<PAGE>
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
OCTOBER 15, 1998
Date of Report (Date of earliest event reported)
NOVASTAR FINANCIAL, INC.
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(Exact Name of Registrant as Specified in Charter)
Maryland 001-135333 74-2830661
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(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
1901 West 47th Place
Suite 105
Westwood, Kansas 66205
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(Address of Principal Executive Offices) (Zip Code)
(913) 362-1090
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(Registrant's Telephone Number,
Including Area Code)
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INFORMATION TO BE INCLUDED IN THE REPORT
Item 5. OTHER EVENTS
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NovaStar Financial, Inc. (the "Company") has announced that the
Company has taken steps to address its immediate liquidity needs
including: (1) the documentation of the earlier announced $15
million 90-day committed secured financing agreement and (2)
commitments for the sale of corporate and mortgage securities and
the termination of related hedging arrangements which will result in
material losses during the fourth quarter. In a second press
release, the Company announced loan production figures for two of
its affiliated companies, NovaStar Mortgage, Inc. and NovaStar
Capital, Inc. for the third quarter ended September 30, 1998. Copies
of the Company's Press Releases are included herewith as Exhibits.
Item 7(c). Exhibit
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99.1 Press Release, dated October 15, 1998 "NovaStar Announces
Completion of Financing Arrangement"
99.2 Press Release, dated October 15, 1998 "NovaStar Financial,
Inc. Announces Third Quarter Loan Production of
Affiliates"
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: October 15, 1998
NOVASTAR FINANCIAL, INC.
By: /s/ Mark J. Kohlrus
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Mark J. Kohlrus
Senior Vice President, Treasurer
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number
- --------------
99.1 Press Release, dated October 15, 1998 "NovaStar Announces Completion
of Financing Arrangement"
99.2 Press Release, dated October 15, 1998 "NovaStar Financial, Inc.
Announces Third Quarter Loan Production of Affiliates"
<PAGE>
EXHIBIT 99.1
NOVASTAR ANNOUNCES COMPLETION OF FINANCING
ARRANGEMENT; OTHER LIQUIDITY IMPROVING ACTIONS
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WESTWOOD, Kansas, Oct. 15 /PRNewswire/ -- NovaStar Financial, Inc. (NYSE: NFI)
announced today that it has made significant progress in restoring its
liquidity. Earlier this week, the Company announced that it had reached
agreement on a short-term secured financing arrangement for up to $15,000,000.
The Company is pleased to announce that it has completed and executed the
definitive documentation for this arrangement with GMAC/Residential Funding
Corporation.
In addition, the Company has taken the following actions:
. Contracts have been executed to sell the Company's corporate securities
position (approximately $20 million), that was being financed with short-term
secured borrowings. A loss upon the sales in the amount of approximately $11
million is expected.
. Contracts have been executed for the sale of all mortgage securities owned by
the Company or its affiliates (approximately $380 million in aggregate
principal), that were being financed with short-term secured borrowings.
These transactions are expected to result in an aggregate loss of
approximately $4.2 million.
. Hedging arrangements with a notional amount of approximately $455 million
related mortgage securities and mortgage loans being sold have been
terminated, thereby eliminating exposure to further margin calls on these
hedges. The Company does not expect remaining hedge arrangements to require
significant cash flow. Termination of these hedging arrangements is estimated
to result in losses of approximately $7.8 million.
. NovaStar Mortgage, Inc., an affiliate of the Company, accepted a bid for the
sale of approximately $176 million of subprime mortgage loans being financed
with short-term secured borrowings.
At present, the Company has no margin call payments due. The Company has
reached agreements with lenders to satisfy all remaining obligations under its
secured financing arrangements relating to its mortgage and corporate securities
using payments to be received in connection with the sales of securities and
other sources on or before October 26, 1998. As a result of the above actions,
the Company's balance sheet consists principally of cash and mortgage loans
securing either asset-backed bonds or warehouse financing facilities.
"We have quickly carried out a significant portion of our action plan to restore
the Company's liquidity position, especially in light of very difficult market
conditions," said
<PAGE>
Scott Hartman, Chairman and Chief Executive Officer. "We expect to continue with
our action plan until the Company's liquidity is fully restored. These actions
have been painful by forcing the Company to recognize material losses during the
fourth quarter. However, we are confident that the Company and its affiliates
will be able to carry on operations during this period of tight liquidity and to
resume profitable operations upon completion of our action plan."
NovaStar Financial, Inc. is a real estate investment trust (REIT) that invests
in the single-family residential subprime mortgage loans originated by its
affiliate, NovaStar Mortgage, Inc., and in high-quality mortgage securities.
Mortgage loans in portfolio are financed on a long-term basis by issuing
collateralized mortgage obligations accounted for as debt instruments. NovaStar
Financial, Inc. is located in Westwood, Kansas, a part of the Kansas City
metropolitan area. NovaStar Mortgage operates wholesale lending operations in
Orange County, California and Boca Raton, Florida.
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, and other risk factors outlined in the
Company's 1997 annual report on Form 10-K.
SOURCE NovaStar Financial, Inc.
- -0-
/Contact: Mark J. Kohlrus, Chief Financial Officer, (913) 514-3534, or Anna
LeCluyse, (913) 514-3505, or fax, (913) 514-3515, both of NovaStar/(NFI)
<PAGE>
EXHIBIT 99.2
NOVASTAR FINANCIAL, INC. ANNOUNCES
-----------------------------------
THIRD QUARTER LOAN PRODUCTION OF AFFILIATES
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(WESTWOOD, KANSAS October 15, 1998) NovaStar Financial, Inc. (NYSE: NFI)
announced loan production figures for two of its affiliated companies, NovaStar
Mortgage, Inc. and NovaStar Capital, Inc. for the third quarter ended September
30, 1998.
NovaStar Mortgage, Inc. (Mortgage) originated $232 million of subprime
residential mortgage loans during the 1998 third quarter. For the nine months
ended September 30, 1998, Mortgage has originated nearly 8,000 subprime
residential loans with an aggregate principal amount of over $735 million. The
third quarter volume represents an increase of $98 million (70 percent) over the
1997 third quarter, but was $62 million less than 1998 second quarter production
levels. In addition, during the 1998 third quarter Mortgage sold $18 million of
production for cash to an unrelated third party for a net gain of approximately
$826,000.
President Lance Anderson had the following comments; "NovaStar Mortgage
concentrated on building its back office operations during the 1998 second
quarter and early third quarter. During that same time we also tightened our
underwriting and appraisal guidelines which resulted in lower production volume
for the quarter. Mortgage's focus in the third quarter was to increase its
sales force, which had remained relatively stable from March 31 through July 31.
Mortgage ended the third quarter with 55 account executives in the field, up
from 41 at the end of July."
Effective October 12, 1998, NovaStar Mortgage further tightened its underwriting
guidelines and lowered the maximum price it pays for mortgage loans. "This was
in reaction to the recent changes in the capital market," Anderson stated, "We
expect these changes to have a negative impact on volume during the fourth
quarter. However, given current market conditions, we believe this is the right
decision for the company."
Anderson also addressed the quality of Mortgage's second quarter production.
"The majority (77 percent) of originations continue to be in our highest credit
grades, the A- and above products." He added that the Company continues to
remain focused on generating loans with protection against prepayments, "79
percent of third quarter originations had some form of prepayment penalty, up
from 71 percent from the second quarter." The average premium paid to brokers
during the third quarter was 1.39 percent of principal, compared to 1.25 percent
and 1.43 percent for the previous two quarters of 1998. The premium paid to
brokers is a function of the nature and extent of prepayment penalties.
<PAGE>
Mortgage originations remained geographically diversified. Florida, California
and Michigan were the only states representing more than 5 percent of total
production for the 1998 third quarter.
In addition to its wholesale origination operation, Mortgage also maintains a
portfolio retention unit focused on keeping borrowers that might otherwise
refinance with another lender. This group recaptured $6 million of subprime
loans during the three months ended September 30, 1998. Loans funded under this
program during the third quarter were substantially all (84%) fixed rate loans
with an average coupon of 8.51 percent and an average loan-to-value of 78
percent.
The Company also announced that another affiliate, NovaStar Capital, Inc.
(Capital), began conducting business during the 1998 third quarter to complement
the activities of Mortgage. Capital's operating strategy is to purchase and/or
sell residential mortgage loans (both subprime and Alt A products) through
channels other than wholesale mortgage brokers, such as banks and thrifts.
Capital opened for business during August and purchased loans with a total
principal amount of $8.6 million during its first quarter of operation.
Capital's purchases consisted primary of ARM loans (2/28 product) with an
average coupon of 8.8 percent and an average loan-to-value of 81 percent.
Capital's loans were generated at an average premium cost of 1.32 percent of
principal.
Detailed information related to the loans originated by Mortgage during the
quarter follows.
- MORE -
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NOVASTAR MORTGAGE
WHOLESALE ORIGINATIONS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
PERCENT AVERAGE AVERAGE
PROGRAM TYPE AMOUNT OF TOTAL COUPON LTV
<S> <C> <C> <C> <C>
Adjustable-rate loans $151,837,544 65% 10.09% 82.1%
Fixed-rate loans 80,495,722 35 10.15 80.1
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$232,333,266 100% 10.11% 81.4%
============ ==== ====== =====
Average loan principal balance $ 90,191
============
Percent of loans with
prepayment penalties 79%
===
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
PERCENT AVERAGE AVERAGE
SUMMARY BY CREDIT GRADE AMOUNT OF TOTAL COUPON LTV
<S> <C> <C> <C> <C>
A+ $ 5,418,915 2% 8.97% 85.3%
AA $ 36,063,269 15% 9.60% 83.9%
A 82,730,530 36 9.83 82.9
A- 52,882,859 23 10.19 83.5
B 29,966,258 13 10.54 79.6
C 20,448,085 9 11.15 71.8
D 4,823,350 2 11.97 62.3
------------ --- ----- ----
$232,333,266 100% 10.11% 81.4%
============ === ===== ====
SUMMARY BY PROGRAM TYPE
2-Year Fixed $129,551,887 56% 10.17% 82.3%
30-Year Fixed Due in 15 41,704,494 18 10.19 81.2
30-Year Fixed 25,932,878 11 10.32 80.8
15-Year Fixed 11,395,225 5 9.71 75.2
3-Year Fixed 9,614,750 4 10.18 78.9
6-Month LIBOR 5,712,350 2 9.20 79.3
1-Year CMT 4,921,457 2 9.44 83.3
Other Products 3,500,225 2 8.95 81.6
------------ --- ----- ----
$232,333,266 100% 10.11% 81.4%
============ === ===== ====
</TABLE>
<PAGE>
NovaStar Financial, Inc. is a real estate investment trust (REIT) that invests
in the single-family residential subprime mortgage loans originated by its
affiliate, NovaStar Mortgage, Inc., and in high-quality mortgage securities.
Mortgage loans in portfolio are financed on a long-term basis by issuing
collateralized mortgage obligations accounted for as debt instruments. NovaStar
Financial, Inc. is located in Westwood, Kansas, a part of the Kansas City
metropolitan area. NovaStar Mortgage's operates wholesale lending operations in
Orange County, California and Boca Raton, Florida. NovaStar Capital, Inc.'s
primary offices are located 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, and other risk factors outlined in the
Company's 1997 annual report on Form 10-K.
###
SOURCE NovaStar Financial, Inc.
- -0-
/Contact: Mark J. Kohlrus, Chief Financial Officer, (913) 514-3534, or Anna
LeCluyse, (913) 514-3505, or fax, (913) 514-3515, both of NovaStar/(NFI)
