Quarterly report pursuant to Section 13 or 15(d)

EQUITY AND EARNINGS PER SHARE

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EQUITY AND EARNINGS PER SHARE
 6 Months Ended
Jun. 30, 2013
Equity And Earnings Per Share  
EQUITY AND EARNINGS PER SHARE
10.  EQUITY AND EARNINGS PER SHARE

A.  
Stockholder’s Equity

On June 6, 2013, Newcastle’s stockholders approved an amendment to the Company’s charter, to increase the total number of authorized shares of common stock, par value $0.01 per share, from 500 million shares to 1.0 billion shares and correspondingly, to increase the total number of authorized shares of the Company’s capital stock from 600 million shares to 1.1 billion shares, which includes 100 million shares of preferred stock, par value $0.01 per share.

In January 2013, Newcastle issued 57,500,000 shares of its common stock in a public offering at a price to the public of $9.35 per share for net proceeds of approximately $526.2 million. Certain principals of Fortress participated in this offering and purchased an aggregate of 213,900 shares at a price of $9.35 per share. For the purpose of compensating the Manager for its successful efforts in raising capital for Newcastle, in connection with this offering, Newcastle granted options to the Manager to purchase 5,750,000 shares of Newcastle’s common stock at a price of $9.35, which had a fair value of approximately $18.0 million as of the grant date.  The assumptions used in valuing the options were: a 2.0% risk-free rate, an 8.8% dividend yield, 56.2% volatility and a 10 year term.
 
In February 2013, Newcastle issued 23,000,000 shares of its common stock in a public offering at a price to the underwriters of $10.34 per share for net proceeds of approximately $237.4 million. Certain principals of Fortress participated in this offering and purchased an aggregate of 191,000 shares at a price of $10.48 per share. For the purpose of compensating the Manager for its successful efforts in raising capital for Newcastle, in connection with this offering, Newcastle granted options to the Manager to purchase 2,300,000 shares of Newcastle’s common stock at a price of $10.48, which had a fair value of approximately $8.4 million as of the grant date.  The assumptions used in valuing the options were: a 2.1% risk-free rate, a 7.8% dividend yield, 55.5% volatility and a 10 year term.

In June 2013, Newcastle issued 40,250,000 shares of its common stock in a public offering at a price to the underwriters of $4.92 per share for net proceeds of approximately $197.6 million. Certain principals of Fortress participated in this offering and purchased an aggregate of 750,000 shares at a price of $4.97 per share. For the purpose of compensating the Manager for its successful efforts in raising capital for Newcastle, in connection with this offering, Newcastle granted options to the Manager to purchase 4,025,000 shares of Newcastle’s common stock at a price of $4.97, which had a fair value of approximately $3.8 million as of the grant date. The assumptions used in valuing the options were: a 2.5% risk-free rate, an 8.8% dividend yield, 36.9% volatility and a 10 year term.

Prior to the spin-off, Newcastle had issued options to the Manager in connection with capital raising activities. In connection with the spin-off, 21.5 million options that were held by FIG LLC, (the Manager), or by the directors, officers or employees of the Manager, were converted into an adjusted Newcastle option and a new New Residential option. The exercise price of each adjusted Newcastle option and New Residential option was set to collectively maintain the intrinsic value of the Newcastle option immediately prior to the spin-off and to maintain the ratio of the exercise price of the adjusted Newcastle option and the New Residential option, respectively, to the fair market value of the underlying shares as of the spin-off date, in each case based on the five day average closing price subsequent to the spin-off date.
 
Newcastle’s outstanding options at May 15, 2013 following the spin-off consisted of the following:

   
Number of Options
    
Strike Price
  
Maturity Date
      6,000     $ 7.75  
5/30/2013
      116,380       9.05  
7/16/2013
      304,604       10.18  
12/1/2013
      328,350       11.74  
1/9/2014
      343,275       11.49  
5/25/2014
      162,500       14.05  
11/22/2014
      330,000       13.24  
1/12/2015
      2,000       13.83  
8/1/2015
      170,000       13.16  
11/1/2016
      242,000       14.01  
1/23/2017
      456,000       12.40  
4/11/2017
      1,676,833       2.72  
3/29/2021
      2,539,833       2.07  
9/27/2021
      2,000       2.28  
12/20/2021
      1,897,500       2.82  
4/3/2022
      2,300,000       3.05  
5/21/2022
      2,530,000       3.04  
7/31/2022
      5,750,000       4.24  
1/11/2023
      2,300,000       4.75  
2/15/2023
Total W/A
     21,457,275     $ 4.43    
 
As of June 30, 2013, Newcastle’s outstanding options were summarized as follows:

Held by the Manager
     21,760,338  
Issued to the Manager and subsequently transferred to certain of the Manager's employees
    3,711,937  
Issued to the independent directors
     4,000  
Total
     25,476,275  
  
Pursuant to Newcastle’s Stock Incentive Plan and the additional terms established by resolution of the Board of Directors, each of the Company’s non-employee director receives an annual award of Newcastle’s Common Stock effective on the first business day after Newcastle’s annual meeting of stockholders, which for 2013 are valued at $50,000 based on the per share closing price of Newcastle’s Common Stock on the New York Stock Exchange on the date of such grant. Accordingly, in June 2013 each such director received 9,025 shares of Common Stock.

B.  
Earnings Per Share

Newcastle is required to present both basic and diluted earnings per share (“EPS”).  Basic EPS is calculated by dividing net income available for common stockholders by the weighted average number of shares of common stock outstanding during each period.  Diluted EPS is calculated by dividing net income available for common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of common stock equivalents during each period.  Newcastle’s common stock equivalents are its outstanding stock options.  During the six months ended June 30, 2013 and 2012, based on the treasury stock method, Newcastle had 5,558,512 and 773,356 dilutive common stock equivalents, respectively, resulting from its outstanding options. During the three months ended June 30, 2013 and 2012, based on the treasury stock method, Newcastle had 6,167,876 and 1,057,618 dilutive common stock equivalents, respectively, resulting from its outstanding options.  Net income available for common stockholders is equal to net income less preferred dividends.