EXHIBIT 10.6
Execution Copy
July 16, 2007
Massachusetts Mutual Life Insurance Company
0000 Xxxxx Xxxxxx
Xxxxxxxxxxx, XX 00000
Jefferies Capital Partners IV LLC
000 Xxxxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Re: Executive Compensation Arrangements
Dear Sirs:
Reference is made to (i) the Securities Purchase Agreement (the "Purchase
Agreement"), dated as of the date hereof, among NovaStar Financial Inc., a
Maryland corporation (the "Company"), Massachusetts Mutual Life Insurance
Company, a mutual life insurance company ("MassMutual"), Jefferies Capital
Partners IV L.P., Jefferies Employee Partners IV LLC and JCP Partners IV LLC
(collectively, "Jefferies" and, together with MassMutual, collectively,
"Investors"), (ii) the Registration Rights and Shareholders Agreement
("Registration Rights and Shareholders Agreement"), dated as of the date hereof,
among the Company and the Investors, (iii) the Standby Purchase Agreement (the
"Standby Purchase Agreement" and, together with the Purchase Agreement, the
Registration Rights and Shareholders Agreement and the agreements contemplated
thereby, the "Transaction Agreements"), dated as of the date hereof, among the
Company and the Investors. Capitalized terms not otherwise defined herein shall
have the meanings ascribed to such terms in the Purchase Agreement.
The undersigned, a stockholder and an officer and/or director of the
Company (the "Key Employee") understands that the Company and the Investors
intend to enter into the Transaction Agreements, which, among other things,
contemplate that the Company will issue and sell to the Investors, and the
Investors will purchase from the Company shares of the Company's Series D-1
Preferred Shares and Series D-2 Preferred Shares. In connection with the
transactions contemplated by the Transaction Agreements, the Investors and the
Key Employee have agreed in principle with respect to the compensation
arrangements for the Key Employee set forth on Annex A attached hereto (the
"Compensation Arrangements"), which Compensation Arrangements the Investors and
the Key Employee acknowledge and agree remain subject to the approval of the
Board of Directors of the Company and/or the shareholders of the Company, as
applicable, and to definitive legal documentation in form and substance
reasonably satisfactory to the Investors and the Key Employee. The Company
acknowledges that its Board of Directors has authorized and approved the
Company's entry into this letter agreement and approved in principle the
Compensation Arrangements. The Investors and the Key Employee each agree that
they shall use their respective reasonable best efforts to work with the Company
and its Board of Directors to implement the Compensation Arrangements. In the
event that it is not possible to effectuate the Compensation Arrangements as
currently contemplated on Annex A, the Key Employee and the Investors each
hereby agree that they shall consult with each other and
negotiate in good faith to provide the Key Employee with a set of compensation
awards that are as nearly as equivalent in terms of the economic value, risk and
reward, retention characteristics and commitment to the long-term growth in
equity value to the Compensation Arrangements.
In recognition of the benefits that (a) the transactions contemplated by
the Transaction Agreements will confer upon the Key Employee as a stockholder of
the Company, (b) the Compensation Arrangements will confer upon the Key Employee
as an officer and/or director of the Company and (c) for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the Key Employee, the Key Employee hereby agrees with the Investors that, during
the period beginning on the date of this letter agreement and ending on the
three year anniversary of the date of this letter agreement, the Key Employee
will not, without the prior written consent of both Investors, directly or
indirectly, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, or otherwise dispose of or transfer (each, a
"Transfer") any shares of the Company's common stock, par value $0.01 per share
(the "Common Stock") or any securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or hereafter acquired by the Key
Employee or with respect to which the Key Employee has or hereafter acquires the
power of disposition, or file, or cause to be filed, any registration statement
under the Securities Act of 1933, as amended, with respect to any of the
foregoing (collectively, the "Lock-Up Securities") or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of the Lock-Up
Securities, whether any such swap or transaction is to be settled by delivery of
Common Stock or other securities, in cash or otherwise; provided, however, that
the restrictions set forth in this paragraph shall be of no further force and
effect (A) in the event that the Investors (or their respective Affiliates), at
any time, sell or otherwise dispose of more than 20% in the aggregate of the
then outstanding (x) Series D-1 Preferred Shares purchased pursuant to the
Purchase Agreement (which shall include the Common Shares and/or Series D-2
Preferred Shares into which such Series D-1 Preferred Shares may convert), (y)
Series D-2 Preferred Shares which the Investors may purchase in the Rights
Offering (which shall include the Common Shares into which such Series D-2
Preferred Shares may convert) and (z) Series D-2 Preferred Shares which the
Investors may purchase pursuant to the Standby Purchase Agreement (which shall
include the Common Shares into which such Series D-2 Preferred Shares may
convert) or (B) upon the death or permanent mental or physical incapacity of the
Key Employee. The Key Employee also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of the Lock-Up Securities except in compliance with the foregoing
restrictions.
Notwithstanding the foregoing, the Key Employee may Transfer the Lock-Up
Securities without the prior written consent of the Investors, as follows: (i)
to satisfy the Key Employee's income tax obligations arising from the Key
Employee's receipt of the REIT Dividends; provided, that the sale of Lock-Up
Securities by the Key Employee shall not occur on or prior to the six-month
anniversary of the date of the Key Employee's receipt of the REIT Dividends;
(ii) in connection with the Key Employee's participation in the Rights Offering;
provided, that (A) the Key Employee shall not Transfer any Lock-Up Securities in
connection with the Key Employee's participation in the Rights Offering on a
date that is on or prior to the six month anniversary of the date on which the
Key Employee purchases securities of the Company in the Rights Offering and (B)
the amount of Lock-Up Securities the Key Employee Transfers in
connection with his participation in the Rights Offering shall be materially the
same as the amount of securities purchased by the Key Employee in the Rights
Offering (as determined on an as-converted basis); (iii) to serve as collateral
pledged by the Key Employee as security for obligations of the Key Employee
under any bona fide loan or financing arrangement; provided, that all such
pledged Lock-Up Securities in the aggregate do not exceed 25% of the Lock-Up
Securities held by the Key Employee at the time of such pledge; (iv) following
the 12-month anniversary of the date of this letter agreement, the Key Employee
shall be permitted to Transfer up to 25% of the Lock-Up Securities held by the
Key Employee as of such 12-month anniversary to the extent that the Trading
Price of the Common Stock equals or exceeds $10 per share as of the date of this
letter agreement (which Trading Price shall be adjusted to take into account any
stock splits, combinations or stock dividends (including the REIT Dividend)
effected by the Company after the date of this letter agreement); (v) following
the 24-month anniversary of the date of this letter agreement, the Key Employee
shall be permitted to Transfer up to an additional 25% of the Lock-Up Securities
held by the Key Employee as of such 24-month anniversary to the extent that the
Trading Price of the Common Stock equals or exceeds $13 per share as of the date
of this letter agreement (which Trading Price shall be adjusted to take into
account any stock splits, combinations or stock dividends (including the REIT
Dividend) effected by the Company after the date of this letter agreement); (vi)
for estate planning purposes to any trust for the direct or indirect benefit of
the Key Employee or the Immediate Family of the Key Employee, provided that the
trustee of the trust agrees to be bound in writing by the restrictions set forth
herein, and provided further that any such Transfer shall not involve a
disposition for value; and (vii) any other voluntary Transfer to a member of the
Immediate Family of the Key Employee, provided that the Immediate Family member
agrees to be bound in writing by the restrictions set forth herein, and provided
further that any such Transfer shall not involve a disposition for value.
For purposes of this letter agreement, (a) "Trading Price" means with
respect to shares of Common Stock, on any day, that are (i) listed on a United
States securities exchange, the weighted average of the last sales price of such
stock for the ten Business Day period prior to such day on the largest United
States securities exchange on which such stock shall have traded on such day, or
if such day is not a day on which a United States securities exchange is open
for trading, on the immediately preceding day on which such securities exchange
was open, and (ii) not listed on a United States securities exchange but are
included in The NASDAQ Stock Market System (including the NASDAQ Global Market),
the last sales price on such system of such shares on such day, or if such day
is not a trading day, on the immediately preceding trading day; and (b)
"Immediate Family" means any relationship by blood, marriage or adoption, not
more remote than first cousin.
The Key Employee also hereby agrees to waive any applicable "change of
control" provisions set forth in the Key Employee's Employment Agreement with
respect to the transactions contemplated by the Transaction Agreements.
[Remainder of Page Intentionally Blank]
Very truly yours,
Signature: /s/ Xxxxxxx X. Xxxxxxx
-------------------------------
Print Name: Xxxxxxx X. Xxxxxxx
------------------------------
Agreed and Acknowledged:
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By: Babson Capital Management LLC,
its investment adviser
By: /s/ Xxxxx X. Port
------------------------------
Name: Xxxxx X. Port
Title: Managing Director
JEFFERIES CAPITAL PARTNERS IV X.X.
XXXXXXXXX EMPLOYEE PARTNERS IV LLC
JCP PARTNERS IV LLC
By: JEFFERIES CAPITAL PARTNERS IV LLC,
as Manager
By: /s/ Xxxxx X. Xxxxxxxx
------------------------------
Name: Xxxxx X. Xxxxxxxx
Title: Managing Member
NOVASTAR FINANCIAL, INC.
By: /s/ Xxxxxxx X. Xxxx
------------------------------
Name: Xxxxxxx X. Xxxx
Title: Senior Vice President, Chief Financial Officer and Assistant Secretary
ANNEX A
KEY EMPLOYEE COMPENSATION ARRANGEMENTS
1. Awards to the Key Employee under the NovaStar Financial, Inc. Executive Bonus
Plan shall only be payable in Restricted Shares in a manner consistent with the
terms of the Key Employee's existing compensation arrangements with the Company.
2. The Key Employee will be entitled to receive 1,000,000 Options subject to the
following terms and conditions:
a) Initial strike price for the Options shall equal the weighted average
conversion price of the Convertible Shares owned by the Investors (following the
issuance of the REIT Dividends)
b) Options will vest 100% on the three year anniversary of the date of this
letter agreement
c) The Key Employee will forfeit 100% of the Options if the Key Employee
has not remained continuously employed by the Company during the period
beginning on the date of this letter agreement and ending on the three year
anniversary of the date of this letter agreement
3. The Key Employee will not be entitled to receive any long-term incentive
awards under the Company's employee benefit plans during the period beginning on
the date of this letter agreement and ending on the three year anniversary of
the date of this letter agreement. Following the three year anniversary of this
letter agreement, the Compensation Committee of the Board of Directors of the
Company shall be permitted to approve and xxxxx xxxx-term incentive awards to
the Key Employee.
