UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended
June 30, 2014
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period From
to
Commission File Number 001-13533
NOVATION COMPANIES, INC.
(Exact Name of Registrant as Specified in its Charter)
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Maryland
(State or Other Jurisdiction of Incorporation or Organization)
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74-2830661
(I.R.S. Employer Identification No.)
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2114 Central Street, Suite 600, Kansas City, MO
(Address of Principal Executive Office)
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64108
(Zip Code)
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Registrant's Telephone Number, Including Area Code:
(816) 237-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (
§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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o
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o
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o
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x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
The number of shares of the Registrant's Common Stock outstanding on
August 1, 2014
was 91,479,519.
NOVATION COMPANIES, INC.
FORM 10-Q
For the Quarterly Period Ended
June 30, 2014
TABLE OF CONTENTS
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Financial Information
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Other Information
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NOVATION COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; dollars in thousands, except share and per share amounts)
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June 30,
2014
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December 31,
2013
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Assets
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Current Assets
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Cash and cash equivalents
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$
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39,580
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$
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7,222
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Marketable securities, current
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16,530
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3,728
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Service fee receivable, net of allowance of $52 and $14, respectively
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934
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424
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Other current assets
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1,302
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1,648
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Current assets held for sale
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1,245
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2,098
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Current assets of discontinued operations
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—
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7,517
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Total current assets
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59,591
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22,637
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Non-Current Assets
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Marketable securities, non-current
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4,554
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—
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Property and equipment, net of accumulated depreciation
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3,873
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3,596
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Deferred income tax asset, net
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1,041
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1,101
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Other assets
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1,367
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760
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Non-current assets held for sale
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370
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431
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Non-current assets of discontinued operations
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—
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5,517
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Total non-current assets
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11,205
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11,405
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Total assets
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$
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70,796
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$
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34,042
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Liabilities and Shareholders' Equity (Deficit)
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Liabilities:
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Current Liabilities
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Accounts payable
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$
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2,723
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$
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2,391
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Deferred income tax liability, net
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1,041
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1,101
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Other current liabilities
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533
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1,561
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Current liabilities held for sale
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1,909
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1,817
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Current liabilities of discontinued operations
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—
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6,495
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Total current liabilities
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6,206
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13,365
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Non-Current Liabilities
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Senior notes
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84,957
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83,867
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Other liabilities
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1,359
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3,666
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Non-current liabilities held for sale
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1,504
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1,140
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Non-current liabilities of discontinued operations
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—
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224
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Total non-current liabilities
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87,820
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88,897
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Total liabilities
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94,026
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102,262
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Commitments and contingencies (Note 8)
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Shareholders' deficit:
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Capital stock, $0.01 par value per share, 120,000,000 shares authorized:
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Common stock, 91,479,519 shares issued and outstanding
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915
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915
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Additional paid-in capital
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743,663
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739,468
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Accumulated deficit
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(770,735
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)
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(811,742
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)
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Accumulated other comprehensive income
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2,927
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3,103
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Total Novation Companies, Inc. shareholders' deficit
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(23,230
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)
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(68,256
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)
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Noncontrolling interests
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—
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36
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Total shareholders' deficit
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(23,230
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)
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(68,220
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)
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Total liabilities and shareholders' deficit
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$
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70,796
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$
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34,042
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See notes to condensed consolidated financial statements.
NOVATION COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; dollars in thousands, except share and per share amounts)
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For the Six Months Ended
June 30,
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For the Three Months Ended
June 30,
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2014
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2013
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2014
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2013
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Income and Revenues:
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Service fee income
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$
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10,603
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$
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8,370
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$
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2,932
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$
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1,653
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Interest income – mortgage securities
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3,396
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2,405
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1,610
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1,488
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Total
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13,999
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10,775
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4,542
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3,141
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Costs and Expenses:
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Cost of services
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6,127
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4,817
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2,663
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1,278
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Selling, general and administrative expense
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12,969
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11,484
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6,596
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5,576
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Total
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19,096
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16,301
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9,259
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6,854
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Other income
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64
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1,445
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9
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161
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Interest expense
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(1,595
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(1,584
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(799
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(800
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Loss from continuing operations before income taxes
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(6,628
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(5,665
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(5,507
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(4,352
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Income tax (benefit) expense, continuing operations
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(7,230
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)
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27,666
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(7,258
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26,528
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Net income (loss) from continuing operations
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602
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(33,331
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1,751
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(30,880
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)
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Income from discontinued operations, net of income taxes
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40,405
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7,417
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38,493
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4,311
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Net income (loss)
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41,007
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(25,914
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)
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40,244
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(26,569
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Less: Net (loss) income attributable to noncontrolling interests
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—
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(77
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)
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(33
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)
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24
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Net income (loss) attributable to Novation
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$
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41,007
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$
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(25,837
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$
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40,277
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$
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(26,593
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)
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Earnings Per Share attributable to Novation:
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Basic
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$
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0.45
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$
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(0.28
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$
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0.44
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$
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(0.29
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)
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Diluted
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$
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0.45
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$
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(0.28
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)
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$
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0.44
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$
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(0.29
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)
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Weighted average basic shares outstanding
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90,866,933
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90,716,933
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90,866,933
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90,716,933
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Weighted average diluted shares outstanding
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90,904,092
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90,716,933
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90,940,843
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90,716,933
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See notes to condensed consolidated financial statements.
NOVATION COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; dollars in thousands)
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For the Six Months Ended
June 30,
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For the Three Months Ended
June 30,
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2014
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2013
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2014
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2013
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Net income (loss)
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$
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41,007
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$
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(25,914
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$
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40,244
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$
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(26,569
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)
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Other comprehensive income:
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Change in unrealized gain on mortgage securities – available-for-sale (Note 9)
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(176
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)
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(473
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)
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50
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146
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Total comprehensive income (loss)
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40,831
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(26,387
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)
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40,294
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(26,423
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)
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Comprehensive (loss) income attributable to noncontrolling interests:
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Less: Net (loss) income attributable to noncontrolling interests
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—
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(77
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)
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(33
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)
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24
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Total comprehensive income (loss) attributable to Novation
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$
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40,831
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$
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(26,310
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)
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$
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40,327
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$
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(26,447
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)
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See notes to condensed consolidated financial statements.
NOVATION COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(unaudited; dollars in thousands)
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Total Novation Shareholders’ Equity (Deficit)
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Common
Stock
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Additional
Paid-in
Capital
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Accumulated
Deficit
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Accumulated
Other
Comprehensive
Income
|
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Noncontrolling
Interests
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Total
Shareholders’
Equity (Deficit)
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Balance, December 31, 2013
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$
|
915
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$
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739,468
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$
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(811,742
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)
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$
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3,103
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$
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36
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$
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(68,220
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)
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Compensation recognized under stock compensation plans
|
—
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381
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—
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—
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—
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381
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Distributions to noncontrolling interests
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—
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—
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—
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—
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(5
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)
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(5
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)
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Exchange of membership interests for forgiveness of note payable
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—
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3,814
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|
—
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|
|
—
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|
107
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|
|
3,921
|
|
Deconsolidation of subsidiary
|
—
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|
—
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—
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|
—
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(138
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)
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(138
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)
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Net income
|
—
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|
|
—
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41,007
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|
—
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|
—
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41,007
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Other comprehensive loss
|
—
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|
|
—
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|
|
—
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|
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(176
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)
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—
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(176
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)
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Balance, June 30, 2014
|
$
|
915
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|
|
$
|
743,663
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|
|
$
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(770,735
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)
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|
$
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2,927
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|
$
|
—
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|
|
$
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(23,230
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)
|
|
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|
|
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|
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|
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Total Novation Shareholders’ Equity (Deficit)
|
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Common
Stock
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Additional
Paid-in
Capital
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|
Accumulated
Deficit
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Accumulated
Other
Comprehensive
Income
|
|
Noncontrolling
Interests
|
|
Total
Shareholders’
Equity (Deficit)
|
Balance, December 31, 2012
|
$
|
915
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|
$
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740,171
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|
|
$
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(744,213
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)
|
|
$
|
3,301
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|
|
$
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(2,198
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)
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|
$
|
(2,024
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)
|
Compensation recognized under stock compensation plans
|
—
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|
|
231
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|
|
—
|
|
|
—
|
|
|
—
|
|
|
231
|
|
Contributions from noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
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|
|
83
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|
|
83
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|
Distributions to noncontrolling interests
|
—
|
|
|
—
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|
|
—
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|
|
—
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|
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(384
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)
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|
(384
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)
|
Acquisition of noncontrolling interests
|
—
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(1,863
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)
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|
—
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|
—
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|
1,863
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|
|
—
|
|
Net loss
|
—
|
|
|
—
|
|
|
(25,837
|
)
|
|
—
|
|
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(77
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)
|
|
(25,914
|
)
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
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(473
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)
|
|
—
|
|
|
(473
|
)
|
Balance, June 30, 2013
|
$
|
915
|
|
|
$
|
738,539
|
|
|
$
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(770,050
|
)
|
|
$
|
2,828
|
|
|
$
|
(713
|
)
|
|
$
|
(28,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
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|
|
|
|
|
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|
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NOVATION COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; dollars in thousands)
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
2014
|
|
2013
|
Cash flows from operating activities:
|
|
|
|
Net income (loss)
|
$
|
41,007
|
|
|
$
|
(25,914
|
)
|
Net income from discontinued operations
|
40,405
|
|
|
7,417
|
|
Net income (loss) from continuing operations
|
602
|
|
|
(33,331
|
)
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Accretion of mortgage securities
|
(385
|
)
|
|
(373
|
)
|
Provision for (recovery of) bad debt, net
|
298
|
|
|
(1,051
|
)
|
Amortization of deferred debt issuance costs and senior debentures discount
|
1,090
|
|
|
1,051
|
|
Fair value adjustments
|
—
|
|
|
(150
|
)
|
Impairments of other assets held for sale
|
689
|
|
|
—
|
|
Loss on disposal of fixed assets
|
6
|
|
|
1
|
|
Compensation recognized under stock compensation plans
|
381
|
|
|
231
|
|
Depreciation expense
|
818
|
|
|
540
|
|
Deferred taxes
|
(7,230
|
)
|
|
27,600
|
|
Eliminations of intercompany activity
|
1,822
|
|
|
3,142
|
|
Changes in:
|
|
|
|
Due from discontinued operations
|
730
|
|
|
(366
|
)
|
Service fee receivable
|
(831
|
)
|
|
(181
|
)
|
Restricted cash
|
—
|
|
|
64
|
|
Other current assets and liabilities, net
|
529
|
|
|
474
|
|
Other noncurrent assets and liabilities, net
|
373
|
|
|
1,050
|
|
Deferred revenue
|
(82
|
)
|
|
6
|
|
Accounts payable and accrued expenses
|
(1,331
|
)
|
|
1,934
|
|
Net cash (used in) provided by operating activities of continuing operations
|
(2,521
|
)
|
|
641
|
|
Net cash (used in) provided by operating activities of discontinued operations
|
(2,480
|
)
|
|
3,779
|
|
Net cash (used in) provided by operating activities
|
(5,001
|
)
|
|
4,420
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Proceeds from paydowns of mortgage securities
|
385
|
|
|
404
|
|
Restricted cash, net
|
(3
|
)
|
|
—
|
|
Proceeds from paydowns of notes receivable
|
—
|
|
|
1,663
|
|
Issuance of notes receivable
|
—
|
|
|
(200
|
)
|
Proceeds from sale of subsidiary
|
54,748
|
|
|
—
|
|
Purchases of available-for-sale securities
|
(17,536
|
)
|
|
—
|
|
Purchase of cost method investment
|
(600
|
)
|
|
—
|
|
Purchases of property and equipment
|
(913
|
)
|
|
(1,420
|
)
|
Net cash provided by investing activities of continuing operations
|
36,081
|
|
|
447
|
|
Net cash used in investing activities of discontinued operations
|
(556
|
)
|
|
(33
|
)
|
Net cash provided by investing activities
|
35,525
|
|
|
414
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Cash payments for contributions of capital to discontinued operations
|
(1,054
|
)
|
|
(1,068
|
)
|
Cash receipts from distributions of earnings from discontinued operations
|
—
|
|
|
4,031
|
|
Principal payments under capital leases
|
(148
|
)
|
|
(110
|
)
|
Paydowns of note payable to related party
|
—
|
|
|
(250
|
)
|
Net cash (used in) provided by financing activities of continuing operations
|
(1,202
|
)
|
|
2,603
|
|
Net cash provided by (used in) financing activities of discontinued operations
|
991
|
|
|
(3,322
|
)
|
Net cash used in financing activities
|
(211
|
)
|
|
(719
|
)
|
|
Continued
|
|
|
|
|
|
|
|
|
|
|
NOVATION COMPANIES, INC.
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
(unaudited; dollars in thousands)
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
2014
|
|
2013
|
|
|
|
|
Net increase in cash and cash equivalents of continuing operations
|
$
|
32,358
|
|
|
$
|
3,691
|
|
Cash and cash equivalents, beginning of period
|
7,222
|
|
|
8,851
|
|
Cash and cash equivalents, end of period
|
$
|
39,580
|
|
|
$
|
12,542
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents of discontinued operations
|
$
|
(2,045
|
)
|
|
$
|
424
|
|
Cash and cash equivalents, beginning of period
|
2,045
|
|
|
7,511
|
|
Cash and cash equivalents, end of period
|
$
|
—
|
|
|
$
|
7,935
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(unaudited; dollars in thousands)
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
2014
|
|
2013
|
Cash paid for interest
|
$
|
551
|
|
|
$
|
278
|
|
Cash received from income taxes, net
|
37
|
|
|
21
|
|
Cash received on mortgage securities – available-for-sale with no cost basis
|
3,011
|
|
|
2,032
|
|
Non-cash investing and financing activities:
|
|
|
|
Exchange of membership interests for forgiveness of note payable
|
3,921
|
|
|
—
|
|
Acquisition of noncontrolling interest for extinguishment of intercompany debt
|
—
|
|
|
1,863
|
|
Assets acquired under capital lease
|
140
|
|
|
294
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
|
|
|
|
NOVATION COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the period ended
June 30, 2014
(Unaudited)
Note 1. Financial Statement Presentation
Description of Operations –
Novation Companies, Inc. (the “Company” or "Novation" or "we” or “us”) acquires and operates technology-enabled service businesses, with a focus on building and developing these businesses to create long-term value.
The Company owns
100%
of CorvisaCloud, LLC ("CorvisaCloud"). CorvisaCloud provides cloud-based communication software under the CorvisaOne™ brand and implementation consulting services for its own clients as well as clients of a leading customer relationship management (CRM) software provider.
The Company owns
100%
of Advent Financial Services LLC (“Advent”). Advent provides financial settlement services for professional tax preparers nationwide. On June 6, 2014 the Company announced that it was exploring alternatives for Advent with the goal of selling or exiting the business by the end of 2014. As a result, the operations of Advent will be included in continuing operations until the date on which the business is sold or, in the event the business is abandoned, the run-off operations have ceased. The assets and liabilities of Advent have been classified as held for sale as of June 30, 2014. See Note 3 to the condensed consolidated financial statements for additional information regarding these developments.
On April 16, 2014, the Company and the non-controlling members of StreetLinks, a national residential appraisal and mortgage real estate valuation management services company, entered into a purchase and sale agreement with Assurant Services, LLC, a subsidiary of Assurant, Inc. ("Assurant"), pursuant to which Assurant purchased 100% of the outstanding membership units of StreetLinks. This transaction closed on April 16, 2014. See
Note 3
to the condensed consolidated financial statements for additional information regarding this transaction. The operations of StreetLinks have been classified as discontinued operations for all periods presented.
Effective February 27, 2013 the Company and non-controlling owners agreed to dissolve Mango Moving, LLC ("Mango"), a third-party logistics provider within the household goods industry, and abandon its operations. As discussed in
Note 3
, the operations of Mango have been classified as discontinued operations for all periods presented.
Financial Statement Presentation –
The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the period. The Company uses estimates and judgments in establishing the fair value of its mortgage securities and accounting for income taxes, including the determination of the timing of the establishment or release of the valuation allowance related to the deferred tax asset balances and reserves for uncertain tax positions. While the condensed consolidated financial statements and footnotes reflect the best estimates and judgments of management at the time, actual results could differ significantly from those estimates.
Cash equivalents consist of liquid investments with an original maturity of three months or less. Cash equivalents are stated at cost, which approximates fair value.
The condensed consolidated financial statements of the Company include the accounts of all wholly-owned and majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
The Company's condensed consolidated financial statements are unaudited. In the opinion of management, all necessary adjustments have been made, which were of a normal and recurring nature, for a fair presentation of the condensed consolidated financial statements.
The Company's condensed consolidated financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements of the Company and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2013
.
Note 2. New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. Compared with current U.S. GAAP, the ASU also requires significantly expanded disclosures about revenue recognition. The ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early application is not permitted. The Company is evaluating the impact of ASU 2014-09 on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the definition of a discontinued operation in ASC 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-operations criteria. The FASB issued the ASU to provide more decision-useful information and to make it more difficult for a disposal transaction to qualify as a discontinued operation. The ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. The impact of the adoption of ASU 2014-08 on the Company's financial statements will be based on future disposal activity.
In September 2013, the U.S. Department of the Treasury and the IRS released final regulations providing guidance on the application of IRC Section 263(a) to amounts paid to acquire, produce, or improve tangible property, as well as rules for materials and supplies (“Tangible Property Regulations”). While the Tangible Property Regulations are generally effective for taxable years beginning on or after January 1, 2014, taxpayers are permitted to early adopt provisions for years beginning on or after January 1, 2012. This guidance did not have a significant impact on the Company's financial statements.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force), which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB's objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date and is effective for fiscal years beginning after December 15, 2013, and interim periods within those years. This guidance did not have a significant impact on the Company's financial statements.
Note 3
. Divestitures
Held for Sale
Advent Financial Services, LLC (Financial Intermediary Segment)
On April 16, 2014 the Company announced a significant strategic shift with the sale of StreetLinks, which is discussed below, and the decision to focus our resources primarily on the business of CorvisaCloud. This decision was based largely on the Company's firm belief that CorvisaCloud represents a better opportunity for Novation to build long-term shareholder value. On June 6, 2014 the Company announced that it was exploring alternatives for Advent with the goal of selling or exiting the business by the end of 2014. As a result, the operations of Advent will be included in continuing operations until the date on which the business is sold or, in the event the business is abandoned, the run-off operations have ceased. Based on the Company's analysis of the facts and circumstances existing as of June 30, 2014, which included an assessment as to the progress of discussions with potential buyers, the Company classified Advent as held for sale in accordance with the relevant accounting guidance.
The major classes of assets and liabilities held for sale as of June 30, 2014 and December 31, 2013 are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31,
2013
|
Assets
|
|
|
|
|
Current Assets
|
|
|
|
|
Service fee receivable, net
|
|
92
|
|
|
69
|
|
Restricted cash, current
|
|
1,035
|
|
|
1,035
|
|
Other current assets
|
|
118
|
|
|
994
|
|
Total current assets
|
|
1,245
|
|
|
2,098
|
|
Non-Current Assets
|
|
|
|
|
Property and equipment, net of accumulated depreciation
|
|
359
|
|
|
420
|
|
Other assets
|
|
11
|
|
|
11
|
|
Total non-current assets
|
|
370
|
|
|
431
|
|
Total assets
|
|
$
|
1,615
|
|
|
$
|
2,529
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
39
|
|
|
$
|
103
|
|
Accrued expenses
|
|
1,839
|
|
|
1,669
|
|
Due to Novation (A)
|
|
1,430
|
|
|
5,650
|
|
Other current liabilities
|
|
31
|
|
|
45
|
|
Total current liabilities
|
|
3,339
|
|
|
7,467
|
|
Non-Current Liabilities
|
|
|
|
|
Other liabilities
|
|
1,504
|
|
|
1,140
|
|
Total non-current liabilities
|
|
1,504
|
|
|
1,140
|
|
Total liabilities
|
|
$
|
4,843
|
|
|
$
|
8,607
|
|
|
|
|
|
|
|
|
(A)
|
Amounts due to Novation are eliminated upon consolidation. As such, these amounts are not included in the consolidated balance sheets for any periods presented.
|
Discontinued Operations
StreetLinks, LLC (Appraisal Management Segment)
On April 16, 2014, the Company and non-controlling members of StreetLinks (the "Sellers") entered into a purchase and sale agreement with Assurant, pursuant to which Assurant purchased 100% of the outstanding membership units of StreetLinks in exchange for
$60.0 million
paid in cash at closing and up to
$12.0 million
in post-closing consideration contingent upon the total revenue of StreetLinks in fiscal years 2015 and 2016. The sale closed on April 16, 2014. The Company received approximately
$53.9 million
in cash proceeds at closing, of which
$1.0 million
was used to make certain earned bonus payments to three StreetLinks executives. Subsequent to closing, the Company received an additional
$0.8 million
relating to adjustments for working capital.
The post-closing consideration provides for payment if (a) the total revenue of StreetLinks is
$184 million
or more for calendar year 2015, Assurant shall pay to the Sellers an aggregate of
$12.0 million
; but if not, then (b) if the total revenue of StreetLinks is greater than
$167.5 million
for the calendar year 2016, Assurant shall pay to Sellers up to an aggregate of
$12.0 million
, based on a linear scale where full payment of the
$12.0 million
would occur at total revenue of
$184 million
. The post-closing consideration will be reduced for certain earned bonus payments to three StreetLinks executives of
$2.0 million
if the maximum post-closing consideration is earned and otherwise prorated based on the same linear scale.
The transaction resulted in a gain of approximately
$48.2 million
, which is included in the net income from discontinued operations line on the condensed consolidated statement of operations. Also included in net income from discontinued operations are approximately
$1.8 million
of transaction-related expenses, such as legal and consulting fees.
In connection with the sale, the Company and Assurant also entered into a transition services agreement, pursuant to which the Company will provide ongoing information technology, human resources management and accounting services to StreetLinks for a period of up to eighteen months. The cash flows related to these services are not significant to StreetLinks. The Company will have no significant continuing involvement with StreetLinks beyond the transition services. Professional service fees earned by
the ongoing entity under the transition services agreement are included in service fee income on the condensed consolidated statement of operations.
The Company has also executed a Non-Competition, Non-Solicitation and Non-Disclosure Agreement with StreetLinks providing that Novation will be prohibited from competing in the real estate appraisal management or valuation services business for a period of four years.
Mango Moving LLC (Logistics Segment)
Because of continued capital demands and difficulties generating positive cash flows or earnings, effective February 27, 2013, the Company committed to a plan to abandon the operations of Mango, which comprised the Company's entire Logistics segment. The run-off operations of Mango ceased during the first quarter of 2013, and the Company will not have any significant continuing involvement in Mango.
Results of Discontinued Operations
For the six and three months ended June 30, 2014, net income from discontinued operations consists of the net operating income and losses of the disposed entities and any necessary eliminations through the date of sale or disposal, the gain on the sale of StreetLinks, income tax expense, and transaction-related expenses. For the six and three month periods ended June 30, 2013, net income (loss) from discontinued operations consists solely of the net operating income and losses of the disposed entities and any necessary eliminations.
The results of the Company's discontinued operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
For the Three Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Service fee income
|
$
|
29,131
|
|
|
$
|
84,310
|
|
|
$
|
5,247
|
|
|
$
|
43,165
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before income taxes
|
$
|
48,232
|
|
|
$
|
7,417
|
|
|
$
|
46,320
|
|
|
$
|
4,311
|
|
Income tax expense
|
7,827
|
|
|
—
|
|
|
7,827
|
|
|
—
|
|
Income from discontinued operations, net of income taxes
|
$
|
40,405
|
|
|
$
|
7,417
|
|
|
$
|
38,493
|
|
|
$
|
4,311
|
|
|
|
|
|
|
|
|
|
The major classes of assets and liabilities of discontinued operations as of December 31, 2013 are detailed below. There were no remaining assets or liabilities of discontinued operations as of June 30, 2014
|
|
|
|
|
|
|
|
December 31,
2013
|
Assets
|
|
|
Current Assets
|
|
|
Cash and cash equivalents
|
|
$
|
2,045
|
|
Service fee receivable, net
|
|
4,781
|
|
Other current assets
|
|
691
|
|
Total current assets
|
|
7,517
|
|
Non-Current Assets
|
|
|
Property and equipment, net of accumulated depreciation
|
|
909
|
|
Goodwill
|
|
3,170
|
|
Other assets
|
|
1,438
|
|
Total non-current assets
|
|
5,517
|
|
Total assets
|
|
$
|
13,034
|
|
|
|
|
Liabilities
|
|
|
Current Liabilities
|
|
|
Accounts payable
|
|
$
|
3,122
|
|
Accrued expenses
|
|
2,574
|
|
Deferred revenue
|
|
621
|
|
Due to Novation (A)
|
|
717
|
|
Other current liabilities
|
|
178
|
|
Total current liabilities
|
|
7,212
|
|
Non-Current Liabilities
|
|
|
Other liabilities
|
|
224
|
|
Total non-current liabilities
|
|
224
|
|
Total liabilities
|
|
$
|
7,436
|
|
|
|
|
|
|
(A)
|
Amounts due to Novation are eliminated upon consolidation. As such, these amounts are not included in the consolidated balance sheets for any periods presented.
|
Note 4
. Marketable Securities
The following table presents certain information on the Company's portfolio of available-for-sale securities as of
June 30, 2014
and
December 31, 2013
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014
|
Description of Securities
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Marketable securities, current
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
$
|
6,850
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
6,848
|
|
Agency securities
|
6,130
|
|
|
—
|
|
|
—
|
|
|
6,130
|
|
Mortgage securities
|
625
|
|
|
2,927
|
|
|
—
|
|
|
3,552
|
|
Total
|
$
|
13,605
|
|
|
$
|
2,927
|
|
|
$
|
(2
|
)
|
|
$
|
16,530
|
|
|
|
|
|
|
|
|
|
Marketable securities, non-current
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
$
|
4,556
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
4,554
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
Description of Securities
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Marketable securities, current
|
|
|
|
|
|
|
|
Mortgage securities
|
$
|
625
|
|
|
$
|
3,103
|
|
|
$
|
—
|
|
|
$
|
3,728
|
|
|
|
|
|
|
|
|
|
Prior to 2008, the Company originated, purchased, securitized, sold, invested in and serviced residential nonconforming mortgage loans and mortgage securities. As a result of those activities, we acquired mortgage securities that continue to be a source of our earnings and cash flow. As of
June 30, 2014
and
December 31, 2013
, these mortgage securities consisted entirely of the Company's investment in the residual securities issued by securitization trusts sponsored by the Company. Residual securities consist of interest-only, prepayment penalty and overcollateralization bonds.
There were
no
other-than-temporary impairments relating to available-for-sale securities for the
six and three months ended June 30, 2014 and 2013
. The average remaining maturities of the Company’s short-term and long-term available-for-sale investments at June 30, 2014 were approximately
six
months and
fifteen
months, respectively. Maturities of mortgage securities owned by the Company depend on repayment characteristics and experience of the underlying financial instruments. See
Note 9
to the condensed consolidated financial statements for details on the Company's fair value methodology.
Variable Interest Entities
The following table relates to the securitizations where the Company retained an interest in the assets issued by the securitization trust, a variable interest entity or VIE (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Size/Principal Outstanding (A)
|
|
Assets on Balance Sheet (B)
|
|
Liabilities on Balance Sheet
|
|
Maximum Exposure to Loss(C)
|
|
Year to Date Loss on Sale
|
|
Year to Date Cash Flows (D)
|
June 30, 2014
|
$
|
4,295,594
|
|
|
$
|
3,552
|
|
|
$
|
—
|
|
|
$
|
3,552
|
|
|
$
|
—
|
|
|
$
|
3,395
|
|
December 31, 2013
|
4,811,987
|
|
|
3,728
|
|
|
—
|
|
|
3,728
|
|
|
—
|
|
|
2,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Size/principal outstanding reflects the estimated principal of the underlying assets held by the VIE.
|
|
|
(B)
|
Assets on balance sheet are securities issued by the entity and are recorded in the mortgage securities line item on the condensed consolidated balance sheets.
|
|
|
(C)
|
The maximum exposure to loss includes the assets held by the Company and assumes a total loss on the referenced assets held by the VIE.
|
|
|
(D)
|
Year to date cash flows are for the
six months ended June 30, 2014 and 2013
, respectively.
|
Note 5
. Business Combinations and Consolidation
Prior to 2013, the Company entered into a Membership Interest Purchase Agreement (the "Unit Purchase Agreement") with its Chief Operating Officer, Mr. Steve Haslam, pursuant to which Mr. Haslam sold
1,927
units in StreetLinks to the Company in exchange for a total purchase price of
$6.1 million
, payable in quarterly installments. At the time of the original transaction, Mr. Haslam's units represented approximately
5%
of the outstanding StreetLinks membership units. On April 16, 2014, the Company and Mr. Haslam agreed to terminate the Unit Purchase Agreement. In full satisfaction of the Company's outstanding obligations under the Unit Purchase Agreement, which are discussed further in
Note 7
to the condensed consolidated financial statements, the Company transferred back to Mr. Haslam
1,218
StreetLinks membership units (approximately
3%
of StreetLinks), which represents the portion of the membership units attributable to the
$3.9 million
in unpaid installment payments and
$0.2 million
in interest remaining under the Unit Purchase Agreement. The termination of the Unit Purchase Agreement and simultaneous transfer of
1,218
StreetLinks membership units to Mr. Haslam reduced the Company's ownership interest to approximately
88%
as of April 16, 2014.
During the fourth quarter of 2013, the Company, through a series of transactions with the minority owners of CorvisaCloud, acquired an additional
15%
ownership stake in CorvisaCloud for a total purchase price of approximately
$0.6 million
. These transactions increased the Company's ownership interest in CorvisaCloud to
100%
as of December 31, 2013.
Prior to 2013, Advent entered into a revolving note and revolving credit agreement with the Company whereby the noncontrolling members of Advent pledged their membership interests as security for Advent's obligations under the agreements. As a result of Advent's default under the agreements, during the second quarter of 2013 the Company foreclosed on the membership interests of the noncontrolling members in full satisfaction of Advent's outstanding intercompany debt obligations. At the time of foreclosure, Advent's noncontrolling members held approximately
22%
of the outstanding membership interests. Therefore, the foreclosure raised the Company's ownership interest in Advent to
100%
as of December 31, 2013. In accordance with the relevant accounting guidance, this debt extinguishment was treated as an equity transaction, reducing both additional paid in capital and Advent's noncontrolling interest deficit by approximately
$1.9 million
on a consolidated basis with no corresponding gain or loss recognized in the condensed consolidated statement of operations.
Note 6. Property and Equipment, Net
All of the Company's property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. The estimated useful lives of the Company's property and equipment are the lesser of
5
years or remaining lease term for leasehold improvements,
5
years for furniture and fixtures,
3
to
5
years for office and computer equipment, and
3
years for software.
Maintenance and repairs are charged to expense. Major renewals and improvements are capitalized. Gains and losses on dispositions are credited or charged to earnings as incurred. Depreciation and amortization expense relating to property and equipment was
$0.8 million
and
$0.4 million
for the
six and three months ended June 30, 2014
, respectively and
$0.5 million
and
$0.3 million
for the
six and three months ended June 30, 2013
, respectively.
The following table shows the Company's property and equipment, net as of
June 30, 2014
and
December 31, 2013
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
Furniture, fixtures and office equipment
|
$
|
592
|
|
|
$
|
509
|
|
Hardware and computer equipment
|
2,681
|
|
|
2,382
|
|
Software
|
2,714
|
|
|
2,309
|
|
Leasehold improvements
|
757
|
|
|
727
|
|
Total Cost
|
6,744
|
|
|
5,927
|
|
Less: Accumulated depreciation and amortization
|
(2,871
|
)
|
|
(2,331
|
)
|
Property and equipment, net
|
$
|
3,873
|
|
|
$
|
3,596
|
|
|
The hardware and computer equipment amount above includes gross assets under capital leases of
$0.7 million
as of both
June 30, 2014
and
December 31, 2013
. Accumulated depreciation and amortization relating to these assets totaled approximately
$0.4 million
and
$0.3 million
as of
June 30, 2014
and
December 31, 2013
, respectively.
Note 7
. Borrowings
Senior Notes
–
The Company has outstanding unsecured senior notes pursuant to three indentures (collectively, the “Senior Notes”) with an aggregate principal balance of
$85.9 million
. The Senior Notes were created through an exchange of the Company's previously outstanding junior subordinated notes that occurred prior to 2012. This exchange was considered a modification of a debt instrument for accounting purposes, therefore the Company uses the effective interest method to accrete from the existing balances of
$85.0 million
and
$83.9 million
as of
June 30, 2014
and
December 31, 2013
, respectively to the aggregate principal balance of
$85.9 million
.
The Senior Notes accrue interest at a rate of
1.0%
until the earlier of (a) the completion of an equity offering by the Company or its subsidiaries that results in proceeds of
$40 million
or more or (b) January 1, 2016. Thereafter, the Senior Notes will accrue interest at a rate of
three-month LIBOR
plus
3.5%
(the “Full Rate”). Interest on the Senior Notes is paid on a quarterly basis and no principal payments are due until maturity on March 30, 2033.
The indentures governing the Senior Notes (the “Indentures”) contain certain restrictive covenants (the “Negative Covenants”) subject to certain exceptions in the Indentures, including written consent of the holders of the Senior Notes. The Negative Covenants prohibit the Company and its subsidiaries, from among other things, incurring debt, permitting any lien upon any of its property or assets, making any cash dividend or distribution or liquidation payment, acquiring shares of the Company or its subsidiaries, making payment on debt securities of the Company that rank
pari passu
or junior to the Senior Notes, or disposing of any equity interest in its subsidiaries or all or substantially all
of the assets of its subsidiaries. The Negative Covenants remain in effect until both of the following conditions are met: 1) the Senior Notes begin accruing interest at the Full Rate, and 2) the Company satisfies certain financial covenants (the “Financial Covenants”). Satisfaction of the Financial Covenants requires the Company to demonstrate on a consolidated basis that (1) its Tangible Net Worth is equal to or greater than
$40 million
, and (2) either (a) the Interest Coverage Ratio is equal to or greater than
1.35
x, or (b) the Leverage Ratio is not greater than
95%
. As the Senior Notes were not accruing interest at the Full Rate, the Negative Covenants, as defined above, were still in effect as of
June 30, 2014
and
December 31, 2013
. Compliance with the Financial Covenants is required only when the Company seeks to take action prohibited by the Negative Covenants that has not been approved by the holders of the Senior Notes.
As discussed in
Note 3
, the Company and the non-controlling members of StreetLinks entered into a purchase and sale agreement with Assurant, pursuant to which Assurant purchased 100% of the outstanding membership units of StreetLinks. The sale of a subsidiary is not prohibited by the Negative Covenants provided that the sale is at fair market value and the proceeds are reinvested in the Company. As such, the Company was in compliance with all Negative Covenants as of
June 30, 2014
and
December 31, 2013
, and therefore the Company was under no obligation to comply with the Financial Covenants during these periods.
Note Payable to Related Party
– As detailed in
Note 3
, on April 16, 2014, the Company and Mr. Haslam agreed to terminate the Unit Purchase Agreement. In full satisfaction of the Company's outstanding obligation under the Unit Purchase Agreement, the Company transferred back to Mr. Haslam
1,218
StreetLinks membership units, which represents the portion of the membership units attributable to the
$3.9 million
in unpaid installment payments and
$0.2 million
in interest remaining under the Unit Purchase Agreement.
As of December 31, 2013, current maturities of the note payable to Mr. Haslam under the Unit Purchase Agreement of approximately
$1.3 million
and noncurrent maturities of
$2.6 million
are included in the other current liabilities and other liabilities line items, respectively, in the Company's condensed consolidated balance sheets.
Capital Leases
–
The Company leases hardware and computer equipment under capital leases. These capital leases are payable in
36
monthly installments and mature between
August 2014
and
June 2017
. Current maturities of obligations under capital leases were approximately
$0.2 million
as of both
June 30, 2014
and
December 31, 2013
. Noncurrent maturities of obligations under capital leases were approximately
$0.2 million
as of both
June 30, 2014
and
December 31, 2013
, respectively. Due to the immaterial nature of these obligations with regard to the Company's financial statements as a whole, current maturities and noncurrent maturities of capital leases are included in the other current liabilities and other liabilities line items, respectively, in the Company's condensed consolidated balance sheets.
Note 8
. Commitments and Contingencies
Contingencies
–
Prior to 2008, the Company originated, purchased, securitized, sold, invested in and serviced residential nonconforming mortgage loans and mortgage securities. The Company has received indemnification and loan repurchase demands with respect to alleged violations of representations and warranties (“defects”) made in loan sale and securitization documents. These demands have been received substantially beginning in 2006 and have continued into
2014
. Prior to the Company ceasing the origination of loans in its mortgage lending business, it sold loans to securitization trusts and other third parties and agreed to repurchase a loan due to missing documentation or breaches of representations or warranties made in sale documents that materially adversely affected the value of the loan. Beginning in 1997 and ending in 2007, affiliates of the Company sold loans to securitization trusts and third parties with the potential of such repurchase obligations. The aggregate original principal balance of these loans was
$43.1 billion
at the time of sale or securitization. The remaining principal balance of
these loans is not available as these loans are serviced by third parties and may have been refinanced, sold or liquidated. Claims to repurchase loans or to indemnify under securitization documents have not been acknowledged as valid by the Company. In some cases, claims were made against affiliates of the Company that have ceased operations and have no or limited assets. The Company has not repurchased any loans or made any such indemnification payments since 2010.
Historically, repurchases of loans or indemnification of losses where a loan defect has been alleged have been insignificant and any future losses for alleged loan defects have not been deemed to be probable or reasonably estimable; therefore, the Company has recorded no reserves related to these claims. The Company does not use internal groupings for purposes of determining the status of these loans. The Company is unable to develop an estimate of the maximum potential amount of future payments related to repurchase demands because the Company does not have access to information relating to loans sold and securitized and the number or amount of claims deemed probable of assertion is not known nor is it reasonably estimated. Further, the validity of claims received remains questionable. Also, considering that the Company completed its last sale or securitization of loans during 2007, the Company believes that it will be difficult for a claimant to successfully validate any additional repurchase demands. Management does not expect that the potential impact of claims will be material to the Company's financial statements.
Pending Litigation
–
The Company is a party to various legal proceedings. Except as set forth below, these proceedings are of an ordinary and routine nature.
Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than the active proceedings described in detail below, proceedings and actions against the Company should not, individually, or in the aggregate, have a material effect on the Company's financial condition, operations and liquidity. Furthermore, due to the uncertainty of any potential loss as a result of pending litigation and due to the Company's belief that an adverse ruling is not probable, the Company has not accrued a loss contingency related to the following matters in its consolidated financial statements. However, a material outcome in one or more of the active proceedings described below could have a material impact on the results of operations in a particular quarter or fiscal year.
On May 21, 2008, a purported class action case was filed in the Supreme Court of the State of New York, New York County, by the New Jersey Carpenters' Health Fund, on behalf of itself and all others similarly situated. Defendants in the case included NovaStar Mortgage Funding Corporation (
“
NMFC
”
), a wholly-owned subsidiary of the Company, and its individual directors, several securitization trusts sponsored by the Company ("affiliated defendants") and several unaffiliated investment banks and credit rating agencies. The case was removed to the United States District Court for the Southern District of New York. On June 16, 2009, the plaintiff filed an amended complaint. The plaintiff seeks monetary damages, alleging that the defendants violated sections 11, 12 and 15 of the Securities Act of 1933, as amended, by making allegedly false statements regarding mortgage loans that served as collateral for securities purchased by the plaintiff and the purported class members. On August 31, 2009, the Company filed a motion to dismiss the plaintiff's claims, which the court granted on March 31, 2011, with leave to amend. The plaintiff filed a second amended complaint on May 16, 2011, and the Company again filed a motion to dismiss. On March 29, 2012, the court dismissed the plaintiff's second amended complaint with prejudice and without leave to replead. The plaintiff filed an appeal. On March 1, 2013, the appellate court reversed the judgment of the lower court, which had dismissed the case. Also, the appellate court vacated the judgment of the lower court which had held that the plaintiff lacked standing, even as a class representative, to sue on behalf of investors in securities in which plaintiff had not invested
,
and the appellate court remanded the case back to the lower court for further proceedings. On April 23, 2013 the plaintiff filed its memorandum with the lower court seeking a reconsideration of the earlier dismissal of plaintiff's claims as to five offerings in which plaintiff was not invested. Given the early stage of the litigation, the Company cannot provide an estimate of the range of any loss. The Company believes that the affiliated defendants have meritorious defenses to the case and expects them to defend the case vigorously.
On June 20, 2011, the National Credit Union Administration Board, as liquidating agent of U.S. Central Federal Credit Union, filed an action against NMFC and numerous other defendants in the United States District Court for the District of Kansas, claiming that the defendants issued or underwrote residential mortgage-backed securities pursuant to allegedly false or misleading registration statements, prospectuses, and/or prospectus supplements. On October 12, 2011, the complaint was served on NMFC. On December 20, 2011, NMFC filed a motion to dismiss the plaintiff's complaint and to strike certain paragraphs of the complaint. On July 25, 2012, the court granted the motion in part and denied the motion in part. The plaintiff was granted leave to amend the complaint. On August 24, 2012, the plaintiff filed an amended complaint making essentially the same claims against NMFC. On October 29, 2012, NMFC filed a motion to dismiss the amended complaint. The defendants had claimed that the case should be dismissed based upon a statute of limitations and sought an appeal of the court
'
s denial of this defense. An interlocutory appeal of this issue was allowed, and oral argument on the appeal occurred May 8, 2013. On August 27, 2013, the Tenth Circuit affirmed the lower court’s denial of defendants’ motion to dismiss the plaintiff’s claims as being time barred; the appellate court held that the Extender Statute, 12 U.S.C. §1787(b)(14) applied to plaintiff’s claims. On September 12, 2013, the lower court denied NMFC’s motion to dismiss the amended complaint against NMFC. On June 16, 2014, the United States Supreme Court granted a motion of NMFC and its co-defendants for certiorari and vacated the earlier ruling of Tenth Circuit remanding the case back to the Tenth Circuit for further consideration in light of the Supreme Court’s decision in CTS Corp. v. Waldburger, 573 U.S. ___ 2014. Additional briefs were filed with the 10th Circuit on July 11, 2014. This litigation is in an early stage, and the Company cannot provide an estimate of the range of any loss. The Company believes that NMFC has meritorious defenses to the case and expects it to defend the case vigorously.
On February 28, 2013 the Federal Housing Finance Agency, as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac) and on behalf of the Trustee of the NovaStar Mortgage Funding Trust, Series 2007-1 (the "Trust"), a securitization trust in which the Company retains a residual interest, filed a summons with notice in the Supreme Court of the State of New York, County of New York against Novation Companies, Inc. and NovaStar Mortgage, Inc. ("NMI"), a wholly-owned subsidiary of the Company. The notice provides that this is a breach of contract action with respect to certain, unspecified mortgage loans and defendant's failure to repurchase such loans under the applicable agreements. Plaintiff alleges that defendants, from the closing date of the transaction that created the Trust that mortgage loans that were sold to the Trust, were aware of the breach of the representations and warranties made and failed to notice and cure such breaches, and due to the failure of defendants to cure any breach, notice to defendants would have been futile. The summons with notice was not served until June 28, 2013. By letter dated June 24, 2013, the Trustee of the Trust forwarded a notice from Freddie Mac alleging breaches of representations and warranties with respect to 43 loans, as more fully set forth in included documentation. The 43 loans had an aggregate, original principal balance of about $6.5 million. On August 19, 2013, Deutsche Bank National Trust Company, as Trustee, filed a complaint identifying alleged breaches of representations and warranties with respect to seven loans that were included in the earlier list of 43 loans. Plaintiff also generally alleged a trust-wide breach of representations and warranties by defendants with respect to loans sold and transferred to the trust. Plaintiff seeks specific performance of repurchase obligations; compensatory, consequential, recessionary and equitable damages for breach of contract; specific performance and damages for anticipatory breach of contract; and indemnification (indemnification against NMI only). On October 9, 2013, the Company and NMI filed a motion to dismiss plaintiff’s complaint. This motion to dismiss was withdrawn after plaintiff filed an amended complaint on January 28, 2014, and on March 4, 2014 the Company and NMI filed a motion to dismiss the amended complaint. This litigation is in an early stage, and the Company cannot provide an estimate of the range of any loss. The Company believes that it has meritorious defenses to the case and expects to defend the case vigorously.
Note 9
. Fair Value Accounting
Fair Value Measurements
The Company's valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy:
•
Level 1 – Valuations based on quoted prices in active markets for
identical
assets and liabilities.
•
Level 2 – Valuations based on observable inputs in active markets for
similar
assets and liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates.
•
Level 3 – Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts.
The following tables present for each of the fair value hierarchy levels, the Company's assets which are measured at fair value on a recurring basis as of
June 30, 2014
and
December 31, 2013
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
Description
|
|
Fair Value at
June 30, 2014
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
7,616
|
|
|
$
|
7,616
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market funds
|
|
28,143
|
|
|
28,143
|
|
|
—
|
|
|
—
|
|
Commercial paper
|
|
2,899
|
|
|
—
|
|
|
2,899
|
|
|
—
|
|
Agency securities
|
|
922
|
|
|
—
|
|
|
922
|
|
|
—
|
|
Marketable securities, current:
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
6,848
|
|
|
—
|
|
|
6,848
|
|
|
—
|
|
Agency securities
|
|
6,130
|
|
|
—
|
|
|
6,130
|
|
|
—
|
|
Mortgage securities – available-for-sale
|
|
3,552
|
|
|
—
|
|
|
—
|
|
|
3,552
|
|
Marketable securities, non-current:
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
4,554
|
|
|
—
|
|
|
4,554
|
|
|
—
|
|
Total
|
|
$
|
60,664
|
|
|
$
|
35,759
|
|
|
$
|
21,353
|
|
|
$
|
3,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
Description
|
|
Fair Value at December 31, 2013
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Mortgage securities – available-for-sale
|
|
$
|
3,728
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,728
|
|
|
|
|
|
|
|
|
|
|
Valuation Methods and Processes
The Company determines the fair value of its cash equivalents and marketable securities based on pricing from our service provider and market prices from industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.
To the extent observable inputs are not available, as is the case with the Company's mortgage securities, the Company estimates fair value using present value techniques and generally does not have the option to choose other valuation methods for these securities. The methods and processes used to estimate the fair value of the Company's mortgage securities are discussed further below. There have been no significant changes to the Company's financial statements as a result from changes to the Company's valuation techniques during the
six months ended June 30, 2014
.
The Company's marketable securities are classified as available-for-sale and are reported at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income. To the extent that the cost basis of the Company's marketable securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The specific identification method is used in computing realized gains or losses.
Mortgage securities - available for sale
.
As discussed above and in
Note 4
to the condensed consolidated financial statements, the Company's mortgage securities – available-for-sale, are measured at fair value. These securities are valued at each reporting date using significant unobservable inputs (Level 3) by discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment.
The Company uses the discount rate methodology for determining the fair value of its residual securities. The fair value of the residual securities is estimated based on the present value of future expected cash flows to be received. Management's best estimate of key assumptions, including credit losses, prepayment speeds, forward yield curves and discount rates commensurate with the risks involved, are used in estimating future cash flows.
An independent entity has been engaged to prepare projected future cash flows of the Company's mortgage securities for each reporting period (quarterly) used by management to estimate fair value. The Company's internal finance and accounting staff reviews and monitors the work of the independent entity, including analysis of the assumptions used, retrospective review and preparing an overall conclusion of the value and process. All other fair value analysis, consisting of simple cash flow estimates and discounting techniques, is conducted internally by the Company's internal financial staff. The Company's fair value process is conducted under the supervision of the Chief Financial Officer.
The following table presents certain quantitative information about the significant unobservable inputs used in the fair value measurement for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Valuation Techniques
|
|
Significant Unobservable Inputs
|
|
Range
|
Assets:
|
|
|
|
|
|
|
Mortgage securities – available-for-sale
|
|
Present value analysis
|
|
Prepayment rates
|
|
3.8% – 12.5%
|
|
|
|
|
Weighted average life (years)
|
|
2.0 – 2.0
|
|
|
|
|
|
|
|
The significant unobservable inputs used in the fair value measurement of mortgage securities – available-for-sale are prepayment rates and the weighted average life for the underlying mortgage loan collateral. Using a faster (higher) estimated prepayment rate would decrease the value of the securities. The Company uses a weighted average life of
2
years from the reporting date for the expected future estimated cash flows. The future cash flows are highly-dependent upon the performance of the underlying collateral of mortgage loans. The nonperformance risk associated with the collateral is the key reason the Company utilizes such a short weighted average life in its calculation. Assuming a shorter weighted average life would decrease the estimated value of the mortgage securities. Alternatively, assuming a longer weighted average life would increase the estimated value of the mortgage securities.
The following table provides a reconciliation of the beginning and ending balances for the Company's mortgage securities – available-for-sale, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
six and three months ended June 30, 2014 and 2013
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
For the Three Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Balance, beginning of period
|
$
|
3,728
|
|
|
$
|
3,906
|
|
|
$
|
3,466
|
|
|
$
|
3,295
|
|
Increases (decreases) to mortgage securities – available-for-sale:
|
|
|
|
|
|
|
|
Accretion of income (A)
|
385
|
|
|
373
|
|
|
192
|
|
|
93
|
|
Proceeds from paydowns of securities (A)
|
(385
|
)
|
|
(404
|
)
|
|
(156
|
)
|
|
(132
|
)
|
Mark-to-market value adjustment
|
(176
|
)
|
|
(473
|
)
|
|
50
|
|
|
146
|
|
Net (decrease) increase to mortgage securities – available-for-sale
|
(176
|
)
|
|
(504
|
)
|
|
86
|
|
|
107
|
|
Balance, end of period
|
$
|
3,552
|
|
|
$
|
3,402
|
|
|
$
|
3,552
|
|
|
$
|
3,402
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Cash received on mortgage securities with no cost basis was
$3.0 million
and
$1.4 million
for the
six and three months ended June 30, 2014
, respectively and
$2.0 million
and
$1.4 million
for the
six and three months ended June 30, 2013
, respectively.
|
Adjustments to assets and liabilities measured at fair value on a recurring and nonrecurring basis did not have a material impact on the earnings of continuing operations for any period presented.
The following disclosure of the estimated fair value of financial instruments presents amounts that have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies could have a material impact on the estimated fair value amounts. The fair value of short-term financial assets and liabilities, such as service fees receivable, notes receivable, and accounts payable and accrued expenses are not included in the following table as their fair value approximates their carrying value.
The estimated fair values of the Company's financial instruments are as follows as of
June 30, 2014
and
December 31, 2013
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014
|
|
As of December 31, 2013
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Financial assets:
|
|
|
|
|
|
|
|
Restricted cash
|
$
|
600
|
|
|
$
|
453
|
|
|
$
|
597
|
|
|
$
|
369
|
|
Marketable securities
|
21,084
|
|
|
21,084
|
|
|
3,728
|
|
|
3,728
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Senior notes
|
$
|
84,957
|
|
|
$
|
13,053
|
|
|
$
|
83,867
|
|
|
$
|
13,119
|
|
Note payable to related party
|
—
|
|
|
—
|
|
|
3,863
|
|
|
2,880
|
|
|
|
|
|
|
|
|
|
For the items in the table above not measured at fair value in the statement of financial position but for which the fair value is disclosed, the fair value has been estimated using Level 3 methodologies, based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow calculations based on internal cash flow forecasts. No assets or liabilities have been transferred between levels during any period presented.
Restricted cash
– The fair value of restricted cash was estimated by discounting estimated future release of the cash from restriction.
Senior notes
– The fair value is estimated by discounting future projected cash flows using a discount rate commensurate with the risks involved. The value of the Senior Notes was calculated assuming that the Company would be required to pay interest at a rate of
1.0%
per annum until January 2016, at which time the Company would be required to start paying the Full Rate of
three-month LIBOR
plus
3.5%
until maturity in March 2033. The three-month LIBOR used in the analysis was projected using a forward interest rate curve.
Note payable to related party
– As of December 31, 2013, the fair value of the note payable to related party was estimated by discounting future projected principal and interest payment cash flows using a discount rate commensurate with the risks involved. The future projected interest payments were calculated assuming the stated rate of
4.0%
per annum until maturity in March 2016. As detailed in Note 7, this obligation was terminated on April 16, 2014. As of December 31, 2013, current maturities of the note payable to related party of approximately
$1.3 million
and noncurrent maturities of
$2.6 million
are included in the other current liabilities and other liabilities line items, respectively, in the Company's condensed consolidated balance sheets.
Note 10
. Income Taxes
For the
six and three months ended June 30, 2014
the Company recorded an income tax benefit from continuing operations of approximately
$7.2 million
. The second quarter income tax benefit relates to current year operating losses from continuing operations and the utilization of a portion of the Company's deferred tax assets to offset the income tax expense from discontinued operations of approximately
$7.8 million
arising primarily from the gain on the sale of StreetLinks. The net income tax expense of
$0.6 million
represents state income tax expense on the income from discontinued operations arising due to variations in state tax law around both the ability and the period over which to carryforward net operating losses. During the
six months ended June 30, 2013
the Company recorded an income tax expense of approximately
$27.7 million
, which represented a discrete event attributable to adjustment of the valuation allowance against the Company's deferred tax assets during the second quarter of 2013.
During 2013, the Company determined that it was no longer more likely than not that it will recognize a portion of its deferred tax assets. Therefore, as of both
June 30, 2014
and
December 31, 2013
, the Company maintained a full valuation allowance against its deferred tax assets of
$266.3 million
and
$283.0 million
, respectively. The Company's determination of the extent to
which its deferred tax assets will be realized requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes. In the event the actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance, which could materially impact our financial position and results of operations. The Company will continue to assess the need for a valuation allowance in future periods.
As of
June 30, 2014
and
December 31, 2013
, the total gross amount of unrecognized tax benefits was
$1.0 million
and
$0.7 million
, respectively. These amounts also represent the total amount of unrecognized tax benefits that would impact the effective tax rate in the respective periods. The Company anticipates an additional reduction of the unrecognized tax benefits in the amount of
$0.6 million
due to the lapse of statute of limitations in the next twelve months.
Note 11
. Segment Reporting
As a result of the divestiture activity during the six months ended June 30, 2014, the Company now reviews, manages and operates its business in only
three
segments: Corporate, Financial Intermediary, and Cloud SaaS. Corporate operating results include mortgage securities retained from securitizations, corporate general and administrative expenses, and, for 2013 only, the operating results of CorvisaCloud, as these results were not significant during the six and three months ended June 30, 2013. The Financial Intermediary segment consists of the financial settlement service fee income and related expenses from a wholly-owned subsidiary of the Company, Advent. The Cloud SaaS segment represents service fee income and related expenses from the Company's wholly-owned subsidiary, CorvisaCloud. Management evaluates segment performance based on income before income taxes, which is prior to the allocation of losses attributable to the noncontrolling interests.
The following is a summary of the operating results of the Company's segments for the
six months ended June 30, 2014 and 2013
and a summary of their financial positions as of
June 30, 2014
and
December 31, 2013
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
Financial Intermediary
|
|
Cloud SaaS
|
|
Eliminations
|
|
Total
|
For the Six Months Ended June 30, 2014
|
|
|
|
|
|
Service fee income
|
$
|
5,189
|
|
|
8,216
|
|
|
$
|
1,526
|
|
|
$
|
(4,328
|
)
|
|
$
|
10,603
|
|
Interest income
|
3,407
|
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
|
3,396
|
|
Interest expense
|
1,594
|
|
|
1
|
|
|
9
|
|
|
(9
|
)
|
|
1,595
|
|
Depreciation and amortization expense (A)
|
518
|
|
|
$
|
93
|
|
|
207
|
|
|
—
|
|
|
818
|
|
Loss from continuing operations before income taxes
|
(2,259
|
)
|
|
$
|
1,097
|
|
|
(3,644
|
)
|
|
(1,822
|
)
|
|
(6,628
|
)
|
Additions to long-lived assets (B)
|
302
|
|
|
$
|
38
|
|
|
713
|
|
|
—
|
|
|
1,053
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014
|
|
|
|
|
|
Total assets (C)
|
$
|
65,056
|
|
|
$
|
2,626
|
|
|
$
|
11,096
|
|
|
$
|
(7,982
|
)
|
|
$
|
70,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Amounts related to continuing operations are included in the cost of services and selling, general and administrative expense line items on the condensed consolidated statements of operations, while amounts related to discontinued operations are included in the (loss) income from discontinued operations, net of income taxes.
|
|
|
(B)
|
Amount includes assets acquired under capital leases.
|
|
|
(C)
|
Amount includes $1.0 million in cash and cash equivalents not classified as held for sale. See
Note 3
for additional information regarding the classification of Advent as held for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
Financial Intermediary
|
|
Eliminations
|
|
Discontinued Operations (C)
|
|
Total
|
For the Six Months Ended June 30, 2013
|
|
|
|
|
|
Service fee income
|
$
|
4,452
|
|
|
8,091
|
|
|
$
|
(4,173
|
)
|
|
$
|
—
|
|
|
$
|
8,370
|
|
Interest income
|
2,725
|
|
|
—
|
|
|
(320
|
)
|
|
—
|
|
|
2,405
|
|
Interest expense
|
1,583
|
|
|
308
|
|
|
(307
|
)
|
|
—
|
|
|
1,584
|
|
Depreciation and amortization expense (A)
|
413
|
|
|
$
|
127
|
|
|
—
|
|
|
—
|
|
|
540
|
|
Loss from continuing operations before income taxes
|
(3,156
|
)
|
|
$
|
633
|
|
|
(3,142
|
)
|
|
—
|
|
|
(5,665
|
)
|
Additions to long-lived assets
|
1,577
|
|
|
$
|
162
|
|
|
—
|
|
|
—
|
|
|
1,739
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
|
|
|
|
Total assets (B)(D)(E)
|
$
|
25,535
|
|
|
$
|
3,983
|
|
|
$
|
(8,510
|
)
|
|
$
|
13,034
|
|
|
$
|
34,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Amounts related to continuing operations are included in the cost of services and selling, general and administrative expense line items on the condensed consolidated statements of operations, while amounts related to discontinued operations are included in the (loss) income from discontinued operations, net of income taxes.
|
|
|
(B)
|
Total assets of discontinued operations includes goodwill of
$3.2 million
resulting from the acquisition of StreetLinks.
|
|
|
(C)
|
See
Note 3
for additional information regarding the financial position and operating results of discontinued operations.
|
|
|
(D)
|
Corporate segment includes Cloud SaaS assets of $1.9 million as of December 31, 2013.
|
|
|
(E)
|
Amount includes $1.5 million in cash and cash equivalents not classified as held for sale. See
Note 3
for additional information regarding the classification of Advent as held for sale.
|
The intersegment service fee income for the six and three months ended June 30, 2014 includes fees charged by the Corporate segment to the Appraisal Management, Financial Intermediary, and Cloud SaaS segments for operational support provided by the Corporate segment's employees. The intersegment interest income and interest expense consists of interest charged by the Corporate segment to the Appraisal Management, Financial Intermediary, and Cloud SaaS segments for borrowings. For the six months ended June 30, 2013, the intersegment service fee income and interest amounts also include fees charged to the Logistics segment.
The following is a summary of the operating results of the Company's segments for the
three months ended June 30, 2014 and 2013
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
Financial Intermediary
|
|
Cloud SaaS
|
|
Eliminations
|
|
Total
|
For the Three Months Ended June 30, 2014
|
|
|
|
|
|
|
|
Service fee income
|
$
|
2,499
|
|
|
$
|
1,335
|
|
|
$
|
674
|
|
|
$
|
(1,576
|
)
|
|
$
|
2,932
|
|
Interest income
|
1,610
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,610
|
|
Interest expense
|
799
|
|
|
1
|
|
|
—
|
|
|
(1
|
)
|
|
799
|
|
Depreciation and amortization expense (A)
|
265
|
|
|
49
|
|
|
108
|
|
|
—
|
|
|
422
|
|
Loss income from continuing operations before income taxes
|
(1,446
|
)
|
|
(1,507
|
)
|
|
(2,265
|
)
|
|
(289
|
)
|
|
(5,507
|
)
|
Additions to long-lived assets (B)
|
170
|
|
|
—
|
|
|
467
|
|
|
—
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Amounts related to continuing operations are included in the cost of services and selling, general and administrative expense line items on the condensed consolidated statements of operations, while amounts related to discontinued operations are included in the (loss) income from discontinued operations, net of income taxes.
|
|
|
(B)
|
Amount includes assets acquired under capital leases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
Financial Intermediary
|
|
Eliminations
|
|
Total
|
For the Three Months Ended June 30, 2013
|
|
|
|
Service fee income
|
$
|
2,250
|
|
|
1,471
|
|
|
$
|
(2,068
|
)
|
|
$
|
1,653
|
|
Interest income
|
1,546
|
|
|
—
|
|
|
(58
|
)
|
|
1,488
|
|
Interest expense
|
799
|
|
|
52
|
|
|
(51
|
)
|
|
800
|
|
Depreciation and amortization expense (A)
|
230
|
|
|
$
|
68
|
|
|
—
|
|
|
298
|
|
Loss from continuing operations before income taxes
|
(2,055
|
)
|
|
$
|
(652
|
)
|
|
(1,645
|
)
|
|
(4,352
|
)
|
Additions to long-lived assets (B)
|
326
|
|
|
$
|
79
|
|
|
—
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Amounts related to continuing operations are included in the cost of services and selling, general and administrative expense line items on the condensed consolidated statements of operations, while amounts related to discontinued operations are included in the (loss) income from discontinued operations, net of income taxes.
|
|
|
(B)
|
Amount includes assets acquired under capital leases.
|
Note 12. Earnings per Share
Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share include the effect of conversions of stock options and nonvested shares. The computations of basic and diluted earnings per share for the
six and three months ended June 30, 2014 and 2013
(dollars in thousands, except share and per share amounts) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
For the Three Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
$
|
602
|
|
|
$
|
(33,331
|
)
|
|
$
|
1,751
|
|
|
$
|
(30,880
|
)
|
Net income from discontinued operations
|
40,405
|
|
|
7,417
|
|
|
38,493
|
|
|
4,311
|
|
Net income (loss)
|
41,007
|
|
|
(25,914
|
)
|
|
40,244
|
|
|
(26,569
|
)
|
Less net (loss) income attributable to noncontrolling interests
|
—
|
|
|
(77
|
)
|
|
(33
|
)
|
|
24
|
|
Net income (loss) available to common shareholders
|
$
|
41,007
|
|
|
$
|
(25,837
|
)
|
|
$
|
40,277
|
|
|
$
|
(26,593
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
90,866,933
|
|
|
90,716,933
|
|
|
90,866,933
|
|
|
90,716,933
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – dilutive:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
90,866,933
|
|
|
90,716,933
|
|
|
90,866,933
|
|
|
90,716,933
|
|
Stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Nonvested shares
|
37,159
|
|
|
—
|
|
|
73,910
|
|
|
—
|
|
Weighted average common shares outstanding – dilutive
|
90,904,092
|
|
|
90,716,933
|
|
|
90,940,843
|
|
|
90,716,933
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
$
|
0.01
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.34
|
)
|
Net income from discontinued operations
|
0.44
|
|
|
0.08
|
|
|
0.42
|
|
|
0.05
|
|
Net income (loss)
|
0.45
|
|
|
(0.29
|
)
|
|
0.44
|
|
|
(0.29
|
)
|
Less net (loss) income attributable to noncontrolling interests
|
—
|
|
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
Net income (loss) available to common shareholders
|
$
|
0.45
|
|
|
$
|
(0.28
|
)
|
|
$
|
0.44
|
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
$
|
0.01
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.34
|
)
|
Net income from discontinued operations
|
0.44
|
|
|
0.08
|
|
|
0.42
|
|
|
0.05
|
|
Net income (loss)
|
0.45
|
|
|
(0.29
|
)
|
|
0.44
|
|
|
(0.29
|
)
|
Less net (loss) income attributable to noncontrolling interests
|
—
|
|
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
Net income (loss) available to common shareholders
|
$
|
0.45
|
|
|
$
|
(0.28
|
)
|
|
$
|
0.44
|
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
The following weighted-average options to purchase shares of Common Stock were outstanding during each period presented, but were not included in the computation of diluted earnings per share because the calculated number of shares assumed to be repurchased was greater than the number of shares to be obtained upon exercise, therefore, the effect would be antidilutive (in thousands, except exercise prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
For the Three Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Number of stock options
|
8,675
|
|
|
8,362
|
|
|
8,856
|
|
|
8,578
|
|
Weighted average exercise price of stock options
|
$
|
0.68
|
|
|
$
|
0.69
|
|
|
$
|
0.68
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2014, the Company granted
3.0 million
options to purchase shares of Common Stock at a weighted average exercise price of $0.51. The weighted average impact of
0.2 million
and
0.4 million
options are included in the table above for the
six and three months ended June 30, 2014
, respectively. During the
six months ended June 30, 2013
, the Company granted
0.6 million
options to purchase shares of Common Stock at a weighted average exercise price of
$0.53
. The weighted average impact of
0.3 million
and
0.6 million
are included in the table above for the
six and three months ended June 30, 2013
, respectively. There were no options granted during the second quarter of 2013.
The Company had approximately
0.6 million
and
0.8 million
nonvested shares outstanding as of
June 30, 2014
and
June 30, 2013
, respectively, which have original cliff vesting schedules ranging between five and ten years. Of these, the weighted average impact of approximately
0.6 million
and
0.5 million
nonvested shares for the
six and three months ended June 30, 2014
, respectively and
0.8 million
nonvested shares for the
six and three months ended June 30, 2013
were not included in the calculation of earnings per share because they were anti-dilutive.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Statements in this report regarding Novation Companies, Inc. and its business, that are not historical facts are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are those that predict or describe future events, do not relate solely to historical matters and include statements regarding management's beliefs, estimates, projections, and assumptions with respect to, among other things, our future operations, business plans and strategies, as well as industry and market conditions, all of which are subject to change at any time without notice. Words such as "believe," "expect," "anticipate," "promise," "plan," and other expressions or words of similar meanings, as well as future or conditional auxiliary verbs such as "would," "should," "could," or "may" are generally intended to identify forward-looking statements. Actual results and operations for any future period may vary materially from those discussed herein. Some important factors that could cause actual results to differ materially from those anticipated include: our ability to manage our business; variability in the home mortgage or refinancing market that affects the demand for real estate appraisal services; changes in the regulatory environments within which our subsidiaries operate; our ability to develop new relationships and maintain existing relationships with both customers and business partners; decreases in cash flows from our mortgage securities; our ability to remain in compliance with the agreements governing our indebtedness; the outcome of litigation actions pending against us or other legal contingencies; our compliance with applicable local, state and federal laws and regulations; compliance with new accounting pronouncements; the impact of general economic conditions; and the risks that are from time to time included in our filings with the Securities and Exchange Commission (“SEC”), including the Company's most recent Annual Report on Form 10-K and this report on Form 10-Q. Other factors not presently identified may also cause actual results to differ. This report on Form 10-Q speaks only as of its date and we expressly disclaim any duty to update the information herein except as required by applicable law.
Executive Overview
The following Management's Discussion and Analysis of Financial Condition and Operating Results (“MD&A”)
should be read in conjunction with the preceding unaudited condensed consolidated financial statements of Novation Companies, Inc. and its subsidiaries (the “Company” or ”Novation" or “we” or “us”) and the notes thereto as well as the Company's Annual Report on Form 10-K for the year ended
December 31, 2013
. MD&A includes the following sections:
|
|
•
|
Corporate Overview, Background and Strategy
–
a brief overview of our business, current strategy, and significant recent events.
|
|
|
•
|
Critical Accounting Policies
–
an update, since
December 31, 2013
, of our discussion of accounting policies that impact our financial statements and involve a high degree of judgment or complexity. This section also includes the impact of new accounting standards.
|
|
|
•
|
Consolidated Results of Operations
–
an analysis of our results of operations for the
six months ended June 30, 2014 and 2013
as presented in our unaudited Condensed Consolidated Financial Statements.
|
|
|
•
|
Segment Results of Operations
–
an analysis of our results of operations for the
six months ended June 30, 2014 and 2013
as presented in our unaudited Condensed Consolidated Financial Statements for our reporting segments.
|
|
|
•
|
Liquidity and Capital Resources
–
an analysis of our cash flows and financial commitments.
|
Corporate Overview, Background and Strategy
Our Business
Novation Companies, Inc. (the “Company” or "Novation” or "we” or “us”) is a Maryland corporation formed on September 13, 1996.
CorvisaCloud, LLC (CorvisaCloud) is a developer and seller of proprietary cloud-based contact center software and private branch exchange (PBX) systems. In addition, CorvisaCloud provides implementation consulting services for clients of a leading customer relationship management (CRM) software. We acquired CorvisaCloud in 2012. It was originally named IVR Central LLC and we rebranded the business to CorvisaCloud in 2013. We own
100%
of CorvisaCloud.
Advent provides financial settlement services for professional tax preparers nationwide. On June 6, 2014 the Company announced that it was exploring alternatives for Advent with the goal of selling or exiting the business by the end of 2014. As a result, the operations of Advent will be included in continuing operations until the date on which the business is sold or, in the event the business is abandoned, the run-off operations have ceased. The assets and liabilities of Advent have been classified as held for sale as of June 30, 2014. See Note 3 to the condensed consolidated financial statements for additional information regarding these developments.
On April 16, 2014, the Company and the non-controlling members of StreetLinks, a national residential appraisal and mortgage real estate valuation management services company, entered into a purchase and sale agreement with Assurant Services, LLC,
a subsidiary of Assurant, Inc. ("Assurant"), pursuant to which Assurant purchased 100% of the outstanding membership units of StreetLinks. See Note 3 to the condensed consolidated financial statements for additional information regarding this transaction.
In each of these businesses we invested at the early stage of the company
’
s life with the goal of growing each business to its maximum potential. When we acquire businesses, our goal is to own indefinitely. However, we may consider the sale of a business or businesses if we believe we can invest the proceeds from a sale elsewhere at a better risk adjusted long term return for shareholders. This may include investing capital in a business we already own or investing in an unrelated business not yet identified.
On April 16, 2014 we announced a significant strategic shift for Novation with the sale of StreetLinks and the decision to focus our resources primarily on the business of CorvisaCloud. This decision was based largely on the Company's belief that CorvisaCloud represents a better opportunity for Novation to build long-term shareholder value due to CorvisaCloud's CorvisaOne™ technology platform and the size of its target customer base. What follows is a detailed discussion of the CorvisaCloud business.
Note 11
to the condensed consolidated financial statements set forth in Item 1 of this report, which is incorporated by reference, includes information about the operating results and financial position of the segments to which this business relates.
CORVISACLOUD, LLC
CorvisaCloud is a provider of cloud-based, proprietary communication software under the brand CorvisaOne™ and implementation consulting services for its own clients as well as clients of a leading customer relationship management (CRM) software provider.
CorvisaOne™ is a full contact center suite including both inbound and outbound contact center functionality as well as full private branch exchange (PBX) phone system functionality. Features of the communications software include interactive voice response, automated call distribution, campaign dialing, and a variety of other services, all of which are delivered to clients as part of a comprehensive, fully-hosted cloud solution. The software is fully integrated with the leading CRM provider and can be integrated with other third party software solutions via our advanced web service, JavaScript and platform integration solutions. CorvisaCloud's target customers are businesses of all sizes in all industries, anywhere in the world.
We acquired CorvisaCloud in October 2012 and set out to build a complete cloud-based contact center software solution. By joining the years of contact center operating experience possessed by Novation
’
s leadership team with the technology team acquired through the CorvisaCloud acquisition, we believe we have built a best-in-class contact center software solution. In addition to the product offering, CorvisaCloud has built its product as part of a platform that enables its customers and others to develop their own tools to tie into CorvisaCloud's product offering.
In addition to the benefits associated with cloud-based technology solutions such as security, scalability, reliability, rapid deployment and low cost, additional business benefits to customers using CorvisaCloud's technology product/platform include:
Integrated Cloud PBX (phone system) within CorvisaCloud's contact center application
.
This integration enables executives and contact center employees to be on the same platform and eliminates the need for separate contact center and PBX vendors.
Platform in addition to CorvisaCloud's product
.
CorvisaCloud's platform provides a highly configurable platform that allows for the creation or editing of voice and SMS applications utilizing Summit, CorvisaCloud's Lua-based programming language. Applications built on the CorvisaOne™ platform are fully hosted on the CorvisaCloud network that provides scalability, redundancy, backup, testing frameworks and other features required for enterprise-class applications. Existing applications or those developed by third-party developers can also easily be integrated through our open APIs. This makes it easy for developers to scale with their application and effectively support their product while eliminating the need to manage independent server and hosting environments.
Contact and Campaign Manager.
CorvisaOne™ includes a highly scalable contact/lead management system allowing for dynamic management of millions of contact/lead records, including real-time assignment to dialing campaigns. This functionality eliminates the need to store and manage complex campaign logic in third-party systems or manual spreadsheets. In addition, CorvisaOne™ supports real-time synchronization with leading CRM systems to allow customers to work seamlessly within their CRM.
Redundant Instance-based Architecture.
CorvisaCloud's highly scalable, instance-based architecture allows CorvisaOne™ to scale to support a worldwide presence while providing customer benefits such as read access to their client data, segmented client data and a highly redundant architecture.
Combined Telecom and Production Reporting.
As business operators ourselves, we believe strongly in the importance of closely aligning telecommunications and production data to give greater visibility into overall business operations. The
CorvisaOne™ product is tightly integrated with leading CRM systems to ensure accurate and comprehensive business reporting.
CorvisaCloud derives its revenue from software subscription fees for its product and from telecommunications minutes used. CorvisaCloud also derives revenue from professional service fees charged for enhanced implementation requirements of its contact center solution as well as CRM implementation services.
While CorvisaCloud is still in the initial phases of launching its product, our plan over time is to sell CorvisaCloud's product and services through its direct sales force which is comprised of telephone sales personnel located regionally. For larger opportunities CorvisaCloud will send its implementation teams on site in a consulting role to help onboard clients.
CorvisaCloud's marketing strategy is to promote its brand and generate quality leads for its sales force. CorvisaCloud's primary marketing activities will consist of:
|
|
•
|
Press and industry analyst relations for third-party validation of the CorvisaCloud offering and value proposition
|
|
|
•
|
Attendance at user conferences and trade show events
|
|
|
•
|
Search engine marketing and advertising to drive leads to the CorvisaCloud sales force
|
|
|
•
|
Use of customer testimonials and referrals
|
|
|
•
|
Leads from the CorvisaCloud CRM implementation practice
|
On April 23, 2014, the Company announced that it would be devoting up to $30 million of the proceeds from the StreetLinks sale to CorvisaCloud. The additional capital will be used to expand CorvisaCloud's sales, marketing and operational development efforts and, potentially, fund potential acquisitions. The funds will also be used to accelerate product development and customer acquisition of CorvisaCloud's CorvisaOne™ contact center software products and platform. During the second quarter, the Company contributed approximately $10 million of the allotted $30 million to CorvisaCloud.
Our Strategy
Management is focused on building its operating subsidiaries with a focus on long-term value creation. As previously noted, on April 16, 2014 we announced a significant strategic shift for Novation with the sale of StreetLinks and the decision to focus our resources primarily on the business of CorvisaCloud. Given the early-stage nature of this business, it may not contribute to quarterly earnings for some time but we believe CorvisaCloud represents a solid investment with the opportunity for future earnings and equity value creation that will benefit shareholders. Key performance measures for executive management are:
|
|
•
|
generating income and long-term value for our shareholders, and
|
|
|
•
|
maintaining and/or generating adequate liquidity to sustain us and allow us to take advantage of acquisition opportunities.
|
The following key performance metrics are derived from our condensed consolidated financial statements for the periods presented and should be read in conjunction with the more detailed information therein and with the disclosure included in this report under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
Table 1 – Summary of Financial Highlights and Key Performance Metrics (dollars in thousands; except per share amounts)
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
2014
|
|
2013
|
Net income (loss) available to common shareholders per diluted share
|
$
|
0.45
|
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
As of
|
|
June 30,
2014
|
|
December 31,
2013
|
Unrestricted cash and cash equivalents
|
$
|
39,580
|
|
|
$
|
7,222
|
|
|
|
|
|
Significant Recent Events
On April 16, 2014 the Company announced a significant strategic shift with the sale of StreetLinks, which is discussed below, and the decision to focus our resources primarily on the business of CorvisaCloud. This decision was based largely on the Company's firm belief that CorvisaCloud represents a better opportunity for Novation to build long-term shareholder value. On June 6, 2014 the Company announced that it was exploring alternatives for Advent with the goal of selling or exiting the business
by the end of 2014. As a result, the operations of Advent will be included in continuing operations until the date on which the business is sold or, in the event the business is abandoned, the run-off operations have ceased. Based on the Company's analysis of the facts and circumstances existing as of June 30, 2014, which included an assessment as to the progress of discussions with potential buyers, the Company classified Advent as held for sale in accordance with the relevant accounting guidance. See Note 3 to the condensed consolidated financial statements for additional information regarding these developments.
Critical Accounting Policies
In our Annual Report on Form 10-K for the year ended
December 31, 2013
, we disclose critical accounting policies that require management to use significant judgment or that require significant estimates. Management regularly reviews the selection and application of our critical accounting policies. There have been no updates to the critical accounting policies contained in our Annual Report on Form 10-K for the year ended
December 31, 2013
.
Impact of Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Updated ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. Compared with current U.S. GAAP, the ASU also requires significantly expanded disclosures about revenue recognition. The ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early application is not permitted. The Company is evaluating the impact of ASU 2014-09 on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the definition of a discontinued operation in ASC 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-operations criteria. The FASB issued the ASU to provide more decision-useful information and to make it more difficult for a disposal transaction to qualify as a discontinued operation. The ASU is effective prospectively for all disposals (except disposals classified as held for sale before
the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. The impact of the adoption of ASU 2014-08 on the Company's financial statements will be based on future disposal activity.
In September 2013, the U.S. Department of the Treasury and the IRS released final regulations providing guidance on the application of IRC Section 263(a) to amounts paid to acquire, produce, or improve tangible property, as well as rules for materials and supplies (“Tangible Property Regulations”). While the final regulations are generally effective for taxable years beginning on or after January 1, 2014, taxpayers are permitted to early adopt provisions for years beginning on or after January 1, 2012. This guidance did not have a significant impact on the Company's financial statements.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force), which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB's objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date and is effective for fiscal years beginning after December 15, 2013, and interim periods within those years. This guidance did not have a significant impact on the Company's financial statements.
Consolidated Results of Operations
Service Fee Income and Cost of Services
On a consolidated basis, service fee income increased to
$10.6 million
for the
six months ended June 30, 2014
from
$8.4 million
for the
six months ended June 30, 2013
. For the
three months ended June 30, 2014
service fee income increased to
$2.9 million
from
$1.7 million
for the prior year period. The increase in all periods is driven primarily by the growth of CorvisaCloud and its customer base. In addition, service fee income for the
six and three months ended June 30, 2014
includes approximately $1.0 million of professional service fees earned by the ongoing entity under the transition services agreement with Assurant, while cost of services for the same periods includes approximately $0.6 million of salaries and related expenses incurred to provide these services.
Interest Income – Mortgage Securities
Interest income on the marketable securities we own increased to approximately
$3.4 million
during the
six months ended June 30, 2014
compared to
$2.4 million
during the
six months ended June 30, 2013
. During the
three months ended June 30, 2014
, interest income on marketable securities totaled
$1.6 million
compared to
$1.5 million
during the same period in 2013. The
increase in all periods was attributable to our mortgage securities and was due primarily to lower than anticipated losses on the underlying loan collateral, which led certain securities to begin cash-flowing during the current year period after extended periods of inactivity. Management does not expect this trend to continue on a long-term basis. Instead, the Company expects interest income and cash flow from these securities to decline as the principal on the underlying loan collateral is paid or written down or off.
Selling, General and Administrative
On a consolidated basis, selling, general and administrative expenses increased to
$13.0 million
for the
six months ended June 30, 2014
from
$11.5 million
for the
six months ended June 30, 2013
. For the quarter, selling, general and administrative expenses increased to
$6.6 million
from
$5.6 million
for prior year period. The increase in all periods was driven largely by the operations of the Company's Cloud SaaS segment, which saw increases in headcount, marketing and promotional activities, professional services, and IT support costs as this segment continues to focus on growing its existing customer base and enhancing its product offerings and features.
Other Income
Other income was not material during the
six and three months ended June 30, 2014
. During the
six months ended June 30, 2013
, other income totaled approximately
$1.4 million
, which was primarily attributable to the recovery of credit losses related to a note receivable due from ITS Financial, LLC (“ITS”). Prior to 2013, the Company, based on the existing facts and circumstances surrounding ITS, had recorded a full provision for credit losses of approximately $1.1 million related to this note. The note was paid in full during the first quarter of 2013.
Interest Expense
Interest expense was materially consistent period over period, with the Company incurring approximately
$1.6 million
during the
six months ended June 30, 2014 and 2013
and
$0.8 million
for the
three months ended June 30, 2014 and 2013
. See
Note 7
to the condensed consolidated financial statements for additional information regarding the Company's borrowings.
Income Tax Benefit (Expense)
For the
six and three months ended June 30, 2014
the Company recorded an income tax benefit from continuing operations of approximately
$7.2 million
, which relates to current year operating losses from continuing operations and the utilization of a portion of the Company's deferred tax assets to offset the income tax expense from discontinued operations. During the
six months ended June 30, 2013
the Company recorded an income tax expense of was approximately
$27.7 million
, which represented a discrete event attributable to adjustment of the valuation allowance against the Company's deferred tax assets during the second quarter of 2013. See
Note 10
to the condensed consolidated financial statements for further details regarding the Company
'
s income tax provision and deferred tax assets.
Segment Results of Operations
Cloud SaaS
We earn call center technology fees through software licenses, inbound and outbound minute usage, ancillary fees, and implementation services. Once implemented, clients pay a software as a service (SaaS) fee for a contact center seat license or PBX license, as well as a per minute fee for inbound and outbound minutes used. Minute fees can also be generated from the use of our interactive voice response software. Cost of Services represents both the direct and other costs of providing these services, including but not limited to software development, fees to third party telecommunications carriers, compensation-related expenses, and other expenses necessary to complete services performed.
We earn professional service fees for providing CRM implementation, support and administrative services to our clients. Cost of Services includes the direct costs of providing these services, which consist primarily of compensation-related expenses.
Following is an analysis of the results of operations from the Cloud SaaS segment.
Table 4 – Cloud SaaS Segment Operations (dollars in thousands, except unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
For the Three Months Ended
June 30,
|
|
2014
|
|
2014
|
|
Total
|
|
%
|
|
Total
|
|
%
|
Service fee income:
|
|
|
|
|
|
|
|
Professional services
|
$
|
957
|
|
|
62.7
|
%
|
|
$
|
385
|
|
|
57.1
|
%
|
Call center technology
|
569
|
|
|
37.3
|
|
|
289
|
|
|
42.9
|
|
Total service fee income
|
1,526
|
|
|
100.0
|
|
|
674
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
Cost of services
|
2,206
|
|
|
144.6
|
|
|
1,076
|
|
|
159.6
|
|
Selling, general and administrative expense
|
2,962
|
|
|
194.1
|
|
|
1,870
|
|
|
277.4
|
|
Total expenses
|
5,168
|
|
|
338.7
|
|
|
2,946
|
|
|
437.1
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net
|
(2
|
)
|
|
(0.1
|
)
|
|
7
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
$
|
(3,644
|
)
|
|
(238.8
|
)%
|
|
$
|
(2,265
|
)
|
|
(336.1
|
)%
|
|
|
|
|
|
|
|
|
Service Fee Income
Service fee income for the Cloud SaaS segment totaled
$1.5 million
and
$0.7 million
during the
six and three months ended June 30, 2014
, respectively. Service fee income was comprised primarily of professional service fees related to implementations of third party CRM software. In addition to being a significant source of revenue for CorvisaCloud during the current quarter and for the foreseeable future, these implementation services are expected to serve as a lead source for CorvisaCloud's CorvisaOne™ suite, which was launched during the fourth quarter of 2013.
Cost of Services
Cost of services totaled
$2.2 million
for the
six months ended June 30, 2014
and
$1.1 million
for the
three months ended June 30, 2014
. This amount consists of the direct costs of providing professional and other services, in addition to other compensation-related expenses, depreciation, software licenses, and IT support costs. As this segment is still in the early stages of development, Management continues to identify and explore opportunities to scale the business and improve the efficiency of operations with the intent to generate positive margins.
Selling, General and Administrative
Selling, general and administrative expenses for the
six and three months ended June 30, 2014
totaled
$3.0 million
and
$1.9 million
, respectively. This amount is comprised primarily of compensation-related expenses, marketing and promotional expenses, professional services, and IT support costs, as the Company continues to develop, maintain and expand its IT infrastructure and support staff to accommodate the anticipated growth of this segment. As this segment is still in the early stages of development, selling, general and administrative expenses are significantly higher as a percentage of service fee income than we would anticipate going forward. As we continue to grow and develop this business, we anticipate this percentage will decline, as many of these costs should not increase proportionate to production.
Financial Intermediary
Following is a summary of the results of operations from the Financial Intermediary segment. As discussed in Note 3 to the condensed consolidated financial statements, on June 6, 2014 the Company announced that it was exploring alternatives for Advent with the goal of selling or exiting the business by the end of 2014. As a result, the operations of Advent will be included in continuing operations until the date on which the business is sold or, in the event the business is abandoned, the run-off operations have ceased. The assets and liabilities of Advent have been classified as held for sale as of June 30, 2014.
Table 3 – Financial Intermediary Segment Operations (dollars in thousands, except unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
For the Three Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
Total
|
|
Total
|
|
Total
|
|
Total
|
|
|
|
|
|
|
|
|
Total service fee income
|
$
|
8,216
|
|
|
$
|
8,091
|
|
|
$
|
1,335
|
|
|
$
|
1,471
|
|
Net income (loss) before income taxes
|
$
|
1,097
|
|
|
$
|
633
|
|
|
$
|
(1,507
|
)
|
|
$
|
(652
|
)
|
|
|
|
|
|
|
|
|
The operations of the financial intermediary segment improved year over year despite a decrease in settlement volume. This improvement was driven primarily by favorable changes to the rebate and incentive programs offered by the Company coupled with more favorable pricing terms with our third party service providers when compared to the
six and three months ended June 30, 2013
.
Liquidity and Capital Resources
As of
June 30, 2014
, we had approximately
$39.6 million
in unrestricted cash and cash equivalents and
$0.6 million
of restricted cash, which is included in the other noncurrent assets line item on the condensed consolidated balance sheet. In addition, the Company held approximately $17.4 million in corporate notes and bonds and agency securities with average remaining maturities between four and eighteen months. There securities are classified as available for sale as of June 30, 2014 and are included in the marketable securities, current and marketable securities, non-current line items on the condensed consolidated balance sheet.
Our current projections indicate that sufficient cash and cash flows are and will be available to meet payment needs. However, our mortgage securities cash flows are volatile and uncertain, and the amounts we receive could vary materially from our projections. Further, given the early stage nature of the CorvisaCloud business, it may not contribute to quarterly earnings for some time, as it invests for long-term growth. However, we believe that the proceeds from the StreetLinks sale will be sufficient to offset any reductions in our mortgage securities cash flows, as well as absorb the cash needs necessary to grow the CorvisaCloud business to the point where it is able to generate positive cash flows on a consistent basis. As discussed under the heading “Item 1. Legal Proceedings” of Part II of this report, we are the subject of various legal proceedings, the outcomes of which are uncertain. We may also face demands in the future that are unknown to us today related to our legacy lending and servicing operations. Management believes that its current operations and its available cash are sufficient for the Company to discharge its liabilities and meet its commitments in the normal course of business.
The indentures governing the Senior Notes (the “Indentures”) contain restrictive covenants (the “Negative Covenants”) subject to exceptions in the Indentures, including written consent of the holders of the Senior Notes. The Negative Covenants prohibit NCI and its subsidiaries, from among other things, incurring debt, permitting any lien upon any of its property or assets, making any cash dividend or distribution or liquidation payment, acquiring our shares or equity in our subsidiaries, making payment on our debt securities that rank
pari passu
or junior to the Senior Notes, or disposing of any equity interest in our subsidiaries or all or substantially all
of the assets of our subsidiaries. The Senior Notes accrue interest at a rate of
1.0%
until the earlier of (a) the completion of an equity offering by NCI or our subsidiaries that results in proceeds of
$40 million
or more or (b) January 1, 2016. Thereafter, the Senior Notes will accrue interest at a rate of
three-month LIBOR
plus
3.5%
(the “Full Rate”). Interest on the Senior Notes is paid on a quarterly basis and no principal payments are due until maturity on March 30, 2033. The Negative Covenants remain in effect until both of the following conditions are met: 1) the Senior Notes begin accruing interest at the Full Rate, and 2) the Company satisfies certain financial covenants (the “Financial Covenants”). Satisfaction of the Financial Covenants requires the Company to demonstrate on a consolidated basis that (1) its Tangible Net Worth is equal to or greater than $40 million, and (2) either (a) the Interest Coverage Ratio is equal to or greater than 1.35x, or (b) the Leverage Ratio is not greater than 95%. As the Senior Notes were not accruing interest at the Full Rate, the Negative Covenants, as defined above, were still in effect as of
June 30, 2014
and
December 31, 2013
. Compliance with the Financial Covenants is required only when the Company seeks to take action prohibited by the Negative Covenants that has not been approved by the holders of the Senior Notes.
As discussed in
Note 3
, the Company and the non-controlling members of StreetLinks entered into a purchase and sale agreement with Assurant, pursuant to which Assurant purchased 100% of the outstanding membership units of StreetLinks. The sale of a subsidiary is not prohibited by the Negative Covenants, provided that the sale is at fair market value and the proceeds are reinvested in the Company. As such, the Company was in compliance with all Negative Covenants as of
June 30, 2014
and
December 31, 2013
, and therefore the Company was under no obligation to comply with the Financial Covenants during these periods.
There have been no significant changes to the Company's contractual obligations as presented in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2013
.
Overview of Cash Flow
for the Six Months Ended June 30, 2014
The following table provides a summary of our operating, investing and financing cash flows as taken from our condensed consolidated statements of cash flows for the
six months ended June 30, 2014
and
2013
.
Table 5 – Summary of Operating, Investing and Financing Cash Flows (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
2014
|
|
2013
|
Consolidated Statements of Cash Flows:
|
|
|
|
Cash (used in) provided by operating activities of continuing operations
|
$
|
(2,521
|
)
|
|
$
|
641
|
|
Cash flows provided by investing activities of continuing operations
|
36,081
|
|
|
447
|
|
Cash flows (used in) provided by financing activities of continuing operations
|
(1,202
|
)
|
|
2,603
|
|
|
|
|
|
Operating Activities
The decrease in net cash flows provided by operating activities from
$0.6 million
during the
six months ended June 30, 2013
to
$2.5 million
of net cash flows used in operating activities during the
six months ended June 30, 2014
is driven primarily by the operations of CorvisaCloud.
Investing Activities
The increase in the net cash flows provided by investing activities is due primarily to the cash proceeds received from the sale of StreetLinks offset by declines in the cash received from paydowns of notes receivable and purchases of marketable securities.
Financing Activities
The decrease in the net cash flows provided by financing activities when comparing the
six months ended June 30, 2014 and 2013
is due to a decrease in cash received from distributions of excess StreetLinks capital, as determined in accordance with the StreetLinks operating agreement. Further contributing to the decrease in cash flows provided by financing activities is the increase in cash payments for capital contributions to discontinued entities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the federal securities laws, including this report, is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Company's principal executive officer and principal financial officer evaluated the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(d)) as of the end of the period covered by this report and concluded that the Company's controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the
three months ended June 30, 2014
that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Pending Litigation.
The Company is a party to various legal proceedings. Except as set forth below, these proceedings are of an ordinary and routine nature.
Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than the active proceedings described in detail below, proceedings and actions against the Company should not, individually, or in the aggregate, have a material effect on the Company's financial condition, operations and liquidity. Furthermore, due to the uncertainty of any potential loss as a result of pending litigation and due to the Company's belief that an adverse ruling is not probable, the Company has not accrued a loss contingency related to the following matters in its consolidated financial statements. However, a material outcome in one or more of the active proceedings described below could have a material impact on the results of operations in a particular quarter or fiscal year.
On May 21, 2008, a purported class action case was filed in the Supreme Court of the State of New York, New York County, by the New Jersey Carpenters' Health Fund, on behalf of itself and all others similarly situated. Defendants in the case included NovaStar Mortgage Funding Corporation (
“
NMFC
”
), a wholly-owned subsidiary of the Company, and its individual directors, several securitization trusts sponsored by the Company ("affiliated defendants") and several unaffiliated investment banks and credit rating agencies. The case was removed to the United States District Court for the Southern District of New York. On June 16, 2009, the plaintiff filed an amended complaint. The plaintiff seeks monetary damages, alleging that the defendants violated sections 11, 12 and 15 of the Securities Act of 1933, as amended, by making allegedly false statements regarding mortgage loans that served as collateral for securities purchased by the plaintiff and the purported class members. On August 31, 2009, the Company filed a motion to dismiss the plaintiff's claims, which the court granted on March 31, 2011, with leave to amend. The plaintiff filed a second amended complaint on May 16, 2011, and the Company again filed a motion to dismiss. On March 29, 2012, the court dismissed the plaintiff's second amended complaint with prejudice and without leave to replead. The plaintiff filed an appeal. On March 1, 2013, the appellate court reversed the judgment of the lower court, which had dismissed the case. Also, the appellate court vacated the judgment of the lower court which had held that the plaintiff lacked standing, even as a class representative, to sue on behalf of investors in securities in which plaintiff had not invested
,
and the appellate court remanded the case back to the lower court for further proceedings. On April 23, 2013 the plaintiff filed its memorandum with the lower court seeking a reconsideration of the earlier dismissal of plaintiff's claims as to five offerings in which plaintiff was not invested. Given the early stage of the litigation, the Company cannot provide an estimate of the range of any loss. The Company believes that the affiliated defendants have meritorious defenses to the case and expects them to defend the case vigorously.
On June 20, 2011, the National Credit Union Administration Board, as liquidating agent of U.S. Central Federal Credit Union, filed an action against NMFC and numerous other defendants in the United States District Court for the District of Kansas, claiming that the defendants issued or underwrote residential mortgage-backed securities pursuant to allegedly false or misleading registration statements, prospectuses, and/or prospectus supplements. On October 12, 2011, the complaint was served on NMFC. On December 20, 2011, NMFC filed a motion to dismiss the plaintiff's complaint and to strike certain paragraphs of the complaint. On July 25, 2012, the court granted the motion in part and denied the motion in part. The plaintiff was granted leave to amend the complaint. On August 24, 2012, the plaintiff filed an amended complaint making essentially the same claims against NMFC. On October 29, 2012, NMFC filed a motion to dismiss the amended complaint. The defendants had claimed that the case should be dismissed based upon a statute of limitations and sought an appeal of the court
'
s denial of this defense. An interlocutory appeal of this issue was allowed, and oral argument on the appeal occurred May 8, 2013. On August 27, 2013, the Tenth Circuit affirmed the lower court’s denial of defendants’ motion to dismiss the plaintiff’s claims as being time barred; the appellate court held that the Extender Statute, 12 U.S.C. §1787(b)(14) applied to plaintiff’s claims. On September 12, 2013, the lower court denied NMFC’s motion to dismiss the amended complaint against NMFC. On June 16, 2014, the United States Supreme Court granted a motion of NMFC and its co-defendants for certiorari and vacated the earlier ruling of Tenth Circuit remanding the case back to the Tenth Circuit for further consideration in light of the Supreme Court’s decision in CTS Corp. v. Waldburger, 573 U.S. ___ 2014. Additional briefs were filed with the 10th Circuit on July 11, 2014. This litigation is in an early stage, and the Company cannot provide an estimate of the range of any loss. The Company believes that NMFC has meritorious defenses to the case and expects it to defend the case vigorously.
On February 28, 2013 the Federal Housing Finance Agency, as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac) and on behalf of the Trustee of the NovaStar Mortgage Funding Trust, Series 2007-1 (the "Trust"), a securitization trust in which the Company retains a residual interest, filed a summons with notice in the Supreme Court of the State of New York, County of New York against Novation Companies, Inc. and NovaStar Mortgage, Inc. ("NMI"), a wholly-owned subsidiary of the Company. The notice provides that this is a breach of contract action with respect to certain, unspecified mortgage loans and defendant's failure to repurchase such loans under the applicable agreements. Plaintiff alleges that defendants, from the closing date of the transaction that created the Trust that mortgage loans that were sold to the Trust, were aware of the breach of the representations and warranties made and failed to notice and cure such breaches, and due to the failure of defendants to cure any breach, notice to defendants would have been futile. The summons with notice was not served until June 28, 2013. By letter dated June 24, 2013, the Trustee of the Trust forwarded a notice from Freddie Mac alleging breaches of representations and
warranties with respect to 43 loans, as more fully set forth in included documentation. The 43 loans had an aggregate, original principal balance of about $6.5 million. On August 19, 2013, Deutsche Bank National Trust Company, as Trustee, filed a complaint identifying alleged breaches of representations and warranties with respect to seven loans that were included in the earlier list of 43 loans. Plaintiff also generally alleged a trust-wide breach of representations and warranties by defendants with respect to loans sold and transferred to the trust. Plaintiff seeks specific performance of repurchase obligations; compensatory, consequential, recessionary and equitable damages for breach of contract; specific performance and damages for anticipatory breach of contract; and indemnification (indemnification against NMI only). On October 9, 2013, the Company and NMI filed a motion to dismiss plaintiff’s complaint. This motion to dismiss was withdrawn after plaintiff filed an amended complaint on January 28, 2014, and on March 4, 2014 the Company and NMI filed a motion to dismiss the amended complaint. This litigation is in an early stage, and the Company cannot provide an estimate of the range of any loss. The Company believes that it has meritorious defenses to the case and expects to defend the case vigorously.
Item 1A. Risk Factors
Risk Factors
There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2013
.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities
|
|
Total Number of Shares Purchased
|
|
Average Price Paid per Share
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
|
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (A)
|
April 1, 2014 - April 30, 2014
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
1,020
|
|
May 1, 2014 - May 31, 2014
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
1,020
|
|
June 1, 2014 - June 30, 2014
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
A current report on Form 8-K was filed on October 2, 2000 announcing that the Board of Directors authorized the Company to repurchase its common shares, bringing the total authorization to $9 million. The Company has repurchased $8.0 million to date, leaving approximately $1.0 million of shares that may yet be purchased under the plan.
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit Listing
|
|
|
|
Exhibit No.
|
|
Description of Document
|
10.1
(1)
|
|
Amended and Restated 2004 Incentive Stock Plan (as amended May 29, 2014) *
|
10.2
|
|
Indemnification Agreement by and between Novation Companies, Inc. and Howard M. Amster *
|
10.3
|
|
Indemnification Agreement by and between Novation Companies, Inc. and Barry A. Igdaloff *
|
10.4
|
|
Form of Stock Option Agreement under the Company's Amended and Restated 2004 Incentive Stock Plan (307,166 shares issued on June 20, 2014 to Steve M. Haslam and 1,329,590 shares issued on June 20, 2014 to Matthew Lautz) *
|
10.5
(2)
|
|
First Amendment to the Company's Amended and Restated 2004 Incentive Stock Plan
|
31.1
|
|
Chief Executive Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2
|
|
Principal Financial Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1
|
|
Chief Executive Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
|
Principal Financial Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
101
|
|
The following financial information from Novation Companies, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (Extensible Business Reporting Language) includes: (i) Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Operations for the six and three months ended June 30, 2014 and 2013, (iii) Consolidated Statements of Comprehensive Income for the six and three months ended June 30, 2014 and 2013, (iv) Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2014 and 2013, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013, and (vi) the Notes to Consolidated Financial Statements.
|
|
* Management contract of compensatory plan or arrangement
|
(1) Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on May 30, 2014 (File No. 001-13533)
|
(2) Incorporated by reference to Appendix A to Form DEF 14A filed by the Registrant with the SEC on April 25, 2014 (File No. 001-13533)
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
NOVATION COMPANIES, INC.
|
|
|
|
|
DATE:
|
August 7, 2014
|
|
/s/ W. Lance Anderson
|
|
|
|
W. Lance Anderson, Chairman of the Board of Directors and Chief Executive Officer
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
DATE:
|
August 7, 2014
|
|
/s/ Rodney E. Schwatken
|
|
|
|
Rodney E. Schwatken, Chief Financial Officer
|
|
|
|
(Principal Financial Officer)
|
|
|
|
|
DATE:
|
August 7, 2014
|
|
/s/ Brett A. Monger
|
|
|
|
Brett A. Monger, Vice President and Chief Accounting Officer
|
|
|
|
(Principal Accounting Officer)
|
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made and entered into this 24
th
day of July, 2014 (this “
Agreement
”), by and between Novation Companies, Inc., a Maryland corporation (the “
Company
”), and Howard M. Amster (“
Indemnitee
”).
RECITALS
A.
The Company and Indemnitee recognize the increasing difficulty in obtaining directors’ and officers’ liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance.
B.
The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risk at the same time that the availability and coverage of liability insurance has been severely limited.
C.
Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without the protection provided by this Agreement.
D.
The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law.
AGREEMENT
The Company and Indemnitee hereby agree as follows:
1.
Definitions
. For purposes of this Agreement:
(a)
“Change in Control” shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied:
(i)
any “person” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) (other than the Company; any trustee or other fiduciary holding securities under an executive benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company), is or becomes the “beneficial owner” (as defined by Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company (not including any securities acquired directly from the Company or from a transferor in a transaction expressly approved or consented to by the Board of Directors) representing more than twenty-five percent (25%) of the combined voting power of the Company’s then outstanding securities; or
(ii)
during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board of Directors and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (ii) or (iv) of this section), (A) whose election by the Board of Directors or nomination for election by the Company’s stockholders was approved by a vote of at least (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or (B) whose election is to replace a person who ceases to be a director due to death, disability or age, cease for any reason to constitute a majority thereof; or
(iii)
the stockholders of the Company approve a merger or consolidation of the Company with another corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an executive benefit plan of the Company, at least seventy-five percent (75%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than fifty-percent (50%) of the combined voting power of the Company’s then outstanding securities; or
(iv)
the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets.
(b)
“Corporate Status” means with respect to the Indemnitee the status of such person as a director, trustee, officer, manager, employee or agent of the Company or of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise for which such person is or was serving at the request of the Company.
(c)
“Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding for which indemnification is sought by Indemnitee
(d)
“Effective Date” means the date of this Agreement.
(e)
“Expenses” includes all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred, and actually incurred, in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.
(f)
“Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and has not, nor in the past five (5) years has been, retained to represent the Company or Indemnitee in any matter material to either such party, or any other party to or witness in the Proceeding giving rise to a claim for indemnification under this Agreement. “Independent Counsel” does not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. If a Change of Control has not occurred, Independent Counsel shall be selected by the Board of Directors, with the approval of Indemnitee, which approval will not be unreasonably withheld. If a Change of Control has occurred, Independent Counsel shall be selected by Indemnitee, with the approval of the Board of Directors, which approval will not be unreasonably withheld.
(g)
“Liabilities” means liabilities of any type whatsoever incurred by reason of (i) Indemnitee’s Corporate Status, or (ii) any action taken (or failure to act) by him or on his behalf in his Corporate Status, including, but not limited to, any judgments, fines (including any excise taxes assessed on Indemnitee with respect to an employee benefit plan), ERISA excise taxes and penalties, and penalties and amounts paid in settlement of any Proceeding (including all interest, assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties or amounts paid in settlement).
(h)
“Proceeding” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative (including on appeal), including any such proceeding (i) pending or completed on or before the Effective Date, or (ii) with respect to any act or omission of the Company or any members of the Company’s board of directors committed prior to the Effective Date, unless otherwise specifically agreed in writing by the Company and Indemnitee.
2.
Services by Indemnitee
. Indemnitee will serve as a director and/or officer of the Company. However, this Agreement does not impose any obligation on Indemnitee or the Company to continue Indemnitee’s service to the Company beyond any period otherwise required by law or by other agreements or commitments of the parties, if any.
3.
Indemnification - General
. The Company will indemnify, and advance Expenses to, Indemnitee as provided in this Agreement and otherwise to the maximum extent permitted by Maryland law in effect on the Effective Date and as amended from time to time. However, no change in Maryland law will have the effect of reducing the benefits available to Indemnitee based on Maryland law as in effect on the Effective Date. The rights of Indemnitee provided in this Section 3 include, without limitation, the rights set forth in the other sections of this Agreement, including any additional indemnification permitted by Section 2-418(g) of the Maryland General Corporation Law (the “MGCL”).
4.
Third Party Proceedings
. Indemnitee is entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be, made a party to or a witness in any Proceeding, other than a Proceeding by or in the right of the Company. Under this Section 4, Indemnitee will be indemnified against all Liabilities and Expenses actually
and reasonably incurred by him or on his behalf in connection with a Proceeding by reason of his Corporate Status unless one of the following is established:
(a)
The act or omission of Indemnitee was material to the matter giving rise to the Proceeding, and
(i)
was committed in bad faith, or
(ii)
was the result of active and deliberate dishonesty;
(b)
Indemnitee actually received an improper personal benefit in money, property or services; or
(c)
In the case of any criminal Proceeding, Indemnitee had reasonable cause to believe that his conduct was unlawful.
5.
Proceedings by or in the Right of the Company
. Indemnitee is entitled to the rights of indemnification provided in this Section 5 if, by reason of his Corporate Status, he is, or is threatened to be, made a party to or a witness in any Proceeding brought by or in the right of the Company to procure a judgment in its favor. Under this Section 5, Indemnitee will be indemnified against all Liabilities and Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding, unless one of the following is established:
(a)
The act or omission of Indemnitee was material to the matter giving rise to such a Proceeding, and
(i)
was committed in bad faith, or
(ii)
was the result of active and deliberate dishonesty; or
(b)
Indemnitee actually received an improper personal benefit in money, property or services.
6.
Court-Ordered Indemnification
. Notwithstanding any other provision of this Agreement, a court of appropriate jurisdiction, upon application of Indemnitee and such notice as the court requires, may order indemnification in certain circumstances. However, indemnification for any Proceeding by or in the right of the Company, or in which liability has been adjudged in the circumstances described in Section 2-418(c) of the MGCL, will be limited to Expenses actually and reasonably incurred by Indemnitee or on his behalf in connection with a Proceeding. The circumstances under which a court may order such indemnification as it deems proper are:
(a)
If it determines that Indemnitee is entitled to reimbursement under Section 2-418(d)(1) of the MGCL, the court will order indemnification, in which case Indemnitee will be entitled to recover the expenses of securing such reimbursement; or
(b)
If it determines that Indemnitee is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not Indemnitee has:
(i)
met the standards of conduct set forth in Section 2-418(b) of the MGCL; or
(ii)
been adjudged liable for receipt of an improper personal benefit under Section 2-418(c) of the MGCL.
7.
Indemnification for Expenses of a Party Who is Wholly or Partly Successful
. Notwithstanding any other provision of this Agreement, and without limiting any such provision, to the extent that Indemnitee is, by reason of his Corporate Status, made a party to and is successful, on the merits or otherwise, in the defense of any Proceeding, he will be indemnified for all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company will indemnify Indemnitee under this Section 7 for all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter, allocated on a reasonable and proportionate basis. For purposes of this Section 7 and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, will be deemed to be a successful result as to such claim, issue or matter.
8.
Advance of Expenses
. The Company will advance all reasonable Expenses actually and reasonably incurred by or on behalf of Indemnitee in connection with any Proceeding (other than a Proceeding brought to enforce indemnification under this Agreement, applicable law, the Charter or Bylaws of the Company, any agreement, a resolution of the stockholders entitled to vote generally in the election of directors or a resolution of the Board of Directors), to which Indemnitee is, or is threatened to be, made a party or a witness, within ten (10) days after the receipt by the Company of a written statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements must reasonably evidence the Expenses incurred by Indemnitee. The statement or statements must include a written affirmation by Indemnitee of Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Company, as authorized by law and by this Agreement, has been met. The statement or statements must also include a written undertaking by or on behalf of Indemnitee, in substantially the form attached hereto as
Exhibit A
, or in such form as may be required under applicable law as in effect at the time the undertaking is signed. The undertaking requires Indemnitee to reimburse the portion of any Expenses advanced to him relating to claims, issues or matters in the Proceeding for which it is ultimately determined pursuant to Section 9 of this Agreement that the standard of conduct was not met and which have not been successfully resolved as described in Section 7 of this Agreement. Such reimbursement will be made within thirty (30) days of such determination; provided, however, that if Indemnitee has commenced, or commences within such thirty (30)-day period, legal proceedings in a court of competent jurisdiction to secure a determination that he should be indemnified under applicable law, any determination made by the Company that Indemnitee is not entitled to indemnification will not be binding, and Indemnitee will not be required to reimburse the Company for any Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or have lapsed). To the extent that Expenses advanced to Indemnitee do not relate to a specific claim, issue or matter in the Proceeding, such Expenses will be allocated
on a reasonable and proportionate basis. The undertaking required by this Section 8 will be an unlimited general obligation by or on behalf of Indemnitee and will be accepted without reference to Indemnitee’s financial ability to repay such advanced Expenses and without any requirement to post security therefor.
9.
Procedure for Determination of Entitlement to Indemnification
.
(a)
To obtain indemnification under this Agreement, Indemnitee must submit to the Company a written request, including such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company will, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.
(b)
Upon proper written request for indemnification by Indemnitee, a determination, if required by applicable law, with respect to Indemnitee’s entitlement to indemnification will promptly be made in the following manner:
(i)
if a Change in Control has occurred, by Independent Counsel in a written opinion to the Board of Directors, a copy of which will be delivered to Indemnitee; or
(ii)
if a Change of Control has not occurred,
(A)
by the Board of Directors (or a duly authorized committee thereof) by a majority vote of a quorum consisting of Disinterested Directors, or
(B)
if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which will be delivered to Indemnitee, or
(C)
if so directed by a majority of the members of the Board of Directors, by the stockholders of the Company.
(c)
If it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee will be made within ten (10) days after such determination. Indemnitee will cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity, upon reasonable advance request, any documentation or information that is not privileged or otherwise protected from disclosure, and that is reasonably available to Indemnitee and reasonably necessary to such determination in the discretion of the Board of Directors or Independent Counsel if retained pursuant to Section 9(b). Any Expenses actually and reasonably incurred by Indemnitee in cooperating with the person, persons or entity making such determination will be borne by the
Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company will indemnify and hold Indemnitee harmless therefrom.
(d)
If the person or persons empowered or selected under Section 9(b) to determine whether Indemnitee is entitled to indemnification has/have not made a determination within thirty (30) days after receipt by the Company of a written request from Indemnitee for indemnification, the requisite determination of entitlement to indemnification will be deemed to have been made in favor of the Indemnitee, and he will be entitled to such indemnification, absent (i) an intentional misstatement by Indemnitee of a material fact, or an intentional omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification; or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 30-day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person or persons making such determination reasonably and in good faith requires such additional time to complete the obtaining or evaluation of documentation and/or information relating thereto. In the event that the determination as to entitlement to indemnification is made by Independent Counsel or the stockholders of the Company, the thirty (30)-day period shall not begin until the Independent Counsel is selected or until a meeting of the stockholders has been held, provided, however, the notice of any such meeting and any necessary proxy statement must have been filed with the Securities and Exchange Commission within thirty (30) days of the submission by the Indemnitee of a written request for indemnification.
10.
Presumptions and Effect of Certain Proceedings
.
(a)
In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination must presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 9(a). Anyone seeking to overcome this presumption will have the burden of proof and the burden of persuasion, by clear and convincing evidence. In addition, if the person or persons making a determination pursuant to Section 9(b) determine(s) that Indemnitee is not entitled to indemnification hereunder, such determination will not create a presumption against Indemnitee’s entitlement to indemnification in any later action, suit or proceeding initiated by Indemnitee to enforce his rights under this Agreement.
(b)
The termination of any Proceeding by judgment, order, settlement, conviction, a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, does not create a presumption that Indemnitee did not meet the requisite standard of conduct described herein for indemnification.
11.
Remedies of Indemnitee
.
(a)
Indemnitee will be entitled to an adjudication in an appropriate court located in the State of Maryland, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advance of Expenses if any of the following occur:
(i)
a determination is made pursuant to Section 9 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement;
(ii)
advance of Expenses is not timely made pursuant to Section 8 of this Agreement;
(iii)
payment of indemnification is not made pursuant to Section 7 of this Agreement within ten (10) days after receipt by the Company of a written request therefor; or
(b)
payment of indemnification is not made within ten (10) days after (A) a determination has been made that Indemnitee is entitled to indemnification, or (B) the end of the thirty (30)-day period after which Indemnitee is deemed to be entitled to indemnification pursuant to Section 9(e).
(c)
As an alternative to the remedy described in Section 11(a), Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the commercial Arbitration Rules of the American Arbitration Association. Indemnitee must commence such proceeding for adjudication or an award in arbitration within one hundred and eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding under Section 11(a).
(d)
In any judicial proceeding or arbitration commenced pursuant to this Section 11 the Company has the burden of proof and the burden of persuasion, by clear and continuing evidence, that Indemnitee is not entitled to indemnification or advance of Expenses, as the case may be.
(e)
If a determination has been made under Section 9(b) of this Agreement that Indemnitee is entitled to indemnification, the Company will be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 11, unless Indemnitee makes a misstatement of a material fact, or omits a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification.
(f)
If Indemnitee seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, under this Section 11, then Indemnitee will be entitled to recover from the Company, and will be indemnified by the Company for, any and all Expenses actually and reasonably incurred by him in such judicial adjudication or arbitration. If it is determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advance of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration will be appropriately prorated.
12.
Defense of the Underlying Proceeding
.
(a)
Indemnitee must notify the Company promptly upon being served with or receiving any summons, citation, subpoena, complaint, indictment, information, notice, request or other document relating to any Proceeding that may result in the right to indemnification or the advance of Expenses hereunder. However, the failure to give any such notice will not disqualify Indemnitee from the right, or otherwise affect in any manner any right of Indemnitee, to
indemnification or the advance of Expenses under this Agreement unless the Company’s ability to defend in such Proceeding or to obtain proceeds under any insurance policy is materially and adversely prejudiced thereby, and then only to the extent the Company is actually so prejudiced.
(b)
Subject to the provisions of the last sentence of this Section 12(b) and of Sections 12(c) and 12(d), the Company will have the right to defend Indemnitee in any Proceeding that may give rise to indemnification hereunder, subject to Indemnitee’s approval of counsel, which approval may not be unreasonably withheld. However, the Company must notify Indemnitee of any such decision to defend within fifteen (15) calendar days following receipt of notice of any such Proceeding under Section 12(a). The Company may not, without the prior written consent of Indemnitee, consent to the entry of any judgment against Indemnitee, or enter into any settlement or compromise that (A) includes an admission of Indemnitee’s fault or (B) does not include, as an unconditional term, the full release of Indemnitee from all liability in respect of such Proceeding. Such release must be in form and substance reasonably satisfactory to Indemnitee. This Section 12(b) does not apply to a Proceeding brought by Indemnitee under Section 11 or Section 19.
(c)
Indemnitee will be entitled to representation by separate legal counsel of Indemnitee’s choice, subject to the Company’s prior approval, which approval may not be unreasonably withheld, at the expense of the Company, in a Proceeding to which Indemnitee is a party by reason of Indemnitee’s Corporate Status, in the following circumstances:
(i)
Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval may not be unreasonably withheld, that he may have separate defenses or counterclaims to assert with respect to any issue that may not be consistent with other defendants in such Proceeding;
(ii)
Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval may not be unreasonably withheld, that an actual or apparent conflict of interest or potential conflict of interest exists between Indemnitee and the Company; or
(iii)
if the Company fails to assume the defense of such Proceeding in a timely manner.
(d)
In addition, if the Company fails to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any Proceeding to deny or to recover from Indemnitee the benefits intended to be provided to Indemnitee hereunder, Indemnitee shall have the right to retain counsel of Indemnitee’s choice, subject to the prior approval of the Company, which shall not be unreasonably withheld, at the expense of the Company (subject to Section 11(e)), to represent Indemnitee in connection with any such matter.
13.
Non-Exclusivity; Survival of Rights; Subrogation; Insurance
.
(a)
The rights of indemnification and advance of Expenses provided by this Agreement will not be deemed exclusive of any other rights to which Indemnitee may at any time
be entitled under applicable law, the Charter or Bylaws of the Company, any agreement or a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof may limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal.
(b)
If any payment is made under this Agreement, the Company will be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who will execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
(c)
The Company will not be liable under this Agreement to make any payment of amounts otherwise indemnifiable or payable or reimbursable as Expenses hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.
14.
Insurance
. The Company will use its reasonable best efforts to acquire directors and officers liability insurance, on terms and conditions deemed appropriate by the Board of Directors of the Company, with the advice of counsel, covering Indemnitee or any claim made against Indemnitee for service as a director or officer of the Company and covering the Company for any indemnification or advance of Expenses made by the Company to Indemnitee for any claims made against Indemnitee for service as a director or officer of the Company. Without limiting any other obligation under this Agreement, the Company will indemnify Indemnitee for any payment by Indemnitee arising out of the amount of any deductible or retention and the amount of any excess of Liabilities and Expenses actually and reasonably incurred by Indemnitee in connection with a Proceeding over the coverage of any insurance referred to in the previous sentence.
15.
Indemnification for Expenses of a Witness
. Notwithstanding any other provision of this Agreement, if Indemnitee is or may be, by reason of his Corporate Status, a witness in any Proceeding, whether instituted by the Company or any other party, and to which Indemnitee is not a party but in which the Indemnitee receives a subpoena to testify, he will be advanced all reasonable Expenses and indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.
16.
Duration of Agreement; Binding Effect
.
(a)
All agreements and obligations of the Company contained herein will continue during the period Indemnitee is a director, trustee, officer, manager, employee or agent of the Company or of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise for which such person is or was serving at the request of the Company and will continue thereafter so long as Indemnitee is, or may be, subject to any possible Proceeding by reason of the fact that Indemnitee was a director, trustee, officer, manager, employee or agent of the Company or was serving in any other capacity referred to herein.
(b)
The indemnification and advance of Expenses provided by, or granted under, this Agreement will be binding upon and enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company). The indemnification and advance of Expenses will inure to the benefit of Indemnitee and his spouse, assigns, heirs, devisees, executors and administrators and other legal representatives.
(c)
The Company will require and cause any successor to all, substantially all or a substantial part, of the business and/or assets of the Company - whether direct or indirect by purchase, merger, consolidation or otherwise - to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Such assumption by any successor must be in writing in form and substance satisfactory to Indemnitee.
17.
Severability
. If any provision or provisions of this Agreement are held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) will not in any way be affected or impaired thereby. To the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) will be construed so as to give effect to the intent manifested thereby.
18.
Exception to Right of Indemnification or Advance of Expenses
. Notwithstanding any other provision of this Agreement, Indemnitee will not be entitled to indemnification or advance of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee, unless:
(a)
The Proceeding is brought to enforce indemnification under this Agreement, and then only to the extent in accordance with and as authorized by Sections 8 and 11 of this Agreement; or
(b)
The Company’s Bylaws, the Charter, a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors or an agreement approved by the Board of Directors to which the Company is a party expressly provides otherwise.
19.
Specific Performance
. The Company and Indemnitee recognize that if any provision of this Agreement is violated by the Company, Indemnitee may be without an adequate remedy at law. Accordingly, in the event of any such violation, Indemnitee will be entitled, if Indemnitee so elects, to institute proceedings, either in law or at equity, to obtain damages, to enforce specific performance, to enjoin such violation, or to obtain any relief or any combination of the foregoing as Indemnitee may elect it to pursue.
20.
Identical Counterparts
. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute
one and the same Agreement. One such counterpart signed by the party against whom enforceability is sought will be sufficient to evidence the existence of this Agreement.
21.
Headings
. The headings of the paragraphs of this Agreement are inserted for convenience only and will not be deemed to constitute part of this Agreement or to affect the construction thereof.
22.
Modification and Waiver
. No supplement, modification or amendment of this Agreement will be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement will be deemed or constitute a waiver of any other provisions hereof (whether or not similar), nor will such waiver constitute a continuing waiver.
23.
Notices
. Addresses for notice to either party are as shown on the signature pages of this Agreement, or as later modified by written notice. All notices, requests, demands and other communications hereunder must be in writing and will be deemed to have been duly given if:
(a)
Delivered by hand and receipted for by the party to whom said notice or other communication has been directed; or
(b)
Mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed.
24.
Governing Law
. The parties agree that this Agreement will be governed by, and construed and enforced in accordance with, the laws of the State of Maryland, without regard to its conflicts of laws rules.
25.
Miscellaneous
. Use of the masculine pronoun will be deemed to include usage of the feminine pronoun where appropriate.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.
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COMPANY:
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NOVATION COMPANIES, INC.
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By:
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/s/ Rodney E. Schwatken
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Name:
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Rodney Schwatken
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Title:
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Chief Financial Officer
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INDEMNITEE:
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/s/ Howard M. Amster
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Howard M. Amster
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EXHIBIT A
FORM OF UNDERTAKING TO REPAY EXPENSES ADVANCED
The Board of Directors of Novation Companies, Inc.
Re: Undertaking to Repay Expenses Advanced
Ladies and Gentlemen:
This undertaking is being provided pursuant to that certain Indemnification Agreement dated the day of , 2014 , by and between Novation Companies, Inc. (the “
Company
”) and the undersigned Indemnitee (the “
Indemnification Agreement
”), pursuant to which I am entitled to advance of expenses in connection with [Description of Proceeding] (the “
Proceeding
”).
Terms used herein and not otherwise defined have the meanings specified in the Indemnification Agreement.
I am subject to the Proceeding by reason of my Corporate Status or by reason of alleged actions or omissions by me in such capacity. I hereby affirm that at all times, insofar as I was involved as [a director] [an officer] of the Company, in any of the facts or events giving rise to the Proceeding, I (1) acted in good faith and honestly, (2) did not receive any improper personal benefit in money, property or services and (3) in the case of any criminal Proceeding, had no reasonable cause to believe that any act or omission by me was unlawful.
In consideration of the advance of Expenses by the Company for reasonable attorneys’ fees and related expenses incurred by me in connection with the Proceeding (the “Advanced Expenses”), I hereby agree that if, in connection with the Proceeding, it is determined that (1) an act or omission by me was material to the matter giving rise to the Proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty or (2) I actually received an improper personal benefit in money, property or services or (3) in the case of any criminal Proceeding, I had reasonable cause to believe that my conduct was unlawful, then I must reimburse the portion of the Expenses relating to the claims, issues or matters in the Proceeding as to which the foregoing findings have been established and which have not been successfully resolved as described in Section 7 of the Indemnification Agreement within the time periods set forth in and otherwise in accordance with Section 8 of the Indemnification Agreement. To the extent that Advanced Expenses do not relate to a specific claim, issue or matter in the Proceeding, I agree that such Expenses will be allocated on a reasonable and proportionate basis.
IN WITNESS WHEREOF, I have executed this Affirmation and Undertaking on this day of , 2014.
WITNESS:
(SEAL)
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made and entered into this 24
th
day of July, 2014 (this “
Agreement
”), by and between Novation Companies, Inc., a Maryland corporation (the “
Company
”), and Barry A. Igdaloff (“
Indemnitee
”).
RECITALS
A.
The Company and Indemnitee recognize the increasing difficulty in obtaining directors’ and officers’ liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance.
B.
The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risk at the same time that the availability and coverage of liability insurance has been severely limited.
C.
Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without the protection provided by this Agreement.
D.
The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law.
AGREEMENT
The Company and Indemnitee hereby agree as follows:
1.
Definitions
. For purposes of this Agreement:
(a)
“Change in Control” shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied:
(i)
any “person” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) (other than the Company; any trustee or other fiduciary holding securities under an executive benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company), is or becomes the “beneficial owner” (as defined by Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company (not including any securities acquired directly from the Company or from a transferor in a transaction expressly approved or consented to by the Board of Directors) representing more than twenty-five percent (25%) of the combined voting power of the Company’s then outstanding securities; or
(ii)
during any period of two (2) consecutive years (not including
any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board of Directors and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (ii) or (iv) of this section), (A) whose election by the Board of Directors or nomination for election by the Company’s stockholders was approved by a vote of at least (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or (B) whose election is to replace a person who ceases to be a director due to death, disability or age, cease for any reason to constitute a majority thereof; or
(iii)
the stockholders of the Company approve a merger or consolidation of the Company with another corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an executive benefit plan of the Company, at least seventy-five percent (75%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than fifty-percent (50%) of the combined voting power of the Company’s then outstanding securities; or
(iv)
the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets.
(b)
“Corporate Status” means with respect to the Indemnitee the status of such person as a director, trustee, officer, manager, employee or agent of the Company or of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise for which such person is or was serving at the request of the Company.
(c)
“Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding for which indemnification is sought by Indemnitee
(d)
“Effective Date” means the date of this Agreement.
(e)
“Expenses” includes all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred, and actually incurred, in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.
(f)
“Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and has not, nor in the past five (5) years has been, retained
to represent the Company or Indemnitee in any matter material to either such party, or any other party to or witness in the Proceeding giving rise to a claim for indemnification under this Agreement. “Independent Counsel” does not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. If a Change of Control has not occurred, Independent Counsel shall be selected by the Board of Directors, with the approval of Indemnitee, which approval will not be unreasonably withheld. If a Change of Control has occurred, Independent Counsel shall be selected by Indemnitee, with the approval of the Board of Directors, which approval will not be unreasonably withheld.
(g)
“Liabilities” means liabilities of any type whatsoever incurred by reason of (i) Indemnitee’s Corporate Status, or (ii) any action taken (or failure to act) by him or on his behalf in his Corporate Status, including, but not limited to, any judgments, fines (including any excise taxes assessed on Indemnitee with respect to an employee benefit plan), ERISA excise taxes and penalties, and penalties and amounts paid in settlement of any Proceeding (including all interest, assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties or amounts paid in settlement).
(h)
“Proceeding” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative (including on appeal), including any such proceeding (i) pending or completed on or before the Effective Date, or (ii) with respect to any act or omission of the Company or any members of the Company’s board of directors committed prior to the Effective Date, unless otherwise specifically agreed in writing by the Company and Indemnitee.
2.
Services by Indemnitee
. Indemnitee will serve as a director and/or officer of the Company. However, this Agreement does not impose any obligation on Indemnitee or the Company to continue Indemnitee’s service to the Company beyond any period otherwise required by law or by other agreements or commitments of the parties, if any.
3.
Indemnification - General
. The Company will indemnify, and advance Expenses to, Indemnitee as provided in this Agreement and otherwise to the maximum extent permitted by Maryland law in effect on the Effective Date and as amended from time to time. However, no change in Maryland law will have the effect of reducing the benefits available to Indemnitee based on Maryland law as in effect on the Effective Date. The rights of Indemnitee provided in this Section 3 include, without limitation, the rights set forth in the other sections of this Agreement, including any additional indemnification permitted by Section 2-418(g) of the Maryland General Corporation Law (the “MGCL”).
4.
Third Party Proceedings
. Indemnitee is entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be, made a party to or a witness in any Proceeding, other than a Proceeding by or in the right of the Company. Under this Section 4, Indemnitee will be indemnified against all Liabilities and Expenses actually and reasonably incurred by him or on his behalf in connection with a Proceeding by reason of his Corporate Status unless one of the following is established:
(a)
The act or omission of Indemnitee was material to the matter giving rise to the Proceeding, and
(i)
was committed in bad faith, or
(ii)
was the result of active and deliberate dishonesty;
(b)
Indemnitee actually received an improper personal benefit in money, property or services; or
(c)
In the case of any criminal Proceeding, Indemnitee had reasonable cause to believe that his conduct was unlawful.
5.
Proceedings by or in the Right of the Company
. Indemnitee is entitled to the rights of indemnification provided in this Section 5 if, by reason of his Corporate Status, he is, or is threatened to be, made a party to or a witness in any Proceeding brought by or in the right of the Company to procure a judgment in its favor. Under this Section 5, Indemnitee will be indemnified against all Liabilities and Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding, unless one of the following is established:
(a)
The act or omission of Indemnitee was material to the matter giving rise to such a Proceeding, and
(i)
was committed in bad faith, or
(ii)
was the result of active and deliberate dishonesty; or
(b)
Indemnitee actually received an improper personal benefit in money, property or services.
6.
Court-Ordered Indemnification
. Notwithstanding any other provision of this Agreement, a court of appropriate jurisdiction, upon application of Indemnitee and such notice as the court requires, may order indemnification in certain circumstances. However, indemnification for any Proceeding by or in the right of the Company, or in which liability has been adjudged in the circumstances described in Section 2-418(c) of the MGCL, will be limited to Expenses actually and reasonably incurred by Indemnitee or on his behalf in connection with a Proceeding. The circumstances under which a court may order such indemnification as it deems proper are:
(a)
If it determines that Indemnitee is entitled to reimbursement under Section 2-418(d)(1) of the MGCL, the court will order indemnification, in which case Indemnitee will be entitled to recover the expenses of securing such reimbursement; or
(b)
If it determines that Indemnitee is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not Indemnitee has:
(i)
met the standards of conduct set forth in Section 2-418(b) of the MGCL; or
(ii)
been adjudged liable for receipt of an improper personal benefit under Section 2-418(c) of the MGCL.
7.
Indemnification for Expenses of a Party Who is Wholly or Partly Successful
. Notwithstanding any other provision of this Agreement, and without limiting any such provision, to the extent that Indemnitee is, by reason of his Corporate Status, made a party to and is successful, on the merits or otherwise, in the defense of any Proceeding, he will be indemnified for all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company will indemnify Indemnitee under this Section 7 for all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter, allocated on a reasonable and proportionate basis. For purposes of this Section 7 and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, will be deemed to be a successful result as to such claim, issue or matter.
8.
Advance of Expenses
. The Company will advance all reasonable Expenses actually and reasonably incurred by or on behalf of Indemnitee in connection with any Proceeding (other than a Proceeding brought to enforce indemnification under this Agreement, applicable law, the Charter or Bylaws of the Company, any agreement, a resolution of the stockholders entitled to vote generally in the election of directors or a resolution of the Board of Directors), to which Indemnitee is, or is threatened to be, made a party or a witness, within ten (10) days after the receipt by the Company of a written statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements must reasonably evidence the Expenses incurred by Indemnitee. The statement or statements must include a written affirmation by Indemnitee of Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Company, as authorized by law and by this Agreement, has been met. The statement or statements must also include a written undertaking by or on behalf of Indemnitee, in substantially the form attached hereto as
Exhibit A
, or in such form as may be required under applicable law as in effect at the time the undertaking is signed. The undertaking requires Indemnitee to reimburse the portion of any Expenses advanced to him relating to claims, issues or matters in the Proceeding for which it is ultimately determined pursuant to Section 9 of this Agreement that the standard of conduct was not met and which have not been successfully resolved as described in Section 7 of this Agreement. Such reimbursement will be made within thirty (30) days of such determination; provided, however, that if Indemnitee has commenced, or commences within such thirty (30)-day period, legal proceedings in a court of competent jurisdiction to secure a determination that he should be indemnified under applicable law, any determination made by the Company that Indemnitee is not entitled to indemnification will not be binding, and Indemnitee will not be required to reimburse the Company for any Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or have lapsed). To the extent that Expenses advanced to Indemnitee do not relate to a specific claim, issue or matter in the Proceeding, such Expenses will be allocated on a reasonable and proportionate basis. The undertaking required by this Section 8 will be an unlimited general obligation by or on behalf of Indemnitee and will be accepted without reference to Indemnitee’s financial ability to repay such advanced Expenses and without any requirement to
post security therefor.
9.
Procedure for Determination of Entitlement to Indemnification
.
(a)
To obtain indemnification under this Agreement, Indemnitee must submit to the Company a written request, including such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company will, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.
(b)
Upon proper written request for indemnification by Indemnitee, a determination, if required by applicable law, with respect to Indemnitee’s entitlement to indemnification will promptly be made in the following manner:
(i)
if a Change in Control has occurred, by Independent Counsel in a written opinion to the Board of Directors, a copy of which will be delivered to Indemnitee; or
(ii)
if a Change of Control has not occurred,
(A)
by the Board of Directors (or a duly authorized committee thereof) by a majority vote of a quorum consisting of Disinterested Directors, or
(B)
if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which will be delivered to Indemnitee, or
(C)
if so directed by a majority of the members of the Board of Directors, by the stockholders of the Company.
(c)
If it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee will be made within ten (10) days after such determination. Indemnitee will cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity, upon reasonable advance request, any documentation or information that is not privileged or otherwise protected from disclosure, and that is reasonably available to Indemnitee and reasonably necessary to such determination in the discretion of the Board of Directors or Independent Counsel if retained pursuant to Section 9(b). Any Expenses actually and reasonably incurred by Indemnitee in cooperating with the person, persons or entity making such determination will be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company will indemnify and hold Indemnitee harmless therefrom.
(d)
If the person or persons empowered or selected under Section 9(b) to determine whether Indemnitee is entitled to indemnification has/have not made a determination within thirty (30) days after receipt by the Company of a written request from Indemnitee for indemnification, the requisite determination of entitlement to indemnification will be deemed to have been made in favor of the Indemnitee, and he will be entitled to such indemnification, absent (i) an intentional misstatement by Indemnitee of a material fact, or an intentional omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification; or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 30-day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person or persons making such determination reasonably and in good faith requires such additional time to complete the obtaining or evaluation of documentation and/or information relating thereto. In the event that the determination as to entitlement to indemnification is made by Independent Counsel or the stockholders of the Company, the thirty (30)-day period shall not begin until the Independent Counsel is selected or until a meeting of the stockholders has been held, provided, however, the notice of any such meeting and any necessary proxy statement must have been filed with the Securities and Exchange Commission within thirty (30) days of the submission by the Indemnitee of a written request for indemnification.
10.
Presumptions and Effect of Certain Proceedings
.
(a)
In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination must presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 9(a). Anyone seeking to overcome this presumption will have the burden of proof and the burden of persuasion, by clear and convincing evidence. In addition, if the person or persons making a determination pursuant to Section 9(b) determine(s) that Indemnitee is not entitled to indemnification hereunder, such determination will not create a presumption against Indemnitee’s entitlement to indemnification in any later action, suit or proceeding initiated by Indemnitee to enforce his rights under this Agreement.
(b)
The termination of any Proceeding by judgment, order, settlement, conviction, a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, does not create a presumption that Indemnitee did not meet the requisite standard of conduct described herein for indemnification.
11.
Remedies of Indemnitee
.
(a)
Indemnitee will be entitled to an adjudication in an appropriate court located in the State of Maryland, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advance of Expenses if any of the following occur:
(i)
a determination is made pursuant to Section 9 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement;
(ii)
advance of Expenses is not timely made pursuant to Section 8 of this Agreement;
(iii)
payment of indemnification is not made pursuant to Section 7 of this Agreement within ten (10) days after receipt by the Company of a written request therefor; or
(b)
payment of indemnification is not made within ten (10) days after (A) a determination has been made that Indemnitee is entitled to indemnification, or (B) the end of the thirty (30)-day period after which Indemnitee is deemed to be entitled to indemnification pursuant to Section 9(e).
(c)
As an alternative to the remedy described in Section 11(a), Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the commercial Arbitration Rules of the American Arbitration Association. Indemnitee must commence such proceeding for adjudication or an award in arbitration within one hundred and eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding under Section 11(a).
(d)
In any judicial proceeding or arbitration commenced pursuant to this Section 11 the Company has the burden of proof and the burden of persuasion, by clear and continuing evidence, that Indemnitee is not entitled to indemnification or advance of Expenses, as the case may be.
(e)
If a determination has been made under Section 9(b) of this Agreement that Indemnitee is entitled to indemnification, the Company will be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 11, unless Indemnitee makes a misstatement of a material fact, or omits a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification.
(f)
If Indemnitee seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, under this Section 11, then Indemnitee will be entitled to recover from the Company, and will be indemnified by the Company for, any and all Expenses actually and reasonably incurred by him in such judicial adjudication or arbitration. If it is determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advance of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration will be appropriately prorated.
12.
Defense of the Underlying Proceeding
.
(a)
Indemnitee must notify the Company promptly upon being served with or receiving any summons, citation, subpoena, complaint, indictment, information, notice, request or other document relating to any Proceeding that may result in the right to indemnification or the advance of Expenses hereunder. However, the failure to give any such notice will not disqualify Indemnitee from the right, or otherwise affect in any manner any right of Indemnitee, to indemnification or the advance of Expenses under this Agreement unless the Company’s ability to defend in such Proceeding or to obtain proceeds under any insurance policy is materially and adversely prejudiced thereby, and then only to the extent the Company is actually so prejudiced.
(b)
Subject to the provisions of the last sentence of this Section 12(b) and of Sections 12(c) and 12(d), the Company will have the right to defend Indemnitee in any Proceeding that may give rise to indemnification hereunder, subject to Indemnitee’s approval of counsel, which approval may not be unreasonably withheld. However, the Company must notify Indemnitee of any such decision to defend within fifteen (15) calendar days following receipt of notice of any such Proceeding under Section 12(a). The Company may not, without the prior written consent of Indemnitee, consent to the entry of any judgment against Indemnitee, or enter into any settlement or compromise that (A) includes an admission of Indemnitee’s fault or (B) does not include, as an unconditional term, the full release of Indemnitee from all liability in respect of such Proceeding. Such release must be in form and substance reasonably satisfactory to Indemnitee. This Section 12(b) does not apply to a Proceeding brought by Indemnitee under Section 11 or Section 19.
(c)
Indemnitee will be entitled to representation by separate legal counsel of Indemnitee’s choice, subject to the Company’s prior approval, which approval may not be unreasonably withheld, at the expense of the Company, in a Proceeding to which Indemnitee is a party by reason of Indemnitee’s Corporate Status, in the following circumstances:
(i)
Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval may not be unreasonably withheld, that he may have separate defenses or counterclaims to assert with respect to any issue that may not be consistent with other defendants in such Proceeding;
(ii)
Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval may not be unreasonably withheld, that an actual or apparent conflict of interest or potential conflict of interest exists between Indemnitee and the Company; or
(iii)
if the Company fails to assume the defense of such Proceeding in a timely manner.
(d)
In addition, if the Company fails to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any Proceeding to deny or to recover from Indemnitee the benefits intended to be provided to Indemnitee hereunder, Indemnitee shall have the right to retain counsel of Indemnitee’s choice, subject to the prior approval of the Company, which shall not be unreasonably withheld, at the expense of the Company (subject to Section 11(e)), to represent Indemnitee in connection with any such matter.
13.
Non-Exclusivity; Survival of Rights; Subrogation; Insurance
.
(a)
The rights of indemnification and advance of Expenses provided by this Agreement will not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Charter or Bylaws of the Company, any agreement or a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof may limit or restrict any right of Indemnitee under this Agreement in respect of any action
taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal.
(b)
If any payment is made under this Agreement, the Company will be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who will execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
(c)
The Company will not be liable under this Agreement to make any payment of amounts otherwise indemnifiable or payable or reimbursable as Expenses hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.
14.
Insurance
. The Company will use its reasonable best efforts to acquire directors and officers liability insurance, on terms and conditions deemed appropriate by the Board of Directors of the Company, with the advice of counsel, covering Indemnitee or any claim made against Indemnitee for service as a director or officer of the Company and covering the Company for any indemnification or advance of Expenses made by the Company to Indemnitee for any claims made against Indemnitee for service as a director or officer of the Company. Without limiting any other obligation under this Agreement, the Company will indemnify Indemnitee for any payment by Indemnitee arising out of the amount of any deductible or retention and the amount of any excess of Liabilities and Expenses actually and reasonably incurred by Indemnitee in connection with a Proceeding over the coverage of any insurance referred to in the previous sentence.
15.
Indemnification for Expenses of a Witness
. Notwithstanding any other provision of this Agreement, if Indemnitee is or may be, by reason of his Corporate Status, a witness in any Proceeding, whether instituted by the Company or any other party, and to which Indemnitee is not a party but in which the Indemnitee receives a subpoena to testify, he will be advanced all reasonable Expenses and indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.
16.
Duration of Agreement; Binding Effect
.
(a)
All agreements and obligations of the Company contained herein will continue during the period Indemnitee is a director, trustee, officer, manager, employee or agent of the Company or of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise for which such person is or was serving at the request of the Company and will continue thereafter so long as Indemnitee is, or may be, subject to any possible Proceeding by reason of the fact that Indemnitee was a director, trustee, officer, manager, employee or agent of the Company or was serving in any other capacity referred to herein.
(b)
The indemnification and advance of Expenses provided by, or granted under, this Agreement will be binding upon and enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company). The indemnification and advance of Expenses will inure to the benefit of Indemnitee and his spouse, assigns, heirs,
devisees, executors and administrators and other legal representatives.
(c)
The Company will require and cause any successor to all, substantially all or a substantial part, of the business and/or assets of the Company - whether direct or indirect by purchase, merger, consolidation or otherwise - to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Such assumption by any successor must be in writing in form and substance satisfactory to Indemnitee.
17.
Severability
. If any provision or provisions of this Agreement are held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) will not in any way be affected or impaired thereby. To the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) will be construed so as to give effect to the intent manifested thereby.
18.
Exception to Right of Indemnification or Advance of Expenses
. Notwithstanding any other provision of this Agreement, Indemnitee will not be entitled to indemnification or advance of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee, unless:
(a)
The Proceeding is brought to enforce indemnification under this Agreement, and then only to the extent in accordance with and as authorized by Sections 8 and 11 of this Agreement; or
(b)
The Company’s Bylaws, the Charter, a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors or an agreement approved by the Board of Directors to which the Company is a party expressly provides otherwise.
19.
Specific Performance
. The Company and Indemnitee recognize that if any provision of this Agreement is violated by the Company, Indemnitee may be without an adequate remedy at law. Accordingly, in the event of any such violation, Indemnitee will be entitled, if Indemnitee so elects, to institute proceedings, either in law or at equity, to obtain damages, to enforce specific performance, to enjoin such violation, or to obtain any relief or any combination of the foregoing as Indemnitee may elect it to pursue.
20.
Identical Counterparts
. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same Agreement. One such counterpart signed by the party against whom enforceability is sought will be sufficient to evidence the existence of this Agreement.
21.
Headings
. The headings of the paragraphs of this Agreement are inserted for convenience only and will not be deemed to constitute part of this Agreement or to affect the construction thereof.
22.
Modification and Waiver
. No supplement, modification or amendment of this Agreement will be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement will be deemed or constitute a waiver of any other provisions hereof (whether or not similar), nor will such waiver constitute a continuing waiver.
23.
Notices
. Addresses for notice to either party are as shown on the signature pages of this Agreement, or as later modified by written notice. All notices, requests, demands and other communications hereunder must be in writing and will be deemed to have been duly given if:
(a)
Delivered by hand and receipted for by the party to whom said notice or other communication has been directed; or
(b)
Mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed.
24.
Governing Law
. The parties agree that this Agreement will be governed by, and construed and enforced in accordance with, the laws of the State of Maryland, without regard to its conflicts of laws rules.
25.
Miscellaneous
. Use of the masculine pronoun will be deemed to include usage of the feminine pronoun where appropriate.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.
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COMPANY:
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NOVATION COMPANIES, INC.
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By:
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/s/ Rodney E. Schwatken
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Name:
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Rodney Schwatken
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Title:
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Chief Financial Officer
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INDEMNITEE:
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/s/ Barry A. Igdaloff
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Barry A. Igdaloff
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EXHIBIT A
FORM OF UNDERTAKING TO REPAY EXPENSES ADVANCED
The Board of Directors of Novation Companies, Inc.
Re: Undertaking to Repay Expenses Advanced
Ladies and Gentlemen:
This undertaking is being provided pursuant to that certain Indemnification Agreement dated the day of , 2014 , by and between Novation Companies, Inc. (the “
Company
”) and the undersigned Indemnitee (the “
Indemnification Agreement
”), pursuant to which I am entitled to advance of expenses in connection with [Description of Proceeding] (the “
Proceeding
”).
Terms used herein and not otherwise defined have the meanings specified in the Indemnification Agreement.
I am subject to the Proceeding by reason of my Corporate Status or by reason of alleged actions or omissions by me in such capacity. I hereby affirm that at all times, insofar as I was involved as [a director] [an officer] of the Company, in any of the facts or events giving rise to the Proceeding, I (1) acted in good faith and honestly, (2) did not receive any improper personal benefit in money, property or services and (3) in the case of any criminal Proceeding, had no reasonable cause to believe that any act or omission by me was unlawful.
In consideration of the advance of Expenses by the Company for reasonable attorneys’ fees and related expenses incurred by me in connection with the Proceeding (the “Advanced Expenses”), I hereby agree that if, in connection with the Proceeding, it is determined that (1) an act or omission by me was material to the matter giving rise to the Proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty or (2) I actually received an improper personal benefit in money, property or services or (3) in the case of any criminal Proceeding, I had reasonable cause to believe that my conduct was unlawful, then I must reimburse the portion of the Expenses relating to the claims, issues or matters in the Proceeding as to which the foregoing findings have been established and which have not been successfully resolved as described in Section 7 of the Indemnification Agreement within the time periods set forth in and otherwise in accordance with Section 8 of the Indemnification Agreement. To the extent that Advanced Expenses do not relate to a specific claim, issue or matter in the Proceeding, I agree that such Expenses will be allocated on a reasonable and proportionate basis.
IN WITNESS WHEREOF, I have executed this Affirmation and Undertaking on this day of , 2014.
WITNESS:
(SEAL)
EMPLOYEE NON-QUALIFIED STOCK OPTION AGREEMENT
EMPLOYEE NON-QUALIFIED STOCK OPTION AGREEMENT
, dated as of the __th day of _____, 20__, by and between Novation Companies, Inc., a Maryland corporation (the “Company”) and __________ (the “Optionee”).
WHEREAS
, pursuant to the terms of the Company’s 2004 Incentive Stock Plan, as amended (the “Plan”), the Compensation Committee of the Board of Directors of the Company (the “Committee”) has determined that the Optionee is to be granted an option to purchase a specified number of shares of the Company’s common stock on the terms and conditions set forth herein;
WHEREAS
, the Optionee is now an employee of the Company or a Subsidiary of the Company, as defined in the Plan; and
WHEREAS
, the Company and the Optionee desire to enter into this Agreement for the purpose of memorializing the terms and conditions of the option.
NOW, THEREFORE
, the Company and the Optionee agree as follows:
1.
Grant Subject to Plan
. The Option (as defined below) is expressly subject to all terms and provisions of the Plan, and the terms and provisions of such Plan are incorporated herein by reference. Capitalized terms not defined herein shall have the meaning ascribed thereto in the Plan.
2.
Number of Shares and Option Price
. Pursuant to the action of the Committee, which action was effective on __________, 20___ (the “Date of Grant”), the Optionee is hereby granted a non-qualified stock option (the “Option”) to purchase _______________ (________) shares of the Company’s common stock (the “Option Shares”), at the purchase price of Fifty One Cents ($0.51) per share (the “Option Price”). The Option Price is equal to or greater than the price at which the Company’s common stock was last sold as quoted on the Pink Sheets of the OTC on the Date of Grant.
3.
Period of Option
. The term of the Option and of this Agreement shall commence on the Date of Grant and terminate upon the expiration of ten (10) years from the Date of Grant. Upon termination of the Option, all rights of the Optionee hereunder shall cease.
4.
Conditions of Exercise
. This Option may be exercised, in whole or in part at any time, or from time to time, up to ten (10) years from the Date of Grant, but only during the period in which such Option remains exercisable as herein provided. One-quarter of the Option Shares shall vest on each anniversary of the Date of Grant; provided, however, that notwithstanding the foregoing, all of the then-unvested Option Shares shall automatically vest on the closing date of a transaction (i) in which (A) all of the equity interests, or substantially all of the assets, of CorvisaCloud, LLC, a Subsidiary (“Corvisa”), are sold to a Third Party, (B) Corvisa is merged with and into a Third Party and does not retain its separate legal existence or (C) Corvisa is no longer considered a “Subsidiary” of the Company, as defined in the Plan (each of (A), (B) and (C), a “Corvisa Change”), and (ii) as a result of which Optionee is no longer an employee of the Company or any Subsidiary of the Company. For purposes of this Agreement, “Third Party” shall mean any person that is not directly or indirectly controlling, controlled by, or under common control with, the Company. For purposes of the foregoing definition, “control” of an entity means (i) the right, contractual or otherwise, to, directly or indirectly, manage such entity or substantially all of its assets, or (ii) the direct or indirect ownership of more than fifty percent (50%) of the outstanding capital stock or other equity interests of such entity having ordinary voting power.
5.
Nontransferability of Option
. Other than a transfer as described in Section 5(c) of the Plan or otherwise in the discretion of the Administrator pursuant to Section 5(c) of the Plan, the Option and this Agreement shall not be transferable.
6.
Exercise of Option
. The Option may be exercised as described in Section 5 of the Plan or in the following manner: the Optionee, or the person or persons having the right to exercise the Option upon the death or Disability of the Optionee, shall deliver to the Company written notice specifying the number of Option shares which he or she elects to purchase, together with either (i) cash, (ii) shares of Company common stock having a Fair Market Value determined as of the date of exercise, (iii) cancellation of any indebtedness owed by the Company to the Optionee, or (iv) any combination of the above, the sum of which equals the total price to be paid upon the exercise of the Option, and the stock purchased shall thereupon be promptly delivered. The Optionee will not be deemed to be a holder of any shares pursuant to exercise of the Option until the date of issuance to him or her of a stock certificate for such shares and until the shares are paid in full.
7.
Adjustment for Changes in Capitalization
. As described in Section 3(d) of the Plan, in the event of any extraordinary corporate changes occurring after the date hereof, the Administrator shall make adjustments to the Option as set forth therein.
8.
Termination by Death
. If the Optionee’s service
with the Company or any Subsidiary terminates by reason of death, the Option may thereafter be exercised by the legal representative of the estate or by the legatee of the Optionee under the will of the Optionee, to the full extent of the Option Shares, for a period of twelve (12) months or until the expiration of the stated term of such Option, whichever period is shorter.
9.
Termination by Reason of Disability
. If the Optionee’s service
with the Company or any Subsidiary terminates by reason of Disability, any Option held by the Optionee may thereafter be exercised, to the full extent of the Option Shares, for a period of twelve (12) months from the date of such termination of employment or until the expiration of the stated term of such Option, whichever period is shorter;
provided
,
however
, that if the Optionee dies within such twelve (12) month period and prior to the expiration of the stated term of such Option, such Option may thereafter be exercised for a period of twelve (12) months from the date of death or until the expiration of the stated term of such Option, whichever period is shorter.
10.
Termination for Cause
. If the Optionee’s employment with the Company or any Subsidiary is terminated by the Company for “Cause,” as defined below, then the Option shall terminate and no longer be exercisable by the Optionee. For purposes of this Agreement, “Cause” shall mean:
a)
the failure by Optionee to perform such material duties as are reasonably requested in good faith by the Company or, in the case of an employee of a Subsidiary, by the Optionee’s employer, in the course of Optionee’s performance of his duties as an employee;
b)
Optionee’s material disregard of his duties or material failure to act, where such action would be in the ordinary course of Optionee’s duties as an employee;
c)
the material failure by Optionee to observe Company policies or, in the case of an employee of a Subsidiary, the policies of Optionee’s employer;
d)
gross negligence, recklessness or willful misconduct by Optionee in the performance of his duties as an employee;
e)
a conviction of or a plea of guilty or nolo contendere by Optionee to a misdemeanor involving fraud, embezzlement, theft, other financial dishonesty or moral turpitude, or to a felony;
f)
the Company’s reasonable determination, or in the case of an employee of a Subsidiary, the Optionee’s employer’s reasonable determination, that Optionee has engaged in the commission of violations of state or federal law relating to the workplace environment (including, without limitation, laws prohibiting unlawful harassment, discrimination, retaliation, or other conduct related to the workplace);
g)
the breach by Optionee of the provisions of any agreement between the Optionee and Company or, in the case of an employee of a Subsidiary, the breach by Optionee of the provisions of any agreement between the Optionee and the Optionee’s employer; or
h)
any definition of “Cause” set forth in any contract governing termination of Optionee’s employment by Company or any Subsidiary.
11.
Termination by Corvisa Change
. If the Optionee’s service with the Company or any Subsidiary terminates by reason of a Corvisa Change, as a result of which Optionee is no longer an employee of the Company or any Subsidiary of the Company, then the Option may be exercised to the extent it has become exercisable, for a period of three (3) years from the date of such termination or until the expiration of the stated term of the Option, whichever period is shorter;
provided
,
however
, that if the Optionee dies within such three (3) year period and prior to the expiration of the stated term of such Option, such Option may thereafter be exercised to the extent it has become exercisable for a period of twelve (12) months from the date of death or until the expiration of the stated term of the Option, whichever period is shorter.
12.
Other Termination
. If the Optionee’s service with the Company (and/or any Subsidiary, as the case may be, such that Optionee is no longer employed by either the Company or any Subsidiary) terminates for any reason other than death, Disability, Cause, or a Corvisa Change, the Option may be exercised to the extent it has become exercisable, for a period of three (3) months from the date of such termination or until the expiration of the stated term of the Option, whichever period is shorter;
provided
,
however
, that if the Optionee dies within such three (3) month period and prior to the expiration of the stated term of such Option, such Option may thereafter be exercised to the extent it has become exercisable for a period of twelve (12) months from the date of death or until the expiration of the stated term of the Option, whichever period is shorter.
13.
Option Not an Incentive Stock Option
. It is intended that the Option shall not be treated as an incentive stock option under Section 422 or the Internal Revenue Code of 1986, as amended.
14.
No Contract of Employment
. Nothing contained in this Agreement shall be considered or construed as creating a contract of employment for any specified period of time.
15.
Failure to Enforce Not a Waiver
. The failure of the Company to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.
16.
Entire Agreement; Amendments
. No modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing specifically referred hereto, and signed by the parties hereto. This Agreement supersedes all prior agreements and understandings between the Optionee and the Company to the extent that any such agreements or understandings conflict with the terms hereof.
17.
Governing Law
. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri without regard to the principles of conflicts of law, which might otherwise apply.
[signature page follows]
IN WITNESS WHEREOF
, this Agreement is executed as of the day and year first above written.
NOVATION COMPANIES, INC.
Name: W. Lance Anderson
Title: Chief Executive Officer
OPTIONEE
[___________]
Exhibit 31.1
CERTIFICATION
I, W. Lance Anderson, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Novation Companies, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a.
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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b.
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c.
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Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d.
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Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
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5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
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a.
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
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b.
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
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Date:
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August 7, 2014
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/s/ W. Lance Anderson
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W. Lance Anderson
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Chairman of the Board of Directors and
Chief Executive Officer
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Exhibit 31.2
CERTIFICATION
I, Rodney E. Schwatken, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Novation Companies, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a.
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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b.
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c.
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Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d.
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Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
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5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
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a.
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
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b.
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
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Date:
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August 7, 2014
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/s/ Rodney E. Schwatken
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Rodney E. Schwatken
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Chief Financial Officer
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES - OXLEY ACT OF 2002
In connection with the Quarterly Report of Novation Companies, Inc. (the “Company”) on Form 10-Q for the period ended
June 30, 2014
, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, W. Lance Anderson, Chairman of the Board and Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, that:
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(1)
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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(2)
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Date:
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August 7, 2014
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/s/ W. Lance Anderson
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W. Lance Anderson
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Chairman of the Board of Directors and
Chief Executive Officer
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This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES - OXLEY ACT OF 2002
In connection with the Quarterly Report of Novation Companies, Inc. (the “Company”) on Form 10-Q for the period ended
June 30, 2014
, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rodney E. Schwatken, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, that:
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(1)
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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(2)
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Date:
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August 7, 2014
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/s/ Rodney E. Schwatken
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Rodney E. Schwatken
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Chief Financial Officer
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This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.