Commitment Letter - GE Capital Corp., NovaStar Financial Inc. and Stifel, Nicolaus & Co. Inc.
GE Capital
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Equity Capital Group
General Electric Capital Corporation
260 Long Ridge Road, Stamford, CT 05927
203-357-3100
October 3, 1996
NovaStar Financial, Inc.
1900 W. 47th Place
Westwood, Kansas 66205
Stifel, Nicolaus & Company, Incorporated
500 North Broadway
St. Louis, Missouri 63102
Gentlemen:
You have advised General Electric Capital Corporation ("GE Capital")
that NovaStar Financial, Inc. (the "Company") is seeking to consummate a
transaction to raise $15 million to $45 million of equity capital. We have
reviewed the information provided by you in connection with this proposed
investment. Based on the information that you have provided to date, and our
understanding of the transaction, GE Capital is pleased to issue its commitment
to invest $10 million in the Company, subject to the terms and conditions
contained in the term sheet attached hereto as Annex A (the "Term Sheet") and
included herein by reference and the following additional terms and conditions:
(i) The Company will provide evidence satisfactory to GE Capital as to
its legal, capital and tax structure and ownership, and copies of all documents,
as GE Capital may reasonably request;
(ii) The Company will be in compliance with all applicable federal,
state and local laws and regulations;
(iii) All governmental consents and regulatory approvals and third party
consents, if any, necessary to consummate the proposed transaction shall have
been obtained in form satisfactory to GE Capital; and
(iv) There will exist no litigation which could reasonably be expected
to have a material adverse effect on the financial condition, business, assets,
operations or prospects of the Company, or that challenges the transaction
contemplated hereby.
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This Commitment Letter is being delivered to you on the understanding
and on the condition that neither this Commitment Letter nor its substance shall
be disclosed publicly or privately by either Stifel, Nicolaus & Company,
Incorporated or the Company, except that this Commitment Letter may be disclosed
to those individuals who are, or upon consummation of the transaction
contemplated hereby will be, officers, employees or advisors of the Company who
have a need to know of it as a result of their being specifically involved in
the transaction contemplated hereby and then only on the condition that such
matters may not, except as required by law, be further disclosed. Except as
specifically permitted by the foregoing sentence, none of such persons shall,
except as required by law, use the name of or refer to GE Capital or any of its
affiliates, in any disclosure made in connection with the transaction
contemplated hereby without the prior written consent of GE Capital. Following
your acceptance of this Commitment Letter, reference may be made to this
Commitment Letter in the Private Placement Memorandum for the transactions
contemplated hereby provided that GE Capital reasonably approves of such
disclosure of this letter.
The Company agrees to indemnify and hold harmless GE Capital, its
affiliates and their respective officers, directors, employees, attorneys and
agents, and all persons controlling any of them or any of their affiliates
within the meaning of the Securities Act of 1933 or the Securities Exchange Act
of 1934 (all such persons being hereinafter referred to as "Indemnified
Persons"), whether or not the transaction contemplated hereby is consummated,
from and against all claims, losses, damages, liabilities or expenses of any
kind or nature whatsoever that may be incurred by or asserted against or involve
any Indemnified Person in any and all actions, suits, proceedings (including any
investigations or inquiries) or claims with respect to this Commitment Letter or
the transaction contemplated hereby (whether or not consummated), or the
preparation, execution and delivery of this Commitment Letter and the
documentation contemplated hereby, subject to the limitation on the
reimbursement of legal fees in connection with such documentation as provided in
the Term Sheet and exclusive of any loss resulting solely from a decline in
value of the Units purchased by GE Capital; and, upon demand by GE Capital, to
pay or reimburse any such Indemnified Person for any reasonable legal or other
expenses incurred in connection with investigating, defending or preparing to
defend or participating in any such action, suit, proceeding (including any
inquiry or investigation) or claim, whether commenced or threatened, it being
understood that GE Capital shall have the right to select its own counsel in
connection with such matters; provided, that the Company shall not be
responsible to any such Indemnified Person to the extent that any such losses,
damages, liabilities or expenses are determined by a final judgment of a court
of competent jurisdiction to be attributable solely to the gross negligence or
willful misconduct of such Indemnified Person. Under no circumstances shall GE
Capital or any other Indemnified Person be responsible for or liable to any
other party hereto or to any other person for consequential, indirect, punitive
or exemplary damages which may be alleged as a result of or in connection with
this Commitment
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Letter or the transaction contemplated hereby. The indemnification provisions
set forth herein shall apply whether or not any Indemnified Person is a party to
any such action, suit, proceeding or claim, and are expressly intended to cover,
but not be limited to, reimbursement of legal and other expenses, including
expenses incurred in depositions or other discovery proceedings. The indemnity
obligations hereunder shall be in addition to, and not in limitation of, any
other liability or obligations that the Company or any other person or entity
may have to any indemnified Person, at common law or otherwise, including but
not limited to any obligation of contribution.
GE Capital's offer of this commitment shall expire at the close of
business on October 7, 1996 unless accepted by you on or prior to such date. To
accept this offer, we ask that you return to GE Capital an executed copy of this
letter. Once accepted by you, GE Capital's commitment set forth herein shall
expire at 5:00 p.m. on November 11, 1996, unless the transaction contemplated
hereby shall have been consummated. Notwithstanding the expiration of GE
Capital's commitment hereunder, the obligations set forth herein with respect to
confidentiality and indemnification shall survive such expiration.
This letter: (i) may be executed in counterparts, each of which shall be
deemed an original and all of which counterparts shall constitute one and the
same document; (ii) shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York without regard to the
principles thereof regarding conflict of laws; (iii) supersedes any and all
discussions, negotiations, understandings or agreements, written or oral,
expressed or implied, between us regarding the transaction contemplated hereby;
and (iv) may not be contradicted by evidence of any actual or alleged prior,
contemporaneous or subsequent understandings or agreements of the parties
written or oral, expressed or implied, other than a writing which expressly
amends or supersedes this letter. There are no unwritten understandings or
agreements between the parties. THE PARTIES HAVING DETERMINED IT TO BE IN THEIR
BEST INTERESTS TO SECURE FOR THEMSELVES THE ADVANTAGES OF THE BEST ASPECTS OF
EACH OF ARBITRATION AND THE JUDICIAL SYSTEM, BY PRESERVING FOR THEMSELVES THE
RIGHT OF TRIAL BY JUDGE ALONE, EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER THIS
COMMITMENT LETTER, ANY TRANSACTION RELATING HERETO, OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH WHETHER
SOUNDING IN CONTRACT, TORT OR OTHERWISE.
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We look forward to working with you to bring the proposed transaction to
completion.
Very truly yours,
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ JEROME C. MARCUS
--------------------------------------
Name: Jerome C. Marcus
Title: Department Operations Manager
Accepted this day of October, 1996:
NOVASTAR FINANCIAL, INC.
By:
------------------------------
Name:
Title:
STIFEL, NICOLAUS & COMPANY, INCORPORATED
By:
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Name:
Title:
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Annex A
NovaStar Financial, Inc.
Summary of Proposed Principal Terms
Class A Convertible Preferred Stock
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Issuer: NovaStar Financial, Inc.(the "Company")
Purchaser: General Electric Capital Corporation ("GE Capital") or an
affiliate of GE Capital.
Amount: $10 million for 666,666 Units at $15 per Unit, provided that the
GE Capital minimum condition is satisfied.
Issue: All of the units (the Units") are being offered by the Company.
The closing of this offering (the "Offering" is expected to occur
on or about [November 8, 1996] and will involve at least
1,000,000. Units ($15 million, the Minimum Offering") excluding
Units purchased by Purchaser, and not exceed between 3,000,000
Units and 3,333,333 Units (between $45 million and $50 million;
the "Maximum Offering"). If the maximum amount of the offering ha
not been attained at the time of such closing, one or more
additional closings ("Additional Closings') may be affected, but
in no event will the last closing occur later than December 31,
1996. It is understood that it is a condition to the purchase
hereunder that at least, 1,666,666 Units ($25 million), including
the Units purchased by Purchaser, be sold.
Each Unit consists of one share of Class A Convertible Preferred
Stock. ("the Preferred Stock") and one Stock Purchase Warrant
("Warrant").
Issue Capit- The Company's Common Stock outstanding shall be equal to 100,000
alization share plus 5% of the total amount of Units issued in excess of
Common Stock 1,000,000 Units ("Founders' Stock"), and purchased by the
and Founders Founders for $.01 per share. The Founders intend to also purchase
Units: an amount closely approximately 40.000 Units issued in this
Offering which shall be paid for which cash by the Founders shall
purchase 100,000 Units plus outlined in "Issue" above, the
Founder shall purchase
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NovaStar Financial, Inc.
Page 2
October 3, 1996
through a full recourse Company forgivable loan,
carrying an 8% fixed interest rate with one year
pay-in-kind interest and current interest
payments thereafter, to be secured by the Units.
Further, to assist the Founders with the tax
consequences related to possible debt
forgiveness, the Company shall make a full
recourse loan to the Founders with a floating
interest rate, with interest paid currently at
Prime plus 2.5%. Such loan shall be
collateralized by the Units and be payable upon
the earlier of (i) the Founders selling the
related Units or shares thereof, or (ii) upon
the Founders leaving employment of the Company.
Issuer Capitalization-
Options: The Company shall reserve shares of Common Stock
for issuance upon the exercise of Options
granted to employees, officers and directors,
the number of which shall not exceed (a) 10% of
the Units issued in this Offering plus the
number of Founders' Forgivable Loan Units at any
time prior to a Qualified IPO, and (b) 10% of
the Company's outstanding Common Shares at any
time after a Qualified IPO. The number of such
options granted to the Founders in conjunction
with the closing of this Offering shall not
exceed 133,000 plus 6.7% of the Units issued in
this Offering in excess of 1,000,000 Units. Up
to 50,000 additional options shall be issued to
current and future employees of the Company, not
to include the Founders, and shall be issued at
exercise prices which range from approximately
$1 to $3 per share, with Dividend Equivalent
Rights ("DERs"). The options issued to Messrs.
Anderson and Hartman upon closing of the
Offering shall have an exercise price of $15 per
share. Such options issued to Messrs. Anderson
and Hartman shall vest upon a Qualified IPO and
remain restricted stock (i.e., not publicly
transferable) for a minimum of two years
following the Qualified IPO. Other than the
50,000 DERs mentioned above, the Company shall
not issue any other DERs. In addition, no stock
awards shall be issued by the Company.
Placement Agent
Warrants: Warrants may be granted to Stifel, Nicolaus &
Company, Incorporated in an amount equal to 3%
of the total Units issued in the Offering. The
exercise price for such Warrants shall be
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NovaStar Financial, Inc.
Page 3
October 3, 1996
$15/warrant share. In addition, Stifel, Nicolaus
& Company. Incorporated shall be paid a cash fee
at closing in an amount not to exceed 7% of the
total gross proceeds from the sale of Units in
the Offering.
Use of Proceeds: To fund, along with proceeds from short-term and
other collateralized borrowings, the Company's
origination of and investment in residential
sub-prime mortgage loans and residential
mortgage-backed securities. Pending completion
of the purchase of such assets, the proceeds of
the Offering may be invested in short-term
investments.
Dividends: The Company intends to distribute to
stockholders each year substantially all of its
net taxable income so as to qualify for the tax
benefits accorded to REITs under the Code. The
Company intends to make dividend distributions
at least quarterly. It is anticipated that the
first dividend distribution to stockholders
will be made promptly after the first full
fiscal quarter following completion of this
offering.
Until such time that a Conversion event has
taken place, all net income/dividends will be
paid to the Preferred Stock.
Warrants: Each Warrant entitles the holder thereof to
purchase one share (a "Warrant Share") of the
Company's Common Stock. The Warrants will be
exercisable within six months of a Qualified IPO
at an exercise price of $15 per share ("Warrant
Exercise Price") and remain exercisable for
three years following the initial exercise date.
The Warrants will be deemed exercised upon a
sale or liquidation of the Company which yields
a common stock distribution in excess of $15 per
share.
Warrants may be exercised by (i) paying the
Warrant Exercise Price in cash or (ii)
surrendering the appropriate number of common
shares or Warrants, where the value of such
common shares shall be the then market value of
the Company's common stock and the value of such
Warrants shall be the then market value of the
Company's common stock less the Warrant Exercise
Price.
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NovaStar Financial, Inc.
Page 4
October 3, 1996
Governance Provisions:
Voting Rights: Preferred Stockholders shall have the right to
vote with the common shareholders on all matters
submitted to a vote of shareholders of the
Issuer.
The affirmative vote of two-thirds of the
Preferred Stock outstanding is necessary for the
issuance of securities senior to or on a parity
with the Preferred Stock, the authorization or
issuance of securities convertible into such
senior or parity securities, the amendment of
the Certificate of Incorporation so as to
adversely affect the Preferred Stock, the
amendment of any of the terms of the Preferred
Stock, or the waiver of any other covenants and
other deal-specific class voting provisions.
This does not pertain to the initial public
offering. Shares of Class A Convertible
Preferred stock may be issued through permitted
Additional Closings.
Board
Representation: Purchaser shall have the right to appoint 1
director out of a total of no more than 6
authorized directors so long as it owns at least
10% of the outstanding common shares, assuming a
conversion of the Preferred Stock and full
exercise of all Warrants. Such director shall be
reasonably acceptable to the Company; it being
further understood that GE Capital will put
forth Jenne Britell as its nominee to represent
GE Capital on the Company's Board. A majority of
the Board members will be independent, non-
management directors. Moreover, such GE Capital
director shall be considered an independent
director.
In the event Purchaser does not appoint a
director, Purchaser shall have board observation
rights which will include the right to receive
all information provided to board members
(including all committees of the board) and
reimbursement of related expenses. The
Purchaser's board observation rights shall
terminate when the Purchaser has sold 80% of its
investment assuming full exercise of all
Warrants.
The reasonably acceptable GE Capital designee
shall be elected to the Board for a three-year
term prior to or simultaneously with the closing
of the Offering. The Founders shall agree that
so long as GE Capital is entitled to a director,
the Founders will vote as
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NovaStar Financial, Inc.
Page 5
October 3, 1996
directors and stockholders to nominate and to
elect such reasonably acceptable GE Capital
designee to the Board.
Special Meetings: A Special Meeting of the shareholders may be
called at the request of shareholders holding a
minimum of 20% of the Company's outstanding
shares or by a director. The Board of Directors
agrees that it will implement any resolution
adopted by a majority vote of the Company's
shareholders to sell or liquidate the Company.
Redemption Provisions:
Holder's Option to Redeem: In the event of a change of control, a merger,
consolidation or other combination by the
Company, or transfer of all or substantially all
of the Company's assets, the Purchaser shall
have the option to receive the greater of: (i)
what the common stock would have received if
conversion had occurred prior to the record
date, or (ii) 100% of the Liquidation Preference
of the Preferred Stock as provided under the
"Liquidation Preference" clause below.
Conversion Terms:
Automatic Conversion: Shares of Preferred Stock will convert to the
Company's Common Stock, par value $.01 per share
("Common Stock"), upon the closing of a firm
commitment underwriting by Stifel, Nicolaus &
Company, Incorporated or another nationally
recognized investment banking firm for an
initial public offering of the Common Stock
resulting in aggregate gross proceeds to the
Company of at least $20 million at a minimum
price of $15 per share ("a Qualified IPO"). The
size and minimum price of the Offering can only
be reduced and still be deemed a Qualified IPO
by an affirmative vote of the holders of two-
thirds of the Preferred Stock. Any such vote to
reduce the minimum price shall constitute a
waiver of anti-dilution protection with respect
to the Preferred Stock and Warrants resulting
from such issuance at a price below $15 per
share.
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NovaStar Financial, Inc.
Page 6
October 3, 1996
Optional Conversion: Three years following the last closing of the
Offering at the option of the holder.
Conversion Price: Each share of Preferred will convert into common
on a one-for-one basis provided that such
conversion price shall be appropriately adjusted
for any stock splits or similar transactions and
is subject to Anti-Dilution Provisions included
herein.
Covenants/Restrictions on Issuer:
Covenants: The Purchase Agreement and/or the Certificate of
Incorporation will contain usual and customary
covenants for this type of investment including,
but not limited to: (i) prohibitions on Common
Stock dividends until a Conversion event; (ii)
information requirements until a Qualified IPO;
(iii) approval by a majority of independent
directors of material increases in management
compensation; (iv) restrictions on affiliated
transactions; (v) prohibitions on entering
unrelated lines of business (including, but not
limited to, investments in commercial and multi-
family mortgages and mortgage backed securities
or other REITs); (vi) maintenance of Key Man
life insurance (as required under Conditions of
Purchase and Sale) for five years; (vii)
maintenance of the Company's status as a REIT;
and (viii) approval by a majority of the
independent directors for any changes in the
capital allocation guidelines and hedge
policies.
Following a Qualified IPO or, in the case of
clauses (v) and (vi) above, one year following
Qualified IPO, the provisions of clauses (iii)
through (vii) above may be modified or waived by
a majority of independent directors. During such
one-year period, clauses (v) and (vi) may be
waived by a unanimous vote of the Board of
Directors.
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NovaStar Financial, Inc.
Page 7
October 3, 1996
Other:
Indemnities: The Company shall indemnify Purchaser and its
directors, officers and employees against all
losses and damages resulting from the
transaction other than such losses and damages
which arise out of Purchaser's gross negligence
or willful misconduct.
Representations and
Warranties: Customary representations relating to
organization and qualification, authorization,
execution and delivery, validity and
enforceability of agreements, issuance of the
Preferred Stock, actions pending, compliance
with laws and environmental regulations,
governmental consent, insurance adequacy, no
conflict with agreements and charter provisions,
capitalization, taxes ERISA, and no material
adverse change.
Anti-Dilution Provisions: Conversion rights and the Warrant Exercise Price
will be adjusted to provide standard anti-
dilution protection, including adjustments for
extraordinary dividends, recapitalization, or
subdivisions, combinations or reclassifications
of common stock, issuance of shares at prices
below the higher of (a) $15 per share, and (b)
fair market value subject, however, to the
provisions relating to a Qualified IPO.
Registration Rights: GE Capital and each other purchaser of at least
5% of the Units in this Offering shall be
entitled to unlimited piggyback registration
rights provided that to the extent that the
underwriters require a "cut-back," GE Capital's
and such purchasers' shares shall be cut back
before the Company's, except that to the extent
the Company has or would be issuing more than
$50 million of securities in either of its first
two offerings the Company shall be cut back
first as to any securities in excess of $50
million. Such registrations and the ones
referred to below will be at the expense of the
Company, except that underwriting commissions
will be borne pro rata by the holders.
The Company will file a shelf registration at
the earlier of (i) six months after the
Qualified IPO, and (ii) twenty months following
the closing date provided that if a Qualified
IPO occurs within such 20-month period, the
shelf registration will be filed six months
thereafter. Such shelf registration shall remain
open for three years
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NovaStar Financial, Inc.
Page 8
October 3, 1996
from the closing date of this Offering. Each of
GE Capital and each other purchaser of at least
5% of the Units in this Offering shall further
have two demand registration rights following
the end of the shelf registration period to the
extent necessary for it to sell its shares in
compliance with applicable securities laws. GE
Capital shall not have such demand registration
rights if in the written opinion of the
Company's counsel, which opinion must be
reasonably acceptable to GE Capital and its
counsel, such registration is not necessary for
GE Capital to sell its shares in the manner
contemplated so as to comply with applicable
securities laws. The shelf registration
applicable to the shares issuable upon exercise
of the Warrants shall also be a primary
registration and shall remain effective so long
as the Warrants are outstanding. If requested by
GE Capital, the Company's management will
conduct roadshows to assist GE Capital in
selling its shares under the shelf offering or
demand offering.
Other Provisions:
Conditions of Purchase and
Sale: The purchase and sale of the Preferred Stock
would be subject to certain conditions,
including execution and delivery of all
necessary documentation in form and substance
satisfactory to GE Capital, satisfaction with
the Certificate of Incorporation and bylaws of
the Company, the satisfactory completion of all
business, financial and legal due diligence, the
receipt of opinions of the Company's counsel
satisfactory to the Purchaser (including as to
REIT status), the absence of the occurrence of
any material adverse event, receipt of all
agreements with management (including non-
competition agreements), all stock incentive
plans and other employee benefit plans in form
and substance satisfactory to GE Capital, the
obtaining of Key Man life insurance policies on
both Lance Anderson and Scott Hartman in the
amount of $5 million per individual, the
election of GE Capital's designee to the Board
for a three-year term, and receipt of a
satisfactory waiver or opinion of counsel so
that the restrictions on maximum ownership of
shares and the "Control Shares Provision" of
Maryland law shall not apply to GE Capital. It
is understood that no investor in this Offering
shall be offered any investment terms other than
as previously disclosed to GE Capital and set
forth in the written information previously
provided to GE Capital.
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[LETTERHEAD OF GE CAPITAL APPEARS HERE]
November 8, 1996
NovaStar Financial, Inc.
1900 W. 47th Place
Westwood, Kansas 62205
Stifel, Nicolaus & Company, Incorporated
500 North Broadway
St. Louis, Missouri 63102
Gentlemen:
Reference is made to the letter between us dated October 3, 1996,
pursuant to which General Electric Capital Corporation ("GE Capital"), issued
its commitment to invest $10 million (the "Commitment") in NovaStar Financial,
Inc. (the "Company"), subject to the terms and conditions contained therein (the
"Commitment Letter").
The Commitment Letter is hereby amended by changing the November 11,
1996 expiration date set forth in the first paragraph of page 2 thereof to
December 11, 1996. Further, the Company hereby confirms that if GE Capital
subscribes for $10,000,000 of the Units of the Company as contemplated by the
Commitment Letter, the Company will accept such subscription in full in
accordance with the terms of the Commitment Letter. Except as amended hereby,
the terms of the Commitment Letter shall remain in full force and effect.
This letter: (i) shall become effective only if accepted by you by
signing and returning a copy thereof to GE Capital by the close of business on
November 12, 1996, (ii) may be executed in counterparts, each of which shall be
deemed an original and all of which counterparts shall constitute one and the
same document, and (iii) shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York without regard to the
principles thereof regarding conflict of laws.
Very truly yours,
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ JEROME C. MARCUS
---------------------------------
Name: Jerome C. Marcus
Title: Department Operations Manager
Accepted this 12th day of November, 1996:
NOVASTAR FINANCIAL, INC.
By: /s/ W. LANCE ANDERSON
-------------------------------------
Name: W. Lance Anderson
Title: President
STIFEL, NICOLAUS & COMPANY, INCORPORATED
By: /s/ PATRICK KOSTER
--------------------------------------
Name: Patrick Koster
Title: Vice President