Item 1.01 Entry into a Material Definitive Agreement.
Emergence from Bankruptcy
As previously disclosed, Novation Companies, Inc. (the “Company”)
and certain of its subsidiaries filed voluntary petitions (the cases commenced thereby, the “Bankruptcy Cases”) in
the United States Bankruptcy Court for the District of Maryland (Baltimore Division) (the “Bankruptcy Court”) seeking
relief under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”). The Company and one of its subsidiaries
subsequently filed with the Bankruptcy Court, and amended, a plan of reorganization for the resolution of the outstanding claims
against and interests pursuant to Section 1121(a) of the Bankruptcy Code (as amended and supplemented, the “Plan”)
and a related disclosure statement. As previously disclosed, the Bankruptcy Court entered an order on June 12, 2017 confirming
the Plan (the “Confirmation Order”) solely with respect to the Company, which provided that the effective date of the
Plan will occur when all conditions precedent to effectiveness, as set forth in the Plan, have been satisfied or waived.
Two of the conditions to the effectiveness of the Plan were
(i) the closing of the Company’s acquisition (the “HCS Acquisition”) of all of the capital stock of Healthcare
Staffing, Inc. (“HCS”) pursuant to the terms of the Stock Purchase Agreement, dated as of February 1, 2017 (as amended,
the “Stock Purchase Agreement”), by and among the Company, Novation Holding, Inc., a wholly-owned subsidiary of the
Company (“NHI”), HCS and Butler America, LLC (“Butler”), and (ii) the restructuring (the “Note Refinancing”)
of the Company’s outstanding Series 1 Notes, Series 2 Notes and Series 3 Notes (collectively, the “2011 Notes”),
held by Taberna Preferred Funding I, Ltd. (“Taberna I”), Taberna Preferred Funding II, Ltd. (“Taberna II”)
and Kodiak CDO I, Ltd. (“Kodiak” and, together with Taberna I and Taberna II, the “Noteholders”), issued
pursuant to three Indentures, each dated as of March 22, 2011, between the Company and The Bank of New York Mellon Trust Company,
National Association. The HCS Acquisition and the Note Refinancing were completed on July 27, 2017, and are discussed in detail
below.
On July 27, 2017, upon the completion of the HCS Acquisition
and the Note Refinancing, and the satisfaction or waiver of all other conditions precedent to effectiveness, the effective date
of the Plan occurred and the Company filed a Notice of Occurrence of Effective Date of the Plan with the Bankruptcy Court. Under
the Plan, holders of existing equity interests in the Company (i.e., the common stock) retain their interests.
Acquisition of Healthcare Staffing, Inc.
On July 27, 2017, in connection with the anticipated closing
of the HCS Acquisition, the Company, NHI, HCS and Butler entered into a Closing Agreement, dated as of the same date (the “Closing
Agreement”), relating to certain closing matters and the terms of the Stock Purchase Agreement. The Closing Agreement provided
for the following: (i) eliminate the $240,000 indemnification escrow under the Stock Purchase Agreement; (ii) provide for NHI’s
reimbursement to Butler of $100,000 in costs and expenses incurred by Butler in consideration for the delay in closing the HCS
Acquisition; (iii) clarify the treatment of certain of HCS’s outstanding tax obligations; (iv) provide that an adjustment
to the purchase price under the Stock Purchase Agreement will be made in connection with the calculation of final closing date
net working capital of HCS only if there is a difference between such amount and the pre-closing estimate of greater than three
percent; and (v) make certain other changes to the Stock Purchase Agreement.
On July 27, 2017, the Company and NHI completed the HCS Acquisition
pursuant to the terms of the Stock Purchase Agreement and the Closing Agreement, as a result of which HCS became a wholly-owned
subsidiary of NHI. HCS owns and operates a healthcare staffing solutions business based in the State of Georgia. Consideration
for the HCS Acquisition consisted of $24 million in cash, subject to adjustment as provided in the Stock Purchase Agreement.
Note Refinancing
On July 27, 2017, the Company entered into a Senior Secured
Note Purchase Agreement, dated as of the same date (the “Note Purchase Agreement”), with NHI and HCS as guarantors
(together with the Company, collectively, the “Credit Parties”), the Noteholders and Wilmington Savings Fund Society,
FSB, as collateral agent for the benefit of the Noteholders, to refinance $85,937,500 of principal indebtedness of the Company
under the 2011 Notes. Pursuant to the Note Purchase Agreement, the Noteholders exchanged their 2011 Notes for new notes from the
Company in the same aggregate principal amount (collectively, the “2017 Notes”) on the terms and conditions set forth
therein.
The unpaid principal amounts of the 2017 Notes bear interest
at a variable rate equal to LIBOR plus 3.5% per annum, payable quarterly in arrears until maturity on March 30, 2033. The 2017
Notes generally rank senior in right of payment to any existing or future subordinated indebtedness of the Credit Parties. The
Company may at any time upon 30 days’ notice to the Noteholders redeem all or part of the 2017 Notes at a redemption price
equal to 101% of the principal amount redeemed plus any accrued and unpaid interest thereon.
Pursuant to the Note Purchase Agreement, in connection with
the Note Refinancing, the Company paid all overdue and unpaid accrued interest on the 2011 Notes in the agreed, reduced aggregate
amount of $5,775,779, and paid $500,000 in fees and expenses incurred by the Noteholders.
The Note Purchase Agreement contains customary affirmative
and negative covenants, including but not limited to certain financial covenants. The Note Purchase Agreement also contains customary
events of default, including but not limited to payment defaults, cross defaults with certain other indebtedness, breaches of covenants
and bankruptcy events. In the case of an event of default, the Noteholders may, among other remedies, accelerate the payment of
all obligations under the Note Purchase Agreement and the 2017 Notes.
In connection with the Note Purchase Agreement, on July 27,
2017, the Credit Parties entered into a Pledge and Security Agreement, dated as of the same date, pursuant to which each of the
Credit Parties granted a first priority lien generally covering all of its assets, other than accounts receivable and inventory,
for the benefit of the Noteholders, to secure the obligations under the Note Purchase Agreement and the 2017 Notes.