-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WwJD/XUZ0AhzfcaYq/XKhVXa3p3NIve38zb6VpAYvn6c/ZgL/xjd5IEOmRUgZjqG w6fxOLKp35Tt8ToovlA1JA== 0000929624-99-000645.txt : 19990407 0000929624-99-000645.hdr.sgml : 19990407 ACCESSION NUMBER: 0000929624-99-000645 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990330 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVASTAR FINANCIAL INC CENTRAL INDEX KEY: 0001025953 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 742830661 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-13533 FILM NUMBER: 99587726 BUSINESS ADDRESS: STREET 1: 1901 W 47TH PLACE STREET 2: STE 105 CITY: WESTWOOD STATE: KS ZIP: 66205 BUSINESS PHONE: 9133621090 MAIL ADDRESS: STREET 1: 1901 WEST 47TH PLACE CITY: WESTWOOD STATE: KS ZIP: 66205 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ FORM 8-K Current Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act Of 1934 March 30, 1999 Date of Report (Date of earliest event reported) NOVASTAR FINANCIAL, INC. ------------------------ (Exact Name of Registrant as Specified in Charter)
Maryland 001-13533 74-2830661 -------- ---------- ---------- (State or Other Jurisdiction (Commission File Number) (I.R.S. Employer Identification No.) (of Incorporation)
1901 West 47th Place Suite 105 Westwood, Kansas 66205 ---------------------- (Address of Principal Executive Offices) (913) 362-1090 -------------- (Registrant's Telephone Number, Including Area Code) Not Applicable -------------- (Former Name or Former Address, if Changed Since Last Report) INFORMATION TO BE INCLUDED IN THE REPORT Item 5. OTHER EVENTS ------------ On March 29, 1999, NovaStar Financial, Inc. completed the issuance of 4,285,714 shares (approximately $30 million) of Class B 7% Cumulative Convertible Preferred Stock offered at $7.00 per share pursuant to a private placement memorandum dated March 8, 1999. The preferred stock, par value $.01 per share, is convertible, at the option of the holder, into one share of common stock and may be redeemable by NovaStar Financial, Inc. at any time after March 31, 2002. Approximately $25 million was acquired by Walter Weitz & Company. Stifel, Nicolaus & Company, Incorporated served as placement agent. In connection with the issuance of the shares of preferred stock, a Registration Rights Agreement was entered into March 25, 1999, by and between NovaStar Financial and Stifel, Nicolaus & Company, Incorporated. This issuance of the preferred stock and the earlier issuance of warrants in connection with financing arrangements entered into with First Union and GMAC/Residential Funding Corporation will result in a reduction of the effective exercise price for holders of NovaStar's December 9, 1996 warrants to acquire common stock at $15.00 per share. Pursuant to anti-dilution provisions contained in the 1996 warrants, each warrant exercised at $15.00 will purchase 1.29 shares of common stock, which represents an effective exercise price of $11.62 per share. This new effective exercise price is in effect without any further action required on the part of warrantholders. Item 7(c). Exhibit ------- 3.4 Articles Supplementary of NovaStar Financial, Inc. dated as of March 24, 1999, as filed with the Maryland Department of Assessments and Taxation. 4.3 Specimen certificate for preferred stock. 10.24 Warrant Agreement, dated as of March 10, 1999, by and between NovaStar Financial, Inc. and Residential Funding Corporation, and related Guaranty Warrant, Tag Along Warrant and Registration Rights Agreement. 10.25 Registration Rights Agreement, with respect to the preferred stock, dated as of March 25, 1999, by and between NovaStar Financial, Inc. and Stifel, Nicolaus & Company, Incorporated. 99.2 Press Release from NovaStar Financial, Inc. dated 3/30/99. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: April 5, 1999 NOVASTAR FINANCIAL, INC. By: /s/ Mark J. Kohlrus ------------------------------------ Mark J. Kohlrus Senior Vice President, Treasurer and Chief Financial Officer EXHIBIT INDEX Exhibit Number - -------------- 3.4 Articles Supplementary of NovaStar Financial, Inc. dated as of March 24, 1999, as filed with the Maryland Department of Assessments and Taxation. 4.3 Specimen certificate for preferred stock. 10.24 Warrant Agreement, dated as of March 10, 1999, by and between NovaStar Financial, Inc. and Residential Funding Corporation, and related Guaranty Warrant, Tag Along Warrant, and Registration Rights Agreement. 10.25 Registration Rights Agreement, with respect to the preferred stock, dated as of March 25, 1999, by and between NovaStar Financial, Inc. and Residential Funding Corporation. 99.2 Press Release from NovaStar Financial, Inc. dated 3/30/99. EX-3.4 2 ARTICLES SUPPLEMENTARY OF NOVASTAR EXHIBIT 3.4 ARTICLES SUPPLEMENTARY NOVASTAR FINANCIAL, INC. CLASS B 7.00% CUMULATIVE CONVERTIBLE PREFERRED STOCK (PAR VALUE $.01 PER SHARE) NovaStar Financial, Inc., a Maryland corporation (hereinafter called the "Corporation"), having its principal office at 1901 West 47th Place, Suite 105, Westwood, Kansas, hereby certifies to the Department of Assessments and Taxation of the State of Maryland that: FIRST: Pursuant to authority expressly vested in the Board of Directors of the Corporation by Article VI of the Charter of the Corporation, the Board of Directors has duly divided and classified Four Million Three Hundred Thousand (4,300,000) authorized but unissued shares of the capital stock of the Corporation into a class designated as Class B 7.00% Cumulative Convertible Preferred Stock and has provided for the issuance of such class. SECOND: The reclassification increases the number of shares classified as Class B 7.00% Cumulative Convertible Preferred Stock, par value $.01 per share, from no shares immediately prior to the reclassification to 3,471,429 shares immediately after the reclassification. The reclassification decreases the number of shares classified as Common Stock, par value $.01 per share, from 50,000,000 shares immediately prior to the reclassification to 46,428,571 shares immediately after the reclassification. The number of shares classified as Class B 7.00% Cumulative Convertible Preferred Stock may be decreased pursuant to Section 6 of Article Third of these Articles Supplementary upon reacquisition thereof in any manner, or by retirement thereof, by the Corporation. THIRD: The terms of the Class B 7.00% Cumulative Convertible Preferred Stock (including the preferences, conversions or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, or terms or conditions of redemption) as set by the Board of Directors are as follows: 1. Number of Shares and Designation. This class of Preferred Stock shall be designated as Class B 7.00% Cumulative Convertible Preferred Stock (the "Class B Preferred Stock") and Four Million Three Hundred Thousand (4,300,000) shall be the authorized number of shares of such Class B Preferred Stock constituting such class. 2. Definitions. For purposes of the Class B Preferred Stock, the following terms shall have the meanings indicated: "Act" shall mean the Securities Act of 1933, as amended. "affiliate" of a Person means a Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified. "Board of Directors" shall mean the Board of Directors of the Corporation or any committee authorized by such Board of Directors to perform any of its responsibilities with respect to the Class B Preferred Stock. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which state or federally chartered banking institutions in New York, New York are not required to be open. "Call Date" shall have the meaning set forth in paragraph (b) of Section 5 hereof. "Charter" shall mean the Articles of Incorporation of the Corporation, as amended to-date. 1 "Class B Preferred Stock" shall have the meaning set forth in Section 1 hereof "Common Stock" shall mean the common stock, $.01 par value per share, of the Corporation or such shares of the Corporation's Capital Stock into which outstanding shares of Common Stock shall be reclassified. "Conversion Price" shall mean the conversion price per share of Common Stock for which each share of Class B Preferred Stock is convertible, as such Conversion Price may be adjusted pursuant to paragraph (d) of Section 7. The initial Conversion Price shall be $7.00 (equivalent to an initial conversion rate of one share of Common Stock for each share of Class B Preferred Stock). "Current Market Price" of publicly traded shares of Common Stock or any other class or series of Capital Stock or other security of the Corporation or of any similar security of any other issuer for any day shall mean the closing price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices regular way on such day, in either case as reported on the National Market of the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or, if such security is not quoted on such National Market, on the principal national securities exchange on which such securities are listed or admitted for trading, or if not so quoted, listed or admitted, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on such day shall not have been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any New York Stock Exchange or National Association of Securities Dealers, Inc. member firm regularly making a market in such security selected for such purpose by the Chief Executive Officer or the Board of Directors or if any class or series of securities are not publicly traded, the fair value of the shares of such class as determined reasonably and in good faith by the Board of Directors of the Corporation. "Distribution" shall have the meaning set forth in paragraph (d)(iii) of Section 7 hereof. "Dividend Payment Date" shall mean, with respect to each Dividend Period, the tenth (10th) day of January, May, August and November, in each year, commencing on May 10, 1999 with respect to the period commencing on the Issue Date and ending March 31, 1999; provided, however, that if any Dividend Payment Date falls on any day other than a Business Day, the dividend payment payable on such Dividend Payment Date shall be paid on the Business Day immediately following such Dividend Payment Date. "Dividend Periods" shall mean quarterly dividend periods commencing on January 1, April 1, July 1 and October 1 of each year and ending on and including the day preceding the first day of the next succeeding Dividend Period (other than the initial Dividend Period, which shall commence on the Issue Date and end on and include March 31, 1999). "Fair Market Value" shall mean the average of the daily Current Market Prices of a share of Common Stock during five (5) consecutive Trading Days selected by the Corporation commencing not more than twenty (20) Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex" date with respect to the issuance or distribution requiring such computation. The term "'ex' date," when used with respect to any issuance or distribution, means the first day on which the share of Common Stock trades regular way, without the right to receive such issuance or distribution, on the exchange or in the market, as the case may be, used to determine that day's Current Market Price. "Issue Date" shall mean March 25, 1999. "Junior Stock" shall mean the Common Stock and any other class or series of Capital Stock of the Corporation over which the shares of Class B Preferred Stock have preference or priority in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Corporation. "Parity Stock" shall have the meaning set forth in paragraph (b) of Section 8 hereof. 2 "Person" shall mean any individual, firm, partnership, corporation or other entity and shall include any successor (by merger or otherwise) of such entity. "set apart for payment" shall be deemed to include, without any action other than the following, the recording by the Corporation in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Board of Directors, the allocation of funds to be so paid on any series or class of Capital Stock of the Corporation; provided, however, that if any funds for any class or series of Junior Stock or any class or series of Parity Stock are placed in a separate account of the Corporation or delivered to a disbursing, paying or other similar agent, then "set apart for payment" with respect to the Class B Preferred Stock shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent. "Trading Day", as to any securities, shall mean any day on which such securities are traded on the National Market of NASDAQ or, if such securities are not listed or admitted for trading on the National Market of NASDAQ, on the principal national securities exchange on which such securities are listed or admitted or, if such securities are not listed or admitted for trading on any national securities exchange, in the securities market in which such securities are traded. "Transaction" shall have the meaning set forth in paragraph (e) of Section 7 hereof. "Transfer Agent" means UMB Bank, N.A., or such other transfer agent as may be designated by the Board of Directors or their designee as the transfer agent for the Class B Preferred Stock. "Voting Preferred Stock" shall have the meaning set forth in Section 9 hereof. 3. Dividends. (a) The holders of Class B Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available for that purpose, cumulative dividends payable in cash in an amount per share of Class B Preferred Stock equal to the greater of (i) the base dividend of $0.1225 per quarter (the "Base Rate") or (ii) the cash dividends declared on the number of shares of Common Stock, or portion thereof, into which a share of Class B Preferred Stock is convertible. The initial Dividend Period shall commence on the Issue Date and end on March 31, 1999. The dividends payable with respect to the portion of the initial Dividend Period commencing on the Issue Date and ending on March 31, 1999, shall be determined solely by reference to the Base Rate. The amount referred to in clause (ii) of this paragraph (a) with respect to each succeeding Dividend Period shall be determined as of the applicable Dividend Payment Date by multiplying the number of shares of Common Stock, or portion thereof calculated to the fourth decimal point, into which a share of Class B Preferred Stock would be convertible at the opening of business on such Dividend Payment Date (based on the Conversion Price then in effect) by the aggregate cash dividends payable or paid for such Dividend Period in respect of a share of Common Stock outstanding as of the record date for the payment of dividends on the Common Stock with respect to such Dividend Period or, if different, with respect to the most recent quarterly period for which dividends with respect to the Common Stock have been declared. Such dividends shall be cumulative from the Issue Date, whether or not in any Dividend Period or Periods such dividends shall be declared or there shall be funds of the Corporation legally available for the payment of such dividends, and shall be payable quarterly in arrears on the Dividend Payment Dates, commencing on the first Dividend Payment Date after the Issue Date. Each such dividend shall be payable in arrears to the holders of record of the Class B Preferred Stock, as they appear on the stock records of the Corporation at the close of business on a record date fixed by the Board of Directors which shall be not more than 60 days prior to the applicable Dividend Payment Date and, within such 60 day period, shall be the same date as the record date for the regular quarterly dividend payable with respect to the Common Stock for the Dividend Period to which such Dividend Payment Date relates (or, if there is no such record date for Common Stock, then such date as the Board of Directors may fix). Accumulated, accrued and unpaid dividends for any past Dividend Periods may be declared and paid at any time, 3 without reference to any regular Dividend Payment Date, to holders of record on such date, which date shall not precede by more than 45 days the payment date thereof, as may be fixed by the Board of Directors. Upon a final administrative determination by the Internal Revenue Service that the Corporation does not qualify as a real estate investment trust in accordance with Section 856 of the Internal Revenue Code of 1986 (the "Code"), the Base Rate set forth in (a)(i) will be increased to $0.16 until such time as the Corporation regains its status as a real estate investment trust; provided, however, that if (i) the Corporation voluntarily terminates its real estate investment trust status pursuant to the vote of a majority of the Board of Directors, the Base Rate shall not be increased or (ii) the Corporation contests its loss of real estate investment trust status in Federal Court, following its receipt of an opinion of nationally recognized tax counsel to the effect that there is a reasonable basis to contest such loss of status, the Base Rate shall not be increased during the pendency of such judicial proceeding; provided further, however, that upon a final judicial determination in Federal Tax Court, Federal District Court or the Federal Claims Court that the Corporation does not qualify as a real estate investment trust, the Base Rate will be increased as stated above. (b) The amount of dividends payable per share of Class B Preferred Stock for the portion of the initial Dividend Period commencing on the Issue Date and ending and including March 31, 1999, or any other period shorter than a full Dividend Period, shall be computed ratably on the basis of twelve 30-day months and a 360-day year. Holders of Class B Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of cumulative dividends, as herein provided, on the Class B Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Class B Preferred Stock that may be in arrears. (c) So long as any of the shares of Class B Preferred Stock are outstanding, except as described in the immediately following sentence, no dividends shall be declared or paid or set apart for payment by the Corporation and no other distribution of cash or other property shall be declared or made directly or indirectly by the Corporation with respect to any class or series of Parity Stock for any period unless dividends equal to the full amount of accumulated, accrued and unpaid dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been or contemporaneously is set apart for such payment on the Class B Preferred Stock for all Dividend Periods terminating on or prior to the Dividend Payment Date with respect to such class or series of Parity Stock. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all dividends declared upon the Class B Preferred Stock and all dividends declared upon any other class or series of Parity Stock shall be declared ratably in proportion to the respective amounts of dividends accumulated, accrued and unpaid on the Class B Preferred Stock and accumulated, accrued and unpaid on such Parity Stock. (d) So long as any of the shares of Class B Preferred Stock are outstanding, no dividends (other than dividends or distributions paid in shares of or options, warrants or rights to subscribe for or purchase shares of Junior Stock) shall be declared or paid or set apart for payment by the Corporation and no other distribution of cash or other property shall be declared or made directly or indirectly by the Corporation with respect to any shares of Junior Stock, nor shall any shares of Junior Stock be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of Common Stock made for purposes of an employee incentive or benefit plan of the Corporation or any subsidiary) for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) directly or indirectly by the Corporation (except by conversion into or exchange for Junior Stock), nor shall any other cash or other property otherwise be paid or distributed to or for the benefit of any holder of shares of Junior Stock in respect thereof, directly or indirectly, by the Corporation unless in each case (i) the full cumulative dividends (including all accumulated, accrued and unpaid dividends) on all outstanding shares of Class B Preferred Stock and any other Parity Stock of the Corporation shall have been paid or such dividends have been declared and set apart for payment for all past Dividend Periods with respect to the Class B Preferred Stock and all past dividend periods with respect to such Parity Stock and (ii) sufficient funds shall have been paid or set apart for the payment of the full dividend for the current Dividend Period with respect to the Class B Preferred Stock and the current dividend period with respect to such Parity Stock. 4 4. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment or distribution of the Corporation (whether capital or surplus) shall be made to or set apart for the holders of Junior Stock, the holders of shares of Class B Preferred Stock shall be entitled to receive Seven Dollars ($7.00) per share of Class B Preferred Stock (the "Liquidation Preference"), plus an amount equal to all dividends (whether or not earned or declared) accumulated, accrued and unpaid thereon to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. Until the holders of the Class B Preferred Stock have been paid the Liquidation Preference in full, plus an amount equal to all dividends (whether or not earned or declared) accumulated, accrued and unpaid thereon to the date of final distribution to such holders, no payment will be made to any holder of Junior Stock upon the liquidation, dissolution or winding up of the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of Class B Preferred Stock and any class or series of Parity Stock shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other shares of any class or series of Parity Stock, then such assets, or the proceeds thereof, shall be distributed among the holders of Class B Preferred Stock and any such other Parity Stock ratably in the same proportion as the respective amounts that would be payable on such Class B Preferred Stock and any such other Parity Stock if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation or merger of the Corporation with one or more corporations, (ii) a sale or transfer of all or substantially all of the Corporation's assets, or (iii) a statutory share exchange shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation. (b) Subject to the rights of the holders of any shares of Parity Stock, upon any liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full to the holders of Class B Preferred Stock and any Parity Stock, as provided in this Section 4, any other series or class or classes of Junior Stock shall, subject to the respective terms thereof, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Class B Preferred Stock and any Parity Stock shall not be entitled to share therein. 5. Redemption at the Option of the Corporation. (a) Shares of Class B Preferred Stock shall not be redeemable by the Corporation prior to March 31, 2002. Shares of Class B Preferred Stock may be redeemed, in whole or in part, at the option of the Corporation at any time on or after March 31, 2002 out of funds legally available therefor at a redemption price payable in cash equal to $7.00 per share of Class B Preferred Stock (plus all accumulated, accrued and unpaid dividends as provided below). The Corporation shall pay in cash all cumulative, accrued and unpaid dividends for all Dividend Periods ending prior to the Dividend Period in which the redemption occurs, plus the dividend (determined by reference to the Base Rate if the Call Date precedes the date on which the dividend on the Common Stock is declared for such Dividend Period) accrued from the beginning of the Dividend Period in which the redemption occurs and ending on the Call Date, provided, however, that if such Call Date is on or after the record date for such Dividend Period, each holder of Class B Preferred Stock at the close of business on such dividend record date shall be entitled to the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the redemption of such shares prior to such Dividend Payment Date. Except as provided above, the Corporation shall make no payment or allowance for accumulated or accrued dividends on shares of Class B Preferred Stock called for redemption or on the shares of Common Stock issued upon such redemption. (b) Shares of Class B Preferred Stock shall be redeemed by the Corporation on the date specified in the notice to holders required under paragraph (d) of this Section 5 (the "Call Date"). The Call Date shall be selected by the Corporation, shall be specified in the notice of redemption and shall be not less than 30 days nor more than 60 days after the date notice of redemption is sent by the Corporation. (c) If full cumulative dividends on all outstanding shares of Class B Preferred Stock and any other class or series of Parity Stock of the Corporation have not been paid or declared and set apart for payment, no shares of Class B Preferred Stock may be redeemed unless all outstanding shares of Class B Preferred Stock are simultaneously redeemed and neither the Corporation nor any affiliate of the Corporation may purchase or acquire 5 shares of Class B Preferred Stock, otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of shares of Class B Preferred Stock. (d) Notice of the Corporation's redemption of shares of Class B Preferred Stock shall be given to each holder of record of the shares to be redeemed by first class mail, postage prepaid, at such holder's address as the same appears on the stock records of the Corporation, or by publication in The Wall Street Journal or The New York Times, or if neither such newspaper is then being published, any other daily newspaper of national circulation not less than 30 nor more than 60 days prior to the Call Date. If the Corporation elects to provide such notice by publication, it shall also promptly mail notice of such redemption to the holders of the shares of Class B Preferred Stock to be redeemed. Neither the failure to mail any notice required by this paragraph (d), nor any defect therein or in the mailing thereof to any particular holder, shall affect the sufficiency of the notice or the validity of the proceedings for redemption with respect to the other holders. Any notice which was mailed in the manner herein provided shall be conclusively presumed to have been duly given on the date mailed whether or not the holder receives the notice. Each such mailed or published notice shall state, as appropriate: (1) the Call Date; (2) the number of shares of Class B Preferred Stock to be redeemed and, if fewer than all such shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) that the redemption will be for cash pursuant to paragraph (a) of this Section 5; (4) the place or places at which certificates for such shares are to be surrendered for certificates representing shares of Common Stock; and (5) the then-current Conversion Price. Notice having been published or mailed as aforesaid, from and after the Call Date (unless the Corporation shall fail to make available the amount of cash necessary to effect such redemption), (i) except as otherwise provided herein, dividends on the shares of Class B Preferred Stock so called for redemption shall cease to accumulate or accrue on the shares of Class B Preferred Stock called for redemption (except that, in the case of a Call Date after a dividend record date and prior to the related Dividend Payment Date, holders of Class B Preferred Stock on the dividend record date will be entitled on such Dividend Payment Date to receive the dividend payable on such shares), (ii) said shares shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Class B Preferred Stock of the Corporation shall cease (except the rights to receive cash payable upon such redemption, without interest thereon, upon surrender and endorsement of their certificates if so required and to receive any dividends payable thereon). The Corporation's obligation to provide cash in accordance with the preceding sentence shall be deemed fulfilled if, on or before the Call Date, the Corporation shall deposit with a bank or trust company (which may be an affiliate of the Corporation) that has, or is an affiliate of a bank or trust company that has, a capital and surplus of at least $50,000,000, the amount of cash as is necessary for such redemption, in trust, with irrevocable instructions that such cash be applied to the redemption of the shares of Class B Preferred Stock so called for redemption. No interest shall accrue for the benefit of the holders of shares of Class B Preferred Stock to be redeemed on any cash so set aside by the Corporation. Subject to applicable escheat laws, any such cash unclaimed at the end of two years from the Call Date shall revert to the general funds of the Corporation, after which reversion the holders of shares of Class B Preferred Stock so called for redemption shall look only to the general funds of the Corporation for the payment of such cash. As promptly as practicable after the surrender in accordance with said notice of the certificates for any such shares so redeemed (properly endorsed or assigned for transfer, if the Corporation shall so require and if the notice shall so state), such certificates shall be exchanged for cash (without interest thereon) for which such shares have been redeemed in accordance with such notice. If fewer than all the outstanding shares of Class B Preferred Stock are to be redeemed, shares to be redeemed shall be selected by the Corporation from outstanding shares of Class B Preferred Stock not previously called for redemption by lot or, with respect to the number of shares of Class B Preferred Stock held of record by each holder of such shares, pro rata (as nearly as may be) or by any other method as may be determined by the Board of Directors in its discretion to be equitable. If fewer than all the shares of Class B Preferred Stock represented by any certificate are redeemed, then a new certificate representing the unredeemed shares shall be issued without cost to the holders thereof. 6. Stock To Be Retired. All shares of Class B Preferred Stock which shall have been issued and reacquired in any manner by the Corporation shall be restored to the status of authorized, but unissued shares of Common Stock, par value $.01 per share. The Corporation may also retire any unissued shares of Class B Preferred Stock, and such shares shall then be restored to the status of authorized but unissued shares of Common Stock, par value $.01 per share. 6 7. Conversion. Holders of shares of Class B Preferred Stock shall have the right to convert all or a portion of such shares into shares of Common Stock, as follows: (a) Subject to and upon compliance with the provisions of this Section 7, a holder of shares of Class B Preferred Stock shall have the right, at such holder's option, at any time to convert such shares, in whole or in part, into the number of fully paid and non-assessable shares of authorized but previously unissued shares of Common Stock per each share of Class B Preferred Stock obtained by dividing the Liquidation Preference (excluding any accumulated, accrued and unpaid dividends) per share of Class B Preferred Stock by the Conversion Price (as in effect at the time and on the date provided for in the last subparagraph of paragraph (b) of this Section 7) and by surrendering such shares to be converted, such surrender to be made in the manner provided in paragraph (b) of this Section 7; provided, however, that the right to convert shares of Class B Preferred Stock called for redemption pursuant to Section 5 shall terminate at the close of business on the Call Date fixed for redemption, unless the Corporation shall default in making payment of cash upon such redemption under Section 5 hereof. (b) In order to exercise the conversion right, the holder of each share of Class B Preferred Stock to be converted shall surrender the certificate representing such share, duly endorsed or assigned to the Corporation or in blank, at the office of the Transfer Agent, accompanied by written notice to the Corporation that the holder thereof elects to convert such share of Class B Preferred Stock. Unless the shares issuable on conversion are to be issued in the same name as the name in which such share of Class B Preferred Stock is registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Corporation, duly executed by the holder or such holder's duly authorized attorney and an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Corporation demonstrating that such taxes have been paid). Holders of shares of Class B Preferred Stock at the close of business on a dividend payment record date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the conversion thereof following such dividend payment record date and prior to such Dividend Payment Date. Except as provided above, the Corporation shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the shares of Common Stock issued upon such conversion. As promptly as practicable after the surrender of certificates for shares of Class B Preferred Stock as aforesaid, the Corporation shall issue and shall deliver at such office to such holder, or send on such holder's written order, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such shares of Class B Preferred Stock in accordance with provisions of this Section 7, and any fractional interest in respect of a share of Common Stock arising upon such conversion shall be settled as provided in paragraph (c) of this Section 7. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for shares of Class B Preferred Stock shall have been surrendered and such notice received by the Corporation as aforesaid, and the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time and on such date and such conversion shall be at the Conversion Price in effect at such time on such date unless the stock transfer books of the Corporation shall be closed on that date, in which event such Person or Persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date on which such shares shall have been surrendered and such notice received by the Corporation. If the dividend payment record date for the Class B Preferred Stock and Common Stock do not coincide, and the preceding sentence does not operate to ensure that a holder of shares of Class B Preferred Stock whose shares are converted into Common Stock does not receive dividends on both the shares of Class B Preferred Stock and the Common Stock into which such shares are converted for the same Dividend Period, then notwithstanding anything herein to the contrary, it is the intent, and the Transfer Agent is authorized to ensure that no conversion after the earlier of such record dates will be accepted until after the latter of such record dates. 7 (c) No fractional share of Common Stock or scrip representing fractions of a share of Common Stock shall be issued upon conversion of the shares of Class B Preferred Stock. Instead of any fractional interest in a share of Common Stock that would otherwise be deliverable upon the conversion of shares of Class B Preferred Stock, the Corporation shall pay to the holder of such share an amount in cash based upon the Current Market Price of the Common Stock on the Trading Day immediately preceding the date of conversion. If more than one share shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Class B Preferred Stock so surrendered. (d) The Conversion Price shall be adjusted from time to time as follows: (i) If the Corporation shall after the Issue Date (A) pay a dividend or make a distribution on its Capital Stock in shares of Common Stock, (B) subdivide its outstanding Common Stock into a greater number of shares, (C) combine its outstanding Common Stock into a smaller number of shares or (D) issue any shares of Capital Stock by reclassification of its outstanding Common Stock, the Conversion Price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or distribution or at the opening of business on the day following the day on which such subdivision, combination or reclassification becomes effective, as the case may be, shall be adjusted so that the holder of any share of Class B Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock (or fraction of a share of Common Stock) that such holder would have owned or have been entitled to receive after the happening of any of the events described above had such share of Class B Preferred Stock been converted immediately prior to the record date in the case of a dividend or distribution or the effective date in the case of a subdivision, combination or reclassification. An adjustment made pursuant to this paragraph (d)(i) of this Section 7 shall become effective immediately after the opening of business on the day next following the record date (except as provided in paragraph (h) below) in the case of a dividend or distribution and shall become effective immediately after the opening of business on the day next following the effective date in the case of a subdivision, combination or reclassification. (ii) If the Corporation shall issue after the Issue Date rights, options or warrants to all holders of Common Stock entitling them (for a period expiring within 45 days after the record date described below in this paragraph (d)(ii) of this Section 7) to subscribe for or purchase Common Stock at a price per share less than the Fair Market Value per share of the Common Stock on the record date for the determination of stockholders entitled to receive such rights, options or warrants, then the Conversion Price in effect at the opening of business on the day next following such record date shall be adjusted to equal the price determined by multiplying (A) the Conversion Price in effect immediately prior to the opening of business on the day following the date fixed for such determination by (B) a fraction, the numerator of which shall be the sum of (X) the number of shares of Common Stock outstanding on the close of business on the date fixed for such determination and (Y) the number of shares that could be purchased at such Fair Market Value from the aggregate proceeds to the Corporation from the exercise of such rights, options or warrants for Common Stock, and the denominator of which shall be the sum of (XX) the number of shares of Common Stock outstanding on the close of business on the date fixed for such determination and (YY) the number of additional shares of Common Stock offered for subscription or purchase pursuant to such rights, options or warrants. Such adjustment shall become effective immediately after the opening of business on the day next following such record date (except as provided in paragraph (h) below). In determining whether any rights, options or warrants entitle the holders of Common Stock to subscribe for or purchase Common Stock at less than such Fair Market Value, there shall be taken into account any consideration received by the Corporation upon issuance and upon exercise of such rights, options or warrants, the value of such consideration, if other than cash, to be determined in good faith by the Board of Directors. (iii) If the Corporation shall after the Issue Date make a distribution on its Common Stock other than in cash or shares of Common Stock (including any distribution in securities other than rights, options or warrants as set forth below) (each of the foregoing being referred to herein as a "distribution"), then the Conversion Price in effect at the opening of business on the next day following the record date for 8 determination of stockholders entitled to receive such distribution shall be adjusted to equal the price determined by multiplying (A) the Conversion Price in effect immediately prior to the opening of business on the day following the record date by (B) a fraction, the numerator of which shall be the difference between (X) the number of shares of Common Stock outstanding on the close of business on the record date and (Y) the number of shares determined by dividing (aa) the aggregate value of the property being distributed by (bb) the Fair Market Value per share of Common Stock on the record date, and the denominator of which shall be the number of shares of Common Stock outstanding on the close of business on the record date. Such adjustment shall become effective immediately after the opening of business on the day next following such record date (except as provided below). The value of the property being distributed shall be as determined in good faith by the Board of Directors. Neither the issuance by the Corporation of rights, options or warrants to subscribe for or purchase securities of the Corporation nor the exercise thereof shall be deemed a distribution under this paragraph. Notwithstanding the foregoing provisions of this paragraph, the Corporation will not make any distribution that, when taken together with all prior distributions after the Issue Date, would result in an aggregate adjustment constituting 50% or more of the Conversion Price on the Issue Date without obtaining prior consent by the affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of Class B Preferred Stock and any other class or series of outstanding Parity Stock, voting together as a single class, given in Person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose. (iv) No adjustment in the Conversion Price shall be required unless such adjustment would require a cumulative increase or decrease of at least 1% in such price; provided, however, that any adjustments that by reason of this paragraph (d)(iv) are not required to be made shall be carried forward and taken into account in any subsequent adjustment until made; and provided, further, that any adjustment shall be required and made in accordance with the provisions of this Section 7 (other than this paragraph (d)(iv)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the holders of shares of Common Stock. Notwithstanding any other provisions of this Section 7, the Corporation shall not be required to make any adjustment of the Conversion Price for the issuance of (A) any shares of Common Stock pursuant to any plan providing for the reinvestment of dividends or interest payable on securities of the Corporation and the investment of optional amounts in shares of Common Stock under such plan or (B) any options, rights or shares of Common Stock pursuant to any stock option, stock purchase or other stock-based plan maintained by the Corporation. All calculations under this Section 7 shall be made to the nearest cent (with $.005 being rounded upward) or to the nearest one-tenth of a share (with .05 of a share being rounded upward), as the case may be. Anything in this paragraph (d) of this Section 7 to the contrary notwithstanding, the Corporation shall be entitled, to the extent permitted by law, to make such reductions in the Conversion Price, in addition to those required by this paragraph (d), as it in its discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, reclassification or combination of shares, distribution of rights or warrants to purchase stock or securities, or a distribution of other assets (other than cash dividends) hereafter made by the Corporation to its stockholders shall not be taxable, or if that is not possible, to diminish any income taxes that are otherwise payable because of such event. (e) If the Corporation shall be a party to any transaction (including without limitation a merger, consolidation, statutory share exchange, issuer or self tender offer for all or a substantial portion of the shares of Common Stock outstanding, sale of all or substantially all of the Corporation's assets or recapitalization of the Common Stock, but excluding any transaction as to which paragraph (d)(i) of this Section 7 applies) (each of the foregoing being referred to herein as a "Transaction"), in each case as a result of which shares of Common Stock shall be converted into the right to receive stock, securities or other property (including cash or any combination thereof), each share of Class B Preferred Stock which is not converted into the right to receive stock, securities or other property in connection with such Transaction shall thereupon be convertible into the kind and amount of shares of stock, securities and other property (including cash or any combination thereof) receivable upon such consummation by a holder of that number of shares of Common Stock into which one share of Class B Preferred Stock was convertible immediately prior to such Transaction. The Corporation shall not be a party to any Transaction unless the terms of such Transaction are consistent with the provisions of this paragraph (e), and it shall not consent or agree to the occurrence of any Transaction until the Corporation has entered into an agreement with the successor or purchasing entity, as the case may be, for the benefit of the holders of the Class B Preferred Stock that will contain provisions enabling the holders of the 9 Class B Preferred Stock that remain outstanding after such Transaction to convert into the consideration received by holders of Common Stock at the Conversion Price in effect immediately prior to such Transaction. The provisions of this paragraph (e) shall similarly apply to successive Transactions. (f) If: (i) the Corporation shall declare a dividend (or any other distribution) on the Common Stock (other than cash dividends and cash distributions); or (ii) the Corporation shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of any class or series of Capital Stock or any other rights or warrants; or (iii) there shall be any reclassification of the outstanding Common Stock or any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or a statutory share exchange, or an issuer or self tender offer by the Corporation for all or a substantial portion of its outstanding shares of Common Stock (or an amendment thereto changing the maximum number of shares sought or the amount or type of consideration being offered therefor) or the sale or transfer of all or substantially all of the assets of the Corporation as an entirety; or (iv) there shall occur the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, then the Corporation shall cause to be filed with the Transfer Agent and shall cause to be mailed to each holder of shares of Class B Preferred Stock at such holder's address as shown on the stock records of the Corporation, as promptly as possible, but at least 15 days prior to the applicable date hereinafter specified, a notice stating (A) the record date for the payment of such dividend, distribution or rights or warrants, or, if a record date is not established, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights or warrants are to be determined or (B) the date on which such reclassification, consolidation, merger, statutory share exchange, sale, transfer, liquidation, dissolution or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, statutory share exchange, sale, transfer, liquidation, dissolution or winding up or (C) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). Failure to give or receive such notice or any defect therein shall not affect the legality or validity of the proceedings described in this Section 7. (g) Whenever the Conversion Price is adjusted as herein provided, the Corporation shall promptly file with the Transfer Agent an officer's certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after delivery of such certificate, the Corporation shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the effective date such adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to each holder of shares of Class B Preferred Stock at such holder's last address as shown on the stock records of the Corporation. (h) In any case in which paragraph (d) of this Section 7 provides that an adjustment shall become effective on the day next following the record date for an event, the Corporation may defer until the occurrence of such event (A) issuing to the holder of any share of Class B Preferred Stock converted after such record date and before the occurrence of such event the additional Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount of cash in lieu of any fraction pursuant to paragraph (c) of this Section 7. 10 (i) There shall be no adjustment of the Conversion Price in case of the issuance of any Capital Stock of the Corporation in a reorganization, acquisition or other similar transaction except as specifically set forth in this Section 7. (j) If the Corporation shall take any action affecting the Common Stock, other than action described in this Section 7, that in the opinion of the Board of Directors would materially adversely affect the conversion rights of the holders of Class B Preferred Stock, the Conversion Price for the Class B Preferred Stock may be adjusted, to the extent permitted by law, in such manner, if any, and at such time as the Board of Directors, in its sole discretion, may determine to be equitable under the circumstances. (k) The Corporation shall at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock solely for the purpose of effecting conversion of the Class B Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all outstanding shares of Class B Preferred Stock not theretofore converted into Common Stock. For purposes of this paragraph (k), the number of shares of Common Stock that shall be deliverable upon the conversion of all outstanding shares of Class B Preferred Stock shall be computed as if at the time of computation all such outstanding shares were held by a single holder (and without regard to the Aggregate Stock Ownership Limit or the Common Stock Ownership Limit set forth in the Charter of the Corporation). The Corporation covenants that any shares of Common Stock issued upon conversion of the shares of Class B Preferred Stock shall be validly issued, fully paid and nonassessable. The Corporation shall use its best efforts to list the shares of Common Stock required to be delivered upon conversion of the shares of Class B Preferred Stock, prior to such delivery, upon each national securities exchange, if any, upon which the outstanding shares of Common Stock are listed at the time of such delivery. (l) The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock or other securities or property on conversion or redemption of shares of Class B Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock or other securities or property in a name other than that of the holder of the shares of Class B Preferred Stock to be converted or redeemed, and no such issue or delivery shall be made unless and until the Person requesting such issue or delivery has paid to the Corporation the amount of any such tax or established, to the reasonable satisfaction of the Corporation, that such tax has been paid. 8. Ranking. Any class or series of Capital Stock of the Corporation shall be deemed to rank: (a) prior or senior to the Class B Preferred Stock, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class B Preferred Stock; (b) on a parity with the Class B Preferred Stock, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof be different from those of the Class B Preferred Stock, if the holders of such class of stock or series and the Class B Preferred Stock shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority one over the other ("Parity Stock"); and (c) junior to the Class B Preferred Stock, as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, if such stock or series shall be Common Stock or if the holders of Class B 11 Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of such class or series ("Junior Stock"). 9. Voting. (a) If and whenever (i) six quarterly dividends (whether or not consecutive) payable on the Class B Preferred Stock or any series or class of Parity Stock shall be in arrears (which shall, with respect to any such quarterly dividend, mean that any such dividend has not been paid in full), whether or not earned or declared, or (ii) the consolidated shareholders' equity of the Corporation (determined in accordance with generally accepted accounting principles and giving effect to any adjustment for the net unrealized gain or loss on assets available for sale) at the end of any calendar quarter is less than 150% of the aggregate Liquidation Preference (excluding any accumulated, accrued and unpaid dividends) of the then outstanding Class B Preferred Stock and the aggregate liquidation preference (excluding any accumulated, accrued and unpaid dividends) of any then outstanding Parity Stock, the number of directors then constituting the Board of Directors shall be increased by two (if not already increased by reason of similar types of provisions with respect to Voting Preferred Stock (as defined below)) and the holders of shares of Class B Preferred Stock, together with the holders of shares of every other series or class of Parity Stock (any other such series, the "Voting Preferred Stock"), voting as a single class regardless of series, shall be entitled to elect the two additional directors to serve on the Board of Directors at any annual meeting of stockholders or special meeting held in place thereof, or at a special meeting of the holders of the Class B Preferred Stock and the Voting Preferred Stock called as hereinafter provided. Notwithstanding anything herein to the contrary, if any class or series of Voting Preferred Stock (with which the Class B Preferred Stock is entitled to vote as a single class) is entitled to elect two directors as a result of a failure to maintain a specified level of consolidated shareholders' equity required by the terms of such Voting Preferred Stock, then when such entitlement is triggered, the separate entitlement to elect two directors pursuant to Section 9(a)(ii) hereof shall be suspended. Whenever the entitlement pursuant to Section 9(a)(ii) of the Class B Preferred Stock (together with holders of Voting Preferred Stock voting as a single class regardless of series) to vote is suspended as described in the preceding sentence, the terms of office of all Persons elected as directors pursuant to Section 9(a)(ii) shall terminate upon the election of the two directors elected pursuant to a vote of the Class B Preferred Stock and Voting Preferred Stock voting as a single class as a result of a failure to maintain a specified level of consolidated shareholders' equity required by the terms of such class or series of Voting Preferred Stock. Whenever (1) in the case of an arrearage in dividends described in clause (i), all arrears in dividends on the Class B Preferred Stock and the Voting Preferred Stock then outstanding shall have been paid and dividends thereon for the current quarterly dividend period shall have been paid or declared and set apart for payment, or (2) in the case of a shortfall in the Corporation's consolidated shareholders' equity described in clause (ii), the consolidated shareholders' equity of the Corporation (determined in accordance with generally accepted accounting principles and giving effect to any adjustment for the net unrealized gain or loss on assets available for sale) at the end of any subsequent calendar quarter equals or exceeds 150% of the aggregate Liquidation Preference (excluding any accumulated, accrued and unpaid dividends) of the then outstanding Class B Preferred Stock and the aggregate liquidation preference (excluding any accumulated, accrued and unpaid dividends) of the then outstanding Parity Stock, then the right of the holders of the Class B Preferred Stock and the Voting Preferred Stock to elect such additional two directors shall cease (but subject always to the same provision for the vesting of such voting rights in the case of any similar future arrearages in six quarterly dividends or shortfall in consolidated shareholders' equity), and the terms of office of all Persons elected as directors by the holders of the Class B Preferred Stock and the Voting Preferred Stock shall forthwith terminate and the number of directors constituting the Board of Directors shall be reduced accordingly. At any time after such voting power shall have been so vested in the holders of Class B Preferred Stock and the Voting Preferred Stock, if applicable, the Secretary of the Corporation may, and upon the written request of any holder of Class B Preferred Stock (addressed to the Secretary at the principal office of the Corporation) shall, call a special meeting of the holders of the Class B Preferred Stock and of the Voting Preferred Stock for the election of the two Directors to be elected by them as herein provided, such call to be made by notice similar to that provided in the Bylaws of the Corporation for a special meeting of the stockholders or as required by law. If any such special meeting required to be called as above provided shall not be called by the Secretary within 20 days after receipt of any such request, then any holder of Class B Preferred Stock may call such meeting, upon the notice above provided, and for that purpose shall have access to the stock books of the Corporation. The Directors elected at any such special meeting shall hold office until the next annual meeting of the stockholders or special meeting held in lieu thereof if such office shall not have previously terminated as above 12 provided. If any vacancy shall occur among the Directors elected by the holders of the Class B Preferred Stock and the Voting Preferred Stock, a successor shall be elected by the Board of Directors, upon the nomination of the then-remaining Director elected by the holders of the Class B Preferred Stock and the Voting Preferred Stock or the successor of such remaining Director, to serve until the next annual meeting of the stockholders or special meeting held in place thereof if such office shall not have previously terminated as provided above. (b) So long as any shares of Class B Preferred Stock are outstanding, in addition to any other vote or consent of stockholders required by law or by the Articles of Incorporation, as amended, the affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of the Class B Preferred Stock, given in Person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (i) Any amendment, alteration or repeal of any of the provisions of these Articles Supplementary to the Articles of Incorporation, the Articles of Incorporation or the Bylaws of the Corporation that materially adversely affects the voting powers, rights or preferences of the holders of the Class B Preferred Stock; provided, however, that the amendment of the provisions of the Articles of Incorporation so as to authorize or create, or to increase the authorized amount of, any Junior Stock or any shares of any class ranking on a parity with the Class B Preferred Stock shall not be deemed to materially adversely affect the voting powers, rights or preferences of the holders of Class B Preferred Stock; or (ii) The authorization or creation of, or the increase in the authorized amount of, any shares of any class or any security convertible into shares of any class ranking prior or senior to the Class B Preferred Stock in the distribution of assets on any liquidation, dissolution or winding up of the Corporation or in the payment of dividends; provided, however, that no such vote of the holders of Class B Preferred Stock shall be required if, at or prior to the time when such amendment, alteration or repeal is to take effect, or when the issuance of any such prior shares or convertible security is to be made, as the case may be, provision is made for the redemption of all shares of Class B Preferred Stock at the time outstanding unless all or a portion of the redemption price is to come from proceeds of the issuance of such prior shares or convertible securities. For purposes of the foregoing provisions and all other voting rights under these Articles Supplementary, each share of preferred stock shall have one (1) vote per share, except that when any class or series of Parity Stock shall have the right to vote with the Class B Preferred Stock as a single class on any matter, then the Class B Preferred Stock and such other class or series shall have with respect to such matters one (1) vote per $7.00 of stated liquidation preference. Except as otherwise required by applicable law or as set forth herein, the Class B Preferred Stock shall not have any relative, participating, optional or other special voting rights and powers other than as set forth herein, and the consent of the holders thereof shall not be required for the taking of any corporate action. 10. Record Holders. The Corporation and the Transfer Agent may deem and treat the record holder of any share of Class B Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Corporation nor the Transfer Agent shall be affected by any notice to the contrary. 11. ERISA-Related Ownership Restrictions. (a) Commencing on the Effective Date and terminating on the ERISA- Restriction Termination Date, no Benefit Plan Investor may beneficially acquire or beneficially own any shares of Class B Preferred Stock. Prior to the ERISA- Restriction Termination Date, transfers of Class B Preferred Stock to a Benefit Plan Investor will be void ab initio. In addition, in the event that the any share of Class B Preferred Stock, but for the operation of this Section 11, would be beneficially owned by a Benefit Plan Investor (i) the shares of Class B Preferred Stock purportedly held by such Benefit Plan Investor shall be transferred automatically and by operation of law to the Trust (as described in Section 11.3.1 of Article XI of the Company's Charter) to be held in accordance with this Section 11 and otherwise in accordance with the applicable provisions of Article XI, Section 11.3 of the Company's Charter, provided that any references therein to ownership limitations shall be deemed to be references 13 to the ownership limitations set forth in this Section 11, and (ii) the Benefit Plan Investor purportedly owning such shares shall submit such shares for registration in the name of the Trust. Such transfer to Trust shall be effective as of the close of business on the business day prior to the date of the event that otherwise would have caused the Benefit Plan Investor to beneficially own Class B Preferred Stock. (b) Prior to the sale by the Trust of shares held by it as provided in Section 11.3 of Article XI of the Charter, any transfer of Class B Preferred Stock by a Benefit Plan Investor to a non-Benefit Plan Investor (a "Permitted Transferee") shall reduce the number of shares held by the Trust on a one-for- one basis, and such shares shall be returned to the Permitted Transferee, effective at exactly the time of the purported transfer to the Permitted Transferee, automatically and without further action by the Corporation, the Trustee or the Benefit Plan Investor. (c) On the ERISA-Restriction Termination Date, (i) this Section 11 shall cease to apply to the Class B Preferred Stock and (ii) all shares that were held by the Trust pursuant to this Section 11 shall be returned, automatically and by operation of law, to their purported owners. (d) In case of any ambiguity in the application of any of the provisions of this Section 11, including any definition contained in Section 11(g), the Board of Directors shall have the power to determine the applicability of the provisions of this Section 11 with respect to any situation based on the facts known to it (subject, however, to the provisions of Section 11(e)). (e) Nothing in this Section 11 shall be interpreted to preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange, the American Stock Exchange, any other national securities exchange or NASDAQ, but the shares which are the subject of such transaction shall continue to be subject to the terms of this Section 11 subsequent to such settlement. (f) Each certificate for Class B Preferred Stock shall bear substantially the following legend in addition, without limitation, to any other legends required by the Charter or to comply with federal and state securities laws: The securities represented by this certificate are subject to ERISA-Related ownership restrictions. Prior to the ERISA-Restriction Termination Date, no Benefit Plan Investor may beneficially acquire or beneficially own any shares of Class B Preferred Stock and transfers of Class B Preferred Stock to a Benefit Plan Investor will be void ab initio. In addition, in the event that any share of Class B Preferred Stock, but for the operation of Section 11 of the Articles Supplementary governing the Class B Preferred Stock, would be beneficially owned by a Benefit Plan Investor (i) the shares of Class B Preferred Stock purportedly held by such Benefit Plan Investor shall be transferred automatically and by operation of law to the Trust (as described in Section 11.3.1 of Article XI of the Company's Charter) to be held in accordance with Section 11 and otherwise in accordance with the applicable provisions of Article XI, Section 11.3 of the Company's Charter, provided that any references therein to ownership limitations shall be deemed to be references to the ownership limitations set forth in Section 11 of the Articles Supplementary, and (ii) the Benefit Plan Investor purportedly owning such shares shall submit such shares for registration in the name of the Trust. All capitalized terms of this legend have the meanings defined in the Articles Supplementary governing the Class B Preferred Stock and the Charter of the Company, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Capital Stock of the Company on request and without charge. (g) For purposes of this Section 11 the following terms shall have the meanings indicated: (i) "Benefit Plan Investor" shall mean (i) an employee benefit plan as described in Section 3(3) of ERISA, whether or not it is subject to the provisions of ERISA (an "ERISA Plan"); (ii) any 14 plan described in Section 4975 of the Code, including an individual retirement account, individual retirement annuity or Keogh plan (together with ERISA Plans, a "Plan"); or (iii) any entity whose underlying assets are deemed to include assets of a Plan by reason of a Plan's investment in the entity under the Plan Asset Regulation. (ii) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (iii) "Effective Date" shall mean the time the Maryland State Department of Assessments and Taxation accepts these Articles Supplementary for record. (iv) "ERISA" shall mean the U.S. Employee Retirement Income Security Act of 1974, as amended from time to time. (v) "ERISA-Restriction Termination Date" shall mean the earlier to occur of (A) the date on which the Board of Directors determines that the Class B Preferred Stock qualifies as a Publicly-Offered Security or (B) the date on which the Board of Directors determines that another exception to the Look-Through Rule (other than the exception for insignificant Benefit Plan Investor equity participation in the Company) applies to the Class B Preferred Stock or the Company as a whole. (vi) "Look-Through Rule" shall mean the provisions of paragraph (a)(2) of the Plan Asset Regulation. (vii) "Plan Asset Regulation" shall mean the plan asset regulation promulgated by the U.S. Department of Labor under ERISA at 29 C.F.R. 2510.3-101. (viii) "Publicly Offered Security" shall have the meaning set forth in paragraph (b)(2) of the Plan Asset Regulation. FOURTH: These Articles Supplementary shall be effective at the time the Maryland State Department of Assessments and Taxation accepts these Articles Supplementary for record. IN WITNESS WHEREOF, the Corporation has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary on March __, 1999. WITNESS: NOVASTAR FINANCIAL, INC. ____________________________________ ____________________________________ Rodney Schwatken Mark J. Kohlrus Vice President and Controller Senior Vice President, Chief Financial Officer and Assistant Secretary THE UNDERSIGNED, Senior Vice President, Chief Financial Officer and Assistant Secretary of NovaStar Financial, Inc., who executed on behalf of the Corporation the Articles Supplementary of which this Certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Articles Supplementary to be the corporate act of said Corporation and hereby certifies that the matters and facts set forth herein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. ____________________________________ Mark J. Kohlrus Senior Vice President, Chief Financial Officer and Assistant Secretary 15 EX-4.3 3 SPECIMEN CERTIFICATE FOR PREFERRED STOCK Preferred Stock Preferred Stock NUMBER SHARES ----------------- ---------------- B- ---------------------------------------------------------------------------- NOVASTAR FINANCIAL, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND ---------------------------------------------------------------------------- This Certifies that _______________________________________________ is the registered holder of ______________________________________________ Shares of fully paid and non-assessable Class B 7% Convertible Preferred Stock, par value $0.01 per share transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. In Witness Whereof, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this ________________ day of _______________ A.D. _____ __________________________________ ________________________________ Rodney Schwatken, Vice President Mark J. Kohlrus, Senior Vice and Controller President, Chief Financial Officer and Assistant Secretary THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE. THE "RESALE RESTRICTION TERMINATION DATE," WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATED PERSON OF THE COMPANY WAS THE OWNER OF THIS SECURITY, OR ANY PREDECESSOR OF SUCH SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A. TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE INVESTOR ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (A)(2), (A)(3) OR (A)(7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE INVESTOR ACCOUNT OF SUCH AN INSTITUTIONAL OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR" FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (E) TO AN INDIVIDUAL "ACCREDITED INVESTOR" AS DEFINED IN SUBPARAGRAPH (A)(4), (A)(5) OR (A)(6) OF RULE 501 UNDER THE SECURITIES ACT THAT IS RESIDING IN ONE OF THE JURISDICTIONS AUTHORIZED BY THE COMPANY AND WHO IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S OR OTHER TRANSFER AGENT'S RIGHT, AS THE CASE MAY BE, PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL CERTIFICATION AND/OR OTHER INFORMATION REASONABLY SATISFACTORY TO IT, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE SECURITY COMPLETED AND DELIVERED BY THE TRANSPEROR TO THE COMPANY OR OTHER TRANSFER AGENT, AS THE CASE MAY BE, IN ADDITION, PRIOR TO THE TIME THE CLASS OF STOCK EVIDENCED BY THIS SECURITY IS LISTED ON A NATIONAL SECURITIES EXCHANGE OR THE NASDAQ NATIONAL MARKET, THIS SECURITY MAY NOT BE TRANSFERRED TO ANY "BENEFIT PLAN INVESTOR" AS SUCH TERM IS DEFINED IN 29 C.F.R. (S)2510.3-101 UNLESS THE PROPOSED TRANSFEREE PROVIDES A DISCLOSURE AND ACKNOWLEDGEMENT FORM AND THE AGGREGATE PERCENTAGE OF THE CLASS OF STOCK EVIDENCED HEREBY AND PROPOSED TO BE TRANSFERRED, TAKEN TOGETHER WITH ALL OTHER SHARES OF SUCH CLASS OWNED BY BENEFIT PLAN INVESTORS, WOULD NOT EQUAL OR EXCEED 25% OF SUCH CLASS OUTSTANDING. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON BENEFICIAL OWNERSHIP AND CONSTRUCTIVE OWNERSHIP AND TRANSFER FOR THE PURPOSE OF THE CORPORATION'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). SUBJECT TO CERTAIN FURTHER RESTRICTIONS AND EXCEPT AS EXPRESSLY PROVIDED IN THE CORPORATION'S CHARTER, (I) NO PERSON MAY BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF THE CORPORATION'S COMMON STOCK IN EXCESS OF 9.8 PERCENT (IN VALUE OR NUMBER OF SHARES) OF THE OUTSTANDING SHARES OF COMMON STOCK OF THE CORPORATION UNLESS SUCH PERSON IS AN EXCEPTED HOLDER (IN WHICH CASE THE EXCEPTED HOLDER LIMIT SHALL BE APPLICABLE): (II) NO PERSON MAY BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK OF THE CORPORATION IN EXCESS OF 9.8 PERCENT OF THE VALUE OF THE TOTAL OUTSTANDING SHARES OF CAPITAL STOCK OF THE CORPORATION, UNLESS SUCH PERSON IS AN EXCEPTED HOLDER (IN WHICH CASE THE EXCEPTED HOLDER LIMIT SHALL BE APPLICABLE); (III) NO PERSON MAY BENEFICIALLY OR CONSTRUCTIVELY OWN CAPITAL STOCK THAT WOULD RESULT IN THE CORPORATION BEING "CLOSELY HELD" UNDER SECTION 856(H) OF THE CODE OR OTHERWISE CAUSE THE CORPORATION TO FAIL TO QUALIFY AS A REIT; AND (IV) NO PERSON MAY TRANSFER SHARES OF CAPITAL STOCK IF SUCH TRANSFER WOULD RESULT IN THE CAPITAL STOCK OF THE CORPORATION BEING OWNED BY FEWER THAN 100 PERSONS. ANY PERSON WHO BENEFICIALLY OWNS OR CONSTRUCTIVELY OWNS OR ATTEMPTS TO BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK WHICH CAUSES OR WILL CAUSE A PERSON WHO A PERSON TO BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK IN EXCESS OR IN VIOLATION OF THE ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE CORPORATION. ATTEMPTED TRANSFERS OF OWNERSHIP IN VIOLATION OF THESE RESTRICTIONS SHALL BE NULL AND VOID AB INITIO. IN ADDITION, IF ANY OF THE RESTRICTIONS ON TRANSFER OR --------- OWNERSHIP ARE VIOLATED, THE SHARES OF CAPITAL STOCK REPRESENTED HEREBY MAY BE AUTOMATICALLY TRANSFERRED TO A TRUSTEE OF A TRUST FOR THE BENEFIT OF ONE OR MORE CHARITABLE BENEFICIARIES. IN ADDITION, UPON THE OCCURRENCE OF CERTAIN EVENTS, ATTEMPTED TRANSFERS IN VIOLATION OF THE RESTRICTIONS DESCRIBED ABOVE MAY BE VOID AB INITIO. ALL CAPITALIZED TERMS IN THE LEGEND HAVE THE MEANINGS DEFINED IN THE - --------- CHARTER OF THE CORPORATION, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON TRANSFER AND OWNERSHIP, WILL BE FURNISHED TO EACH HOLDER OF CAPITAL STOCK OF THE CORPORATION ON REQUEST AND WITHOUT CHARGE. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO ERISA-RELATED OWNERSHIP RESTRICTIONS. PRIOR TO THE ERISA-RESTRICTION TERMINATION DATE, NO BENEFIT PLAN INVESTOR MAY BENEFICIALLY ACQUIRE OR BENEFICIALLY OWN ANY SHARES OF CLASS B PREFERRED STOCK AND TRANSFERS OF CLASS B PREFERRED STOCK TO A BENEFIT PLAN INVESTOR WILL BE VOID AB INITIO. IN ADDITION, IN THE EVENT THAT ANY SHARE OF CLASS B PREFERRED STOCK, BUT FOR THE OPERATION OF SECTION 11 OF THE ARTICLES SUPPLEMENTARY GOVERNING THE CLASS B PREFERRED STOCK, WOULD BE BENEFICIALLY OWNED BY A BENEFIT PLAN INVESTOR (I) THE SHARES OF CLASS B PREFERRED STOCK PURPORTEDLY HELD BY SUCH BENEFIT PLAN INVESTOR SHALL BE TRANSFERRED AUTOMATICALLY AND BY OPERATION OF LAW TO THE TRUST (AS DESCRIBED IN SECTION 11.3.1 OF ARTICLE XI OF THE COMPANY'S CHARTER) TO BE HELD IN ACCORDANCE WITH SECTION 11 AND OTHERWISE IN ACCORDANCE WITH THE APPLICABLE PROVISIONS OF ARTICLE XI, SECTION 11.3 OF THE COMPANY'S CHARTER, PROVIDED THAT ANY REFERENCES THEREIN TO OWNERSHIP LIMITATIONS SHALL BE DEEMED TO BE REFERENCES TO THE OWNERSHIP LIMITATIONS SET FORTH IN SECTION 11 OF THE ARTICLES SUPPLEMENTARY, AND (II) THE BENEFIT PLAN INVESTOR PURPORTEDLY OWNING SUCH SHARES SHALL SUBMIT SUCH SHARES FOR REGISTRATION IN THE NAME OF THE TRUST. ALL CAPITALIZED TERMS OF THIS LEGEND HAVE THE MEANINGS DEFINED IN THE ARTICLES SUPPLEMENTARY GOVERNING THE CLASS B PREFERRED STOCK AND THE CHARTER OF THE COMPANY, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON TRANSFER AND OWNERSHIP, WILL BE FURNISHED TO EACH HOLDER OF CAPITAL STOCK OF THE COMPANY ON REQUEST AND WITHOUT CHARGE. IN ADDITION, THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER ON REQUEST AND WITHOUT CHARGE A FULL STATEMENT OR SUMMARY OF THE DESIGNATIONS AND ANY PREFERENCES, CONVERSION AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS AND TERMS AND CONDITIONS OF REDEMPTION OF THE STOCK OF EACH CLASS WHICH THE CORPORATION IS AUTHORIZED TO ISSUE AND THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES. IF ANY, TO THE EXTENT THEY HAVE BEEN SET, AND OF THE AUTHORITY OF THE BOARD OF DIRECTORS TO SET THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE CORPORATION. For Value Received, _________ hereby sell, assign and transfer unto ______________________________________________________________________ _________________________________________ Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint _________________________________________ Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated ____________________ In presence of ___________________________ ____________________________ NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. EX-10.24 4 WARRANT AGREEMENT DATED MARCH 10, 1999 EXHIBIT 10.24 WARRANT AGREEMENT BY AND BETWEEN NOVASTAR FINANCIAL, INC. AND RESIDENTIAL FUNDING CORPORATION DATED AS OF MARCH 10, 1999 TABLE OF CONTENTS -----------------
Page ---- 1. Issuance and Delivery............................................................. 1 --------------------- 2. Additional Agreements of the Company.............................................. 2 ------------------------------------ 2A. Registration Rights Agreement................................................ 2 ----------------------------- 2B. Securities Law Compliance.................................................... 2 ------------------------- 2C. Opinion of the Company's Counsel............................................. 2 -------------------------------- 2D. Issuance Documents........................................................... 2 ------------------- 2E. Proceedings.................................................................. 3 ----------- 2F. Expenses..................................................................... 3 -------- 3. Covenants......................................................................... 3 --------- 3A. Information.................................................................. 3 ----------- 3B. Inspection................................................................... 3 ---------- 3C. Compliance with Agreements and Resolutions................................... 4 ------------------------------------------ 3D. Current Public Information................................................... 4 -------------------------- 3E. Reservation of Common Stock.................................................. 4 --------------------------- 3F. Exemption from Maryland Business Combination Statute and Maryland ----------------------------------------------------------------- Control Share Acquisition Statute............................................ 4 --------------------------------- 3G. Exemption from Ownership Limitations......................................... 5 ------------------------------------ 3H. First Refusal Rights......................................................... 5 -------------------- 3I. Repricing or Amendment of Original Warrants.................................. 6 ------------------------------------------- 3J. Waiver of Registration Rights Priority by Five Percent Purchasers............ 7 ----------------------------------------------------------------- 3K. Cooperation.................................................................. 7 ----------- 4. Transfer of Restricted Securities................................................. 7 --------------------------------- 4A. General Provisions........................................................... 7 ------------------ 4B. Opinion Delivery............................................................. 7 ---------------- 4C. Rule 144A.................................................................... 7 --------- 4D. Legend Removal............................................................... 8 -------------- 5. Representations and Warranties of the Company..................................... 8 --------------------------------------------- 5A. Organization, Corporate Power and Licenses................................... 8 ------------------------------------------ 5B. Capital Stock and Related Matters............................................ 8 --------------------------------- 5C. Authorization; No Breach..................................................... 10 ------------------------ 5D. Brokerage.................................................................... 10 --------- 5E. Governmental Consent, etc.................................................... 10 ------------------------- 5F. Disclosure................................................................... 10 ---------- 5G. Closing Time................................................................. 11 ------------ 5H. Reports Filed with the Securities and Exchange Commission.................... 11 ---------------------------------------------------------
i 5I. Maryland Business Combination Statute and Maryland Control ---------------------------------------------------------- Share Acquisition Statute.................................................... 11 ------------------------- 5J. Ownership Limits............................................................. 11 ---------------- 5K. Knowledge.................................................................... 12 --------- 6. Definitions........................................................................ 12 ----------- 7. Miscellaneous...................................................................... 14 ------------- 7A. Expenses..................................................................... 14 -------- 7B. Remedies..................................................................... 14 -------- 7C. Investment Representations................................................... 14 -------------------------- 7D. Consent to Amendments........................................................ 15 --------------------- 7E. Survival of Representations and Warranties................................... 15 ------------------------------------------ 7F. Successors and Assigns....................................................... 15 ---------------------- 7G. Severability................................................................. 15 ------------ 7H. Counterparts................................................................. 16 ------------ 7I. Descriptive Headings; Interpretation......................................... 16 ------------------------------------ 7J. Governing Law................................................................ 16 ------------- 7K. Notices...................................................................... 16 ------- 7L. No Strict Construction....................................................... 17 ---------------------- 7M. Indemnification.............................................................. 17 ---------------
ii Schedules and Exhibits - ---------------------- List of Exhibits List of Disclosure Schedules iii WARRANT AGREEMENT ----------------- THIS AGREEMENT is made as of March 10, 1999, by and between NovaStar Financial, Inc., a Maryland corporation (the "Company"), and Residential Funding ------- Corporation, a Delaware corporation ("Investor"). Except as otherwise indicated -------- herein, capitalized terms used herein are defined in Section 6 hereof. WHEREAS, NovaStar Certificates Financing Corporation, a Delaware corporation and a wholly owned subsidiary of the Company, as Borrower (the "Borrower"), and Investor, as Lender, are parties to that certain Term Loan and -------- Security Agreement, dated as of October 13, 1998 (as amended, the "Loan ---- Agreement"); and - --------- WHEREAS, the Company, as Guarantor, and Investor are parties to that certain Guaranty, dated as of October 13, 1998 (as amended, the "Guaranty"); and -------- WHEREAS, the execution and delivery of the Guaranty was a condition precedent to the making of the initial Advance (as defined in the Loan Agreement) under the Loan Agreement; and WHEREAS, as additional consideration for Investor to enter into the Loan Agreement, the Company agreed to issue the Warrants (as defined below) to Investor; NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: Section 1. Issuance and Delivery. In accordance with Section 23 of --------------------- the Guaranty, the Company shall issue and deliver to Investor an instrument evidencing a Stock Purchase Warrant to acquire an aggregate of 812,731 shares of the Company's Common Stock (as defined in the Guaranty Warrant) containing the terms and conditions and in the form set forth in Exhibit A attached hereto (the --------- "Guaranty Warrant"). In addition, the Company issue and deliver to Investor an ---------------- instrument evidencing a Stock Purchase Warrant (the "Tag Along Warrant") to ----------------- acquire an aggregate of 364,982 shares of Company's Common Stock containing the terms and conditions and in the form set forth in Exhibit B attached hereto. The --------- parties acknowledge that the Investor has no right to any additional warrants for any additional shares. Both the Guaranty Warrant and the Tag Along Warrant shall be registered in the name of Investor or its nominee's name, at the offices of Kirkland & Ellis at 10:00 a.m. on March 10, 1999 (the "Closing ------- Time"), or at such other place or at such other time and on such other date as - ---- may be mutually agreeable to the Company and Investor. For purposes of this Agreement, "Warrants" shall mean the Guaranty Warrant and the Tag Along Warrant -------- initially issued hereunder and any Stock Purchase Warrant representing a portion of the rights under such initially issued Guaranty Warrant or Tag Along Warrant. Section 2. Additional Agreements of the Company. The Company hereby ------------------------------------ agrees as follows: 2A. Registration Rights Agreement. At or prior to the Closing Time, ----------------------------- the Company shall enter into a registration rights agreement in form and substance as set forth in Exhibit C attached hereto (the "Registration Rights --------- ------------------- Agreement"). - --------- 2B. Securities Law Compliance. At or prior to the Closing Time, the ------------------------- Company shall make all filings under all applicable federal and state securities laws necessary to consummate the issuance of the Warrants pursuant to this Agreement in compliance with such laws. 2C. Opinion of the Company's Counsel. At or prior to the Closing Time, -------------------------------- the Company shall cause to be delivered to Investor an opinion from Tobin & Tobin, P.C., counsel for the Company, with respect to the matters set forth in Exhibit D attached hereto, which shall be addressed to Investor, dated the date - --------- of the Closing Time and in form and substance satisfactory to Investor. 2D. Issuance Documents. At or prior to the Closing Time, the Company ------------------ shall deliver to Investor all of the following documents: (i) an Officer's Certificate, dated the date of the Closing Time, stating that the Company has fully complied with the agreements specified in Section 1 and paragraphs 2A through 2F, inclusive; (ii) certified copies of the resolutions duly adopted by the Company's board of directors (A) authorizing the execution, delivery and performance of this Agreement, the Registration Rights Agreement and each of the other agreements contemplated hereby, (B) granting waivers to Investor, GMAC RF, Inc., a Michigan corporation, GMAC Mortgage Group, Inc., a Michigan corporation, General Motors Acceptance Corporation, a Delaware corporation, General Motors Corporation, a Delaware corporation ("GM"), and -- any other Subsidiaries of GM (collectively, the "Investor Entities") of the ----------------- Aggregate Stock Ownership Limit (as defined in the Company's Articles of Incorporation, as amended (including any Articles Supplementary thereto, the "Charter")) and the Common Stock Ownership Limit (as defined in the ------- Charter), (C) exempting Investor and the Investor Entities from Section 3- 602 of the Corporations and Associations Article of the Annotated Code of Maryland (the "Corporations Code") and (D) authorizing the issuance of the ----------------- Warrants, the reservation for issuance upon exercise of (i) the Guaranty Warrant of an aggregate of 812,731 shares of Common Stock and (ii) the Tag Along Warrant of an aggregate of 364,982 shares of Common Stock, and the consummation of all other transactions contemplated by this Agreement; (iii) certified copies of the Charter (including all Articles Supplementary thereto) and the Company's Bylaws (the "Bylaws"), each as in ------ effect at the Closing Time; (iv) copies of all third party and governmental consents, approvals and filings required in connection with the consummation of the transactions hereunder (including, without limitation, all blue sky law filings and waivers of all preemptive rights and rights of first refusal); and (v) such other documents relating to the transactions contemplated by this Agreement as Investor or its special counsel may reasonably request. 2E. Proceedings. At or prior to the Closing Time, the Company shall ----------- take all corporate and other proceedings required to be taken by the Company in connection with the transactions contemplated hereby, and all documents incident thereto shall be satisfactory in form and substance to Investor and its special counsel. 2F. Expenses. At the Closing Time, the Company shall reimburse -------- Investor for the fees and expenses of its special counsel as provided in paragraph 7A hereof. Section 3. Covenants. --------- 3A. Information. The Company shall deliver to Investor (so long as ----------- Investor holds any Warrants or at least 5% of the Underlying Common Stock) and to each holder (excluding Affiliates of Investor) of at least 25% of the Underlying Common Stock: (i) within five days after transmission thereof, copies of all financial statements, proxy statements, reports and any other general written communications which the Company sends to its stockholders and copies of all regular, special or periodic reports which it files, or (to its knowledge) any of its officers, directors or beneficial owners of the Common Stock file with respect to the Company (including under Section 13 and Section 16 of the Securities Exchange Act) with the Securities and Exchange Commission or with any securities exchange on which any of its securities are then listed, and copies of all press releases and other statements made available generally by the Company to the public concerning material developments in the Company's and its Subsidiaries' businesses; and (ii) with reasonable promptness, such other information and financial data concerning the Company and its Subsidiaries as any Person entitled to receive information under this paragraph 3A may reasonably request. For purposes of this Agreement and the Registration Rights Agreement, all holdings of Underlying Common Stock by Persons who are Affiliates of each other shall be aggregated for purposes of meeting any threshold tests under this Agreement and Registration Rights Agreement. 3 3B. Inspection. The Company shall permit Investor and any ---------- representative designated by Investor (so long as Investor holds any Warrants or at least 5% of the Underlying Common Stock) or any holder (excluding Affiliates of Investor) of at least 25% of the Underlying Common Stock and any representative designated by any such holder to (i) visit and inspect any of the properties of the Company and its Subsidiaries and (ii) examine the corporate and financial records of the Company and its Subsidiaries and make copies thereof, in each such case to the same extent as stockholders of the Company are so permitted under the applicable provisions of the Corporations Code. 3C. Compliance with Agreements and Resolutions. The Company shall ------------------------------------------ perform and observe (i) all of its obligations to each holder of the Underlying Common Stock set forth in the Charter or the Bylaws, (ii) all of its obligations to each holder of a Warrant set forth therein, (iii) all of its obligations to each holder of Registrable Securities set forth in the Registration Rights Agreement and (iv) all of its obligations in all resolutions adopted by the Company's board of directors relating hereto or to Section 23 of the Guaranty. 3D. Current Public Information. The Company shall file all reports -------------------------- required to be filed by it under the Securities Act and the Securities Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission thereunder and shall take such further action as any holder or holders of Restricted Securities may reasonably request, all to the extent required to enable such holders to sell Restricted Securities pursuant to Rule 144 adopted by the Securities and Exchange Commission under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission. Upon request, the Company shall deliver to any holder of Restricted Securities a written statement as to whether it has complied with such requirements. 3E. Reservation of Common Stock. The Company shall at all times --------------------------- reserve and keep available out of its authorized but unissued shares of Capital Stock designated as Common Stock, solely for the purpose of issuance upon the exercise of the Warrant(s), such number of shares of Common Stock issuable upon the exercise of all outstanding Warrants. All shares of Common Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Company shall take all such actions as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately transmitted by the Company upon issuance). 4 3F. Exemption from Maryland Business Combination Statute and Maryland ----------------------------------------------------------------- Control Share Acquisition Statute. - --------------------------------- (i) The Company shall not make any amendment to the Charter or the Bylaws, and the Company's board of directors shall not adopt any resolution containing any provisions, relating to the exemption from Section 3-602 of the Corporations Code granted to each of Investor and the Investor Entities which would adversely affect or otherwise impair the rights of Investor or any Investor Entity thereunder. (ii) The Company shall not make any amendment to the Charter or the Bylaws, and the Company's board of directors shall not adopt any resolution containing any provisions, relating to the exemption from Sections 3-701 to 3-709 of the Corporations Code contained in Section 3 of Section IX of the Bylaws which would adversely affect or otherwise impair the rights of the current or future holders of the Underlying Common Stock thereunder. (iii) Upon the reasonable request of Investor, the Investor Entities and any successors or assigns of Investor or the Investor Entities, the Company shall grant an exemption from Section 3-602 of the Corporations Code to any proposed transferee of Underlying Common Stock. 3G. Exemption from Ownership Limitations. ------------------------------------ (i) The Company shall not make any amendment to the Charter or the Bylaws, and the Company's board of directors shall not adopt any resolution containing any provisions, relating to the waiver of the Aggregate Stock Ownership Limit and the Common Stock Ownership Limit granted to each of Investor and the Investor Entities which would adversely affect or otherwise impair the rights of Investor or any Investor Entity thereunder. (ii) Upon the reasonable request of Investor, the Investor Entities and any successors or assigns of Investor or the Investor Entities, the Company shall grant a waiver of the Aggregate Stock Ownership Limit and the Common Stock Ownership Limit on the same terms, and subject to the same conditions, as that certain waiver granted to Investor by a resolution adopted by the Company's board of directors on October 12, 1998, to any proposed transferee of Underlying Common Stock; provided that the -------- Company may require that any such proposed transferee make the representations and undertakings specified in Section 11.2.7(a)(i), (ii) and (iii) of the Charter. 3H. First Refusal Rights. -------------------- (i) Except for issuances of (A) Common Stock (1) to the Company's directors, officers or employees under any stock option plan or employee stock ownership plan, (2) upon the exercise of a Warrant (or portion thereof) or any options, warrants or rights 5 to acquire any shares of Common Stock, (3) in connection with the acquisition (whether by a purchase of assets, purchase of stock, merger or otherwise) of another company or business by the Company or any of its Subsidiaries, (4) pursuant to a public offering registered under the Securities Act (including a dividend reinvestment plan or a direct stock purchase plan), (5) pursuant to purchase rights which are offered to all holders of Warrants or (6) upon the conversion of dividend equivalent rights or (B) options, warrants or rights to acquire any shares of Common Stock (including, but not limited to, dividend equivalent rights) which trigger an adjustment to the Exercise Price (as defined in the Warrants) pursuant to Section 2 of the Warrants, if the Company authorizes after the date hereof the issuance or sale of any shares of Common Stock or any securities convertible into or containing options, warrants or rights to acquire any shares of Common Stock (other than as a dividend on the outstanding Common Stock) (an "Issuance"), subject to the rules of the New York Stock Exchange the Company shall first offer to sell to each holder of Underlying Common Stock a portion of the stock or securities comprising such Issuance equal to the quotient determined by dividing (1) the number of shares of Underlying Common Stock held by such holder by (2) the sum of the total number of shares of Underlying Common Stock on a fully diluted basis giving effect to all options, warrants and convertible securities and the number of shares of Common Stock outstanding which are not shares of Underlying Common Stock. Each holder of Underlying Common Stock shall be entitled to purchase such stock or securities at the most favorable price and on the most favorable terms as such stock or securities are to be offered to any other Persons. The purchase price for all stock and securities offered to the holders of the Underlying Common Stock shall be payable in cash or, to the extent otherwise required hereunder, notes issued by such holders. (ii) In order to exercise its purchase rights hereunder, a holder of Underlying Common Stock must within 15 days after receipt of written notice from the Company describing in reasonable detail the stock or securities being offered, the purchase price thereof, the payment terms and such holder's percentage allotment deliver a written notice to the Company describing its election hereunder. If all of the stock and securities offered to the holders of Underlying Common Stock is not fully subscribed by such holders, the remaining stock and securities shall be reoffered by the Company to the holders purchasing their full allotment upon the terms set forth in this paragraph, except that such holders must exercise their purchase rights within five days after receipt of such reoffer. (iii) Upon the expiration of the offering periods described above, the Company shall be entitled to sell such stock or securities which the holders of Underlying Common Stock have not elected to purchase during the 90 days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to such holders. Any stock or securities offered or sold by the Company after such 90-day period must be reoffered to the holders of Underlying Common Stock pursuant to the terms of this paragraph. 6 (iv) The provisions of this paragraph 3H shall not apply to the issuance of Class B convertible preferred stock in March 1999 and shall terminate automatically and be of no further force and effect upon the termination of the Exercise Period (as defined in the Warrants). 3I. Repricing or Amendment of Original Warrants. So long as they are ------------------------------------------- outstanding, if the Company reprices, adjusts or amends in any manner the warrants issued pursuant to the Warrant Agreement dated as of December 9, 1996 between the Company and the holders of such warrants (the "Original Warrants"), ----------------- the Company shall offer to make an identical change to the Tag Along Warrants at the same time as the Original Warrants and upon the request of any such holder, shall promptly so amend such holder's Tag Along Warrant. A true, correct and complete copy of the form of the Original Warrant and the Warrant Agreement dated as of December 9, 1996 are attached hereto as Exhibit E and Exhibit F, --------- --------- respectively. 3J. Waiver of Registration Rights Priority by Five Percent ------------------------------------------------------ Purchasers. Both prior and subsequent to the Closing Time, the Company will - ---------- use its best efforts to obtain from the Five Percent Purchasers waivers of certain preferential registration rights as provided in Exhibit G hereto. --------- 3K. Cooperation. In addition to any other agreements or covenants of ----------- the Company hereunder or under the Warrants or the Registration Rights Agreement, the Company shall take all appropriate action in connection with any transfer or proposed transfer of the Warrants (or any portion thereof) or any Underlying Common Stock as Investor, the Investor Entities and any successors or assigns of Investor or the Investor Entities may reasonably request. Section 4. Transfer of Restricted Securities. --------------------------------- 4A. General Provisions. Restricted Securities are transferable only ------------------ pursuant to (i) public offerings registered under the Securities Act, (ii) Rule 144 or Rule 144A of the Securities and Exchange Commission (or any similar rule or rules then in force) if such rule is available and (iii) subject to the conditions specified in paragraph 4B below, any other legally available means of transfer. 4B. Opinion Delivery. In connection with the transfer of any --------------- Restricted Securities (other than a transfer described in paragraph 4A(i) or (ii) above), the holder thereof shall deliver written notice to the Company describing in reasonable detail the transfer or proposed transfer, together with an opinion of counsel which (to the Company's reasonable satisfaction) is knowledgeable in securities law matters to the effect that such transfer of Restricted Securities may be effected without registration of such Restricted Securities under the Securities Act. In addition, if the holder of the Restricted Securities delivers to the Company an opinion of counsel that no subsequent transfer of such Restricted Securities shall require registration under the Securities Act, the Company shall promptly upon such contemplated transfer deliver new certificates for such Restricted Securities which do not bear the Securities Act legend set forth in paragraph 7C. If the 7 Company is not required to deliver new certificates for such Restricted Securities not bearing such legend, the holder thereof shall not transfer the same until the prospective transferee has confirmed to the Company in writing its agreement to be bound by the conditions contained in this paragraph and paragraph 7C. 4C. Rule 144A. Upon the request of Investor, the Company shall --------- promptly supply to Investor or its prospective transferees all information regarding the Company required to be delivered in connection with a transfer pursuant to Rule 144A of the Securities and Exchange Commission. 4D. Legend Removal. If any Restricted Securities become eligible for -------------- sale pursuant to Rule 144(k), the Company shall, upon the request of the holder of such Restricted Securities, remove the legend set forth in paragraph 7C from the certificates for such Restricted Securities. Section 5 Representations and Warranties of the Company. As a material --------------------------------------------- inducement to Investor to enter into this Agreement, the Company hereby represents and warrants that: 5A. Organization, Corporate Power and Licenses. The Company is a ------------------------------------------ corporation duly organized, validly existing and in good standing under the laws of Maryland and is qualified to do business in every jurisdiction in which its ownership of property or conduct of business requires it to qualify. The Company possesses all requisite corporate power and authority and all material licenses, permits and authorizations necessary to own and operate its properties, to carry on its businesses as now conducted and presently proposed to be conducted and to carry out the transactions contemplated by this Agreement. The copies of the Charter (including the Articles Supplementary thereto) and the Bylaws which have been furnished to Investor's special counsel reflect all amendments made thereto (and all Articles Supplementary to the Charter) at any time prior to the date of this Agreement and are correct and complete. 5B. Capital Stock and Related Matters. --------------------------------- (i) As of October 13, 1998, the authorized capital stock of the Company consisted of 50,000,000 shares of Capital Stock, all of which were classified as Common Stock, (a) of which 8,127,314 shares were issued and outstanding and (b) none of which were treasury shares. As of October 13, 1998, neither the Company nor any of its Subsidiaries had outstanding any stock or securities convertible or exchangeable for any shares of the Company's Capital Stock or containing any profit participation features, nor did it have outstanding any rights or options to subscribe for or to purchase the Company's Capital Stock or any stock or securities convertible into or exchangeable for the Company's Capital Stock or any stock appreciation rights or phantom stock plans, except as set forth on the attached "October 13 Capitalization Schedule." The October 13 Capitalization Schedule accurately sets forth the following information with respect to all outstanding options and 8 rights to acquire the Company's Capital Stock (both before and after giving effect to the issuance of the Warrants): the holder, the number of shares covered, the exercise price and the expiration date. As of October 13, 1998, neither the Company nor any of its Subsidiaries was subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of the Company's Capital Stock or any warrants, options or other rights to acquire the Company's Capital Stock, except as set forth on the October 13 Capitalization Schedule. As of October 13, 1998, all of the outstanding shares of the Company's Capital Stock were validly issued, fully paid and nonassessable. (ii) As of the Closing Time and immediately thereafter, the authorized Capital Stock of the Company shall consist of 50,000,000 shares of Capital Stock, of which 50,000,000 shares shall be classified as Common Stock, of which 8,160,039 shares of Common Stock shall be issued and outstanding, 3,463,151 shares shall be reserved for issuance upon exercise of the Original Warrants, 350,000 shares shall be reserved for issuance upon exercise of the First Union Warrants, 383,820 shares shall be reserved for issuance upon exercise of employee stock options outstanding (including unvested options) and 1,177,713 shares shall be reserved for issuance upon exercise of the Guaranty Warrant and the Tag Along Warrant. As of the Closing Time, neither the Company nor any of its Subsidiaries shall have outstanding any stock or securities convertible or exchangeable for any shares of the Company's Capital Stock or containing any profit participation features, nor shall it have outstanding any rights or options to subscribe for or to purchase the Company's Capital Stock or any stock or securities convertible into or exchangeable for the Company's Capital Stock or any stock appreciation rights or phantom stock plans, except for the Warrants and except as set forth on the attached "Closing Time Capitalization Schedule." The Closing Time Capitalization Schedule accurately sets forth the following information with respect to all outstanding options and rights to acquire the Company's Capital Stock: the holder, the number of shares covered, the exercise price and the expiration date. As of the Closing Time, neither the Company nor any of its Subsidiaries shall be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of the Company's Capital Stock or any warrants, options or other rights to acquire the Company's Capital Stock, except as set forth on the Closing Time Capitalization Schedule. As of the Closing Time, all of the outstanding shares of the Company's Capital Stock shall be validly issued, fully paid and nonassessable. (iii) There are no statutory or, to the best of the Company's knowledge, contractual stockholders preemptive rights or rights of refusal with respect to the issuance of the Warrants hereunder or the issuance of the Common Stock upon exercise of the Warrants or any other issuance of Common Stock (or options, warrants or rights to acquire any shares of Common Stock). The Company has not violated any applicable federal or state securities laws in connection with the offer, sale or issuance of any of its Capital Stock, and the offer, sale and issuance of the Warrants hereunder do not require registration under the Securities Act or any applicable state securities laws. There are no agreements between the Company and its stockholders with respect to the registration of shares of the Company's 9 stock under the Securities Act (other than any agreements under which no further registrations of shares are required), except for (a) the Registration Rights Agreement dated December 9, 1996 between the Company and Stifel, Nicolaus & Company, Incorporated, (b) the Founders Registration Rights Agreement dated December 9, 1996 by and among the Company, W. Lance Anderson and Scott F. Hartman and (c) the Warrant Agreement dated February 12, 1999 between the Company and First Union Corporation providing for the issuance of warrants to acquire up to 350,000 shares of the Company's Common Stock (subject to adjustment) (the "First Union Warrants"). To the -------------------- best of the Company's knowledge, there are no agreements between the Company's stockholders with respect to the voting or transfer of the Company's Capital Stock or with respect to any other aspect of the Company's affairs, except for (a) the Purchase Terms Agreement dated December 6, 1996 and (b) the Supplement to Subscription and Purchase Agreement made between the Company and General Electric Capital Corporation as of December 4, 1996. 5C. Authorization; No Breach. The execution, delivery and performance ------------------------ of this Agreement, the Registration Rights Agreement, the Warrants and all other agreements and instruments contemplated hereby to which the Company is a party have been duly authorized by the Company. This Agreement, the Registration Rights Agreement, the Warrants and all other agreements and instruments contemplated hereby to which the Company is a party each constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms. The execution and delivery by the Company of this Agreement, the Registration Rights Agreement, the Warrants and all other agreements and instruments contemplated hereby to which the Company is a party, the offering, sale and issuance of the Warrants hereunder, the issuance of the Common Stock upon exercise of the Warrant(s) and the fulfillment of and compliance with the respective terms hereof and thereof by the Company, do not and shall not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in the creation of any lien, security interest, charge or encumbrance upon the Company's or any Subsidiary's capital stock or assets pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of, or (vi) require any authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any court or administrative or governmental body or agency pursuant to, the charter or bylaws of the Company or any of its Subsidiaries, or any law, statute, rule or regulation to which the Company or any of its Subsidiaries is subject, or any agreement, instrument, order, judgment or decree to which the Company or any of its Subsidiaries is subject (except to the extent of any Five Percent Purchaser rights not waived). 5D. Brokerage. There are no claims for brokerage commissions, --------- finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement binding upon the Company or any of its Subsidiaries. The Company shall pay, and hold Investor harmless against, any liability, loss or expense (including, without limitation, reasonable attorneys' fees and out-of-pocket expenses) arising in connection with any such claim. 10 5E. Governmental Consent, etc... No permit, consent, approval or ------------------------- authorization of, or declaration to or filing with, any governmental authority is required in connection with the execution, delivery and performance by the Company of this Agreement or the other agreements contemplated hereby, or the consummation by the Company of any other transactions contemplated hereby or thereby, except as expressly contemplated herein or in the exhibits hereto. 5F. Disclosure. Neither this Agreement nor any of the exhibits, ---------- schedules, attachments, written statements, documents, certificates or other items prepared or supplied to Investor by or on behalf of the Company with respect to the transactions contemplated hereby contain any untrue statement of a material fact or omit a material fact necessary to make each statement contained herein or therein not misleading. There is no fact which the Company has not disclosed to Investor in writing and of which any of its officers, directors or executive employees is aware and which has had or would reasonably be expected to have a material adverse effect upon the existing or expected financial condition, operating results, assets, customer or supplier relations, employee relations or business prospects of the Company and its Subsidiaries taken as a whole. 5G. Closing Time. The representations and warranties of the Company ------------ contained in this Section 5 and elsewhere in this Agreement and all information contained in any exhibit, schedule or attachment hereto or in any certificate or other writing delivered by, or on behalf of, the Company to Investor shall be true and correct in all material respects on the date of the Closing Time as though then made, except as affected by the transactions expressly contemplated by this Agreement. 5H. Reports Filed with the Securities and Exchange Commission. --------------------------------------------------------- The Company has furnished Investor with complete and accurate copies of its annual report on Form 10-K for its most recent fiscal year, all other reports or documents required to be filed by the Company pursuant to Section 13(a) or 15(d) of the Securities Exchange Act since the end of its most recent fiscal year and its most recent annual report to its stockholders. Such reports and filings do not contain any material false statements or any misstatement of any material fact and do not omit to state any fact necessary to make the statements set forth therein not misleading. The Company has made all filings with the Securities and Exchange Commission (the "SEC") which it is required to make, and --- the Company has not received any request from the SEC to file any amendment or supplement to any of the reports described in this paragraph (except for the comment letters from the SEC dated February 3, 1999 and March 5, 1999). 5I. Maryland Business Combination Statute and Maryland Control Share ---------------------------------------------------------------- Acquisition Statute. - -------------------- (i) The Company has taken all action required under Section 3-603 of the Corporations Code necessary to irrevocably exempt each of Investor and the Investor Entities from the provisions of Section 3-602 of the Corporations Code, and such exemptions are in full force and effect. 11 (ii) As of the date hereof, all shares of capital stock of the Company now or hereafter outstanding are exempt to the fullest extent permitted by the Corporations Code from Sections 3-701 to 3-709 of the Corporations Code. 5J. Ownership Limits. ---------------- (i) The Company has taken all action required under the Charter necessary to grant a waiver of the Aggregate Stock Ownership Limit and the Common Stock Ownership Limit to each of Investor and the Investor Entities, and such waivers are in full force and effect. (ii) With respect to each of Investor and the Investor Entities, as of and from October 1, 1998 to and including the respective dates on which the Company granted the waivers specified in subparagraph (i) above, neither Investor nor any Investor Entity was in violation of any provision of Section 11 of the Charter. 5K. Knowledge. As used in this Section 5, the terms "knowledge" or --------- "aware" shall mean and include (i) the actual knowledge or awareness of the Company and its Subsidiaries (which shall include the actual knowledge and awareness of the officers, directors and key employees of the Company and its Subsidiaries and the general managers of each facility of the Company and its Subsidiaries) and (ii) the knowledge or awareness which a prudent business person would have obtained in the conduct of his business after making reasonable inquiry and reasonable diligence with respect to the particular matter in question. Section 6 Definitions. For the purposes of this Agreement, the ----------- following terms have the meanings set forth below: "Affiliate" of any particular Person means any other Person --------- controlling, controlled by or under common control with such particular Person, where "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, contract or otherwise. "Capital Stock" means all classes or series of stock of the ------------- Corporation, including, without limitation, Common Stock and Preferred Stock. "Five Percent Purchasers" means those Persons that purchased 5% or ----------------------- more of the units sold by the Company in December 1996 and have registration rights under the Registration Rights Agreement of the Company, dated December 9, 1996, including the Lindner Dividend Fund, General Electric Capital Corporation, First Financial Fund, Inc., Bay Pond Partners, L.P. and Wallace R. Weitz & Company. "Officer's Certificate" means a certificate signed by the Company's --------------------- president or its chief financial officer, stating that (i) the officer signing such certificate has made or has caused to 12 be made such investigations as are necessary in order to permit him to verify the accuracy of the information set forth in such certificate and (ii) to such officer's knowledge, such certificate does not misstate any material fact and does not omit to state any fact necessary to make the certificate not misleading. "Person" means an individual, a partnership, a corporation, a limited ------ liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Restricted Securities" means (i) the Warrants issued hereunder and --------------------- any Warrants representing portions of the rights under the Warrants issued hereunder, (ii) the Common Stock issued upon exercise of the Warrant(s) and (iii) any securities issued with respect to the securities referred to in clauses (i) or (ii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Restricted Securities, such securities shall cease to be Restricted Securities when they have (a) been effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, (b) been distributed to the public through a broker, dealer or market maker pursuant to Rule 144 (or any similar provision then in force) under the Securities Act or become eligible for sale pursuant to Rule 144(k) (or any similar provision then in force) under the Securities Act or (c) been otherwise transferred and new certificates for them not bearing the Securities Act legend set forth in paragraph 7C have been delivered by the Company in accordance with Section 4. Whenever any particular securities cease to be Restricted Securities, the holder thereof shall be entitled to receive from the Company, without expense, new securities of like tenor not bearing a Securities Act legend of the character set forth in paragraph 7C. "Securities Act" means the Securities Act of 1933, as amended, or any -------------- similar federal law then in force. "Securities and Exchange Commission" includes any governmental body or ---------------------------------- agency succeeding to the functions thereof. "Securities Exchange Act" means the Securities Exchange Act of 1934, ----------------------- as amended, or any similar federal law then in force. "Subsidiary" means, with respect to any Person, any corporation, ---------- limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to 13 have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control any managing director or general partner of such limited liability company, partnership, association or other business entity. "Underlying Common Stock" means (i) the Common Stock issued or ----------------------- issuable upon exercise of any Warrant and (ii) any Common Stock issued or issuable with respect to the securities referred to in clause (i) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. For purposes of this Agreement, any Person who holds a Warrant shall be deemed to be the holder of the Underlying Common Stock obtainable upon exercise of such Warrant in connection with the transfer thereof or otherwise regardless of any restriction or limitation on the exercise of such Warrant, such Underlying Common Stock shall be deemed to be in existence, and such Person shall be entitled to exercise the rights of a holder of Underlying Common Stock hereunder. As to any particular shares of Underlying Common Stock, such shares shall cease to be Underlying Common Stock when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, (b) distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or any similar provision then in force) or (c) repurchased by the Company or any of its Subsidiaries thereof. Section 7 Miscellaneous. ------------- 7A. Expenses. The Company shall pay, and hold each of Investor, the -------- Investor Entities and all other holders of Warrants and Underlying Common Stock harmless against liability for the payment of, (i) the fees and expenses of their counsel arising in connection with the negotiation and execution of this Agreement, the Warrants and the agreements and instruments contemplated hereby and the consummation of the transactions contemplated hereby which shall be payable at the Closing Time or, if not then paid, upon demand, (ii) the fees and expenses incurred with respect to any amendments or waivers (whether or not the same become effective) under or in respect of this Agreement, the Warrant(s) and the agreements and instruments contemplated hereby, (iii) stamp and other taxes which may be payable in respect of the execution and delivery of this Agreement or the issuance, delivery or acquisition of any Warrant or any shares of Common Stock issuable exercise of the Warrant(s), (iv) the fees and expenses incurred with respect to the enforcement of the rights granted under this Agreement, the Warrants, the agreements or instruments contemplated hereby and the Charter and (v) the fees and expenses incurred by each such Person in any filing with any governmental agency with respect to its investment in the Company or in any other filing with any governmental agency with respect to the Company which mentions such Person. 7B. Remedies. Each holder of Underlying Common Stock shall have all -------- rights and remedies set forth in this Agreement, the Warrants and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights 14 which such holders have under any law. Any Person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. 7C. Investment Representations. Investor hereby represents that it -------------------------- is acquiring the Restricted Securities purchased hereunder or acquired pursuant hereto for its own account with the present intention of holding such securities for purposes of investment, and that it has no intention of selling such securities in a public distribution in violation of the federal securities laws or any applicable state securities laws; provided that nothing contained herein -------- shall prevent Investor and subsequent holders of Restricted Securities from transferring such securities in compliance with the provisions of Section 4 hereof. Each certificate or instrument representing Restricted Securities shall be imprinted with a legend in substantially the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended. The transfer of the securities represented by this certificate is subject to the conditions specified in the Warrant Agreement, dated as of March 10, 1999, and as amended and modified from time to time, between the issuer (the "Company") and the initial holder hereof, and the Company reserves the right to refuse the transfer of such securities until such conditions have been fulfilled with respect to such transfer. A copy of such conditions shall be furnished by the Company to the holder hereof upon written request and without charge." 7D. Consent to Amendments. Except as otherwise expressly provided --------------------- herein, the provisions of this Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the holders of a majority of the Warrants and the Underlying Common Stock (on a combined basis). No other course of dealing between the Company and the holder of any Warrant or Underlying Common Stock or any delay in exercising any rights hereunder or under the Warrant(s) or the Charter shall operate as a waiver of any rights of any such holders. For purposes of this Agreement, Warrants or Underlying Common Stock held by the Company or any Subsidiaries shall not be deemed to be outstanding. If the Company pays any consideration to any holder of Underlying Common Stock for such holder's consent to any amendment, modification or waiver hereunder, the Company shall also pay each other holder granting its consent hereunder equivalent consideration computed on a pro rata basis. 7E. Survival of Representations and Warranties. All representations ------------------------------------------ and warranties contained herein or made in writing by any party in connection herewith shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, regardless of any investigation made by Investor or on its behalf. 7F. Successors and Assigns. Except as otherwise expressly provided ---------------------- herein, this Agreement (other than those provisions relating to the rights of holders of the Warrant(s) or Underlying Common Stock) is not assignable without the prior written consent of the Company and 15 the Investor. Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. In addition, and whether or not any express assignment has been made, the provisions of this Agreement which are for Investor's benefit as a holder of the Warrant(s) or Underlying Common Stock are also for the benefit of, and enforceable by, any subsequent holder of any such Warrant or Underlying Common Stock. 7G. Severability. Whenever possible, each provision of this Agreement ------------ shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 7H. Counterparts. This Agreement may be executed simultaneously in ------------ two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. 7I. Descriptive Headings; Interpretation. The descriptive headings of ------------------------------------ this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. The use of the word "including" in this Agreement shall be by way of example rather than by limitation. 7J. Governing Law. The corporate law of the State of Maryland shall ------------- govern all issues and questions concerning the relative rights and obligations of the Company and its stockholders. All other issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of Minnesota, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Minnesota or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Minnesota. 7K. Notices. All notices, demands or other communications to be given ------- or delivered under or by reason of the provisions of this Agreement shall be in writing, shall be delivered personally, sent by reputable overnight courier service (charges prepaid) or sent by registered or certified mail, return receipt requested, postage prepaid, and shall be deemed to have been given when personally delivered, the first business day after being sent by reputable overnight courier service or the fifth business day after being deposited in the U.S. Mail (i) to the Company, at its principal executive offices and (ii) to Investor at the address indicated below: Residential Funding Corporation 8400 Normandale Lake Boulevard Bloomington, MN 55437 Attention: Kevin Miller 16 with copies to: -------------- GMAC Mortgage Group, Inc. c/o General Motors Corporation Legal Staff 3031 West Grand Boulevard Detroit, MI 48202 Attention: General Counsel and --- Residential Funding Corporation 8400 Normandale Lake Boulevard Bloomington, MN 55437 Attention: Office of the General Counsel or to such other address or to the attention of such other person as the recipient party (including any successors or assigns of the Company or Investor) has specified by prior written notice to the sending party. 7L. No Strict Construction. The parties hereto have participated ---------------------- jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 7M. Indemnification. In consideration of Investor's execution and --------------- delivery of this Agreement hereunder and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless each of Investor and the Investor Entities, and each other holder of Warrants and Underlying Common Stock, and all of their officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Indemnitees") from and against any and all actions, causes ----------- of action, suits, claims, losses, costs, penalties, fees, and liabilities and damages (including, but not limited to, any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, and liabilities and damages under, as a result of, arising out of, or relating to Section 11 of the Charter or Section 3-602 of the Corporations Code), and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees (including, but not limited to, allocated costs of internal counsel) and disbursements (the "Indemnified Liabilities"), incurred by the Indemnitees or ----------------------- any of them as a result of, or arising out of, or relating to, directly or indirectly (including in connection with any other transaction or event), the execution, delivery, performance or enforcement of this Agreement, the Guaranty (to the extent a result of, arising out of, or relating to Section 23 thereof), the Warrants and any other instrument, document or agreement 17 executed pursuant hereto or in connection herewith, the acquisition or exercise of the Warrants (or any portion thereof), the ownership of the Warrants or the Underlying Common Stock. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. * * * * * * 18 IN WITNESS WHEREOF, the parties hereto have executed this Warrant Agreement on the date first written above. NOVASTAR FINANCIAL, INC. By: _______________________________ Name: _______________________________ Its: _______________________________ RESIDENTIAL FUNDING CORPORATION By: ______________________________ Name: ______________________________ Its: ______________________________ LIST OF EXHIBITS ---------------- Exhibit A - Form of Guaranty Warrant Exhibit B - Form of Tag Along Warrant Exhibit C - Registration Rights Agreement Exhibit D - Opinion of Counsel Exhibit E - Original Warrant Exhibit F - Warrant Agreement dated as of December 9, 1996 Exhibit G - Registration Rights Agreement dated December 9, 1996 and proposed waivers thereto LIST OF DISCLOSURE SCHEDULES ---------------------------- Closing Time Capitalization Schedule October 13 Capitalization Schedule CLOSING TIME CAPITALIZATION SCHEDULE ------------------------------------ Attached hereto OCTOBER 13 CAPITALIZATION SCHEDULE ---------------------------------- Attached hereto This Warrant and the securities obtainable upon exercise thereof are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose of the Corporation's maintenance of its status as a Real Estate Investment Trust under the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain further ---- restrictions and except as expressly provided in the Corporation's Charter, (i) no Person may Beneficially or Constructively Own shares of the Corporation's Common Stock in excess of 9.8 percent (in value or number of shares) of the outstanding shares of Common Stock of the Corporation unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (ii) no Person may Beneficially or Constructively Own shares of Capital Stock of the Corporation in excess of 9.8 percent of the value of the total outstanding shares of Capital Stock of the Corporation, unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (iii) no Person may Beneficially or Constructively Own Capital Stock that would result in the Corporation being "closely held" under Section 856(h) of the Code or otherwise cause the Corporation to fail to qualify as a REIT; and (iv) no Person may Transfer shares of Capital Stock if such Transfer would result in the Capital Stock of the Corporation being owned by fewer than 100 Persons. Any Person who Beneficially or Constructively Owns or attempts to Beneficially or Constructively Own shares of Capital Stock which causes or will cause a Person to Beneficially or Constructively Own shares of Capital Stock in excess or in violation of the above limitations must immediately notify the Corporation. Attempted transfers of ownership in violation of these restrictions shall be null and void ab initio. In addition, if any of the restrictions on transfer or ownership are violated, this Warrant and the shares of Capital Stock obtainable upon exercise thereof may be automatically transferred to a Trustee of a Trust for the benefit of one or more Charitable Beneficiaries. In addition, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio. All capitalized terms in this legend have the meanings defined in the Charter of the Corporation, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Capital Stock of the Corporation on request and without charge. The issuance of this Warrant was not registered under the Securities Act of 1933, as amended. The transfer of this Warrant and the securities obtainable upon exercise thereof is subject to the conditions on transfer specified in the Warrant Agreement, dated as of March 10, 1999 (as amended and modified from time to time), between the issuer hereof (the "Company") and the initial holder hereof, and the Company reserves the right to refuse the transfer of such security until such conditions have been fulfilled with respect to such transfer. Upon written request, a copy of such conditions shall be furnished by the Company to the holder hereof without charge. In addition, the Company will furnish to any warrantholder on request and without charge a full statement or summary of the designations and preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the stock of each class which the Company is authorized to issue and the differences in the relative rights and preferences between such shares of each series, if any, to the extent they have been set, and of the authority of the Board of Directors to set the relative rights and preferences of subsequent series. Such request may be made to the Secretary of the Company. NOVASTAR FINANCIAL INC. STOCK PURCHASE WARRANT ---------------------- Certificate No. W-___________ FOR VALUE RECEIVED, NovaStar Financial, Inc., a Maryland corporation (the "Company"), hereby grants to Residential Funding Corporation ("RFC") or its ------- --- registered assigns (the "Registered Holder") the right to purchase from the ----------------- Company 812,731 shares of the Company's Common Stock at a price per share of $4.5625 (as adjusted from time to time hereunder, the "Exercise Price"). This -------------- Warrant is subject to the Warrant Agreement, dated as of March 10, 1999, by and between the Company and RFC (the "Warrant Agreement"). Certain capitalized ----------------- terms used herein are defined in Section 5 hereof. The amount and kind of securities obtainable pursuant to the rights granted hereunder and the purchase price for such securities are subject to adjustment pursuant to the provisions contained in this Warrant. 2 This Warrant is subject to the following provisions: Section 1. Exercise of Warrant. ------------------- 1A. Exercise Period. The Registered Holder may exercise, in whole --------------- or in part (but not as to a fractional share of Common Stock), the purchase rights represented by this Warrant at any time prior to October 13, 2003 (the "Exercise Period"). The Company shall give the Registered Holder written notice --------------- of the termination of the Exercise Period at least 30 days but not more than 90 days prior to the end of the Exercise Period. 1B. Exercise Procedure. ------------------ (i) This Warrant shall be deemed to have been exercised when the Company has received all of the following items (the "Exercise Time"): ------------- (a) a completed Exercise Agreement, as described in paragraph 1C below, executed by the Person exercising all or part of the purchase rights represented by this Warrant (the "Purchaser"); --------- (b) this Warrant; (c) if this Warrant is not registered in the name of the Purchaser, an Assignment or Assignments in the form set forth in Exhibit II ---------- hereto evidencing the assignment of this Warrant to the Purchaser, in which case the Registered Holder shall have complied with the provisions set forth in Section 7 hereof; and (d) either (1) a check payable to the Company in an amount equal to the product of the Exercise Price multiplied by the number of shares of Common Stock being purchased upon such exercise (the "Aggregate --------- Exercise Price"), (2) the surrender to the Company of debt or equity -------------- securities of the Company or any of its wholly owned Subsidiaries having a Market Price equal to the Aggregate Exercise Price of the Common Stock being purchased upon such exercise (provided that for purposes of this subparagraph, the Market Price of any note or other debt security or any preferred stock shall be deemed to be equal to the aggregate outstanding principal amount or liquidation value thereof plus all accrued and unpaid interest thereon or accrued or declared and unpaid dividends thereon) or (3) a written notice to the Company that the Purchaser is exercising the Warrant (or a portion thereof) by authorizing the Company to withhold from issuance a number of shares of Common Stock issuable upon such exercise of the Warrant which when multiplied by the Market Price of the Common Stock is equal to the Aggregate Exercise Price (and such withheld shares shall no longer be issuable under this Warrant). (ii) Certificates for shares of Common Stock purchased upon exercise of this Warrant shall be delivered by the Company to the Purchaser within three business days after the date 3 of the Exercise Time. Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company shall prepare a new Warrant, substantially identical hereto, representing the rights formerly represented by this Warrant which have not been exercised and shall within such three-day period, deliver such new Warrant to the Person designated for delivery in the Exercise Agreement. (iii) The Common Stock issuable upon the exercise of this Warrant shall be deemed to have been issued to the Purchaser at the opening of business on the date on which the Exercise Time occurs, and the Purchaser shall be deemed for all purposes to have become the record holder of such Common Stock at the Exercise Time. (iv) The issuance of certificates for shares of Common Stock upon exercise of this Warrant shall be made without charge to the Registered Holder or the Purchaser for any issuance tax in respect thereof or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Common Stock. (v) The Company shall not close its books against the transfer of this Warrant or of any share of Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. The Company shall from time to time take all such action as may be necessary to assure that the par value per share of the unissued Common Stock acquirable upon exercise of this Warrant is at all times equal to or less than the Exercise Price then in effect. (vi) The Company shall assist and cooperate with any Registered Holder or Purchaser required to make any governmental filings or obtain any governmental approvals prior to or in connection with any exercise of this Warrant (including, without limitation, making any filings required to be made by the Company). (vii) Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a registered public offering or the sale of the Company, the exercise of any portion of this Warrant may, at the election of the holder hereof, be conditioned upon the consummation of the public offering or sale of the Company in which case such exercise shall not be deemed to be effective until the consummation of such transaction. (viii) The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Common Stock then issuable upon the exercise of all outstanding Warrants. All shares of Common Stock which are so issuable shall, when issued upon payment of the Exercise Price therefor, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Company shall take all such actions as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which 4 shall be immediately delivered by the Company upon each such issuance). The Company shall not take any action which would cause the number of authorized but unissued shares of Common Stock to be less than the number of such shares required to be reserved hereunder for issuance upon exercise of the Warrants. 1C. Exercise Agreement. Upon any exercise of this Warrant, the ------------------ Exercise Agreement shall be substantially in the form set forth in Exhibit I --------- hereto, except that if the shares of Common Stock are not to be issued in the name of the Person in whose name this Warrant is registered, the Exercise Agreement shall also state the name of the Person to whom the certificates for the shares of Common Stock are to be issued, and if the number of shares of Common Stock to be issued does not include all the shares of Common Stock purchasable hereunder, it shall also state the name of the Person to whom a new Warrant for the unexercised portion of the rights hereunder is to be delivered. Such Exercise Agreement shall be dated the actual date of execution thereof. 1D. Fractional Shares. If a fractional share of Common Stock would, ----------------- but for the provisions of paragraph 1A, be issuable upon exercise of the rights represented by this Warrant, the Company shall, within three business days after the date of the Exercise Time, deliver to the Purchaser a check payable to the Purchaser in lieu of such fractional share in an amount equal to the difference between Market Price of such fractional share as of the date of the Exercise Time and the Exercise Price of such fractional share. Section 2. Adjustment of Exercise Price and Number of Shares. In ------------------------------------------------- order to prevent dilution of the rights granted under this Warrant, the Exercise Price shall be subject to adjustment from time to time as provided in this Section 2, and the number of shares of Common Stock obtainable upon exercise of this Warrant shall be subject to adjustment from time to time as provided in this Section 2. 2A. Adjustment of Exercise Price and Number of Shares upon Issuance --------------------------------------------------------------- of Common Stock. If and whenever on or after the Date of Issuance the Company - --------------- issues or sells, or in accordance with paragraph 2B is deemed to have issued or sold, any share of Common Stock for a consideration per share less than the greater of (i) $4.5625 and (ii) the Market Price per share of such Common Stock (such greater amount being hereinafter referred to as the "Base Rate"), then --------- immediately upon such issue or sale the Exercise Price shall be reduced to the Exercise Price determined by multiplying (A) the Exercise Price in effect immediately prior to such issue or sale by (B) a fraction, the numerator of which shall be the sum of (x) the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale and (y) the number of shares that could be purchased at the Base Rate from the aggregate proceeds to the Company from the issuance of such new shares of Common Stock, and the denominator of which shall be the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale. Upon each such adjustment of the Exercise Price hereunder, the number of shares of Common Stock acquirable upon exercise of this Warrant shall be adjusted to the number of shares determined by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common 5 Stock acquirable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. 2B. Effect on Exercise Price of Certain Events. For purposes of ------------------------------------------ determining the adjusted Exercise Price under paragraph 2A, the following shall be applicable: (i) Issuance of Rights or Options. If the Company in any manner ----------------------------- grants or sells any Options and the price per share for which Common Stock is issuable upon the exercise of such Options, or upon conversion or exchange of any Convertible Securities issuable upon exercise of such Options, is less than the Base Rate in effect immediately prior to the time of the granting or sale of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options, or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options, shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Options for such price per share. For purposes of this paragraph, the "price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of any Convertible Securities" is determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the granting or sale of such Options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Company upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Exercise Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Company in any ---------------------------------- manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon conversion or exchange thereof is less than the Base Rate in effect immediately prior to the time of such issue or sale, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issue or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "price per share for which Common Stock is issuable upon conversion or exchange thereof" is determined by dividing (A) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Exercise Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments 6 of the Exercise Price had been or are to be made pursuant to other provisions of this paragraph 2B, no further adjustment of the Exercise Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase ----------------------------------------- price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock changes at any time, the Exercise Price in effect at the time of such change shall be adjusted immediately to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold and the number of shares of Common Stock issuable hereunder shall be correspondingly adjusted; provided that no such -------- change shall at any time cause the Exercise Price hereunder to be increased. For purposes of this paragraph 2B, if the terms of any Option or Convertible Security which was outstanding as of the Date of Issuance are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change; provided that no such change shall at any time cause the -------- Exercise Price hereunder to be increased. (iv) Treatment of Expired Options and Unexercised Convertible -------------------------------------------------------- Securities. The expiration of any Option or the termination of any right to - ---------- convert or exchange any Convertible Securities without the exercise of such Option or right shall not cause any adjustment to the Exercise Price then in effect. (v) Calculation of Consideration Received. If any Common Stock, ------------------------------------- Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the net amount received by the Company therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company shall be the Market Price thereof as of the date of receipt. In case any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving corporation, the amount of consideration therefor shall be deemed to be the Fair Market Value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. (vi) Integrated Transactions. In case any Option is issued in ----------------------- connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options shall be deemed to have been issued without consideration. 7 (vii) Treasury Shares. The number of shares of Common Stock --------------- outstanding at any given time does not include shares owned or held by or for the account of the Company or any Subsidiary, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock. (viii) Record Date. If the Company takes a record of the holders of ----------- Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ix) Liquidating Dividends. In case the Company shall fix a record --------------------- date for making a distribution to any holders of the shares of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of shares of stock other than Common Stock, other securities, evidences of indebtedness, cash or assets or property of whatever nature, including rights to purchase any of the foregoing (excluding cash dividends consistent with past practice), (i) the number of shares of Common Stock for which a Warrant is exercisable shall be adjusted to equal the product of the number of shares of Common Stock for which a Warrant is exercisable immediately prior to such adjustment multiplied by a fraction (A) the numerator of which shall be the Fair Market Value per share of Common Stock immediately prior to such record date and (B) the denominator of which shall be such Fair Market Value per share of Common Stock minus the amount allocable to one share of Common Stock of any such cash so distributable and of the Fair Market Value of any and all such shares of stock, other securities, evidences of indebtedness, or assets or property so distributable, and (ii) the Exercise Price to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, of which the numerator shall be the current Fair Market Value per share of Common Stock immediately prior to such record date minus the amount allocable to one share of Common Stock of any such cash so distributable and of the Fair Market Value of any and all such shares of stock, other securities, evidences of indebtedness, or assets of property so distributable, and of which the denominator shall be such current Fair Market Value per share of Common Stock immediately prior to such record date. Such adjustment shall be made successively whenever such a record date is fixed; and, if such distribution is not so made, the Exercise Price shall again be adjusted to be the Exercise Price which would then be in effect if such record date had not been fixed. 2C. Subdivision or Combination of Common Stock. If the Company at ------------------------------------------ any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of shares of Common Stock acquirable upon exercise of this Warrant shall be proportionately increased. If the Company at any time combines (by reverse stock split or otherwise) one or more classes of its 8 outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of shares of Common Stock acquirable upon exercise of this Warrant shall be proportionately decreased. 2D. Reorganization, Reclassification, Consolidation, Merger or ---------------------------------------------------------- Sale. In the case of any capital reorganization of the Company, or of any - ---- reclassification of the shares of Common Stock, or in case of the consolidation of the Company with or the merger of the Company with or into any other Person (where the Company is not the surviving corporation or Person) or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other Person, each Warrant shall after such capital reorganization, reclassification of shares of Common Stock, consolidation, merger, or sale be exercisable, upon the terms and conditions specified herein, for the number of shares of Common Stock (or Other Securities outstanding) for which a Warrant is exercisable immediately prior to such event; and in any such case, if necessary, the provisions set forth in this Section 2 with respect to the rights thereafter of the holders shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or assets thereafter deliverable on the exercise of the Warrants. The subdivision or combination of the shares of Common Stock at any time outstanding into a greater or lesser number of units or any other event covered by Section 2C shall not be deemed to be a reclassification of the shares of Common Stock for the purposes of this Section 2D. The Company shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor Person resulting from such consolidation or merger or the Person purchasing such assets shall assume, by written agreement, the obligation to deliver to each holder the shares of stock, cash, other securities or assets to which, in accordance with the foregoing provisions, each holder may be entitled and shall assume all other obligations of the Company under this Warrant and the Warrant Agreement. 2E. Certain Events. If any event occurs of the type contemplated -------------- by the provisions of this Section 2 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's board of directors shall make an appropriate adjustment in the Exercise Price and the number of shares of Common Stock acquirable upon exercise of this Warrant so as to protect the rights of the holders of the Warrants; provided that no such adjustment shall increase the Exercise Price or decrease - -------- the number of shares of Common Stock acquirable upon exercise of this Warrant as otherwise determined pursuant to this Section 2. 2F. Notices. ------- (i) Immediately upon any adjustment of the Exercise Price, the Company shall give written notice thereof to the Registered Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company shall give written notice to the Registered Holder at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to 9 any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any transaction described in Section 2D, dissolution or liquidation. (iii) The Company shall also give written notice to the Registered Holders at least 20 days prior to the date on which any transaction described in Section 2D, dissolution or liquidation shall take place. Section 3. [Reserved] Section 4. Definitions. The following terms have meanings set forth ----------- below: "Common Stock" means the Company's Common Stock, $0.01 par value, and ------------ except for purposes of the number of shares of Common Stock acquirable upon exercise of this Warrant, any capital stock of any class of the Company hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. "Common Stock Deemed Outstanding" means, at any given time, the number ------------------------------- of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to paragraphs 2B(i) and 2B(ii) hereof regardless of whether the Options or Convertible Securities are actually exercisable at such time, but excluding the number of shares of Common Stock acquirable upon exercise of any Warrant. "Convertible Securities" means any stock or securities (directly or ---------------------- indirectly) convertible into or exchangeable for Common Stock. "Fair Market Value" In order to determine Fair Market Value for ----------------- purposes of this Warrant Agreement, the Company and a representative (the "Representative") designated by a majority of the Registered Holders shall - --------------- attempt to agree upon such Fair Market Value. If the Company and the Representatives are unable to agree upon the Fair Market Value within 20 days after notification of the event requiring such a determination, the Company and the Representative shall agree on an appraiser to be appointed by the Company to determine the Fair Market Value. In the event that the parties cannot agree upon an appraiser in the foregoing period, then the determination of Fair Market Value shall be conducted by two appraisers, one of whom shall be selected by the Company, and one of whom shall be selected by the Representative. If either of such two determinations of Fair Market Value is within ten percent (10%) of the other determination of Fair Market Value, then the Fair Market Value shall be the average of such two determinations. The Company shall pay the expenses of each such appraiser. If neither of such two determinations of Fair Market Value is within ten percent (10%) of the other determination of Fair Market Value, a third appraiser shall be selected by the other two appraisers. The third appraiser shall make its own independent final determination of Fair Market Value. The Company shall pay the expenses of such 10 third appraiser. All appraisal reports shall be in writing, shall be signed by the appraisers and shall be delivered to the Company and the Registered Holders. The Fair Market Value determined in the above manner shall be final and binding upon the Company and the Registered Holders. "Market Price" means as to any security the average of the closing ------------ prices of such security's sales on all domestic securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over the period of 10 consecutive business days ending on the business day immediately prior to the day as of which "Market Price" is being determined; provided that if such -------- security is listed on any domestic securities exchange the term "business days" as used in this sentence means business days on which such exchange is open for trading. If at any time such security is not listed on any domestic securities exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Company and the Registered Holders of Warrants representing a majority of the Common Stock purchasable upon exercise of all the Warrants then outstanding; provided that if such parties are unable to reach agreement within a reasonable - -------- period of time, such fair value shall be determined by an appraiser jointly selected by the Company and the Registered Holders of Warrants representing a majority of the Common Stock purchasable upon exercise of all the Warrants then outstanding. The determination of such appraiser shall be final and binding on the Company and the Registered Holders of the Warrants, and the fees and expenses of such appraiser shall be paid by the Company. "Options" means any rights or options to subscribe for or purchase ------- Common Stock or Convertible Securities. "Other Securities" shall mean any securities (other than shares of ---------------- Common Stock) of the Company or any other Person which the Registered Holders at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to the Underlying Common Stock or which at any time shall be issuable or shall have been issued to holders of the Underlying Common Stock in exchange for, in addition to or in replacement of, the Underlying Common Stock. "Person" means an individual, a partnership, a joint venture, a ------ corporation, a limited liability company, a trust, an unincorporated organization and a government or any department or agency thereof. Other capitalized terms used in this Warrant but not defined herein shall have the meanings set forth in the Warrant Agreement. 11 Section 5. No Voting Rights; Limitations of Liability. This Warrant ------------------------------------------ shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. No provision hereof, in the absence of affirmative action by the Registered Holder to purchase Common Stock, and no enumeration herein of the rights or privileges of the Registered Holder shall give rise to any liability of such holder for the Exercise Price of Common Stock acquirable by exercise hereof or as a stockholder of the Company. Section 6. Warrant Transferable. Subject to the transfer conditions -------------------- referred to in the legend endorsed hereon, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Registered Holder, upon surrender of this Warrant with a properly executed Assignment (in the form of Exhibit II hereto) at the principal office of the Company. ---------- Section 7. Warrant Exchangeable for Different Denominations. This ------------------------------------------------ Warrant is exchangeable, upon the surrender hereof by the Registered Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Warrants shall represent such portion of such rights as is designated by the Registered Holder at the time of such surrender. October 13, 1998 shall be deemed to be the "Date of Issuance" hereof regardless of the number of times new certificates representing the unexpired and unexercised rights formerly represented by this Warrant shall be issued. All Warrants representing portions of the rights hereunder are referred to herein as the "Warrants." Section 8. Replacement. Upon receipt of evidence reasonably ----------- satisfactory to the Company (an affidavit of the Registered Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing this Warrant, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company (provided that if the holder is the original holder hereof or any Affiliate thereof or a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 9. Notices. Except as otherwise expressly provided herein, ------- all notices referred to in this Warrant shall be in writing and shall be delivered personally, sent by reputable overnight courier service (charges prepaid) or sent by registered or certified mail, return receipt requested, postage prepaid, and shall be deemed to have been given when personally delivered, the first business day after being sent by reputable overnight courier service or the fifth business day after being deposited in the U.S. Mail (i) to the Company, at its principal executive offices and (ii) to the Registered Holder of this Warrant, at such holder's address as it appears in the records of the Company (unless otherwise indicated by any such holder). Section 10. Amendment and Waiver. Except as otherwise provided -------------------- herein, the provisions of the Warrants may be amended and the Company may take any action herein 12 prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Registered Holders of Warrants representing a majority of the shares of Common Stock obtainable upon exercise of the Warrants; provided that no such action may change the -------- Exercise Price of the Warrants or the number of shares or class of stock obtainable upon exercise of each Warrant without the written consent of the Registered Holders of Warrants representing at least a majority of the shares of Common Stock obtainable upon exercise of the Warrants. Section 11. Descriptive Headings; Governing Law. The descriptive ----------------------------------- headings of the several Sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The corporation laws of the State of Maryland shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by the internal law of the State of Minnesota, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Minnesota or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Minnesota. * * * * * * 13 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated as of the Date of Issuance hereof. NOVASTAR FINANCIAL, INC. By: __________________________________ Name: __________________________________ Its: __________________________________ [Corporate Seal] Attest: ______________________________ Title: ______________________ EXHIBIT I EXERCISE AGREEMENT ------------------ To: Dated: ____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (Certificate No. W-____________), hereby agrees to subscribe for the purchase of ____________ shares of the Common Stock covered by such Warrant and makes payment herewith in full therefor at the price per share provided by such Warrant. Signature: _____________________ Address: _______________________ EXHIBIT II ASSIGNMENT ---------- FOR VALUE RECEIVED, ______________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (Certificate No. W-____________) with respect to the number of shares of the Common Stock covered thereby set forth below, unto: Names of Assignee Address No. of Shares ----------------- ------- ------------- Signature: _____________________ Witness: _______________________ This Warrant and the securities obtainable upon exercise thereof are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose of the Corporation's maintenance of its status as a Real Estate Investment Trust under the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain further ---- restrictions and except as expressly provided in the Corporation's Charter, (i) no Person may Beneficially or Constructively Own shares of the Corporation's Common Stock in excess of 9.8 percent (in value or number of shares) of the outstanding shares of Common Stock of the Corporation unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (ii) no Person may Beneficially or Constructively Own shares of Capital Stock of the Corporation in excess of 9.8 percent of the value of the total outstanding shares of Capital Stock of the Corporation, unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (iii) no Person may Beneficially or Constructively Own Capital Stock that would result in the Corporation being "closely held" under Section 856(h) of the Code or otherwise cause the Corporation to fail to qualify as a REIT; and (iv) no Person may Transfer shares of Capital Stock if such Transfer would result in the Capital Stock of the Corporation being owned by fewer than 100 Persons. Any Person who Beneficially or Constructively Owns or attempts to Beneficially or Constructively Own shares of Capital Stock which causes or will cause a Person to Beneficially or Constructively Own shares of Capital Stock in excess or in violation of the above limitations must immediately notify the Corporation. Attempted transfers of ownership in violation of these restrictions shall be null and void ab initio. In addition, if any of the restrictions on transfer or ownership are violated, this Warrant and the shares of Capital Stock obtainable upon exercise thereof may be automatically transferred to a Trustee of a Trust for the benefit of one or more Charitable Beneficiaries. In addition, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio. All capitalized terms in this legend have the meanings defined in the Charter of the Corporation, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Capital Stock of the Corporation on request and without charge. The issuance of this Warrant was not registered under the Securities Act of 1933, as amended. The transfer of this Warrant and the securities obtainable upon exercise thereof is subject to the conditions on transfer specified in the Warrant Agreement, dated as March 10, 1999 (as amended and modified from time to time), between the issuer hereof (the "Company") and the initial holder hereof, and the Company reserves the right to refuse the transfer of such security until such conditions have been fulfilled with respect to such transfer. Upon written request, a copy of such conditions shall be furnished by the Company to the holder hereof without charge. In addition, the Company will furnish to any warrantholder on request and without charge a full statement or summary of the designations and preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the stock of each class which the Company is authorized to issue and the differences in the relative rights and preferences between such shares of each series, if any, to the extent they have been set, and of the authority of the Board of Directors to set the relative rights and preferences of subsequent series. Such request may be made to the Secretary of the Company. NOVASTAR FINANCIAL INC. STOCK PURCHASE WARRANT ---------------------- Certificate No. W-_______ FOR VALUE RECEIVED, NovaStar Financial, Inc., a Maryland corporation (the "Company"), hereby grants to Residential Funding Corporation ("RFC") or its ------- --- registered assigns (the "Registered Holder") the right to purchase from the ----------------- Company 364,982 shares of the Company's Common Stock at a price per share of $15.00 (as adjusted from time to time hereunder, the "Exercise Price"). This -------------- Warrant is subject to the Warrant Agreement, dated as of March 10, 1999, by and between the Company and RFC (the "Warrant Agreement"). Certain capitalized ----------------- terms used herein are defined in Section 5 hereof. The amount and kind of securities obtainable pursuant to the rights granted hereunder and the purchase price for such securities are subject to adjustment pursuant to the provisions contained in this Warrant. 2 This Warrant is subject to the following provisions: Section 1. Exercise of Warrant. ------------------- 1A. Exercise Period. The Registered Holder may exercise, in whole or --------------- in part (but not as to a fractional share of Common Stock), the purchase rights represented by this Warrant at any time and from time to time after the Closing Time (the "Date of Issuance") to and including the expiration date of the ---------------- Original Warrants, which is February 3, 2001 (the "Exercise Period"). The --------------- Company shall give the Registered Holder written notice of the termination of the Exercise Period at least 30 days but not more than 90 days prior to the end of the Exercise Period. 1B. Exercise Procedure. ------------------ (i) This Warrant shall be deemed to have been exercised when the Company has received all of the following items (the "Exercise Time"): ------------- (a) a completed Exercise Agreement, as described in paragraph 1C below, executed by the Person exercising all or part of the purchase rights represented by this Warrant (the "Purchaser"); --------- (b) this Warrant; (c) if this Warrant is not registered in the name of the Purchaser, an Assignment or Assignments in the form set forth in Exhibit II ---------- hereto evidencing the assignment of this Warrant to the Purchaser, in which case the Registered Holder shall have complied with the provisions set forth in Section 7 hereof; and (d) either (1) a check payable to the Company in an amount equal to the product of the Exercise Price multiplied by the number of shares of Common Stock being purchased upon such exercise (the "Aggregate Exercise ------------------ Price"), (2) the surrender to the Company of debt or equity securities of ----- the Company or any of its wholly owned Subsidiaries having a Market Price equal to the Aggregate Exercise Price of the Common Stock being purchased upon such exercise (provided that for purposes of this subparagraph, the Market Price of any note or other debt security or any preferred stock shall be deemed to be equal to the aggregate outstanding principal amount or liquidation value thereof plus all accrued and unpaid interest thereon or accrued or declared and unpaid dividends thereon) or (3) a written notice to the Company that the Purchaser is exercising the Warrant (or a portion thereof) by authorizing the Company to withhold from issuance a number of shares of Common Stock issuable upon such exercise of the Warrant which when multiplied by the Market Price of the Common Stock is equal to the Aggregate Exercise Price (and such withheld shares shall no longer be issuable under this Warrant). 3 (ii) Certificates for shares of Common Stock purchased upon exercise of this Warrant shall be delivered by the Company to the Purchaser within three business days after the date of the Exercise Time. Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company shall prepare a new Warrant, substantially identical hereto, representing the rights formerly represented by this Warrant which have not been exercised and shall within such three-day period, deliver such new Warrant to the Person designated for delivery in the Exercise Agreement. (iii) The Common Stock issuable upon the exercise of this Warrant shall be deemed to have been issued to the Purchaser at the opening of business on the date on which the Exercise Time occurs, and the Purchaser shall be deemed for all purposes to have become the record holder of such Common Stock at the Exercise Time. (iv) The issuance of certificates for shares of Common Stock upon exercise of this Warrant shall be made without charge to the Registered Holder or the Purchaser for any issuance tax in respect thereof or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Common Stock. (v) The Company shall not close its books against the transfer of this Warrant or of any share of Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. The Company shall from time to time take all such action as may be necessary to assure that the par value per share of the unissued Common Stock acquirable upon exercise of this Warrant is at all times equal to or less than the Exercise Price then in effect. (vi) The Company shall assist and cooperate with any Registered Holder or Purchaser required to make any governmental filings or obtain any governmental approvals prior to or in connection with any exercise of this Warrant (including, without limitation, making any filings required to be made by the Company). (vii) Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a registered public offering or the sale of the Company, the exercise of any portion of this Warrant may, at the election of the holder hereof, be conditioned upon the consummation of the public offering or sale of the Company in which case such exercise shall not be deemed to be effective until the consummation of such transaction. (viii) The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Common Stock then issuable upon the exercise of all outstanding Warrants. All shares of Common Stock which are so issuable shall, when issued upon payment of the Exercise Price therefor, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Company shall take all such actions as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any 4 applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). The Company shall not take any action which would cause the number of authorized but unissued shares of Common Stock to be less than the number of such shares required to be reserved hereunder for issuance upon exercise of the Warrants. 1C. Exercise Agreement. Upon any exercise of this Warrant, the ------------------ Exercise Agreement shall be substantially in the form set forth in Exhibit I --------- hereto, except that if the shares of Common Stock are not to be issued in the name of the Person in whose name this Warrant is registered, the Exercise Agreement shall also state the name of the Person to whom the certificates for the shares of Common Stock are to be issued, and if the number of shares of Common Stock to be issued does not include all the shares of Common Stock purchasable hereunder, it shall also state the name of the Person to whom a new Warrant for the unexercised portion of the rights hereunder is to be delivered. Such Exercise Agreement shall be dated the actual date of execution thereof. 1D. Fractional Shares. If a fractional share of Common Stock would, ----------------- but for the provisions of paragraph 1A, be issuable upon exercise of the rights represented by this Warrant, the Company shall, within three business days after the date of the Exercise Time, deliver to the Purchaser a check payable to the Purchaser in lieu of such fractional share in an amount equal to the difference between Market Price of such fractional share as of the date of the Exercise Time and the Exercise Price of such fractional share. Section 2. Adjustment of Exercise Price and Number of Shares. ------------------------------------------------- 2A. Adjustment of Exercise Price and Number of Shares. In order to ------------------------------------------------- prevent dilution of the rights granted under this Warrant, the Exercise and the number of shares of Common Stock obtainable upon exercise of this Warrant shall be subject to adjustment from time to time as provided in the Original Warrants. Such adjustment shall continue to be made as so provided regardless of whether any Original Warrants remain outstanding. 2B. Subdivision or Combination of Common Stock. If the Company at ------------------------------------------ any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of shares of Common Stock acquirable upon exercise of this Warrant shall be proportionately increased. If the Company at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of shares of Common Stock acquirable upon exercise of this Warrant shall be proportionately decreased. 2C. Reorganization, Reclassification, Consolidation, Merger or Sale. --------------------------------------------------------------- In the case of any capital reorganization of the Company, or of any reclassification of the shares of Common 5 Stock, or in case of the consolidation of the Company with or the merger of the Company with or into any other Person (where the Company is not the surviving corporation or Person) or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other Person, each Warrant shall after such capital reorganization, reclassification of shares of Common Stock, consolidation, merger, or sale be exercisable, upon the terms and conditions specified herein, for the number of shares of Common Stock (or Other Securities outstanding) for which a Warrant is exercisable immediately prior to such event; and in any such case, if necessary, the provisions set forth in this Section 2 with respect to the rights thereafter of the holders shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or assets thereafter deliverable on the exercise of the Warrants. The subdivision or combination of the shares of Common Stock at any time outstanding into a greater or lesser number of units or any other event covered by Section 2B shall not be deemed to be a reclassification of the shares of Common Stock for the purposes of this Section 2C. The Company shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor Person resulting from such consolidation or merger or the Person purchasing such assets shall assume, by written agreement, the obligation to deliver to each holder the shares of stock, cash, other securities or assets to which, in accordance with the foregoing provisions, each holder may be entitled and shall assume all other obligations of the Company under this Warrant and the Warrant Agreement. 2D. Certain Events. If any event occurs of the type contemplated by -------------- the provisions of this Section 2 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's board of directors shall make an appropriate adjustment in the Exercise Price and the number of shares of Common Stock acquirable upon exercise of this Warrant so as to protect the rights of the holders of the Warrants; provided that no such adjustment shall increase the Exercise Price or decrease - -------- the number of shares of Common Stock acquirable upon exercise of this Warrant as otherwise determined pursuant to this Section 2. 2E. Notices. ------- (i) Immediately upon any adjustment of the Exercise Price, the Company shall give written notice thereof to the Registered Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company shall give written notice to the Registered Holder at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any transaction described in Section 2C, dissolution or liquidation. (iii) The Company shall also give written notice to the Registered Holders at least 20 days prior to the date on which any Section 2C, dissolution or liquidation shall take place. 6 Section 3. Definitions. The following terms have meanings set forth ----------- below: "Common Stock" means the Company's Common Stock, $0.01 par value, and ------------ except for purposes of the number of shares of Common Stock acquirable upon exercise of this Warrant, any capital stock of any class of the Company hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. "Market Price" means as to any security the average of the closing ------------ prices of such security's sales on all domestic securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over the period of 10 consecutive business days ending on the business day immediately prior to the day as of which "Market Price" is being determined; provided that if such -------- security is listed on any domestic securities exchange the term "business days" as used in this sentence means business days on which such exchange is open for trading. If at any time such security is not listed on any domestic securities exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Company and the Registered Holders of Warrants representing a majority of the Common Stock purchasable upon exercise of all the Warrants then outstanding; provided that if such parties are unable to reach agreement within a reasonable - -------- period of time, such fair value shall be determined by an appraiser jointly selected by the Company and the Registered Holders of Warrants representing a majority of the Common Stock purchasable upon exercise of all the Warrants then outstanding. The determination of such appraiser shall be final and binding on the Company and the Registered Holders of the Warrants, and the fees and expenses of such appraiser shall be paid by the Company. "Other Securities" shall mean any securities (other than shares of ---------------- Common Stock) of the Company or any other Person which the Registered Holders at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to the Underlying Common Stock or which at any time shall be issuable or shall have been issued to holders of the Underlying Common Stock in exchange for, in addition to or in replacement of, the Underlying Common Stock. "Person" means an individual, a partnership, a joint venture, a ------ corporation, a limited liability company, a trust, an unincorporated organization and a government or any department or agency thereof. 7 Other capitalized terms used in this Warrant but not defined herein shall have the meanings set forth in the Warrant Agreement. Section 4. No Voting Rights; Limitations of Liability. This Warrant ------------------------------------------ shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. No provision hereof, in the absence of affirmative action by the Registered Holder to purchase Common Stock, and no enumeration herein of the rights or privileges of the Registered Holder shall give rise to any liability of such holder for the Exercise Price of Common Stock acquirable by exercise hereof or as a stockholder of the Company. Section 5. Warrant Transferable. Subject to the transfer conditions -------------------- referred to in the legend endorsed hereon, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Registered Holder, upon surrender of this Warrant with a properly executed Assignment (in the form of Exhibit II hereto) at the principal office of the Company. ---------- Section 6. Warrant Exchangeable for Different Denominations. This ------------------------------------------------ Warrant is exchangeable, upon the surrender hereof by the Registered Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Warrants shall represent such portion of such rights as is designated by the Registered Holder at the time of such surrender. The Closing Time shall be deemed to be the "Date of Issuance" hereof regardless of the number of times new certificates representing the unexpired and unexercised rights formerly represented by this Warrant shall be issued. All Warrants representing portions of the rights hereunder are referred to herein as the "Warrants." Section 7. Replacement. Upon receipt of evidence reasonably ----------- satisfactory to the Company (an affidavit of the Registered Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing this Warrant, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company (provided that if the holder is the original holder hereof or any Affiliate thereof or a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 8. Notices. Except as otherwise expressly provided herein, ------- all notices referred to in this Warrant shall be in writing and shall be delivered personally, sent by reputable overnight courier service (charges prepaid) or sent by registered or certified mail, return receipt requested, postage prepaid, and shall be deemed to have been given when personally delivered, the first business day after being sent by reputable overnight courier service or the fifth business day after being deposited in the U.S. Mail (i) to the Company, at its principal executive offices and (ii) to the Registered Holder of this Warrant, at such holder's address as it appears in the records of the Company (unless otherwise indicated by any such holder). 8 Section 9. Amendment and Waiver. Except as otherwise provided -------------------- herein, the provisions of the Warrants may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Registered Holders of Warrants representing a majority of the shares of Common Stock obtainable upon exercise of the Warrants; provided that no such action may -------- change the Exercise Price of the Warrants or the number of shares or class of stock obtainable upon exercise of each Warrant without the written consent of the Registered Holders of Warrants representing at least a majority of the shares of Common Stock obtainable upon exercise of the Warrants. Section 10. Descriptive Headings; Governing Law. The descriptive ----------------------------------- headings of the several Sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The corporation laws of the State of Maryland shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by the internal law of the State of Minnesota, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Minnesota or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Minnesota. * * * * * * 9 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated as of the Date of Issuance hereof. NOVASTAR FINANCIAL, INC. By: _________________________________ Name:_________________________________ Its: _________________________________ [Corporate Seal] Attest: ______________________________ Title: ______________________ EXHIBIT I EXERCISE AGREEMENT ------------------ To: Dated: ____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (Certificate No. W-____________), hereby agrees to subscribe for the purchase of ____________ shares of the Common Stock covered by such Warrant and makes payment herewith in full therefor at the price per share provided by such Warrant. Signature: ____________________ Address: ______________________ EXHIBIT II ASSIGNMENT ---------- FOR VALUE RECEIVED, ______________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (Certificate No. W-____________) with respect to the number of shares of the Common Stock covered thereby set forth below, unto: Names of Assignee Address No. of Shares ----------------- ------- ------------- Signature: ____________________ Witness: ______________________ REGISTRATION RIGHTS AGREEMENT ----------------------------- THIS AGREEMENT is made as of March 10, 1999, by and between NovaStar Financial, Inc., a Maryland corporation (the "Company"), and Residential Funding ------- Corporation, a Delaware corporation ("Investor"). Unless otherwise provided in -------- this Agreement, capitalized terms used herein shall have the meanings set forth in paragraph 9 hereof. The parties to this Agreement are parties to a Warrant Agreement of even date herewith (the "Warrant Agreement"). In order to induce Investor to ----------------- enter into the Warrant Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company has agreed to provide the registration rights set forth in this Agreement. The parties hereto agree as follows: 1. Demand Registrations. -------------------- (a) Requests for Registration. At any time, the holders of at least a ------------------------- majority of the Registrable Securities may request registration under the Securities Act of all or any portion of their Registrable Securities on Form S- 11 or any similar long-form registration ("Long-Form Registrations") or, if ----------------------- available, on Form S-2 or Form S-3 or any similar short-form registration ("Short-Form Registrations"). All registrations requested pursuant to this - -------------------------- paragraph 1(a) are referred to herein as "Demand Registrations." Each request -------------------- for a Demand Registration shall specify the approximate number of Registrable Securities requested to be registered and the intended method or methods of disposition of such Registrable Securities. Within ten days after receipt of any such request, the Company shall give written notice of such requested registration to all other holders of Registrable Securities and shall include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company's notice. (b) Long-Form Registrations. Subject to the second sentence of ----------------------- subparagraph (c) below, the holders of Registrable Securities shall be entitled to request four (4) Long-Form Registrations in which the Company shall pay all Registration Expenses (as defined in paragraph 5). A registration shall not count as one of the permitted Long-Form Registrations until it has become effective, and the last Long-Form Registration shall not count as one of the permitted Long-Form Registrations unless the holders of Registrable Securities are able to register and sell at least 90% of the Registrable Securities requested to be included in such registration; provided that in any event the -------- Company shall pay all Registration Expenses in connection with any Long-Form Registration whether or not it has become effective and whether or not such registration has counted as one of the permitted Long-Form Registrations. (c) Short-Form Registrations. In addition to the Long-Form ------------------------ Registrations provided pursuant to paragraph 1(b), the holders of Registrable Securities shall be entitled to request an unlimited number of Short-Form Registrations in which the Company shall pay all Registration Expenses. Demand Registrations shall be Short-Form Registrations whenever the Company is permitted to use any applicable short form. The Company shall use its best efforts to make Short-Form Registrations available for the sale of Registrable Securities. With respect to any Demand Registration, the requesting holders of Registrable Securities may request that the Company effect a registration of Registrable Securities under a registration statement on Form S-3 or S-11 pursuant to Rule 415 under the Securities Act (or any successor form or rule) (a "Shelf Registration"), under which such holders may sell Registrable Securities ------------------ from time to time in underwritten or non-underwritten offerings. The holders of Registrable Securities may request an unlimited number of underwritten offerings of any Registrable Securities registered under a Shelf Registration and any such request shall be considered a Demand Registration for purposes of this Agreement (including paragraph 4 hereof). (d) Priority on Demand Registrations. If a Demand Registration is an -------------------------------- underwritten offering and the managing underwriters advise the Company in writing that, in their opinion, the number of Registrable Securities and other securities requested to be included in such offering exceeds the number of Registrable Securities and other securities, if any, which can be sold in an orderly manner in such offering within a price range acceptable to the holders of a majority of the Registrable Securities initially requesting registration, the Company shall include in such registration prior to the inclusion of any securities which are not Registrable Securities (including securities held by the Five Percent Purchasers) the number of Registrable Securities requested to be included which in the opinion of such underwriters can be sold in an orderly manner within the price range of such offering, pro rata among the respective holders thereof on the basis of the amount of Registrable Securities owned by each such holder. (e) Restrictions on Demand Registrations. The Company may postpone ------------------------------------ for up to 120 days (from the date of the request) the filing or the effectiveness of a registration statement for a Demand Registration or the commencement of a Demand Registration under a Shelf Registration if the Company's board of directors believes that such Demand Registration would reasonably be expected to have a material adverse effect on any proposal or plan by the Company or any of its Subsidiaries to engage in any acquisition of assets (other than in the ordinary course of business) or any stock purchase, merger, consolidation, tender offer, reorganization or similar transaction; provided -------- that in such event, the holders of Registrable Securities initially requesting such Demand Registration shall be entitled to withdraw such request and, if such request is withdrawn, such Demand Registration shall be treated as if it had never been made in the first instance, and the Company shall pay all Registration Expenses in connection with such registration. The Company may delay a Demand Registration hereunder only once in any 12-month period. (f) Selection of Underwriters. The holders of a majority of the ------------------------- Registrable Securities initially requesting a Demand Registration hereunder shall have the right to select the 2 investment banker(s) and manager(s) to administer the offering (including an underwritten offering under a Shelf Registration). 2. Piggyback Registrations. ----------------------- (a) Right to Piggyback. Whenever the Company proposes (i) to register ------------------ any of its securities under the Securities Act (other than pursuant to a Demand Registration (which is addressed in paragraph 1 above rather than in this paragraph 2) or a registration on Form S-4 or Form S-8 or any similar or successor forms or in connection with a dividend reinvestment or direct stock purchase plan) and the registration form to be used may be used for the registration of Registrable Securities or (ii) to effect an underwritten public offering under a shelf registration statement (each of (i) and (ii) being a "Piggyback Registration"), the Company shall give prompt written notice to all - ----------------------- holders of Registrable Securities of its intention to effect such a registration or offering and, subject to paragraphs 2(c) and 2(d) below, shall include in such registration or offering all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 20 days after the receipt of the Company's notice; provided that with respect to any -------- Piggyback Registration, the holders of a majority of the Registrable Securities shall have the right to waive and forego, as against all holders of Registrable Securities, the inclusion of any Registrable Securities in such Piggyback Registration. (b) Piggyback Expenses. The Registration Expenses of the holders of ------------------ Registrable Securities shall be paid by the Company in all Piggyback Registrations. (c) Priority on Primary Registrations. If a Piggyback Registration is --------------------------------- an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing (with a copy to each holder requesting registration of Registrable Securities) that, in their opinion, the number of securities requested to be included in such registration or offering exceeds the number which can be sold in such offering without adversely affecting the marketability of such offering, the Company shall include in such registration (i) first, the securities the Company proposes to sell and (ii) second, the Registrable Securities requested to be included in such registration and other securities requested to be included in such registration (including securities held by the Five Percent Purchasers), pro rata among the holders of such Registrable Securities and other securities on the basis of the number of securities requested to be included therein. (d) Priority on Secondary Registrations. If a Piggyback Registration ----------------------------------- is an underwritten secondary registration on behalf of holders of the Company's securities (it being understood that secondary registrations on behalf of holders of Registrable Securities are addressed in paragraph 1 above rather than in this paragraph 2(d)), and the managing underwriters advise the Company in writing that, in their opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company shall include in such registration (i) first, the securities requested to be included therein by the holders requesting such registration and (ii) second, the 3 Registrable Securities requested to be included in such registration and other securities requested to be included in such registration (including securities held by the Five Percent Purchasers), pro rata among the holders of such Registrable Securities and other securities on the basis of the number of securities requested to be included therein. (e) Withdrawal by Company. If, at any time after giving notice of its --------------------- intention to register or effect an offering of any of its securities as set forth in paragraph 2(a) and before the effective date of such registration statement filed in connection with such registration or the commencement of the offering, as the case may be, the Company shall determine, for any reason, not to register such securities or commence the offering, the Company may, at its sole discretion, give written notice of such determination to each holder of Registrable Securities and thereupon shall be relieved of its obligation to register or include any Registrable Securities in connection with such registration or offering (but not from its obligation to pay the Registration Expenses in connection therewith as provided herein). 3. Holdback Agreements. ------------------- (a) Each holder of Registrable Securities shall not effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and the 90-day period beginning on the effective date of any underwritten public offering of the Company's equity securities (including Demand and Piggyback Registrations) (except as part of such underwritten registration), unless the underwriters managing the registered public offering otherwise agree. (b) The Company (i) shall not effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and during the 90-day period beginning on the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration or the commencement date of any underwritten offering under a Shelf Registration (except as part of such underwritten offering or pursuant to registrations on Form S-8 or any successor form or in connection with a dividend reinvestment or direct stock purchase plan), unless the underwriters managing the registered public offering otherwise agree, and (ii) shall use its best reasonable efforts to cause each holder of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, purchased or otherwise acquired from the Company at any time after the date of this Agreement (other than in a registered public offering) to agree not to effect any public sale or distribution (including sales pursuant to Rule 144) of any such securities during such period (except as part of such underwritten offering, if otherwise permitted), unless the underwriters managing the registered public offering otherwise agree. 4. Registration Procedures. Whenever the holders of Registrable ----------------------- Securities have requested that any Registrable Securities be registered pursuant to this Agreement (including requesting an underwritten offering under a Shelf Registration as described in paragraph 1(c)), the 4 Company shall use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company shall as expeditiously as possible: (a) prepare and file with the Securities and Exchange Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective; (b) except in the case of a Shelf Registration, prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of Registrable Securities subject to such registration for a period of either (i) not less than six months (subject to extension pursuant to paragraph 7(b)) or, if such registration statement relates to an underwritten offering, such longer period as in the opinion of counsel for the underwriters a prospectus is required by law to be delivered in connection with sales of Registrable Securities by an underwriter or dealer, or (ii) such shorter period as shall terminate when all of the securities covered by such registration statement during such period have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement (but, in any event, not before the expiration of any longer period required under the Securities Act), and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement; (c) in the case of a Shelf Registration, prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of Registrable Securities subject to such registration until the earlier of (i) 18 months (subject to extension pursuant to paragraph 7(b)) after the effective date of such registration statement and (ii) the date on which all Registrable Securities subject to such registration statement have been sold pursuant to such registration statement (such period with respect to each Shelf Registration, a "Shelf Registration Period"); ------------------------- (d) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus and any supplemental prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (e) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do 5 any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph or (ii) subject itself to taxation in any such jurisdiction); (f) notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company shall prepare and furnish to such seller a reasonable number of copies of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (g) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on a securities exchange or the National Association of Securities Dealers automated quotation system ("Nasdaq") ------ and, if listed on the Nasdaq, use its best efforts to secure designation of all such Registrable Securities covered by such registration statement as a "national market system security" of The Nasdaq Stock Market within the meaning of Rule 11Aa2-1 of the Securities and Exchange Commission or, failing that, to secure The Nasdaq Stock Market's authorization for such Registrable Securities, subject in all cases to applicable rules of national securities exchanges and Nasdaq. (h) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (i) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of a majority of the Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities; (j) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees, agents, representatives and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (k) otherwise use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission, and make available to its security holders, 6 as soon as reasonably practicable, an earnings statement covering the period of at least 12 months beginning with the first day of the Company's first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (l) permit any holder of Registrable Securities which holder, in its sole and exclusive judgment, might be deemed to be an underwriter or a controlling person of the Company, to participate in the preparation of such registration or comparable statement and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such holder and its counsel should be included; (m) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any securities included in such registration statement for sale in any jurisdiction, the Company shall use its best efforts promptly to obtain the withdrawal of such order; (n) use its best efforts to cause such Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the sellers thereof to consummate the disposition of such Registrable Securities; (o) obtain a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters, which letter shall be addressed to the underwriters and, to the extent reasonably practicable, to the holders of such Registrable Securities; and (p) obtain an opinion from the Company's outside counsel in customary form and covering such matters of the type customarily covered by such opinions, which opinion shall be addressed to the underwriters and the holders of such Registrable Securities. Before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to the counsel selected by the holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review and comment of such counsel. In addition, if any such registration or comparable statement refers to any such holder by name or otherwise as the holder of any securities of the Company, other than to disclose solely the number of shares of Common Stock or Warrants held, such holder shall have the right to require (i) the insertion therein of language, in form and substance satisfactory to such holder and presented to the Company in writing, to the effect that the holding by such holder of such securities is not to be construed as a recommendation by such holder of the investment quality of the Company's securities covered thereby, and that such holding does not imply that such holder shall assist in meeting any future financial requirements of the Company, or (ii) in the event that such reference to such holder by 7 name or otherwise is not required by the Securities Act or any similar federal or state statute then in force, the deletion of the reference to such holder; provided that, with respect to this clause (ii), such holder shall furnish to - -------- the Company an opinion of counsel to such effect, which opinion and counsel shall be reasonably satisfactory to the Company. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company with such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. 5. Registration Expenses. --------------------- (a) "Registration Expenses" shall mean all expenses incident to the --------------------- Company's performance of or compliance with this Agreement, including, without limitation, all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, fees and disbursements of custodians, fees and disbursements of counsel for the Company and all independent certified public accountants, underwriters (excluding discounts and commissions) and other Persons retained by the Company, the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or, if none are so listed, on a securities exchange or on the NASD automated quotation system. (b) In connection with each Demand Registration (and each underwritten offering under a Shelf Registration) and each Piggyback Registration, the Company shall reimburse the holders of Registrable Securities included in such registration for the reasonable fees and disbursements of one counsel chosen by the holders of a majority of the Registrable Securities included in such registration. 6. Indemnification. --------------- (a) The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each holder of Registrable Securities, its officers, directors, agents, and employees and each Person who controls such holder (within the meaning of the Securities Act) against any and all losses, claims, damages, liabilities, joint or several, together with reasonable costs and expenses (including reasonable attorney's fees), to which such indemnified party may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of, are based upon, are caused by, or result from (i) any untrue or alleged untrue statement of material fact contained (A) in any registration statement, prospectus, or preliminary prospectus or any amendment thereof or supplement thereto, or (B) in any application or other document or communication (in this paragraph 6 collectively called an "application") executed by or on behalf of the Company or based upon ----------- written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify any securities covered by such registration statement under the blue sky or securities laws 8 thereof, or (ii) any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company shall reimburse such holder and each such director, officer, and controlling Person for any legal or any other expenses incurred by them in connection with investigating or defending any such loss, claim, liability, action, or proceeding; provided, however, that the Company shall not be liable -------- ------- in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof), or expense arises out of, is based upon, is caused by, or results from an untrue statement or alleged untrue statement, or omission or alleged omission, made in such registration statement, any such prospectus or preliminary prospectus or any amendment or supplement thereto, or in any application, in reliance upon, and in conformity with, written information prepared and furnished to the Company by such holder expressly for use therein or by such holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. In connection with any underwritten offering, the Company shall indemnify the underwriters, their officers and directors, and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities. (b) In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder shall furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the full extent permitted by law, shall indemnify and hold harmless the other holders of Registrable Securities and the Company, and their respective directors, officers, agents, and employees and each other Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities, joint or several, together with reasonable costs and expenses (including reasonable attorney's fees), to which such indemnified party may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of, are based upon, are caused by, or result from (i) any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or in any application, or (ii) any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is made in such registration statement, any such prospectus or preliminary prospectus or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with written information prepared and furnished to the Company by such holder expressly for use therein; provided, however, that -------- ------- the obligation to indemnify shall be individual to each holder and shall be limited to the net amount of proceeds received by such holder from the sale of Registrable Securities pursuant to such registration statement. (c) Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that the failure to give prompt notice shall not impair any Person's right to indemnification hereunder to the extent such failure has not prejudiced the indemnifying party), and (ii) unless in 9 such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) The indemnifying party shall not, except with the approval of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to each indemnified party of a release from all liability in respect to such claim or litigation without any payment or consideration provided by such indemnified party. (e) If the indemnification provided for in this paragraph 6 is unavailable to, or is insufficient to hold harmless, an indemnified party under the provisions above in respect to any losses, claims, damages, or liabilities referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the sellers of Registrable Securities and any other sellers participating in the registration statement on the other hand from the sale of securities pursuant to the registered offering of securities as to which indemnity is sought, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the sellers of Registrable Securities and any other sellers participating in the registration statement on the other hand in connection with the registration statement on the other in connection with the statement or omissions which resulted in such losses, claims, damages, or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the sellers of Registrable Securities and any other sellers participating in the registration statement on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) to the Company bear to the total net proceeds from the offering (before deducting expenses) to the sellers of Registrable Securities and any other sellers participating in the registration statement. The relative fault of the Company on the one hand and of the sellers of Registrable Securities and any other sellers participating in the registration statement on the other hand shall be determined by reference to, among other things, whether the untrue or alleged omission to state a material fact relates to information supplied by the Company or by the sellers of Registrable Securities or other sellers participating in the registration statement and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. 10 (f) The Company and the sellers of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this paragraph 6 were determined by pro rata allocation (even if the sellers of Registrable Securities were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this paragraph 6, no seller of Registrable Securities shall be required to contribute any amount in excess of the net proceeds received by such seller from the sale of Registrable Securities covered by the registration statement filed pursuant hereto. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (g) The indemnification and contribution by any such party provided for under this Agreement shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract and shall remain in full force and effect regardless of any investigation made or omitted by or on behalf of the indemnified party or any officer, director, or controlling Person of such indemnified party and shall survive the transfer of securities. 7. Participation in Registrations. ------------------------------ (a) No Person may participate in any registration hereunder which is underwritten unless such Person (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements (including, without limitation, pursuant to the terms of any over-allotment or "green shoe" option requested by the managing underwriter(s); provided that no holder of Registrable -------- Securities shall be required to sell more than the number of Registrable Securities that such holder has requested the Company to include in any registration), and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements, and other documents reasonably required under the terms of such underwriting arrangements; provided that no -------- holder of Registrable Securities included in any underwritten registration shall be required to make any representations or warranties to the Company or the underwriters (other than representations and warranties regarding such holder and such holder's intended method of distribution) or to undertake any indemnification obligations to the Company or the underwriters with respect thereto, except as otherwise provided in paragraph 6 hereof. (b) Each Person that is participating in any registration hereunder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in paragraph 4(f) above, such Person shall forthwith discontinue the disposition of its Registrable Securities pursuant to the registration statement until such Person's receipt of the copies of a 11 supplemented or amended prospectus as contemplated by such paragraph 4(f). In the event that the Company shall give any such notice, the applicable time period mentioned in paragraphs 4(b) and 4(c) during which a Registration Statement is to remain effective shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to this paragraph 7(b) to and including the date when each seller of a Registrable Security covered by such registration statement shall have received the copies of the supplemented or amended prospectus contemplated by paragraph 4(f). 8. Eligibility. The Company represents, warrants and covenants that, ----------- at such time as the Company's outstanding securities satisfy the eligibility criteria for the use of Form S-3 under the Securities Act, the Company shall be and shall remain at all times during a Shelf Registration Period, eligible to use Form S-3 under the Securities Act. 9. Definitions. ----------- (a) "Five Percent Purchasers" means those Persons that purchased 5% or ----------------------- more of the units sold by the Company in December 1996 and have registration rights under the Registration Rights Agreement of the Company, dated December 9, 1996, including the Lindner Dividend Fund, General Electric Capital Corporation, First Financial Fund, Inc., Bay Pond Partners, L.P. and Wallace R. Weitz & Company. (b) "Registrable Securities" means (i) all of the Stock Purchase ---------------------- Warrants initially issued pursuant to the Warrant Agreement, (ii) any Stock Purchase Warrant representing a portion of the rights under any such initially issued Stock Purchase Warrants, (iii) any Common Stock issued upon the exercise of any Stock Purchase Warrant referred to in clauses (i) or (ii) above and (iv) any Common Stock or other equity securities of the Company issued or issuable with respect to the securities referred to in clauses (i), (ii) and (iii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when they have been distributed to the public pursuant to a offering registered under the Securities Act or sold to the public through a broker, dealer or market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force) or repurchased by the Company or any of its Subsidiaries. For purposes of this Agreement, a Person shall be deemed to be a holder of Registrable Securities, and the Registrable Securities shall be deemed to be in existence, whenever such Person has the right to acquire directly or indirectly such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected, and such Person shall be entitled to exercise the rights of a holder of Registrable Securities hereunder. (c) Unless otherwise stated, other capitalized terms contained herein have the meanings set forth in the Warrant Agreement. 12 10. Miscellaneous. ------------- (a) No Inconsistent Agreements. The Company shall not hereafter enter -------------------------- into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the holders of Registrable Securities in this Agreement. (b) Remedies. Any Person having rights under any provision of this -------- Agreement shall be entitled to enforce such rights specifically to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights existing in their favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or other security) for specific performance and for other injunctive relief in order to enforce or prevent any violation of the provisions of this Agreement. (c) Amendments and Waivers. Except as otherwise provided herein, the ---------------------- provisions of this Agreement may be amended or waived only upon the prior written consent of the Company and holders of at least a majority of the Registrable Securities. (d) Successors and Assigns. All covenants and agreements in this ---------------------- Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. In addition, whether or not any express assignment has been made, the provisions of this Agreement which are for the benefit of purchasers or holders of Registrable Securities are also for the benefit of, and enforceable by, any subsequent holder of Registrable Securities. (f) Incorporation of Warrant Agreement Provisions. The paragraphs --------------------------------------------- entitled "Severability," "Counterparts," "Descriptive Headings; Interpretation,""Governing Law" and "Notices" of the Warrant Agreement are hereby incorporated in this Agreement by reference and made a part hereof, except that the provisions of such paragraphs shall refer to this Agreement rather than the Warrant Agreement and shall continue to apply hereto regardless of whether the Warrant Agreement is no longer in effect. * * * * * 13 IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. NOVASTAR FINANCIAL, INC. By: _______________________________ Name: _____________________________ Its: ______________________________ RESIDENTIAL FUNDING CORPORATION By: _______________________________ Name: _____________________________ Its: ______________________________ EX-10.25 5 REGISTRATION RIGHTS AGREEMENT DATED MARCH 25, 1999 EXHIBIT 10.25 - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT by and between NOVASTAR FINANCIAL, INC. and STIFEL, NICOLAUS & COMPANY, INCORPORATED relating to the private placement of shares of CLASS B 7.00% CUMULATIVE CONVERTIBLE PREFERRED STOCK March 25, 1999 - -------------------------------------------------------------------------------- NOVASTAR FINANCIAL, INC. ____________________ REGISTRATION RIGHTS AGREEMENT CLASS B 7.00% CUMULATIVE CONVERTIBLE PREFERRED STOCK ____________________ March 25, 1999 INTRODUCTORY. This Registration Rights Agreement (this "Agreement") is made and entered into as of March 25, 1999, by and among NovaStar Financial Inc., a Maryland real estate investment trust (the "Company"), and Stifel, Nicolaus & Company, Incorporated (the "Placement Agent") for the benefit of the Holders (defined herein). This Agreement is entered into pursuant to that certain Placement Agency Agreement (the "Placement Agency Agreement") dated March 12, 1999, by and between the Company and the Placement Agent. In order to induce the Purchasers (as defined in the Placement Agency Agreement) to purchase the Company's Class B 7.00% Cumulative Convertible Preferred Stock (the "Class B Preferred Stock"), the Company has agreed to provide the registration rights provided for in this Agreement to the Purchasers and their direct and indirect transferees. The execution of this Agreement is a condition to the closing of the transactions contemplated by the Placement Agency Agreement. The parties hereby agree as follows: SECTION 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: 1.1 Affiliate: As to any specified person, shall mean any other --------- person directly or indirectly controlling or controlled by, or under direct or indirect common control with, such specified person. For the purposes of this definition, "control," when used with respect to any person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have the meanings correlative to the foregoing. 1.2 Agreement: This Registration Rights Agreement, as the same --------- may be amended, supplemented or modified from time to time in accordance with the terms of this Agreement. 1.3 Business Day: With respect to any act to be performed under ------------ this Agreement, each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York, New York, or other applicable place where such act is to occur, are authorized or obligated by applicable law, regulation or executive order to close. 1.4 Commission: The United States Securities and Exchange ---------- Commission. 1.5 Common Shares: Shares of the Company's common stock, $0.01 ------------- par value per share. 1.6 Company: NovaStar Financial, Inc., a Maryland corporation, ------- and any successor thereto. 1.7 Controlling Person: Any person who controls a specified ------------------ person within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act. 1.8 Demanding Parties: as defined in Section 2.3 of this ----------------- Agreement. 1.9 Exchange Act: The Securities and Exchange Act of 1934, as ------------ amended, and the rules and regulations promulgated by the Commission thereunder. 1.10 Holder: Each beneficial owner of any Registrable Shares ------ from time to time. 1.11 Issue Date: the Initial Closing Date, as defined in the ---------- Placement Agency Agreement, which is the first date of issuance of the Class B Preferred Stock. 1.12 NASD: National Association of Securities Dealers, Inc. or ---- its subsidiary NASD Regulation, Inc., as the context requires. 1.13 Person: An individual, partnership, corporation, trust, ------ limited liability company or unincorporated organization, or government agency or political subdivision thereof or any other legal entity. 1.14 Piggyback Registration: as defined in Section 2.3 of this ---------------------- Agreement. 1.15 Proceeding: An action, claim, suit or proceeding ---------- (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or, to the knowledge of the person subject thereto, threatened. 1.16 Prospectus: The prospectus included in any Registration ---------- Statement, including any preliminary prospectus, and all other amendments and supplements to any such prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference, if any, in such prospectus. 1.17 Placement Agency Agreement: As defined in the Introductory -------------------------- paragraph of this Agreement. 1.18 Placement Agent: As defined in the Introductory paragraph --------------- of this Agreement. 2 1.19 Register, registered and registration: Such terms refer to -------- ---------- ------------ a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement by the Commission. 1.20 Registrable Shares: The Class B Preferred Shares and the ------------------ Underlying Common Shares, upon original issuance thereof and at all times subsequent thereto, until, in the case of any Share, the earliest to occur of (i) the date on which it has been registered effectively under the Securities Act and disposed of in accordance with the registration statement relating to it, (ii) the date on which it either is transferred in compliance with Rule 144 (or any similar provision then in effect) or is eligible for resale in compliance with Rule 144(k), as promulgated by the Commission under the Securities Act, (iii) the date on which it is eligible for general resale, without restriction, pursuant to another available exemption from registration under the Securities Act, if any, or (iv) the date on which it is sold to the Company. 1.21 Registration Expenses: Any and all expenses incident to the --------------------- performance of or compliance with this Agreement, including, without limitation: (i) all Commission, stock exchange, NASD registration, listing, inclusion and filing fees; (ii) all fees and expenses incurred in connection with compliance with Canadian, federal or state securities or blue sky laws (including, without limitation, any registration, listing and filing fees and reasonable fees and disbursements of counsel in connection with blue sky qualification of any of the Registrable Shares and the preparation of a Blue Sky Memorandum and compliance with the rules of the NASD); (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, duplicating, printing, delivering and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, certificates and other documents relating to the performance of and compliance with this Agreement; (iv) all fees and expenses incurred in connection with the listing or including of any of the Registrable Shares on any securities exchange or The Nasdaq National Market pursuant to Section 5.11 of this Agreement; (v) the fees and disbursements of counsel for the Company and of the independent public accountants (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance) of the Company (provided that Registration Expenses shall not include the fees and expenses of any counsel to the Holders); and (vi) any fees and disbursements customarily paid in connection with the issuance or sales of securities (including the fees and expenses of any experts retained by the Company in connection with any Registration Statement), but excluding brokers' commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Shares by a Holder. 1.22 Registration Statement: One or more registration ---------------------- statements, on the appropriate form, of the Company that cover the resale of any of the Registrable Shares pursuant to the provisions of this Agreement, including the Prospectus, any required amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference, if any, in such registration statement. 1.23 Rule 144: Rule 144 promulgated by the Commission pursuant -------- to the Securities Act, as such rule may be amended from time to time, or any similar or successor rule 3 or regulation hereafter adopted by the Commission as a replacement thereto having substantially the same effect as such rule. 1.24 Rule 144A: Rule 144A promulgated by the Commission pursuant --------- to the Securities Act, as such rule may be amended from time to time, or any similar or successor rule or regulation hereafter adopted by the Commission as a replacement thereto having substantially the same effect as such rule. 1.25 Rule 158: Rule 158 promulgated by the Commission pursuant -------- to the Securities Act, as such rule may be amended from time to time, or any similar or successor rule or regulation hereafter adopted by the Commission as a replacement thereto having substantially the same effect as such rule. 1.26 Rule 424: Rule 424 promulgated by the Commission pursuant -------- to the Securities Act, as such rule may be amended from time to time, or any similar or successor rule or regulation hereafter adopted by the Commission as a replacement thereto having substantially the same effect as such rule. 1.27 Securities Act: The Securities Act of 1933, as amended, and -------------- the rules and regulations promulgated by the Commission thereunder. 1.28 Class B Preferred Shares: Shares of the Company's Class B ------------------------ Preferred Stock. 1.29 Shares: The Class B Preferred Shares and the Underlying ------ Common Shares. 1.30 Underlying Common Shares: The Common Shares into which the ------------------------ Class B Preferred Shares are convertible. 1.31 Underwritten Offering: A sale of securities of the Company --------------------- to an underwriter or underwriters for reoffering to the public. SECTION 2. REGISTRATION. 2.1 Shelf Registration. The Company agrees to file with the ------------------ Commission as soon as reasonably practicable, but in no event later than six (6) months after the Issue Date, a shelf Registration Statement with respect to the sale from time to time by the Holders of any and all Registrable Shares. The Company shall use its best efforts to cause such Registration Statement to be declared effective by the Commission as soon as practicable thereafter and to remain effective until such time as none of the Shares are Registrable Shares. Such registration shall be made in accordance with the procedures described in Section 5. 2.2 Subsequent Demand Registration. Following the expiration of ------------------------------ the shelf Registration Statement referred to in Section 2.1 above, Holders collectively holding at least 25% of the then outstanding Registrable Shares shall have the right to request and have effected one or more registrations of Registrable Shares for sale in public offerings unless, in the written opinion of counsel to the Company, which opinion is reasonably acceptable to such 4 Holders, such registration is not necessary for such Holders to sell their Registrable Shares in the manner contemplated in compliance with applicable securities laws. Such requests shall be in writing and shall state the number of Registrable Shares to be disposed of and the intended method of disposition of such Registrable Shares by such Holders. The Company shall give notice to all of the Holders of Registrable Shares of the receipt of a request for registration pursuant to this Section 2.2 and shall provide a reasonable opportunity for such Persons to participate in such a registration provided they elect to do so in writing to the Company within 15 days after the date of the Company's written notice. Subject to the foregoing, the Company will use its best efforts to effect promptly the registration of all Registrable Shares to the extent requested by the Holder or Holders thereof, and to keep such registration effective for 36 months or until all such Holders' Registrable Shares registered thereunder are sold, whichever is shorter. If so requested by any Holder in connection with a registration under this Section 2.2 the Company shall take such steps as are required to register such Holder's Registrable Securities for sale on a delayed or continuous basis under Rule 415 of the Securities Act or any successor provision (if applicable). Such registration shall be made in accordance with the procedures described in Section 5. 2.3 Piggyback Registration. ---------------------- (i) Notice. If (and on each occasion that) the Company proposes ------ to register any of its securities under the Securities Act in connection with an Underwritten Offering or to effect an Underwritten Offering under an effective shelf registration statement, either for the Company's own account and/or for the account of any of its securityholders, other than any such registration described in the last sentence of clause (ii) below (each such registration or offering being herein called a Piggyback Registration), then the company will give written notice to all Holders who then hold Registrable Securities of the Company's intention to effect such Piggyback Registration not later than the earlier to occur of (A) 30 days prior to the anticipated initial filing date of such Piggyback Registration if such registration is on Form S-3 (or any successor form), (B) 45 days prior to such date if the registration is on any other form or (C) promptly after receiving a demand from a Demanding Party under Section 2.3 (iii) below. (ii) Registration; Withdrawal. Subject to the provisions ------------------------ contained in Section 2.3 (iii) and in the last sentence of this clause (ii), in connection with any registration or offering subject to the provisions of this Section 2.3, if within 20 days after the date of the Company notice pursuant to clause (i) above Holders of Registrable Securities request the inclusion of some or all of the Registrable Securities owned by them in such registration or offering, the Company will use best efforts to effect the registration under the Securities Act of all Registrable Securities which such Holders request to be registered or to include such Registrable Securities in such offering. Holders of Registrable Securities shall be permitted to withdraw all or any part of the Registrable Securities of such Holders from any Piggyback Registration at any time prior to the final filing (which has been made by and in the discretion of the Company) or the commencement of offers to the public pursuant to a final prospectus with respect to such Piggyback Registration, and the Company shall have the right to postpone or withdraw any registration without obligation to any Holder (other than for payment of any reasonable expense incurred by the Holders). Notwithstanding anything herein to the 5 contrary, the Company will not be obligated or required to include any Registrable Securities in any registration effected on Form S-4 or Form S-8 solely to implement an employee benefit plan (including any option plan) or transaction of the type to which Rule 145 of the Commission or any successor provision is applicable, or in connection with a dividend reinvestment or direct stock purchase plan for the benefit of the Company's stockholders. (iii) Allocation of Piggyback Registrations. In connection with ------------------------------------- an Underwritten Offering effected pursuant to a Piggyback Registration, if the managing underwriter or underwriters shall advise the Company in writing that, in the reasonable opinion of such managing underwriter or underwriters, the inclusion of all Registrable Securities for which registration is requested pursuant to Section 2.3 hereof would materially and adversely affect the success of such offering, then registration for the Registrable Securities shall be cut back such that (i) no Holder of Registrable Securities shall be entitled to participate in such Underwritten Offering unless all shares of Common Stock proposed to be sold by the Company for its own account or for the account of the parties for which the Underwritten Offering was commenced as a result of the exercise of demand registration rights, whether pursuant to this Agreement or any other agreement ("Demanding Parties"), have been included in such Underwritten Offering, and (ii) after the Company or the Demanding Party has included their proposed shares of Common Stock, the Holders, and any other owners of securities for which the Company has granted Piggyback Registration rights shall be entitled to include their Registrable Securities and such other owners' registrable securities in an amount up to the amount that such managing underwriter or underwriters advise may be included therein (as allocated among the Holders, and such other owners pro rata on the basis of the number of securities requested to be included therein by each such Holder or other owner). SECTION 3. EXPENSES. As between the Company and the Holders, the Company shall pay all Registration Expenses in connection with the registration of the Registrable Shares pursuant to this Agreement. The Holder or Holders shall pay all broker's or underwriter's discounts or commissions and transfer taxes, if any, and any other expense not specifically allocated to the Company pursuant to this Agreement relating to the sale or disposition of such Holder's Registrable Shares pursuant to any Registration Statement. SECTION 4. RULES 144 AND 144A. During such time as any of the Shares are Registrable Shares, the Company shall use its best efforts to file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner sufficient to satisfy the condition set forth in Rule 144(c), and during such time as any Class B Preferred Shares are Registrable Shares as described herein, the Company shall make available such other information, if any, as required by, and so long as necessary to permit sales of such Class B Preferred Shares pursuant to, Rule 144A. SECTION 5. REGISTRATION PROCEDURES. In connection with any Registration required by this Agreement, the Company shall: 6 5.1 prepare and file with the Commission, as specified in this Agreement, a Registration Statement, which Registration Statement shall comply as to form in all material respects with the requirements of the Securities Act, and use its best efforts to cause such Registration Statement to become effective as soon as possible after filing and remain effective for the term provided in this Agreement. In order to allow Holders to sell their Shares privately pursuant to Rule 144 (during the periods, and in the quantities and manner allowed by such rule) even though such Shares may also be registered for resale under the Registration Statement, the Company agrees to disclose under the caption "Plan of Distribution" (or other appropriate location) in the Registration Statement, that sales by the Holders pursuant to Rule 144 may occur. 5.2 subject to Section 5.8 of this Agreement, (i) prepare and file with the Commission such amendments and post-effective amendments to each such Registration Statement as may be necessary to keep such Registration Statement effective for the period described in Section 5.1, (ii) cause each such Prospectus contained therein to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 or any similar rule that may be adopted under the Securities Act, and (iii) comply with the provisions of the Securities Act so as to permit the sale and resale of such Registrable Shares by the Holder or Holders in accordance with customary methods of sale or distribution, including through brokers' transactions and block trades, as well as any other intended method or methods of distribution reasonably requested by any Holder by written notice to the Company prior to the filing of the Registration Statement. 5.3 furnish to any Holder named in any Prospectus, without charge, as many copies of such Prospectus, and any amendment or supplement thereto as such Holder may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Shares; the Company consents to the use of any such Prospectus by such Holder in connection with the offering and sale of the Registrable Shares covered by any such Prospectus in accordance with the plan of distribution described therein; 5.4 use its best efforts to register or qualify, or obtain exemption from registration or qualification for, all Registrable Shares by the time the Registration Statement is declared effective by the Commission under all applicable Canadian, federal or state securities or "blue sky" laws of such jurisdictions as any Holder shall reasonably request in writing, keep each such registration or qualification or exemption effective during the period such Registration Statement is required to be kept effective pursuant to Section 5.1 of this Agreement and do any and all other acts which may be reasonably necessary to enable each Holder to consummate the disposition in each such jurisdiction of such Registrable Shares owned by such Holder in accordance with the Registration Statement; provided, however, that the Company shall not be required to (i) qualify generally to do business in any jurisdiction or to register as a broker or dealer in such jurisdiction where it would not otherwise be required to qualify or register but for this Section 5.4, (ii) subject itself to taxation in any such jurisdiction, or (iii) submit to the general service of process in any such jurisdiction; 5.5 notify the Placement Agent and each Holder named as a selling shareholder in the Registration Statement promptly and, if requested by the Placement Agent or any Holder named as a selling shareholder in the Registration Statement, confirm such 7 information in writing (i) when a Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iii) of any request by the Commission or any other federal or state governmental authority for amendments or supplements to a Registration Statement or related Prospectus or for additional information, and (iv) of the happening of any event during the period a Registration Statement is required to remain effective as a result of which such Registration Statement or the related Prospectus or any document incorporated by reference therein contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading (which information shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made); 5.6 during the period of time referred to in Section 5.1 of this Agreement, use reasonable efforts to avoid the issuance of, or, if issued, obtain the withdrawal of, any enjoining order suspending the use or effectiveness of a Registration Statement or suspending the qualification (or exemption from qualification) of any of the Registrable Shares for sale in any jurisdiction, at the earliest possible moment; 5.7 upon request, furnish to each requesting Holder, without charge, at least one conformed copy of each Registration Statement and any post- effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); 5.8 except as provided in Section 8 of this Agreement, upon the occurrence of any event contemplated by Section 5.5 (iv) of this Agreement, use its best efforts promptly to prepare a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered by the selling Holders to the purchasers of the Registrable Shares, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; 5.9 if requested by the representative underwriters, if any, or any Holders of Registrable Shares being sold in connection with an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such material information as the representative of the underwriters, if any, or such Holders indicate relates to them (and such information shall be deemed to have been furnished in writing to the Company by the Holders of Registrable Shares being sold in such Underwritten Offering expressly for use in the Registration Statement), and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; 5.10 enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in underwritten offerings) and take all such other actions reasonably requested by the Holders of a majority in interest of the Registrable Shares 8 being sold in connection therewith (including those reasonably requested by the managing underwriters, if any) in order to expedite or facilitate the disposition of such Registrable Shares, and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten offering, (i) make such representations and warranties to the Holders of such Registrable Shares and the underwriters, if any, with respect to the business of the Company and its subsidiaries, and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings, and, if true, confirm the same if and when requested in writing to do so, (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions, in form, scope and substance, shall be reasonably satisfactory to the managing underwriters, if any, and counsel to the Holders of Registrable Shares being sold), addressed to each selling Holder and each of the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested in writing by such counsel and underwriters, (iii) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each selling Holder (unless such accountants shall be prohibited from so addressing such letters by applicable standards of the accounting profession) and each of the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings, (iv) if an underwriting agreement is entered into, such underwriting agreement shall contain indemnification provisions and procedures substantially to the effect set forth in Section 8 of this Agreement and (v) deliver such additional documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Shares being sold, their counsel and the managing underwriters, if any, to evidence the continued validity of the representations and warranties made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement, or as and to the extent required thereunder; provided, however, that the Company shall not be required to take the actions described in this paragraph in connection with an Underwritten Offering unless the Underwriting Offering involves at least 500,000 shares. 5.11 in connection with an Underwritten Offering of Registrable Shares, make available for inspection by representatives of the Holders and the representative of any underwriters participating in any disposition pursuant to a Registration Statement and any special counsel or accountant retained by such Holders or underwriters, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries and cause their respective officers, directors and employees to supply all information reasonably requested by any such representatives, the representative of the underwriters, the special counsel or accountants in connection with a Registration Statement; provided, however, that such records, documents or information which the Company determines, in good faith, to be confidential and notifies such representatives, representative of the underwriters, special counsel or accountants are confidential, shall be kept confidential and shall not be disclosed by the representatives, representative of the underwriters, special counsel or accountants unless (i) subject to the provisions hereof, the disclosure of such records, documents or information is necessary to avoid 9 or correct a misstatement or omission in a Registration Statement or Prospectus, (ii) the release of such records, documents or information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, or (iii) such records, documents or information have been generally made available to the public; and provided, further, that the foregoing inspection and information gathering shall, to the greatest extent possible, be coordinated on behalf of the Holders and the other parties entitled thereto by one counsel designated by and on behalf of such Holders and other parties reasonably acceptable to the Company; and provided, further, that the Company shall not be required to furnish the information described in this paragraph unless the Underwritten Offering involves at least 500,000 Shares. 5.12 if requested by the majority in interest of the Holders selling Registrable Shares in an Underwritten Offering, the Company's management shall cooperate in roadshow presentations to assist such Holders in selling their Registrable Shares and shall otherwise work in good faith with any managing underwriter(s) in connection with taking all actions necessary to consummate successfully the Underwritten Offering. 5.13 use its reasonable best efforts to list the Underlying Common Shares on the New York Stock Exchange or another nationally recognized exchange or the Nasdaq National Market as soon as reasonably practicable after the listing requirements are met; 5.14 prepare and file in a timely manner all documents and reports required by the Exchange Act which are incorporated by reference into any Registration Statement; 5.15 provide a CUSIP number for all Registrable Shares, not later than the effective date of the Registration Statement; 5.16 use its best efforts to comply with all applicable rules and regulations of the Commission and make generally available to its securityholders, as soon as reasonably practicable, earnings statements covering at least 12 months which satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 (or any similar rule promulgated under the Securities Act) thereunder; 5.17 provide and cause to be maintained a transfer agent for all Registrable Shares covered by any Registration Statement from and after a date not later than the effective date of such Registration Statement; 5.18 in connection with any sale or transfer of the Registrable Shares that will result in such Shares no longer being restricted from resale without registration under the Securities Act, cooperate with the Holders and the representative of the underwriters, if any, to facilitate the timely preparation and delivery of certificates representing the Registrable Shares to be sold, which certificates shall not bear any restrictive legends, and to enable such Registrable Shares to be in such denominations and registered in such names as the representative of the underwriters, if any, or Holders may request at least three Business Days prior to any sale of the Registrable Shares; and 5.19 the effectiveness of the first Registration Statement filed under this Agreement, the Company will take such actions and make such filings as are necessary to effect 10 the registration of the Class B Preferred Shares under the Exchange Act simultaneously with or immediately following the effectiveness of the Registration Statement. The Company may require each Holder to furnish to the Company such information regarding the proposed distribution by such Holder of Registrable Shares as the Company may from time to time reasonably request in writing and no Holder shall be entitled to be named as a selling securityholder in any Registration Statement and no Holder shall be entitled to use the Prospectus forming a part thereof if such Holder does not provide such information to the Company. The Company shall, to the extent it first receives such information from Holders after initial effectiveness of the shelf Registration Statement, file a supplemental prospectus or post-affective amendment within 20 Business Days of receiving such complete information unless the Company receives complete information from Holders holding at least $2.0 million aggregate liquidation preference of Class B Preferred Shares, in which case supplemental prospectuses will be filed within 10 Business Days of receiving such information. Upon receipt of written notice from the Company of the happening of any event of the kind described in Section 5.5 (ii), (iii) or (iv) of this Agreement, each Holder shall immediately discontinue disposition of Registrable Shares pursuant to a Registration Statement until such Holder, or its nominee, receives copies of a supplemented or amended Prospectus or the facts and circumstances giving rise to such notice are otherwise cured to the Company's satisfaction. If so requested by the Company, the Holders shall deliver to the Company (at the expense of the Company) all copies in their possession, other than permanent file copies then in the Holders' possession, of the Prospectus covering such Registrable Shares current at the time of receipt of such notice. SECTION 6. BLACK-OUT PERIOD. Subject to the provisions of Section ---------------- 7, following the effectiveness of a Registration Statement (and the filings with any state securities commissions), the Company, by written notice to the Placement Agent and to the Holders as described below, may direct the Holders to suspend sales of the Registrable Shares pursuant to the Registration Statement if any of the following events (each a "Suspension Event") shall occur: (i) an Underwritten Offering by the Company (whether or not for the account of the Company or others) where the Company is advised by the representative of underwriters for such Underwritten Offering that the sale of Registrable Shares pursuant to the Registration Statement would have a material adverse effect on such Underwritten Offering; (ii) pending negotiations relating to, or consummation of, a transaction or the occurrence of an event that requires additional disclosure of material information by the Company in the Registration Statement and which has not been so disclosed; (iii) a material corporate transaction is pending or has occurred, the disclosure of which should be set forth in the Registration Statement and the Board of Directors of the Company shall have determined in good faith that such disclosure would not then be in the best interests of the Company and its stockholders; or (iv) any of the events described in Section 5.5 (ii), (iii) or (iv). Upon the occurrence of a Suspension Event, the Company shall use its best efforts to remedy the cause of the Suspension Event so as to permit the Holders to resume sales of the Registrable Shares (including, as applicable, using its best efforts to cause the Registration Statement to become effective and/or promptly amending or supplementing the Registration Statement on a post-effective basis so that it contains no material misstatements or omissions); provided, however, that in the case of the Suspension Event referenced in clause (iii) immediately above, the Company may delay such remediation during, 11 but only during, such non-disclosure period as the Company's Board of Directors determines in good faith is in the Company's best interest. Upon the occurrence of a Suspension Event, the Company shall give written notice (a "Suspension Notice") to the Holders (with a copy to the Placement Agent) to suspend sales of the Registrable Shares so that the Company may remedy the cause of the Suspension Event; provided, however, that such suspension shall continue only for so long as the Suspension Event or its effect is continuing and the Company is taking all reasonable steps to remedy the cause of the Suspension Event as promptly as possible. The Holders shall not effect any sales of Registrable Shares pursuant to such Registration Statement at any time after receipt of a Suspension Notice from the Company (and prior to receipt of an End of Suspension Notice (defined below)). If so requested by the Company, the Holders will deliver to the Company (at the expense of the Company) all copies in their possession, other than permanent file copies then in the Holders' possession, of the Prospectus covering such Registrable Shares at the time of receipt of the Suspension Notice. The Holders may recommence effecting sales of the Registrable Shares pursuant to the Registration Statement (or such filings) following further notice to such effect (an "End of Suspension Notice") from the Company, which End of Suspension Notice shall be given by the Company to the Holders and the Placement Agent promptly following the conclusion of any Suspension Event. SECTION 7. SPECIAL DISTRIBUTIONS. 7.1 Registration Default. If within six months after the -------------------- Issue Date, the resale shelf Registration Statement referred to in Section 2 of this Agreement has not been filed with the Commission (a "Registration Default"), additional distributions ("Special Distributions") shall be payable quarterly in arrears to holders of the Registrable Shares (in addition to any regular distribution accruing or payable on such Shares) and will accrue beginning (and including) the date on which any such Registration Default shall occur and ending (but excluding) the date on which all Registration Defaults have been cured. Special Distributions shall accrue at a rate of 0.25% of the liquidation preference per annum per Class B Preferred Share during the 90- calendar-day period immediately following the occurrence of any Registration Default, which rate shall increase by 0.25% of the liquidation preference per annum per Class B Preferred Share at the beginning of each subsequent 90- calendar-day period, but in no event shall such rate exceed 1.00% of the liquidation preference per annum per Class B Preferred Share. Special Distributions shall accrue on any Underlying Common Shares into which the Class B Preferred Shares have been converted or redeemed, at a rate adjusted to provide the Holder thereof with the same economic benefit as though such Underlying Common Shares had not been converted or redeemed from the Class B Preferred Shares. 7.2 Cessation Date. Special Distributions shall cease to -------------- accrue in respect of any Registrable Share on such date as such Share is no longer a Registrable Share. 7.3 Payment Date. The Company shall cause the Special ------------ Distributions to be paid on the regular dividend date, whether or not the Company shall have declared a dividend or other distribution on the Registrable Shares for such quarter, and shall be payable to the holder of record of Registrable Shares on the record date relating to such regular dividend date. If for any quarter in which Special Distributions are payable in respect of Underlying 12 Common Shares, no record date is declared on the Common Shares, then the record date for such Underlying Common Shares shall be deemed to be the same as the record date for the Class B Preferred Shares. If for any quarter in which Special Distributions are payable in respect of Class B Preferred Shares, no record date is otherwise declared on the Class B Preferred Shares, then the Company shall select a record date for payment of the Special Distribution in good faith. The Special Distribution is a contract right and is not a dividend. SECTION 8. INDEMNIFICATION AND CONTRIBUTION. 8.1 Indemnification by the Company. The Company agrees to ------------------------------ indemnify and hold harmless (i) the Placement Agent, (ii) each Holder, (iii) each Person, if any, who is a Controlling Person of any of the foregoing, and (iv) the respective officers, directors, employees, representatives and agents of the Placement Agent and each Holder or any Controlling Person as follows: (i) from and against any and all loss, claim, liability and damage whatsoever, as incurred, arising out of any untrue or alleged untrue statement of a material fact contained in any Registration Statement (or any supplement or amendment thereto) pursuant to which Registrable Shares were registered under the Securities Act, including all documents incorporated therein by reference, or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto), including all documents incorporated therein by reference, or the omission or alleged omission to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that such indemnity with respect to any Registration Statement or Prospectus shall not inure to the benefit of any Holder or the Placement Agent (or any Controlling Person thereof) to the extent that any such loss, claim, liability, damage or expense arises out of such indemnified person's failure to send or give a copy of the revised Registration Statement or final Prospectus, as the same may be then supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Shares to such Person if such statement or omission was corrected in such revised Registration Statement or such final Prospectus and the Company shall have made available to such indemnified person a sufficient number of copies of such revised Registration Statement or such final Prospectus in a timely manner so as to permit such Holder or the Placement Agent to send or give a copy of the revised Registration Statement or such final Prospectus containing such correction prior to the written confirmation of the purchase and sale of such Registrable Shares; (ii) from and against any and all loss, liability, claim and damage whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, if such settlement is effected with the written consent of the Company (which consent shall not be unreasonably withheld or delayed); and 13 (iii) from and against any and all expense reasonably incurred (including reasonable fees and disbursements of counsel) in investigating, preparing or defending against any litigation, or investigation or proceeding by any governmental agency or body commenced or threatened, in each case whether or not a party, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, but only (A) to the extent that such expense was incurred in connection with a matter referred to in (i) or (ii) above, (B) in the case of (ii) above, to the extent that a reasonable estimate of such expenses was provided to the Company before the settlement, and (C) in any case, to the extent that any such expense is not paid under subparagraph (i) or (ii) above; provided, however, that this indemnity agreement does not apply to any Holder with respect to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use in a Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). 8.2 Indemnification by Holders. Each Holder, on a pro rata -------------------------- basis, agrees to indemnify and hold harmless the Company, and trustees, officers, employees, representatives and agents of the Company (including each Controlling Person of the Company) against any and all loss, liability, claim, damage and expenses described in the indemnity contained in Section 8.1 of this Agreement (provided, however, that any settlement described in Section 8.1 of this Agreement is effected with the written consent of such Holder), as incurred, but only with respect to such untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by the Holder or its underwriters, if any, expressly for use in such Registration Statement (or any amendment thereto) or such Prospectus (or any amendment or supplement thereto), and provided, further, that no Holder shall be liable for any amount in excess of the proceeds received by such Holder from the sale of such Holder's Registrable Shares pursuant to a Registration Statement or a Prospectus, as the case may be. 8.3 Conduct of Indemnification Proceedings. Each indemnified -------------------------------------- party shall give reasonably prompt written notice to each indemnifying party of any action or proceeding commenced against it in respect of which indemnity may be sought under this Agreement, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have under this indemnity agreement, except to the extent that the indemnifying party is actually and materially prejudiced by such failure to give written notice. If the indemnifying party so elects within a reasonable time after receipt of such written notice, the indemnifying party may assume the defense of such action or proceeding at such indemnifying party's own expense with counsel chosen by the indemnifying party and approved by the indemnified parties in such action or proceeding, which approval shall not be unreasonably withheld; provided, however, that, if such indemnified party or parties reasonably determines that a conflict of interest exists where it is advisable for such indemnified party or parties to be represented by separate counsel or that, upon advice of counsel, there may be legal defenses available to them which are different from or in addition to those available to the indemnifying 14 party, then the indemnifying party shall not be entitled to assume such defense and the indemnified party or parties shall be entitled to one separate counsel (and any necessary local counsel) at the indemnifying party's expense. If an indemnifying party is not entitled to assume the defense of such action or proceeding as a result of the proviso to the preceding sentence, such indemnifying party's counsel shall be entitled to conduct such indemnifying party's defense and counsel for the indemnified party or parties shall be entitled to conduct the defense of such indemnified party or parties, it being understood that both such counsel will cooperate with each other to conduct the defense of such action or proceeding as efficiently as possible. If an indemnifying party is not so entitled to assume the defense of such action or does not assume such defense, after having received the notice referred to in the first sentence of this paragraph, the indemnifying party or parties will pay the reasonable fees and expenses of not more than one counsel (and any necessary local counsel) for the indemnified party or parties. In such event, however, no indemnifying party will be liable for any settlement effected without the written consent of such indemnifying party, which consent shall not be unreasonably withheld or delayed. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into a settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. If an indemnifying party is entitled to assume, and assumes, the defense of such action or proceeding in accordance with this paragraph, such indemnifying party shall not be liable for any fees and expenses for counsel for the indemnified parties incurred thereafter in connection with such action or proceeding. 8.4 Contribution. In order to provide for just and equitable ------------ contribution in circumstances in which the indemnity agreement provided for in this Section 8 is for any reason held to be unenforceable, unavailable or insufficient although applicable in accordance with its terms, the Company and a Holder shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company and the Holder in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the Holder, on the other (taking into consideration the fact that the provisions of the registration rights under this Agreement are a material inducement to the Holders to purchase the Registrable Shares), in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. Relative fault shall be determined by reference to, among other things, whether an untrue or alleged untrue statement of a material fact or an omission or alleged omission of a material fact relates to information supplied by or available to the Company, on the one hand, or the Holder, on the other hand, and by the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Notwithstanding the foregoing, no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. No Holder shall be liable for any amount in excess of the proceeds received from such Holder from the sale of such Holder's Registrable Shares pursuant to a Registration Statement or a Prospectus, as the case may be. For purposes of this Section 8, each Person, if any, who is a Controlling Person of a Holder shall have the same rights to contribution as such Holder, and each trustee of the Company, each officer of the Company who signed the Registration Statement and each Person, if any, who is a Controlling Person of the Company and each employee, representative or agent of the Company shall have the same rights to contribution as the Company. Each Person entitled 15 to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it shall promptly give written notice of such service to the Person or Persons from whom contribution may be sought, but the omission so to notify such Person or Persons of any such service shall not relieve the Person from whom contribution may be sought from any obligation it may have under this Agreement or otherwise unless failure to provide such written notice actually prejudices such Person or Persons. SECTION 9. MISCELLANEOUS. 9.1 Remedies. In the event of a breach by the Company or by -------- a Holder of any of their obligations under this Agreement, each Holder or the Company, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. It is acknowledged and agreed that monetary damages would not be adequate compensation for any loss incurred by reason of a breach of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, the parties shall waive the defense that a remedy at law would be adequate. 9.2 Amendments and Waivers. The provisions of this ---------------------- Agreement, including the provisions of this sentence, may be amended, modified or supplemented, and waivers or consents to departures from the provisions of this Agreement may be given, with, but only with, the prior written consent of the Company and the Holders beneficially owning not less than 50% of the then outstanding Registrable Shares; provided, however, that, for the purposes of this Agreement, Registrable Shares that are owned, directly or indirectly, by either the Company or an Affiliate of the Company shall not be deemed to be outstanding. Notwithstanding the foregoing, a waiver or consent to depart from the provisions of this Agreement with respect to a matter that relates exclusively to the rights of a Holder whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of any other Holder must be given by such Holder. 9.3 Notices. All notices and other communications provided for in this Agreement shall be made in writing by hand-delivery, next-day air courier, certified first-class mail, return receipt requested, telex or telecopy; (i) if to the Company, as provided in the Placement Agency Agreement, (ii) if to the Placement Agent, as provided in the Placement Agency Agreement, or (iii) if to any Holder, to the address of such Holder as it appears in the stock register of the Company. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when (A) delivered by hand, if personally delivered, (B) one Business Day after being timely delivered to a next-day air courier, (C) five Business Days after 16 being deposited in the mail, postage prepaid, if mailed, (D) when answered back, if telexed, or (E) when receipt is acknowledged by the recipient's telecopier machine, if telecopied. 9.4 Successors and Assigns. This Agreement shall inure to ---------------------- the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. Each Holder shall be deemed a third-party beneficiary of this Agreement. The Company may not assign its rights or obligations under this Agreement without the prior written consent of each Holder. Notwithstanding the foregoing, no assignee of the Company shall have any of the rights granted under this Agreement until such assignee shall acknowledge its rights and obligations under this Agreement by a signed written agreement pursuant to which such assignee accepts such rights and obligations. 9.5 Counterparts. This Agreement may be executed in any ------------ number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. 9.6 Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of New York, as applied to contracts made and performed within the State of New York without regard to principles of conflicts of law. 9.7 Severability. If any term, provision, covenant or ------------ restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth in this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any such term, provision, covenant or restriction that may be hereafter declared invalid, illegal, void or unenforceable. 9.8 Headings. The headings in this Agreement are for -------- convenience of reference only and shall not limit or otherwise affect the provisions of this Agreement. All references made in this Agreement to "Section" refer to such Section of this Agreement, unless expressly stated otherwise. 9.9 Attorneys' Fees. In any action or proceeding brought to --------------- enforce any provision of this Agreement, or where any provision of this Agreement is validly asserted as a defense, the prevailing party, as determined by the court, shall be entitled to recover its reasonable attorneys' fees in addition to any other available remedy. [Signature page follows.] 17 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first written above. "COMPANY" NOVASTAR FINANCIAL, INC., a Maryland corporation By:__________________________________ W. Lance Anderson President The foregoing Agreement is hereby confirmed and accepted for the benefit of each of the Purchasers (and all subsequent Holders) as of the date first above written. "PLACEMENT AGENT" STIFEL, NICOLAUS & COMPANY, INCORPORATED By:________________________________________ Rick Maples Senior Vice President 18 EX-99.2 6 PRESS RELEASE FROM NOVASTAR FINANCIAL, INC. EXHIBIT 99.2 NovaStar Financial, Inc. Announces Issuance of Convertible Preferred Stock WESTWOOD, Kan., March 30/PRNewswire/-- NovaStar Financial, Inc. (NYSE: NFI), a non-conforming residential mortgage lender, announced today that it has completed the issuance of 4,285,714 million shares of Cumulative Convertible Preferred Stock (the "Preferred Stock") at a price of $7.00 per share, resulting in total proceeds of $30 million, which includes $25 million acquired by Wallace R. Weitz & Company. Scott Hartman, Chairman and Chief Executive Officer stated, "The consummation of this transaction brings out equity capital position back in line with the level it was at during the 1998 third quarter. During the past six months we have managed our loan production to our capital base and liquidity resources. Although our short-term strategy is to continue to sell a majority of loan originations, we are now in a position to focus on growing the mortgage origination business back to its peak levels of 1998. We will return to profitability in the first quarter and on April 15 we will pay the 1998 dividend of $0.35 per share that was deferred to 1999." NovaStar previously announced that each share of the Preferred Stock will: (i) be convertible, at the option of the holder, into one share of common stock; (ii) pay dividends at the rate of 7.0% per annum; and (iii) be redeemable at par by the Company at any time after March 31, 2002. After consideration of the Preferred Stock and warrants previously issued to GMAC/Residential Funding Corporation and First Union National Bank, the Company's December 31, 1998 pro forma book value per share (on a diluted basis) is $9.07. This issuance of the Preferred Stock and the earlier issuance of warrants in connection with financing arrangements entered into with First Union and GMAC/RFC will result in a reduction of the effective exercise price for holders of Novastar's December 9, 1996 warrants to acquire common stock at $15.00 per share. Pursuant to anti-dilution provisions contained in the 1996 warrants, each warrant exercised at $15.00 will purchase 1.29 shares of common stock, which represents an effective exercise price of $11.62 per share. This new effective exercise price is in effect without any further action required on the part of warrantholders. NovaStar Financial, Inc. is a real estate investment trust (REIT) that invests in the single-family residential subprime mortgage loans originated by its affiliates, NovaStar Mortgage, Inc. Mortgage loans in portfolio are financed on a long-term basis through securitization transactions that issue collaterized mortgage obligations accounted for as debt instruments. NovaStar Mortgage issues asset-backed bonds in securitization transactions that are accounted for as sales. NovaStar Financial, Inc. is located in Westwood, Kansas, a part of the Kansas City metropolitan area. NovoStar Mortgage operates its wholesale lending operation in Orange County, California, and its servicing operation in Westwood, Kansas. Certain matters discussed in this news release may constitute forward-looking statements within the meaning of the federal securities laws that inherently include certain risks and uncertainties. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including general economic conditions, fluctuations in interest rates, the availability of subprime residential mortgage loans, the availability and access to financing and liquidity resources, and other risk factors outlined in the Company's 1998 annual report on Form 10-K. -----END PRIVACY-ENHANCED MESSAGE-----