in such registration (including securities
held by the Five Percent Purchasers), pro rata among the holders of such
Registrable Securities and other securities on the basis of the number of
securities requested to be included therein.
(e) Withdrawal by Company. If, at any time after giving notice of its
---------------------
intention to register or effect an offering of any of its securities as set
forth in paragraph 2(a) and before the effective date of such registration
statement filed in connection with such registration or the commencement of the
offering, as the case may be, the Company shall determine, for any reason, not
to register such securities or commence the offering, the Company may, at its
sole discretion, give written notice of such determination to each holder of
Registrable Securities and thereupon shall be relieved of its obligation to
register or include any Registrable Securities in connection with such
registration or offering (but not from its obligation to pay the Registration
Expenses in connection therewith as provided herein).
3. Holdback Agreements.
-------------------
(a) Each holder of Registrable Securities shall not effect any public
sale or distribution (including sales pursuant to Rule 144) of equity securities
of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and the 90-day
period beginning on the effective date of any underwritten public offering of
the Company's equity securities (including Demand and Piggyback Registrations)
(except as part of such underwritten registration), unless the underwriters
managing the registered public offering otherwise agree.
(b) The Company (i) shall not effect any public sale or distribution
of its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration or the commencement date
of any underwritten offering under a Shelf Registration (except as part of such
underwritten offering or pursuant to registrations on Form S-8 or any successor
form or in connection with a dividend reinvestment or direct stock purchase
plan), unless the underwriters managing the registered public offering otherwise
agree, and (ii) shall use its best reasonable efforts to cause each holder of
its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, purchased or otherwise acquired from the
Company at any time after the date of this Agreement (other than in a registered
public offering) to agree not to effect any public sale or distribution
(including sales pursuant to Rule 144) of any such securities during such period
(except as part of such underwritten offering, if otherwise permitted), unless
the underwriters managing the registered public offering otherwise agree.
4. Registration Procedures. Whenever the holders of Registrable
-----------------------
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement (including requesting an underwritten offering under a Shelf
Registration as described in paragraph 1(c)), the
4
<PAGE>
Company shall use its best efforts to effect the registration and the sale of
such Registrable Securities in accordance with the intended method of
disposition thereof, and pursuant thereto the Company shall as expeditiously as
possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective;
(b) except in the case of a Shelf Registration, prepare and file with
the Securities and Exchange Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective and to comply with the
provisions of the Securities Act with respect to the disposition of Registrable
Securities subject to such registration for a period of either (i) not less than
six months (subject to extension pursuant to paragraph 7(b)) or, if such
registration statement relates to an underwritten offering, such longer period
as in the opinion of counsel for the underwriters a prospectus is required by
law to be delivered in connection with sales of Registrable Securities by an
underwriter or dealer, or (ii) such shorter period as shall terminate when all
of the securities covered by such registration statement during such period have
been disposed of in accordance with the intended methods of disposition by the
seller or sellers thereof set forth in such registration statement (but, in any
event, not before the expiration of any longer period required under the
Securities Act), and to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement until such time as all of such securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof set forth in such registration statement;
(c) in the case of a Shelf Registration, prepare and file with the
Securities and Exchange Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective and to comply with the
provisions of the Securities Act with respect to the disposition of Registrable
Securities subject to such registration until the earlier of (i) 18 months
(subject to extension pursuant to paragraph 7(b)) after the effective date of
such registration statement and (ii) the date on which all Registrable
Securities subject to such registration statement have been sold pursuant to
such registration statement (such period with respect to each Shelf
Registration, a "Shelf Registration Period");
-------------------------
(d) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus and any supplemental prospectus) and such other documents
as such seller may reasonably request in order to facilitate the disposition of
the Registrable Securities owned by such seller;
(e) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do
5
<PAGE>
any and all other acts and things which may be reasonably necessary or advisable
to enable such seller to consummate the disposition in such jurisdictions of the
Registrable Securities owned by such seller (provided that the Company shall not
be required to (i) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this subparagraph or (ii)
subject itself to taxation in any such jurisdiction);
(f) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company shall
prepare and furnish to such seller a reasonable number of copies of a supplement
or amendment to such prospectus so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not contain an
untrue statement of a material fact or omit to state any fact necessary to make
the statements therein not misleading;
(g) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on a securities exchange or the
National Association of Securities Dealers automated quotation system ("Nasdaq")
------
and, if listed on the Nasdaq, use its best efforts to secure designation of all
such Registrable Securities covered by such registration statement as a
"national market system security" of The Nasdaq Stock Market within the meaning
of Rule 11Aa2-1 of the Securities and Exchange Commission or, failing that, to
secure The Nasdaq Stock Market's authorization for such Registrable Securities,
subject in all cases to applicable rules of national securities exchanges and
Nasdaq.
(h) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(i) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities;
(j) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees, agents, representatives and independent
accountants to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement;
(k) otherwise use its best efforts to comply with all applicable rules
and regulations of the Securities and Exchange Commission, and make available to
its security holders,
6
<PAGE>
as soon as reasonably practicable, an earnings statement covering the period of
at least 12 months beginning with the first day of the Company's first full
calendar quarter after the effective date of the registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder;
(l) permit any holder of Registrable Securities which holder, in its
sole and exclusive judgment, might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
registration or comparable statement and to require the insertion therein of
material, furnished to the Company in writing, which in the reasonable judgment
of such holder and its counsel should be included;
(m) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any securities included in such registration statement for sale in any
jurisdiction, the Company shall use its best efforts promptly to obtain the
withdrawal of such order;
(n) use its best efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the sellers
thereof to consummate the disposition of such Registrable Securities;
(o) obtain a cold comfort letter from the Company's independent public
accountants in customary form and covering such matters of the type customarily
covered by cold comfort letters, which letter shall be addressed to the
underwriters and, to the extent reasonably practicable, to the holders of such
Registrable Securities; and
(p) obtain an opinion from the Company's outside counsel in customary
form and covering such matters of the type customarily covered by such opinions,
which opinion shall be addressed to the underwriters and the holders of such
Registrable Securities.
Before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company shall furnish to the counsel selected by the
holders of a majority of the Registrable Securities covered by such registration
statement copies of all such documents proposed to be filed, which documents
shall be subject to the review and comment of such counsel. In addition, if any
such registration or comparable statement refers to any such holder by name or
otherwise as the holder of any securities of the Company, other than to disclose
solely the number of shares of Common Stock or Warrants held, such holder shall
have the right to require (i) the insertion therein of language, in form and
substance satisfactory to such holder and presented to the Company in writing,
to the effect that the holding by such holder of such securities is not to be
construed as a recommendation by such holder of the investment quality of the
Company's securities covered thereby, and that such holding does not imply that
such holder shall assist in meeting any future financial requirements of the
Company, or (ii) in the event that such reference to such holder by
7
<PAGE>
name or otherwise is not required by the Securities Act or any similar federal
or state statute then in force, the deletion of the reference to such holder;
provided that, with respect to this clause (ii), such holder shall furnish to
- --------
the Company an opinion of counsel to such effect, which opinion and counsel
shall be reasonably satisfactory to the Company. The Company may require each
seller of Registrable Securities as to which any registration is being effected
to furnish the Company with such information regarding such seller and the
distribution of such securities as the Company may from time to time reasonably
request in writing.
5. Registration Expenses.
---------------------
(a) "Registration Expenses" shall mean all expenses incident to the
---------------------
Company's performance of or compliance with this Agreement, including, without
limitation, all registration and filing fees, fees and expenses of compliance
with securities or blue sky laws, printing expenses, messenger and delivery
expenses, fees and disbursements of custodians, fees and disbursements of
counsel for the Company and all independent certified public accountants,
underwriters (excluding discounts and commissions) and other Persons retained by
the Company, the Company's internal expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit or quarterly review, the
expense of any liability insurance and the expenses and fees for listing the
securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed or, if none are so listed, on a
securities exchange or on the NASD automated quotation system.
(b) In connection with each Demand Registration (and each underwritten
offering under a Shelf Registration) and each Piggyback Registration, the
Company shall reimburse the holders of Registrable Securities included in such
registration for the reasonable fees and disbursements of one counsel chosen by
the holders of a majority of the Registrable Securities included in such
registration.
6. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless, to the full
extent permitted by law, each holder of Registrable Securities, its officers,
directors, agents, and employees and each Person who controls such holder
(within the meaning of the Securities Act) against any and all losses, claims,
damages, liabilities, joint or several, together with reasonable costs and
expenses (including reasonable attorney's fees), to which such indemnified party
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages, or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of, are based upon, are
caused by, or result from (i) any untrue or alleged untrue statement of material
fact contained (A) in any registration statement, prospectus, or preliminary
prospectus or any amendment thereof or supplement thereto, or (B) in any
application or other document or communication (in this paragraph 6 collectively
called an "application") executed by or on behalf of the Company or based upon
-----------
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify any securities covered by such registration
statement under the blue sky or securities laws
8
<PAGE>
thereof, or (ii) any omission or alleged omission of a material fact required to
be stated therein or necessary to make the statements therein not misleading,
and the Company shall reimburse such holder and each such director, officer, and
controlling Person for any legal or any other expenses incurred by them in
connection with investigating or defending any such loss, claim, liability,
action, or proceeding; provided, however, that the Company shall not be liable
-------- -------
in any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof), or expense arises out of, is based
upon, is caused by, or results from an untrue statement or alleged untrue
statement, or omission or alleged omission, made in such registration statement,
any such prospectus or preliminary prospectus or any amendment or supplement
thereto, or in any application, in reliance upon, and in conformity with,
written information prepared and furnished to the Company by such holder
expressly for use therein or by such holder's failure to deliver a copy of the
registration statement or prospectus or any amendments or supplements thereto
after the Company has furnished such holder with a sufficient number of copies
of the same. In connection with any underwritten offering, the Company shall
indemnify the underwriters, their officers and directors, and each Person who
controls such underwriters (within the meaning of the Securities Act) to the
same extent as provided above with respect to the indemnification of the holders
of Registrable Securities.
(b) In connection with any registration statement in which a holder of
Registrable Securities is participating, each such holder shall furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the full extent permitted by law, shall indemnify and hold
harmless the other holders of Registrable Securities and the Company, and their
respective directors, officers, agents, and employees and each other Person who
controls the Company (within the meaning of the Securities Act) against any
losses, claims, damages, liabilities, joint or several, together with reasonable
costs and expenses (including reasonable attorney's fees), to which such
indemnified party may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages, or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of,
are based upon, are caused by, or result from (i) any untrue or alleged untrue
statement of material fact contained in the registration statement, prospectus
or preliminary prospectus or any amendment thereof or supplement thereto or in
any application, or (ii) any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or omission is
made in such registration statement, any such prospectus or preliminary
prospectus or any amendment or supplement thereto, or in any application, in
reliance upon and in conformity with written information prepared and furnished
to the Company by such holder expressly for use therein; provided, however, that
-------- -------
the obligation to indemnify shall be individual to each holder and shall be
limited to the net amount of proceeds received by such holder from the sale of
Registrable Securities pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder shall (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that the failure to give prompt notice
shall not impair any Person's right to indemnification hereunder to the extent
such failure has not prejudiced the indemnifying party), and (ii) unless in
9
<PAGE>
such indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party shall not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent shall not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim shall not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) The indemnifying party shall not, except with the approval of each
indemnified party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to each indemnified party of a release from all liability
in respect to such claim or litigation without any payment or consideration
provided by such indemnified party.
(e) If the indemnification provided for in this paragraph 6 is
unavailable to, or is insufficient to hold harmless, an indemnified party under
the provisions above in respect to any losses, claims, damages, or liabilities
referred to therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the sellers of
Registrable Securities and any other sellers participating in the registration
statement on the other hand from the sale of securities pursuant to the
registered offering of securities as to which indemnity is sought, or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and of the sellers of Registrable Securities and any other sellers
participating in the registration statement on the other hand in connection with
the registration statement on the other in connection with the statement or
omissions which resulted in such losses, claims, damages, or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the sellers of Registrable
Securities and any other sellers participating in the registration statement on
the other hand shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) to the Company bear to
the total net proceeds from the offering (before deducting expenses) to the
sellers of Registrable Securities and any other sellers participating in the
registration statement. The relative fault of the Company on the one hand and
of the sellers of Registrable Securities and any other sellers participating in
the registration statement on the other hand shall be determined by reference
to, among other things, whether the untrue or alleged omission to state a
material fact relates to information supplied by the Company or by the sellers
of Registrable Securities or other sellers participating in the registration
statement and the parties' relative intent, knowledge, access to information,
and opportunity to correct or prevent such statement or omission.
10
<PAGE>
(f) The Company and the sellers of Registrable Securities agree that
it would not be just and equitable if contribution pursuant to this paragraph 6
were determined by pro rata allocation (even if the sellers of Registrable
Securities were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages, and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this paragraph 6, no seller of Registrable Securities shall be
required to contribute any amount in excess of the net proceeds received by such
seller from the sale of Registrable Securities covered by the registration
statement filed pursuant hereto. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(g) The indemnification and contribution by any such party provided
for under this Agreement shall be in addition to any other rights to
indemnification or contribution which any indemnified party may have pursuant to
law or contract and shall remain in full force and effect regardless of any
investigation made or omitted by or on behalf of the indemnified party or any
officer, director, or controlling Person of such indemnified party and shall
survive the transfer of securities.
7. Participation in Registrations.
------------------------------
(a) No Person may participate in any registration hereunder which is
underwritten unless such Person (i) agrees to sell such Person's securities on
the basis provided in any underwriting arrangements approved by the Person or
Persons entitled hereunder to approve such arrangements (including, without
limitation, pursuant to the terms of any over-allotment or "green shoe" option
requested by the managing underwriter(s); provided that no holder of Registrable
--------
Securities shall be required to sell more than the number of Registrable
Securities that such holder has requested the Company to include in any
registration), and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements, and other documents reasonably
required under the terms of such underwriting arrangements; provided that no
--------
holder of Registrable Securities included in any underwritten registration shall
be required to make any representations or warranties to the Company or the
underwriters (other than representations and warranties regarding such holder
and such holder's intended method of distribution) or to undertake any
indemnification obligations to the Company or the underwriters with respect
thereto, except as otherwise provided in paragraph 6 hereof.
(b) Each Person that is participating in any registration hereunder
agrees that, upon receipt of any notice from the Company of the happening of any
event of the kind described in paragraph 4(f) above, such Person shall forthwith
discontinue the disposition of its Registrable Securities pursuant to the
registration statement until such Person's receipt of the copies of a
11
<PAGE>
supplemented or amended prospectus as contemplated by such paragraph 4(f). In
the event that the Company shall give any such notice, the applicable time
period mentioned in paragraphs 4(b) and 4(c) during which a Registration
Statement is to remain effective shall be extended by the number of days during
the period from and including the date of the giving of such notice pursuant to
this paragraph 7(b) to and including the date when each seller of a Registrable
Security covered by such registration statement shall have received the copies
of the supplemented or amended prospectus contemplated by paragraph 4(f).
8. Eligibility. The Company represents, warrants and covenants that,
-----------
at such time as the Company's outstanding securities satisfy the eligibility
criteria for the use of Form S-3 under the Securities Act, the Company shall be
and shall remain at all times during a Shelf Registration Period, eligible to
use Form S-3 under the Securities Act.
9. Definitions.
-----------
(a) "Five Percent Purchasers" means those Persons that purchased 5% or
-----------------------
more of the units sold by the Company in December 1996 and have registration
rights under the Registration Rights Agreement of the Company, dated December 9,
1996, including the Lindner Dividend Fund, General Electric Capital Corporation,
First Financial Fund, Inc., Bay Pond Partners, L.P. and Wallace R. Weitz &
Company.
(b) "Registrable Securities" means (i) all of the Stock Purchase
----------------------
Warrants initially issued pursuant to the Warrant Agreement, (ii) any Stock
Purchase Warrant representing a portion of the rights under any such initially
issued Stock Purchase Warrants, (iii) any Common Stock issued upon the exercise
of any Stock Purchase Warrant referred to in clauses (i) or (ii) above and (iv)
any Common Stock or other equity securities of the Company issued or issuable
with respect to the securities referred to in clauses (i), (ii) and (iii) above
by way of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization. As to
any particular Registrable Securities, such securities shall cease to be
Registrable Securities when they have been distributed to the public pursuant to
a offering registered under the Securities Act or sold to the public through a
broker, dealer or market maker in compliance with Rule 144 under the Securities
Act (or any similar rule then in force) or repurchased by the Company or any of
its Subsidiaries. For purposes of this Agreement, a Person shall be deemed to be
a holder of Registrable Securities, and the Registrable Securities shall be
deemed to be in existence, whenever such Person has the right to acquire
directly or indirectly such Registrable Securities (upon conversion or exercise
in connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected, and such Person shall be entitled
to exercise the rights of a holder of Registrable Securities hereunder.
(c) Unless otherwise stated, other capitalized terms contained herein
have the meanings set forth in the Warrant Agreement.
12
<PAGE>
10. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company shall not hereafter enter
--------------------------
into any agreement with respect to its securities which is inconsistent with or
violates the rights granted to the holders of Registrable Securities in this
Agreement.
(b) Remedies. Any Person having rights under any provision of this
--------
Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights existing in their favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent any violation of the provisions of this
Agreement.
(c) Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and holders of at least a majority of the
Registrable Securities.
(d) Successors and Assigns. All covenants and agreements in this
----------------------
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
(f) Incorporation of Warrant Agreement Provisions. The paragraphs
---------------------------------------------
entitled "Severability," "Counterparts," "Descriptive Headings;
Interpretation,""Governing Law" and "Notices" of the Warrant Agreement are
hereby incorporated in this Agreement by reference and made a part hereof,
except that the provisions of such paragraphs shall refer to this Agreement
rather than the Warrant Agreement and shall continue to apply hereto regardless
of whether the Warrant Agreement is no longer in effect.
* * * * *
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
NOVASTAR FINANCIAL, INC.
By: _______________________________
Name: _____________________________
Its: ______________________________
RESIDENTIAL FUNDING CORPORATION
By: _______________________________
Name: _____________________________
Its: ______________________________
<PAGE>
EXHIBIT 10.25
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
by and between
NOVASTAR FINANCIAL, INC.
and
STIFEL, NICOLAUS & COMPANY, INCORPORATED
relating to the private placement of shares of
CLASS B 7.00% CUMULATIVE CONVERTIBLE PREFERRED STOCK
March 25, 1999
- --------------------------------------------------------------------------------
<PAGE>
NOVASTAR FINANCIAL, INC.
____________________
REGISTRATION RIGHTS AGREEMENT
CLASS B 7.00% CUMULATIVE CONVERTIBLE PREFERRED STOCK
____________________
March 25, 1999
INTRODUCTORY. This Registration Rights Agreement (this "Agreement") is
made and entered into as of March 25, 1999, by and among NovaStar Financial
Inc., a Maryland real estate investment trust (the "Company"), and Stifel,
Nicolaus & Company, Incorporated (the "Placement Agent") for the benefit of the
Holders (defined herein). This Agreement is entered into pursuant to that
certain Placement Agency Agreement (the "Placement Agency Agreement") dated
March 12, 1999, by and between the Company and the Placement Agent. In order to
induce the Purchasers (as defined in the Placement Agency Agreement) to purchase
the Company's Class B 7.00% Cumulative Convertible Preferred Stock (the "Class B
Preferred Stock"), the Company has agreed to provide the registration rights
provided for in this Agreement to the Purchasers and their direct and indirect
transferees. The execution of this Agreement is a condition to the closing of
the transactions contemplated by the Placement Agency Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS. As used in this Agreement, the following
terms shall have the following meanings:
1.1 Affiliate: As to any specified person, shall mean any other
---------
person directly or indirectly controlling or controlled by, or under direct or
indirect common control with, such specified person. For the purposes of this
definition, "control," when used with respect to any person, means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have the meanings correlative to
the foregoing.
1.2 Agreement: This Registration Rights Agreement, as the same
---------
may be amended, supplemented or modified from time to time in accordance with
the terms of this Agreement.
1.3 Business Day: With respect to any act to be performed under
------------
this Agreement, each Monday, Tuesday, Wednesday, Thursday and Friday that is not
a day on which banking institutions in New York, New York, or other applicable
place where such act is to occur, are authorized or obligated by applicable law,
regulation or executive order to close.
<PAGE>
1.4 Commission: The United States Securities and Exchange
----------
Commission.
1.5 Common Shares: Shares of the Company's common stock, $0.01
-------------
par value per share.
1.6 Company: NovaStar Financial, Inc., a Maryland corporation,
-------
and any successor thereto.
1.7 Controlling Person: Any person who controls a specified
------------------
person within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act.
1.8 Demanding Parties: as defined in Section 2.3 of this
-----------------
Agreement.
1.9 Exchange Act: The Securities and Exchange Act of 1934, as
------------
amended, and the rules and regulations promulgated by the Commission thereunder.
1.10 Holder: Each beneficial owner of any Registrable Shares
------
from time to time.
1.11 Issue Date: the Initial Closing Date, as defined in the
----------
Placement Agency Agreement, which is the first date of issuance of the Class B
Preferred Stock.
1.12 NASD: National Association of Securities Dealers, Inc. or
----
its subsidiary NASD Regulation, Inc., as the context requires.
1.13 Person: An individual, partnership, corporation, trust,
------
limited liability company or unincorporated organization, or government agency
or political subdivision thereof or any other legal entity.
1.14 Piggyback Registration: as defined in Section 2.3 of this
----------------------
Agreement.
1.15 Proceeding: An action, claim, suit or proceeding
----------
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or, to the knowledge of the person subject
thereto, threatened.
1.16 Prospectus: The prospectus included in any Registration
----------
Statement, including any preliminary prospectus, and all other amendments and
supplements to any such prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference, if
any, in such prospectus.
1.17 Placement Agency Agreement: As defined in the Introductory
--------------------------
paragraph of this Agreement.
1.18 Placement Agent: As defined in the Introductory paragraph
---------------
of this Agreement.
2
<PAGE>
1.19 Register, registered and registration: Such terms refer to
-------- ---------- ------------
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement by the Commission.
1.20 Registrable Shares: The Class B Preferred Shares and the
------------------
Underlying Common Shares, upon original issuance thereof and at all times
subsequent thereto, until, in the case of any Share, the earliest to occur of
(i) the date on which it has been registered effectively under the Securities
Act and disposed of in accordance with the registration statement relating to
it, (ii) the date on which it either is transferred in compliance with Rule 144
(or any similar provision then in effect) or is eligible for resale in
compliance with Rule 144(k), as promulgated by the Commission under the
Securities Act, (iii) the date on which it is eligible for general resale,
without restriction, pursuant to another available exemption from registration
under the Securities Act, if any, or (iv) the date on which it is sold to the
Company.
1.21 Registration Expenses: Any and all expenses incident to the
---------------------
performance of or compliance with this Agreement, including, without limitation:
(i) all Commission, stock exchange, NASD registration, listing, inclusion and
filing fees; (ii) all fees and expenses incurred in connection with compliance
with Canadian, federal or state securities or blue sky laws (including, without
limitation, any registration, listing and filing fees and reasonable fees and
disbursements of counsel in connection with blue sky qualification of any of the
Registrable Shares and the preparation of a Blue Sky Memorandum and compliance
with the rules of the NASD); (iii) all expenses of any Persons in preparing or
assisting in preparing, word processing, duplicating, printing, delivering and
distributing any Registration Statement, any Prospectus, any amendments or
supplements thereto, certificates and other documents relating to the
performance of and compliance with this Agreement; (iv) all fees and expenses
incurred in connection with the listing or including of any of the Registrable
Shares on any securities exchange or The Nasdaq National Market pursuant to
Section 5.11 of this Agreement; (v) the fees and disbursements of counsel for
the Company and of the independent public accountants (including, without
limitation, the expenses of any special audit and "cold comfort" letters
required by or incident to such performance) of the Company (provided that
Registration Expenses shall not include the fees and expenses of any counsel to
the Holders); and (vi) any fees and disbursements customarily paid in connection
with the issuance or sales of securities (including the fees and expenses of any
experts retained by the Company in connection with any Registration Statement),
but excluding brokers' commissions and transfer taxes, if any, relating to the
sale or disposition of Registrable Shares by a Holder.
1.22 Registration Statement: One or more registration
----------------------
statements, on the appropriate form, of the Company that cover the resale of any
of the Registrable Shares pursuant to the provisions of this Agreement,
including the Prospectus, any required amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference, if any, in such registration statement.
1.23 Rule 144: Rule 144 promulgated by the Commission pursuant
--------
to the Securities Act, as such rule may be amended from time to time, or any
similar or successor rule
3
<PAGE>
or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
1.24 Rule 144A: Rule 144A promulgated by the Commission pursuant
---------
to the Securities Act, as such rule may be amended from time to time, or any
similar or successor rule or regulation hereafter adopted by the Commission as a
replacement thereto having substantially the same effect as such rule.
1.25 Rule 158: Rule 158 promulgated by the Commission pursuant
--------
to the Securities Act, as such rule may be amended from time to time, or any
similar or successor rule or regulation hereafter adopted by the Commission as a
replacement thereto having substantially the same effect as such rule.
1.26 Rule 424: Rule 424 promulgated by the Commission pursuant
--------
to the Securities Act, as such rule may be amended from time to time, or any
similar or successor rule or regulation hereafter adopted by the Commission as a
replacement thereto having substantially the same effect as such rule.
1.27 Securities Act: The Securities Act of 1933, as amended, and
--------------
the rules and regulations promulgated by the Commission thereunder.
1.28 Class B Preferred Shares: Shares of the Company's Class B
------------------------
Preferred Stock.
1.29 Shares: The Class B Preferred Shares and the Underlying
------
Common Shares.
1.30 Underlying Common Shares: The Common Shares into which the
------------------------
Class B Preferred Shares are convertible.
1.31 Underwritten Offering: A sale of securities of the Company
---------------------
to an underwriter or underwriters for reoffering to the public.
SECTION 2. REGISTRATION.
2.1 Shelf Registration. The Company agrees to file with the
------------------
Commission as soon as reasonably practicable, but in no event later than six (6)
months after the Issue Date, a shelf Registration Statement with respect to the
sale from time to time by the Holders of any and all Registrable Shares. The
Company shall use its best efforts to cause such Registration Statement to be
declared effective by the Commission as soon as practicable thereafter and to
remain effective until such time as none of the Shares are Registrable Shares.
Such registration shall be made in accordance with the procedures described in
Section 5.
2.2 Subsequent Demand Registration. Following the expiration of
------------------------------
the shelf Registration Statement referred to in Section 2.1 above, Holders
collectively holding at least 25% of the then outstanding Registrable Shares
shall have the right to request and have effected one or more registrations of
Registrable Shares for sale in public offerings unless, in the written opinion
of counsel to the Company, which opinion is reasonably acceptable to such
4
<PAGE>
Holders, such registration is not necessary for such Holders to sell their
Registrable Shares in the manner contemplated in compliance with applicable
securities laws. Such requests shall be in writing and shall state the number of
Registrable Shares to be disposed of and the intended method of disposition of
such Registrable Shares by such Holders. The Company shall give notice to all of
the Holders of Registrable Shares of the receipt of a request for registration
pursuant to this Section 2.2 and shall provide a reasonable opportunity for such
Persons to participate in such a registration provided they elect to do so in
writing to the Company within 15 days after the date of the Company's written
notice. Subject to the foregoing, the Company will use its best efforts to
effect promptly the registration of all Registrable Shares to the extent
requested by the Holder or Holders thereof, and to keep such registration
effective for 36 months or until all such Holders' Registrable Shares registered
thereunder are sold, whichever is shorter. If so requested by any Holder in
connection with a registration under this Section 2.2 the Company shall take
such steps as are required to register such Holder's Registrable Securities for
sale on a delayed or continuous basis under Rule 415 of the Securities Act or
any successor provision (if applicable). Such registration shall be made in
accordance with the procedures described in Section 5.
2.3 Piggyback Registration.
----------------------
(i) Notice. If (and on each occasion that) the Company proposes
------
to register any of its securities under the Securities Act in connection
with an Underwritten Offering or to effect an Underwritten Offering under
an effective shelf registration statement, either for the Company's own
account and/or for the account of any of its securityholders, other than
any such registration described in the last sentence of clause (ii) below
(each such registration or offering being herein called a Piggyback
Registration), then the company will give written notice to all Holders who
then hold Registrable Securities of the Company's intention to effect such
Piggyback Registration not later than the earlier to occur of (A) 30 days
prior to the anticipated initial filing date of such Piggyback Registration
if such registration is on Form S-3 (or any successor form), (B) 45 days
prior to such date if the registration is on any other form or (C) promptly
after receiving a demand from a Demanding Party under Section 2.3 (iii)
below.
(ii) Registration; Withdrawal. Subject to the provisions
------------------------
contained in Section 2.3 (iii) and in the last sentence of this clause
(ii), in connection with any registration or offering subject to the
provisions of this Section 2.3, if within 20 days after the date of the
Company notice pursuant to clause (i) above Holders of Registrable
Securities request the inclusion of some or all of the Registrable
Securities owned by them in such registration or offering, the Company will
use best efforts to effect the registration under the Securities Act of all
Registrable Securities which such Holders request to be registered or to
include such Registrable Securities in such offering. Holders of
Registrable Securities shall be permitted to withdraw all or any part of
the Registrable Securities of such Holders from any Piggyback Registration
at any time prior to the final filing (which has been made by and in the
discretion of the Company) or the commencement of offers to the public
pursuant to a final prospectus with respect to such Piggyback Registration,
and the Company shall have the right to postpone or withdraw any
registration without obligation to any Holder (other than for payment of
any reasonable expense incurred by the Holders). Notwithstanding anything
herein to the
5
<PAGE>
contrary, the Company will not be obligated or required to include any
Registrable Securities in any registration effected on Form S-4 or Form S-8
solely to implement an employee benefit plan (including any option plan) or
transaction of the type to which Rule 145 of the Commission or any
successor provision is applicable, or in connection with a dividend
reinvestment or direct stock purchase plan for the benefit of the Company's
stockholders.
(iii) Allocation of Piggyback Registrations. In connection with
-------------------------------------
an Underwritten Offering effected pursuant to a Piggyback Registration, if
the managing underwriter or underwriters shall advise the Company in
writing that, in the reasonable opinion of such managing underwriter or
underwriters, the inclusion of all Registrable Securities for which
registration is requested pursuant to Section 2.3 hereof would materially
and adversely affect the success of such offering, then registration for
the Registrable Securities shall be cut back such that (i) no Holder of
Registrable Securities shall be entitled to participate in such
Underwritten Offering unless all shares of Common Stock proposed to be sold
by the Company for its own account or for the account of the parties for
which the Underwritten Offering was commenced as a result of the exercise
of demand registration rights, whether pursuant to this Agreement or any
other agreement ("Demanding Parties"), have been included in such
Underwritten Offering, and (ii) after the Company or the Demanding Party
has included their proposed shares of Common Stock, the Holders, and any
other owners of securities for which the Company has granted Piggyback
Registration rights shall be entitled to include their Registrable
Securities and such other owners' registrable securities in an amount up to
the amount that such managing underwriter or underwriters advise may be
included therein (as allocated among the Holders, and such other owners pro
rata on the basis of the number of securities requested to be included
therein by each such Holder or other owner).
SECTION 3. EXPENSES. As between the Company and the Holders, the
Company shall pay all Registration Expenses in connection with the registration
of the Registrable Shares pursuant to this Agreement. The Holder or Holders
shall pay all broker's or underwriter's discounts or commissions and transfer
taxes, if any, and any other expense not specifically allocated to the Company
pursuant to this Agreement relating to the sale or disposition of such Holder's
Registrable Shares pursuant to any Registration Statement.
SECTION 4. RULES 144 AND 144A. During such time as any of the Shares
are Registrable Shares, the Company shall use its best efforts to file the
reports required to be filed by it under the Securities Act and the Exchange Act
in a timely manner sufficient to satisfy the condition set forth in Rule 144(c),
and during such time as any Class B Preferred Shares are Registrable Shares as
described herein, the Company shall make available such other information, if
any, as required by, and so long as necessary to permit sales of such Class B
Preferred Shares pursuant to, Rule 144A.
SECTION 5. REGISTRATION PROCEDURES. In connection with any
Registration required by this Agreement, the Company shall:
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5.1 prepare and file with the Commission, as specified in this
Agreement, a Registration Statement, which Registration Statement shall comply
as to form in all material respects with the requirements of the Securities Act,
and use its best efforts to cause such Registration Statement to become
effective as soon as possible after filing and remain effective for the term
provided in this Agreement. In order to allow Holders to sell their Shares
privately pursuant to Rule 144 (during the periods, and in the quantities and
manner allowed by such rule) even though such Shares may also be registered for
resale under the Registration Statement, the Company agrees to disclose under
the caption "Plan of Distribution" (or other appropriate location) in the
Registration Statement, that sales by the Holders pursuant to Rule 144 may
occur.
5.2 subject to Section 5.8 of this Agreement, (i) prepare and
file with the Commission such amendments and post-effective amendments to each
such Registration Statement as may be necessary to keep such Registration
Statement effective for the period described in Section 5.1, (ii) cause each
such Prospectus contained therein to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424 or any
similar rule that may be adopted under the Securities Act, and (iii) comply with
the provisions of the Securities Act so as to permit the sale and resale of such
Registrable Shares by the Holder or Holders in accordance with customary methods
of sale or distribution, including through brokers' transactions and block
trades, as well as any other intended method or methods of distribution
reasonably requested by any Holder by written notice to the Company prior to the
filing of the Registration Statement.
5.3 furnish to any Holder named in any Prospectus, without
charge, as many copies of such Prospectus, and any amendment or supplement
thereto as such Holder may reasonably request, in order to facilitate the public
sale or other disposition of the Registrable Shares; the Company consents to the
use of any such Prospectus by such Holder in connection with the offering and
sale of the Registrable Shares covered by any such Prospectus in accordance with
the plan of distribution described therein;
5.4 use its best efforts to register or qualify, or obtain
exemption from registration or qualification for, all Registrable Shares by the
time the Registration Statement is declared effective by the Commission under
all applicable Canadian, federal or state securities or "blue sky" laws of such
jurisdictions as any Holder shall reasonably request in writing, keep each such
registration or qualification or exemption effective during the period such
Registration Statement is required to be kept effective pursuant to Section 5.1
of this Agreement and do any and all other acts which may be reasonably
necessary to enable each Holder to consummate the disposition in each such
jurisdiction of such Registrable Shares owned by such Holder in accordance with
the Registration Statement; provided, however, that the Company shall not be
required to (i) qualify generally to do business in any jurisdiction or to
register as a broker or dealer in such jurisdiction where it would not otherwise
be required to qualify or register but for this Section 5.4, (ii) subject itself
to taxation in any such jurisdiction, or (iii) submit to the general service of
process in any such jurisdiction;
5.5 notify the Placement Agent and each Holder named as a
selling shareholder in the Registration Statement promptly and, if requested by
the Placement Agent or any Holder named as a selling shareholder in the
Registration Statement, confirm such
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information in writing (i) when a Registration Statement has become effective
and when any post-effective amendments and supplements thereto become effective,
(ii) of the issuance by the Commission or any state securities authority of any
stop order suspending the effectiveness of a Registration Statement or the
initiation of any proceedings for that purpose, (iii) of any request by the
Commission or any other federal or state governmental authority for amendments
or supplements to a Registration Statement or related Prospectus or for
additional information, and (iv) of the happening of any event during the period
a Registration Statement is required to remain effective as a result of which
such Registration Statement or the related Prospectus or any document
incorporated by reference therein contains any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading (which information shall
be accompanied by an instruction to suspend the use of the Prospectus until the
requisite changes have been made);
5.6 during the period of time referred to in Section 5.1 of
this Agreement, use reasonable efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of, any enjoining order suspending the use or
effectiveness of a Registration Statement or suspending the qualification (or
exemption from qualification) of any of the Registrable Shares for sale in any
jurisdiction, at the earliest possible moment;
5.7 upon request, furnish to each requesting Holder, without
charge, at least one conformed copy of each Registration Statement and any post-
effective amendment thereto (without documents incorporated therein by reference
or exhibits thereto, unless requested);
5.8 except as provided in Section 8 of this Agreement, upon the
occurrence of any event contemplated by Section 5.5 (iv) of this Agreement, use
its best efforts promptly to prepare a supplement or post-effective amendment to
a Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered by the selling Holders to the purchasers of the Registrable Shares,
such Prospectus will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
5.9 if requested by the representative underwriters, if any, or
any Holders of Registrable Shares being sold in connection with an Underwritten
Offering, (i) promptly incorporate in a Prospectus supplement or post-effective
amendment such material information as the representative of the underwriters,
if any, or such Holders indicate relates to them (and such information shall be
deemed to have been furnished in writing to the Company by the Holders of
Registrable Shares being sold in such Underwritten Offering expressly for use in
the Registration Statement), and (ii) make all required filings of such
Prospectus supplement or such post-effective amendment as soon as practicable
after the Company has received notification of the matters to be incorporated in
such Prospectus supplement or post-effective amendment;
5.10 enter into such agreements (including an underwriting
agreement in form, scope and substance as is customary in underwritten
offerings) and take all such other actions reasonably requested by the Holders
of a majority in interest of the Registrable Shares
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<PAGE>
being sold in connection therewith (including those reasonably requested by the
managing underwriters, if any) in order to expedite or facilitate the
disposition of such Registrable Shares, and in such connection, whether or not
an underwriting agreement is entered into and whether or not the registration is
an underwritten offering, (i) make such representations and warranties to the
Holders of such Registrable Shares and the underwriters, if any, with respect to
the business of the Company and its subsidiaries, and the Registration
Statement, Prospectus and documents, if any, incorporated or deemed to be
incorporated by reference therein, in each case, in form, substance and scope as
are customarily made by issuers to underwriters in underwritten offerings, and,
if true, confirm the same if and when requested in writing to do so, (ii) obtain
opinions of counsel to the Company and updates thereof (which counsel and
opinions, in form, scope and substance, shall be reasonably satisfactory to the
managing underwriters, if any, and counsel to the Holders of Registrable Shares
being sold), addressed to each selling Holder and each of the underwriters, if
any, covering the matters customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably requested in
writing by such counsel and underwriters, (iii) obtain "cold comfort" letters
and updates thereof from the independent certified public accountants of the
Company (and, if necessary, any other independent certified public accountants
of any subsidiary of the Company or of any business acquired by the Company for
which financial statements and financial data are, or are required to be,
included in the Registration Statement), addressed to each selling Holder
(unless such accountants shall be prohibited from so addressing such letters by
applicable standards of the accounting profession) and each of the underwriters,
if any, such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with underwritten
offerings, (iv) if an underwriting agreement is entered into, such underwriting
agreement shall contain indemnification provisions and procedures substantially
to the effect set forth in Section 8 of this Agreement and (v) deliver such
additional documents and certificates as may be reasonably requested by the
Holders of a majority of the Registrable Shares being sold, their counsel and
the managing underwriters, if any, to evidence the continued validity of the
representations and warranties made pursuant to clause (i) above and to evidence
compliance with any customary conditions contained in the underwriting agreement
or other agreement entered into by the Company. The above shall be done at each
closing under such underwriting or similar agreement, or as and to the extent
required thereunder; provided, however, that the Company shall not be required
to take the actions described in this paragraph in connection with an
Underwritten Offering unless the Underwriting Offering involves at least 500,000
shares.
5.11 in connection with an Underwritten Offering of Registrable
Shares, make available for inspection by representatives of the Holders and the
representative of any underwriters participating in any disposition pursuant to
a Registration Statement and any special counsel or accountant retained by such
Holders or underwriters, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries and cause their
respective officers, directors and employees to supply all information
reasonably requested by any such representatives, the representative of the
underwriters, the special counsel or accountants in connection with a
Registration Statement; provided, however, that such records, documents or
information which the Company determines, in good faith, to be confidential and
notifies such representatives, representative of the underwriters, special
counsel or accountants are confidential, shall be kept confidential and shall
not be disclosed by the representatives, representative of the underwriters,
special counsel or accountants unless (i) subject to the provisions hereof, the
disclosure of such records, documents or information is necessary to avoid
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or correct a misstatement or omission in a Registration Statement or Prospectus,
(ii) the release of such records, documents or information is ordered pursuant
to a subpoena or other order from a court of competent jurisdiction, or (iii)
such records, documents or information have been generally made available to the
public; and provided, further, that the foregoing inspection and information
gathering shall, to the greatest extent possible, be coordinated on behalf of
the Holders and the other parties entitled thereto by one counsel designated by
and on behalf of such Holders and other parties reasonably acceptable to the
Company; and provided, further, that the Company shall not be required to
furnish the information described in this paragraph unless the Underwritten
Offering involves at least 500,000 Shares.
5.12 if requested by the majority in interest of the
Holders selling Registrable Shares in an Underwritten Offering, the Company's
management shall cooperate in roadshow presentations to assist such Holders in
selling their Registrable Shares and shall otherwise work in good faith with any
managing underwriter(s) in connection with taking all actions necessary to
consummate successfully the Underwritten Offering.
5.13 use its reasonable best efforts to list the
Underlying Common Shares on the New York Stock Exchange or another nationally
recognized exchange or the Nasdaq National Market as soon as reasonably
practicable after the listing requirements are met;
5.14 prepare and file in a timely manner all documents and
reports required by the Exchange Act which are incorporated by reference into
any Registration Statement;
5.15 provide a CUSIP number for all Registrable Shares,
not later than the effective date of the Registration Statement;
5.16 use its best efforts to comply with all applicable
rules and regulations of the Commission and make generally available to its
securityholders, as soon as reasonably practicable, earnings statements covering
at least 12 months which satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 (or any similar rule promulgated under the
Securities Act) thereunder;
5.17 provide and cause to be maintained a transfer agent
for all Registrable Shares covered by any Registration Statement from and after
a date not later than the effective date of such Registration Statement;
5.18 in connection with any sale or transfer of the
Registrable Shares that will result in such Shares no longer being restricted
from resale without registration under the Securities Act, cooperate with the
Holders and the representative of the underwriters, if any, to facilitate the
timely preparation and delivery of certificates representing the Registrable
Shares to be sold, which certificates shall not bear any restrictive legends,
and to enable such Registrable Shares to be in such denominations and registered
in such names as the representative of the underwriters, if any, or Holders may
request at least three Business Days prior to any sale of the Registrable
Shares; and
5.19 the effectiveness of the first Registration Statement
filed under this Agreement, the Company will take such actions and make such
filings as are necessary to effect
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the registration of the Class B Preferred Shares under the Exchange Act
simultaneously with or immediately following the effectiveness of the
Registration Statement.
The Company may require each Holder to furnish to the Company such
information regarding the proposed distribution by such Holder of Registrable
Shares as the Company may from time to time reasonably request in writing and no
Holder shall be entitled to be named as a selling securityholder in any
Registration Statement and no Holder shall be entitled to use the Prospectus
forming a part thereof if such Holder does not provide such information to the
Company. The Company shall, to the extent it first receives such information
from Holders after initial effectiveness of the shelf Registration Statement,
file a supplemental prospectus or post-affective amendment within 20 Business
Days of receiving such complete information unless the Company receives complete
information from Holders holding at least $2.0 million aggregate liquidation
preference of Class B Preferred Shares, in which case supplemental prospectuses
will be filed within 10 Business Days of receiving such information.
Upon receipt of written notice from the Company of the happening of
any event of the kind described in Section 5.5 (ii), (iii) or (iv) of this
Agreement, each Holder shall immediately discontinue disposition of Registrable
Shares pursuant to a Registration Statement until such Holder, or its nominee,
receives copies of a supplemented or amended Prospectus or the facts and
circumstances giving rise to such notice are otherwise cured to the Company's
satisfaction. If so requested by the Company, the Holders shall deliver to the
Company (at the expense of the Company) all copies in their possession, other
than permanent file copies then in the Holders' possession, of the Prospectus
covering such Registrable Shares current at the time of receipt of such notice.
SECTION 6. BLACK-OUT PERIOD. Subject to the provisions of Section
----------------
7, following the effectiveness of a Registration Statement (and the filings with
any state securities commissions), the Company, by written notice to the
Placement Agent and to the Holders as described below, may direct the Holders to
suspend sales of the Registrable Shares pursuant to the Registration Statement
if any of the following events (each a "Suspension Event") shall occur: (i) an
Underwritten Offering by the Company (whether or not for the account of the
Company or others) where the Company is advised by the representative of
underwriters for such Underwritten Offering that the sale of Registrable Shares
pursuant to the Registration Statement would have a material adverse effect on
such Underwritten Offering; (ii) pending negotiations relating to, or
consummation of, a transaction or the occurrence of an event that requires
additional disclosure of material information by the Company in the Registration
Statement and which has not been so disclosed; (iii) a material corporate
transaction is pending or has occurred, the disclosure of which should be set
forth in the Registration Statement and the Board of Directors of the Company
shall have determined in good faith that such disclosure would not then be in
the best interests of the Company and its stockholders; or (iv) any of the
events described in Section 5.5 (ii), (iii) or (iv). Upon the occurrence of a
Suspension Event, the Company shall use its best efforts to remedy the cause of
the Suspension Event so as to permit the Holders to resume sales of the
Registrable Shares (including, as applicable, using its best efforts to cause
the Registration Statement to become effective and/or promptly amending or
supplementing the Registration Statement on a post-effective basis so that it
contains no material misstatements or omissions); provided, however, that in the
case of the Suspension Event referenced in clause (iii) immediately above, the
Company may delay such remediation during,
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but only during, such non-disclosure period as the Company's Board of Directors
determines in good faith is in the Company's best interest.
Upon the occurrence of a Suspension Event, the Company shall give
written notice (a "Suspension Notice") to the Holders (with a copy to the
Placement Agent) to suspend sales of the Registrable Shares so that the Company
may remedy the cause of the Suspension Event; provided, however, that such
suspension shall continue only for so long as the Suspension Event or its effect
is continuing and the Company is taking all reasonable steps to remedy the cause
of the Suspension Event as promptly as possible. The Holders shall not effect
any sales of Registrable Shares pursuant to such Registration Statement at any
time after receipt of a Suspension Notice from the Company (and prior to receipt
of an End of Suspension Notice (defined below)). If so requested by the
Company, the Holders will deliver to the Company (at the expense of the Company)
all copies in their possession, other than permanent file copies then in the
Holders' possession, of the Prospectus covering such Registrable Shares at the
time of receipt of the Suspension Notice. The Holders may recommence effecting
sales of the Registrable Shares pursuant to the Registration Statement (or such
filings) following further notice to such effect (an "End of Suspension Notice")
from the Company, which End of Suspension Notice shall be given by the Company
to the Holders and the Placement Agent promptly following the conclusion of any
Suspension Event.
SECTION 7. SPECIAL DISTRIBUTIONS.
7.1 Registration Default. If within six months after the
--------------------
Issue Date, the resale shelf Registration Statement referred to in Section 2 of
this Agreement has not been filed with the Commission (a "Registration
Default"), additional distributions ("Special Distributions") shall be payable
quarterly in arrears to holders of the Registrable Shares (in addition to any
regular distribution accruing or payable on such Shares) and will accrue
beginning (and including) the date on which any such Registration Default shall
occur and ending (but excluding) the date on which all Registration Defaults
have been cured. Special Distributions shall accrue at a rate of 0.25% of the
liquidation preference per annum per Class B Preferred Share during the 90-
calendar-day period immediately following the occurrence of any Registration
Default, which rate shall increase by 0.25% of the liquidation preference per
annum per Class B Preferred Share at the beginning of each subsequent 90-
calendar-day period, but in no event shall such rate exceed 1.00% of the
liquidation preference per annum per Class B Preferred Share. Special
Distributions shall accrue on any Underlying Common Shares into which the Class
B Preferred Shares have been converted or redeemed, at a rate adjusted to
provide the Holder thereof with the same economic benefit as though such
Underlying Common Shares had not been converted or redeemed from the Class B
Preferred Shares.
7.2 Cessation Date. Special Distributions shall cease to
--------------
accrue in respect of any Registrable Share on such date as such Share is no
longer a Registrable Share.
7.3 Payment Date. The Company shall cause the Special
------------
Distributions to be paid on the regular dividend date, whether or not the
Company shall have declared a dividend or other distribution on the Registrable
Shares for such quarter, and shall be payable to the holder of record of
Registrable Shares on the record date relating to such regular dividend date.
If for any quarter in which Special Distributions are payable in respect of
Underlying
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Common Shares, no record date is declared on the Common Shares, then the record
date for such Underlying Common Shares shall be deemed to be the same as the
record date for the Class B Preferred Shares. If for any quarter in which
Special Distributions are payable in respect of Class B Preferred Shares, no
record date is otherwise declared on the Class B Preferred Shares, then the
Company shall select a record date for payment of the Special Distribution in
good faith. The Special Distribution is a contract right and is not a dividend.
SECTION 8. INDEMNIFICATION AND CONTRIBUTION.
8.1 Indemnification by the Company. The Company agrees to
------------------------------
indemnify and hold harmless (i) the Placement Agent, (ii) each Holder, (iii)
each Person, if any, who is a Controlling Person of any of the foregoing, and
(iv) the respective officers, directors, employees, representatives and agents
of the Placement Agent and each Holder or any Controlling Person as follows:
(i) from and against any and all loss, claim, liability and
damage whatsoever, as incurred, arising out of any untrue or alleged untrue
statement of a material fact contained in any Registration Statement (or
any supplement or amendment thereto) pursuant to which Registrable Shares
were registered under the Securities Act, including all documents
incorporated therein by reference, or the omission or alleged omission to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
Prospectus (or any amendment or supplement thereto), including all
documents incorporated therein by reference, or the omission or alleged
omission to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that such indemnity with respect to any Registration Statement or
Prospectus shall not inure to the benefit of any Holder or the Placement
Agent (or any Controlling Person thereof) to the extent that any such loss,
claim, liability, damage or expense arises out of such indemnified person's
failure to send or give a copy of the revised Registration Statement or
final Prospectus, as the same may be then supplemented or amended, to the
Person asserting an untrue statement or alleged untrue statement or
omission or alleged omission at or prior to the written confirmation of the
sale of Registrable Shares to such Person if such statement or omission was
corrected in such revised Registration Statement or such final Prospectus
and the Company shall have made available to such indemnified person a
sufficient number of copies of such revised Registration Statement or such
final Prospectus in a timely manner so as to permit such Holder or the
Placement Agent to send or give a copy of the revised Registration
Statement or such final Prospectus containing such correction prior to the
written confirmation of the purchase and sale of such Registrable Shares;
(ii) from and against any and all loss, liability, claim and
damage whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, if such
settlement is effected with the written consent of the Company (which
consent shall not be unreasonably withheld or delayed); and
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(iii) from and against any and all expense reasonably incurred
(including reasonable fees and disbursements of counsel) in investigating,
preparing or defending against any litigation, or investigation or
proceeding by any governmental agency or body commenced or threatened, in
each case whether or not a party, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission, but only (A) to the extent that such expense was incurred in
connection with a matter referred to in (i) or (ii) above, (B) in the case
of (ii) above, to the extent that a reasonable estimate of such expenses
was provided to the Company before the settlement, and (C) in any case, to
the extent that any such expense is not paid under subparagraph (i) or (ii)
above;
provided, however, that this indemnity agreement does not apply to any Holder
with respect to any loss, liability, claim, damage or expense to the extent
arising out of any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with written information
furnished to the Company by such Holder expressly for use in a Registration
Statement (or any amendment thereto) or any Prospectus (or any amendment or
supplement thereto).
8.2 Indemnification by Holders. Each Holder, on a pro rata
--------------------------
basis, agrees to indemnify and hold harmless the Company, and trustees,
officers, employees, representatives and agents of the Company (including each
Controlling Person of the Company) against any and all loss, liability, claim,
damage and expenses described in the indemnity contained in Section 8.1 of this
Agreement (provided, however, that any settlement described in Section 8.1 of
this Agreement is effected with the written consent of such Holder), as
incurred, but only with respect to such untrue statements or omissions, or
alleged untrue statements or omissions, made in the Registration Statement (or
any amendment thereto) or any Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by the Holder or its underwriters, if any, expressly for use in
such Registration Statement (or any amendment thereto) or such Prospectus (or
any amendment or supplement thereto), and provided, further, that no Holder
shall be liable for any amount in excess of the proceeds received by such Holder
from the sale of such Holder's Registrable Shares pursuant to a Registration
Statement or a Prospectus, as the case may be.
8.3 Conduct of Indemnification Proceedings. Each indemnified
--------------------------------------
party shall give reasonably prompt written notice to each indemnifying party of
any action or proceeding commenced against it in respect of which indemnity may
be sought under this Agreement, but failure to so notify an indemnifying party
shall not relieve it from any liability which it may have under this indemnity
agreement, except to the extent that the indemnifying party is actually and
materially prejudiced by such failure to give written notice. If the
indemnifying party so elects within a reasonable time after receipt of such
written notice, the indemnifying party may assume the defense of such action or
proceeding at such indemnifying party's own expense with counsel chosen by the
indemnifying party and approved by the indemnified parties in such action or
proceeding, which approval shall not be unreasonably withheld; provided,
however, that, if such indemnified party or parties reasonably determines that a
conflict of interest exists where it is advisable for such indemnified party or
parties to be represented by separate counsel or that, upon advice of counsel,
there may be legal defenses available to them which are different from or in
addition to those available to the indemnifying
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party, then the indemnifying party shall not be entitled to assume such defense
and the indemnified party or parties shall be entitled to one separate counsel
(and any necessary local counsel) at the indemnifying party's expense. If an
indemnifying party is not entitled to assume the defense of such action or
proceeding as a result of the proviso to the preceding sentence, such
indemnifying party's counsel shall be entitled to conduct such indemnifying
party's defense and counsel for the indemnified party or parties shall be
entitled to conduct the defense of such indemnified party or parties, it being
understood that both such counsel will cooperate with each other to conduct the
defense of such action or proceeding as efficiently as possible. If an
indemnifying party is not so entitled to assume the defense of such action or
does not assume such defense, after having received the notice referred to in
the first sentence of this paragraph, the indemnifying party or parties will pay
the reasonable fees and expenses of not more than one counsel (and any necessary
local counsel) for the indemnified party or parties. In such event, however, no
indemnifying party will be liable for any settlement effected without the
written consent of such indemnifying party, which consent shall not be
unreasonably withheld or delayed. No indemnifying party shall, without the
consent of the indemnified party, consent to entry of any judgment or enter into
a settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation. If an indemnifying party is
entitled to assume, and assumes, the defense of such action or proceeding in
accordance with this paragraph, such indemnifying party shall not be liable for
any fees and expenses for counsel for the indemnified parties incurred
thereafter in connection with such action or proceeding.
8.4 Contribution. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnity agreement provided for in
this Section 8 is for any reason held to be unenforceable, unavailable or
insufficient although applicable in accordance with its terms, the Company and a
Holder shall contribute to the aggregate losses, liabilities, claims, damages
and expenses of the nature contemplated by such indemnity agreement incurred by
the Company and the Holder in such proportion as is appropriate to reflect the
relative fault of the Company, on the one hand, and the Holder, on the other
(taking into consideration the fact that the provisions of the registration
rights under this Agreement are a material inducement to the Holders to purchase
the Registrable Shares), in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. Relative fault shall be determined
by reference to, among other things, whether an untrue or alleged untrue
statement of a material fact or an omission or alleged omission of a material
fact relates to information supplied by or available to the Company, on the one
hand, or the Holder, on the other hand, and by the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. Notwithstanding the foregoing, no Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. No Holder shall be liable for any
amount in excess of the proceeds received from such Holder from the sale of such
Holder's Registrable Shares pursuant to a Registration Statement or a
Prospectus, as the case may be. For purposes of this Section 8, each Person, if
any, who is a Controlling Person of a Holder shall have the same rights to
contribution as such Holder, and each trustee of the Company, each officer of
the Company who signed the Registration Statement and each Person, if any, who
is a Controlling Person of the Company and each employee, representative or
agent of the Company shall have the same rights to contribution as the Company.
Each Person entitled
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to contribution agrees that upon the service of a summons or other initial legal
process upon it in any action instituted against it in respect of which
contribution may be sought, it shall promptly give written notice of such
service to the Person or Persons from whom contribution may be sought, but the
omission so to notify such Person or Persons of any such service shall not
relieve the Person from whom contribution may be sought from any obligation it
may have under this Agreement or otherwise unless failure to provide such
written notice actually prejudices such Person or Persons.
SECTION 9. MISCELLANEOUS.
9.1 Remedies. In the event of a breach by the Company or by
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a Holder of any of their obligations under this Agreement, each Holder or the
Company, in addition to being entitled to exercise all rights granted by law,
including recovery of damages, will be entitled to specific performance of its
rights under this Agreement. It is acknowledged and agreed that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach
of any of the provisions of this Agreement and hereby further agrees that, in
the event of any action for specific performance in respect of such breach, the
parties shall waive the defense that a remedy at law would be adequate.
9.2 Amendments and Waivers. The provisions of this
----------------------
Agreement, including the provisions of this sentence, may be amended, modified
or supplemented, and waivers or consents to departures from the provisions of
this Agreement may be given, with, but only with, the prior written consent of
the Company and the Holders beneficially owning not less than 50% of the then
outstanding Registrable Shares; provided, however, that, for the purposes of
this Agreement, Registrable Shares that are owned, directly or indirectly, by
either the Company or an Affiliate of the Company shall not be deemed to be
outstanding. Notwithstanding the foregoing, a waiver or consent to depart from
the provisions of this Agreement with respect to a matter that relates
exclusively to the rights of a Holder whose securities are being sold pursuant
to a Registration Statement and that does not directly or indirectly affect the
rights of any other Holder must be given by such Holder.
9.3 Notices. All notices and other communications provided
for in this Agreement shall be made in writing by hand-delivery, next-day air
courier, certified first-class mail, return receipt requested, telex or
telecopy;
(i) if to the Company, as provided in the Placement
Agency Agreement,
(ii) if to the Placement Agent, as provided in the
Placement Agency Agreement, or
(iii) if to any Holder, to the address of such Holder
as it appears in the stock register of the
Company.
Except as otherwise provided in this Agreement, all such
communications shall be deemed to have been duly given when (A) delivered by
hand, if personally delivered, (B) one Business Day after being timely delivered
to a next-day air courier, (C) five Business Days after
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being deposited in the mail, postage prepaid, if mailed, (D) when answered back,
if telexed, or (E) when receipt is acknowledged by the recipient's telecopier
machine, if telecopied.
9.4 Successors and Assigns. This Agreement shall inure to
----------------------
the benefit of and be binding upon the successors and permitted assigns of each
of the parties and shall inure to the benefit of each Holder. Each Holder shall
be deemed a third-party beneficiary of this Agreement. The Company may not
assign its rights or obligations under this Agreement without the prior written
consent of each Holder. Notwithstanding the foregoing, no assignee of the
Company shall have any of the rights granted under this Agreement until such
assignee shall acknowledge its rights and obligations under this Agreement by a
signed written agreement pursuant to which such assignee accepts such rights and
obligations.
9.5 Counterparts. This Agreement may be executed in any
------------
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and, all of which
taken together shall constitute one and the same Agreement.
9.6 Governing Law. This Agreement shall be governed by and
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construed in accordance with the laws of the State of New York, as applied to
contracts made and performed within the State of New York without regard to
principles of conflicts of law.
9.7 Severability. If any term, provision, covenant or
------------
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth in this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any such term, provision, covenant or restriction that may be
hereafter declared invalid, illegal, void or unenforceable.
9.8 Headings. The headings in this Agreement are for
--------
convenience of reference only and shall not limit or otherwise affect the
provisions of this Agreement. All references made in this Agreement to "Section"
refer to such Section of this Agreement, unless expressly stated otherwise.
9.9 Attorneys' Fees. In any action or proceeding brought to
---------------
enforce any provision of this Agreement, or where any provision of this
Agreement is validly asserted as a defense, the prevailing party, as determined
by the court, shall be entitled to recover its reasonable attorneys' fees in
addition to any other available remedy.
[Signature page follows.]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above.
"COMPANY"
NOVASTAR FINANCIAL, INC., a Maryland
corporation
By:__________________________________
W. Lance Anderson
President
The foregoing Agreement is hereby confirmed
and accepted for the benefit of each of the
Purchasers (and all subsequent Holders) as
of the date first above written.
"PLACEMENT AGENT"
STIFEL, NICOLAUS & COMPANY, INCORPORATED
By:________________________________________
Rick Maples
Senior Vice President
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<PAGE>
EXHIBIT 99.2
NovaStar Financial, Inc. Announces Issuance of Convertible Preferred Stock
WESTWOOD, Kan., March 30/PRNewswire/-- NovaStar Financial, Inc. (NYSE:
NFI), a non-conforming residential mortgage lender, announced today that it has
completed the issuance of 4,285,714 million shares of Cumulative Convertible
Preferred Stock (the "Preferred Stock") at a price of $7.00 per share, resulting
in total proceeds of $30 million, which includes $25 million acquired by Wallace
R. Weitz & Company.
Scott Hartman, Chairman and Chief Executive Officer stated, "The
consummation of this transaction brings out equity capital position back in line
with the level it was at during the 1998 third quarter. During the past six
months we have managed our loan production to our capital base and liquidity
resources. Although our short-term strategy is to continue to sell a majority of
loan originations, we are now in a position to focus on growing the mortgage
origination business back to its peak levels of 1998. We will return to
profitability in the first quarter and on April 15 we will pay the 1998 dividend
of $0.35 per share that was deferred to 1999."
NovaStar previously announced that each share of the Preferred Stock will:
(i) be convertible, at the option of the holder, into one share of common
stock; (ii) pay dividends at the rate of 7.0% per annum; and (iii) be redeemable
at par by the Company at any time after March 31, 2002. After consideration of
the Preferred Stock and warrants previously issued to GMAC/Residential Funding
Corporation and First Union National Bank, the Company's December 31, 1998 pro
forma book value per share (on a diluted basis) is $9.07.
This issuance of the Preferred Stock and the earlier issuance of warrants
in connection with financing arrangements entered into with First Union and
GMAC/RFC will result in a reduction of the effective exercise price for holders
of Novastar's December 9, 1996 warrants to acquire common stock at $15.00 per
share. Pursuant to anti-dilution provisions contained in the 1996 warrants, each
warrant exercised at $15.00 will purchase 1.29 shares of common stock, which
represents an effective exercise price of $11.62 per share. This new effective
exercise price is in effect without any further action required on the part of
warrantholders.
NovaStar Financial, Inc. is a real estate investment trust (REIT) that
invests in the single-family residential subprime mortgage loans originated by
its affiliates, NovaStar Mortgage, Inc. Mortgage loans in portfolio are financed
on a long-term basis through securitization transactions that issue collaterized
mortgage obligations accounted for as debt instruments. NovaStar Mortgage issues
asset-backed bonds in securitization transactions that are accounted for as
sales. NovaStar Financial, Inc. is located in Westwood, Kansas, a part of the
Kansas City metropolitan area. NovoStar Mortgage operates its wholesale lending
operation in Orange County, California, and its servicing operation in Westwood,
Kansas.
Certain matters discussed in this news release may constitute
forward-looking statements within the meaning of the federal securities laws
that inherently include certain risks and uncertainties. Actual results and the
timing of certain events could differ materially from those projected in or
contemplated by the forward-looking statements due to a number of factors,
including general economic conditions, fluctuations in interest rates, the
availability of subprime residential mortgage loans, the availability and access
to financing and liquidity resources, and other risk factors outlined in the
Company's 1998 annual report on Form 10-K.
