SCHEDULE 14A
(Rule 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Check the appropriate box:
|_| Preliminary proxy statement.
|x| Definitive proxy statement.
|_| Definitive additional materials.
|_| Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
|_| Confidential, for use of the Commission only (as permitted by Rule
14a-6(e)(2)).
NovaStar Financial, Inc.
(Name of Registrant as specified in its Charter)
None
(Name of person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
NovaStar
NovaStar Financial, Inc.
1901 West 47th Place, Suite 105
Westwood, Kansas 66205
(913) 362-1090
----------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 25, 2000
To our stockholders:
The Board of Directors of NovaStar Financial, Inc., a Maryland
corporation, is furnishing this proxy statement in connection with its
solicitation of proxies for use at the annual meeting of stockholders to be held
on May 25, 2000 at 10:00 a.m., Central Daylight Time, at the Sheraton Suites,
770 West 47th Street, Kansas City, Missouri. This proxy statement, the
accompanying proxy card and the notice of annual meeting are being provided to
stockholders beginning on or about March 23, 2000.
GENERAL INFORMATION
Solicitation of Proxies
The costs of this solicitation by the Board of Directors will be borne by
NovaStar Financial. Proxy solicitations will be made by mail. They also may be
made by personal interview, telephone, facsimile transmission and telegram.
Banks, brokerage house nominees and other fiduciaries are requested to forward
the proxy soliciting material to the beneficial owners and to obtain
authorization for the execution of proxies. NovaStar Financial will, upon
request, reimburse those parties for their reasonable expenses in forwarding
proxy materials to the beneficial owners. NovaStar Financial does not expect to
engage an outside firm to solicit votes, but if such a firm is engaged
subsequent to the date of this proxy statement, the cost is estimated to be less
than $5,000.00, plus reasonable out-of-pocket expenses.
Voting Rights
Holders of shares of NovaStar Financial's common stock, par value $0.01
per share, at the close of business on March 16, 2000, the record date, are
entitled to notice of, and to vote at, the annual meeting. On that date,
7,245,932 shares of common stock were outstanding. Each share of common stock
outstanding on the record date is entitled to one vote on each matter presented
at the annual meeting. The presence, in person or by proxy, of stockholders
representing 50% or more of the issued and outstanding stock entitled to vote
constitutes a
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quorum for the transaction of business at the annual meeting. If a quorum is
present, (1) a plurality of the votes cast at the annual meeting is required for
election of a director, (2) the affirmative vote of 2/3 of the votes entitled to
be cast is required for the proposed bylaw amendment, and (3) the affirmative
vote of the majority of the shares present, in person or by proxy, at the annual
meeting and entitled to vote is required for all other matters. Cumulative
voting in the election of directors is not permitted. Abstentions are considered
shares present and entitled to vote, and therefore have the same legal effect as
a vote against all matters presented at the annual meeting other than the
election of directors. Any shares held in street name for which the broker or
nominee receives no instructions from the beneficial owner, and as to which such
broker or nominee does not have discretionary voting authority under applicable
New York Stock Exchange rules, will be considered as shares not entitled to vote
and will therefore not be considered in the tabulation of the votes.
Accordingly, a broker non-vote will have no effect on items (1) and (3) above
but will have the same effect as a vote against the proposal to amend the bylaws
which requires the approval of 66 2/3% of outstanding shares.
Voting of Proxies
Shares of the common stock represented by all properly executed proxies
received in time for the annual meeting will be voted in accordance with the
choices specified in the proxies. Unless contrary instructions are indicated on
the proxy, the shares will be voted FOR the election of the nominees named in
this proxy statement as directors, FOR the appointment of KPMG LLP as
independent public accountants for the fiscal year ending December 31, 2000, and
FOR the adoption of the amendment to the bylaws.
The management and the Board of Directors know of no matters to be brought
before the annual meeting other than as set forth herein. To date, NovaStar
Financial has not received any stockholder proposals. If any other matter of
which the management and Board of Directors are not now aware is presented
properly to the stockholders for action, it is the intention of the proxy
holders to vote in their discretion on all matters on which the shares
represented by such proxy are entitled to vote.
Revocability of Proxy
The giving of the enclosed proxy does not preclude the right to vote in
person should the stockholder giving the proxy so desire. A proxy may be revoked
at any time prior to its exercise by delivering a written statement to the
corporate secretary that the proxy is revoked, by presenting a later-dated
proxy, or by attending the annual meeting and voting in person.
Annual Report
The 1999 annual report including financial statements for the year ended
December 31, 1999, which is being mailed to stockholders together with the proxy
statement, contains financial and other information about the activities of
NovaStar Financial, but is not incorporated into this proxy statement and is not
to be considered a part of these proxy soliciting materials.
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ITEM 1 - ELECTION OF DIRECTORS
The Board of Directors is divided into three classes, designated Class I,
Class II and Class III, with one class standing for election at the annual
meeting of stockholders each year. Class I directors are to be elected at this
year's annual meeting. The nominee for Class I director of the Board of
Directors is set forth below. The proxy holders intend to vote all proxies
received by them in the accompanying form for the nominee for director listed
below unless otherwise specified by the stockholder. In the event any nominee is
unable or declines to serve as a director at the time of the annual meeting, the
proxies will be voted for any nominee who shall be designated by the present
Board of Directors to fill the vacancy. In the event that additional persons are
nominated for election as directors, the proxy holders intend to vote all
proxies received by them for the nominee listed below and against any other
nominees. As of the date of this proxy statement, the Board of Directors is not
aware of any nominee who is unable or will decline to serve as director. The
nominee listed below already serves as a director of NovaStar Financial.
The election to the Board of Directors of the nominee identified in the
proxy statement will require the affirmative vote of a plurality of the
outstanding shares of common stock present in person or represented by proxy at
the annual meeting.
The Board of Directors unanimously recommends that stockholders vote FOR
the nominee identified below.
Nominee to Board of Directors
Name Position with NovaStar Financial
---- --------------------------------
Edward W. Mehrer Director
Class I Nominee - Term Expiring 2003
Edward W. Mehrer, age 60, has been a member of the Board of Directors
since 1996. He is presently the Chief Financial Officer of Cydex, a
pharmaceutical company based in Overland Park, Kansas. Mr. Mehrer was previously
associated with Hoechst Marion Roussel, formerly Marion Merrell Dow, Inc., an
international pharmaceutical company, for approximately ten years until his
retirement in December 1995. From December 1991, he served as Executive Vice
President and Chief Financial Officer and a director of Marion. Prior to that
position, he served in a number of financial and administrative positions. Prior
to joining Marion, Mr. Mehrer was a partner with the public accounting firm of
Peat, Marwick, Mitchell & Co., a predecessor firm to KPMG LLP, in Kansas City,
Missouri.
Class II Directors - Terms Expiring 2001
W. Lance Anderson, age 39, is a co-founder, President and Chief Operating
Officer of NovaStar Financial, and has been a member of the Board of Directors
since 1996. His primary responsibility is to manage mortgage origination and
servicing operations. Prior to NovaStar, Mr. Anderson served as Executive Vice
President of Dynex Capital, Inc., formerly Resource
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Mortgage Capital, Inc., a New York Stock Exchange listed real estate investment
trust. In addition, Mr. Anderson was President and Chief Executive Officer of
Dynex' single-family mortgage operation, Saxon Mortgage. He had been at Dynex
since October 1989. Mr. Anderson also serves as Chairman of the Board of
Directors, President and Chief Executive Officer of NovaStar Mortgage.
Gregory T. Barmore, age 58, was most recently Chairman of the Board of GE
Capital Mortgage Corporation (GECMC), a subsidiary of General Electric Capital
Corporation (GE Capital) headquartered in Raleigh, North Carolina. He has served
on the Board of Directors since 1996. He was responsible for overseeing the
strategic development of GECMC's residential real estate-affiliated financial
business, including mortgage insurance, mortgage services and mortgage funding.
Prior to joining GECMC in 1986, Mr. Barmore was Chief Financial Officer of
Employers Reinsurance Corporation (ERC), one of the nation's largest property
and casualty reinsurance companies and also a subsidiary of GE Capital. Mr.
Barmore was selected to serve on NovaStar Financial's Board as an independent
director without regard to the GE Capital investment in NovaStar Financial and
accordingly there are no arrangements with GE Capital or its affiliates
regarding his term of office or other aspects of his service on the Board.
Class III Directors - Terms Expiring 2002
Scott F. Hartman, age 40, is a co-founder, Chairman of the Board and Chief
Executive Officer of NovaStar Financial, and has been a member of the Board of
Directors since 1996. His primary responsibilities are to interact with the
capital markets and oversee the portfolio of investments and the securitization
of mortgage loan production. Mr. Hartman served from February 1995 to June 1996
as Executive Vice President of Dynex Capital, Inc. His responsibilities while at
Dynex included managing a $4 billion investment portfolio, overseeing the
securitization of mortgage loans originated through Dynex's mortgage operation
and the administration of the securities issued by Dynex. For the previous three
years he had served as a consultant to Dynex. Mr. Hartman also serves as a
director and Vice Chairman of NovaStar Mortgage.
Bart O. Johnson, age 51, has been a member of the Board since 1998 and is
the GE Capital nominee. He is currently President of GE Capital Residential
Connections, a division of GE Capital Mortgage Corporation, and is a 25-year
mortgage industry veteran. Immediately prior to joining GE in 1997, Mr. Johnson
served as Chief Financial Officer and National Residential Production Manager at
Mellon Bank's Mortgage Banking Group beginning in 1989.
Committees of the Board
Audit Committee. The Audit Committee is composed of Mr. Mehrer and Mr.
Johnson. The Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public accountants
the plans and results of any audits, reviews other professional services
provided by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit fees
and reviews the adequacy of internal accounting controls.
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Compensation Committee. The Compensation Committee is composed of Mr.
Barmore and Mr. Mehrer. The Compensation Committee determines the compensation
of executive officers.
During 1999, there were 5 meetings of the Board of Directors, 2 meetings
of the Audit Committee and 1 meeting of the Compensation Committee. Each
director participated in at least 75% of the meetings of the Board and the
committees on which he served.
Compensation of Directors
NovaStar Financial pays independent directors, who are not employed by
NovaStar Financial, $10,000 per year plus $500 for each meeting attended in
person. In addition, each independent director has been granted options to
purchase 5,000 shares of common stock at the fair market value of the common
stock upon becoming a director and options to purchase 2,500 shares at the fair
market value of the common stock on the day after each annual meeting of
stockholders. In addition, Mr. Barmore and Mr. Mehrer were granted options to
purchase 5,000 shares of common stock at $18 per share in connection with the
1997 initial public offering of common stock. However, as the GE Capital
director and pursuant to GE Capital's internal policy, Mr. Johnson does not
receive any compensation, whether fees or stock options, for his services on the
Board of Directors. All directors receive reimbursement of reasonable
out-of-pocket expenses incurred in connection with meetings of the Board of
Directors. No director who is an employee of NovaStar Financial will receive
separate compensation for services rendered as a director.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
directors and executive officers, and holders of more than 10% of NovaStar
Financial's common stock, to file with the SEC initial reports of ownership and
reports of changes in ownership of common stock and other equity securities.
Such officers, directors and 10% stockholders are required by SEC regulation to
furnish NovaStar Financial with copies of all Section 16(a) forms they file.
While Mr. Bamburg may have been deemed an executive officer since 1998, he
initially filed an initial report of ownership in June 1999. Based solely on its
review of such forms that it received, or written representations from reporting
persons that no Form 5s were required for such persons, NovaStar Financial
believes that, during fiscal 1999, all Section 16(a) filing requirements were
satisfied.
Compensation Committee Interlocks
No interlocking relationship exists between the Board of Directors or
officers responsible for compensation decisions and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
5
<PAGE>
Management of NovaStar Financial
The executive officers of NovaStar Financial and their positions are as
follows:
Name Position With NovaStar Financial Age
---- -------------------------------- ---
Scott F. Hartman Chairman of the Board, Secretary 40
and Chief Executive Officer
W. Lance Anderson Director, President and Chief Operating 39
Officer
Michael L. Bamburg Senior Vice President and Chief Investment 37
Officer
Rodney Schwatken Vice President, Treasurer and Controller 36
(Chief Accounting Officer)
The executive officers serve at the discretion of the Board of Directors.
Biographical information regarding Mr. Hartman and Mr. Anderson is provided
above. Biographical information regarding Mr. Bamburg and Mr. Schwatken is set
forth below.
Michael L. Bamburg, age 37, is Senior Vice President and Chief Investment
Officer of NovaStar Financial and NovaStar Mortgage. Mr. Bamburg is responsible
for managing the portfolio of investments, interacting with the capital markets,
overseeing the securitization of the mortgage loan production, and developing
new business lines. Mr. Bamburg most recently served as a Principal of Smith
Breeden Associates, a financial institution consulting and money management firm
specializing in the evaluation and hedging of mortgage backed securities. Mr.
Bamburg spent more than 11 years with Smith Breeden where he analyzed and traded
mortgage- backed securities and consulted with various financial institutions
regarding investments and asset/liability management issues. During the last 3
years with Smith Breeden, Mr. Bamburg spent most of his time marketing Smith
Breeden's money management products.
Rodney E. Schwatken, age 36, is Vice President, Treasurer and Controller
of NovaStar Financial and NovaStar Mortgage. Mr. Schwatken is responsible for
all accounting and finance functions, including management of financial
relationships, management and shareholder reporting and compliance with REIT
regulations. From June 1993 to March 1997, when he joined NovaStar Financial,
Mr. Schwatken was Accounting Manager with U. S. Central Credit Union, a $30
billion dollar investment, liquidity and technology resource for the credit
union industry. From January 1987 to June 1994, Deloitte & Touche LLP in Kansas
City, Missouri employed Mr. Schwatken, most recently as an audit manager.
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<PAGE>
Beneficial Ownership of Common Stock by Large Securityholders
The following table sets forth certain information known to NovaStar Financial
with respect to beneficial ownership of the common stock as of March 1, 2000 by
each person other than members of management known to NovaStar Financial to
beneficially own more than 5% of the common stock. Unless otherwise indicated in
the footnotes to the table, the beneficial owners named have, to the knowledge
of NovaStar Financial, sole voting and investment power with respect to the
shares beneficially owned, subject to community property laws where applicable.
Beneficial Ownership
of Common Stock(1)
------------------
Name and Address of Beneficial Owner Shares Percent
------------------------------------ ------ -------
Wallace R. Weitz & Company(2) ......... 6,374,962 52.59%
1125 South 103rd Street, Suite 600
Omaha, NE 68124-6008
McCarthy Group, Inc.(3) ............... 1,597,885 20.07%
1125 South 103rd Street, Suite 450
Omaha, NE 68124
General Electric Capital Corporation(4) 1,333,332 16.85%
260 Long Ridge Road
Stamford, CT 06927
GMAC/Residential Funding Corporation(5) 1,177,713 13.98%
8400 Normandale Lake Boulevard
Bloomington, MN 55437
First Union Corporation(6) ............ 536,667 7.07%
One First Union Center, TW9
Charlotte, NC 28288-0610
- ---------------------
(1) Assuming no exercise of warrants and no conversion of preferred stock
(except by the securityholder named, separately).
(2) Consists of 1,498,533 shares of common stock, 1,305,000 shares of common
stock issuable upon the exercise of warrants and 3,571,429 shares of
common stock issuable upon conversion of preferred stock.
(3) Consists of 883,600 shares of common stock and 714,285 shares of common
stock issuable upon conversion of preferred stock.
(4) Consists of 666,666 shares of common stock and 666,666 shares of common
stock issuable upon the exercise of warrants.
(5) Consists of 1,177,713 shares of common stock issuable upon the exercise of
warrants.
(6) Consists of 186,667 shares of common stock and 350,000 shares of common
stock issuable upon the exercise of warrants.
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Beneficial Ownership of Common Stock by Directors and Management
The following table sets forth certain information known to NovaStar
Financial with respect to beneficial ownership of the common stock as of March
1, 2000 by (i) each director, (ii) the executive officers, and (iii) all
directors and executive officers as a group. Unless otherwise indicated in the
footnotes to the table, the beneficial owners named have, to the knowledge of
NovaStar Financial, sole voting and investment power with respect to the shares
beneficially owned, subject to community property laws where applicable.
Beneficial Ownership of
Name of Beneficial Owner Common Stock(1)
------------------------ ---------------
Shares Percent
------ -------
Scott F. Hartman(2)........................... 554,265 7.50%
W. Lance Anderson(3).......................... 549,465 7.43%
Edward W. Mehrer(4)........................... 38,875 *
Gregory T. Barmore(5)......................... 11,519 *
Bart O. Johnson............................... -- --
Michael L. Bamburg(6)......................... 99,688 1.37
Rodney Schwatken (7).......................... 6,425 *
All directors and executive officers..........
as a group (7 persons)...................... 1,260,237 17.39%
- -----------------
* Less than 1%.
(1) Assuming no exercise of the warrants and exercisable options (except by
the listed securityholder named, separately).
(2) Consists of 405,932 shares of common stock and 128,333 warrants, including
224,066 of common stock and 20,000 of warrants owned jointly with his
wife, and 20,000 shares of common stock issuable upon the exercise of
options.
(3) Consists of 395,932 shares of common stock and 133,533 warrants, including
287,599 of common stock and 25,200 of warrants owned jointly with his
wife, and 20,000 shares of common stock issuable upon the exercise of
options.
(4) Consists of 20,000 shares of common stock and 12,000 of warrants,
including 2,000 of each owned by his wife, and 6,875 shares of common
stock issuable upon the exercise of options.
(5) Consists of 8,394 shares of common stock and 3,125 shares of common stock
issuable upon the exercise of options.
(6) Consists of 56,388 shares of common stock and 23,300 (owned individually
by Mr. Bamburg or by his wife or jointly with his wife) and 20,000 shares
of common stock issuable upon the exercise of options.
(7) Consists of 2,300 shares of common stock and 4,125 shares of common stock
issuable upon the exercise of options
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Executive Compensation
Executive Officer Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
----------------------------
Other Securities
Annual Underlying DER's All Other
Name and Position Year Salary Bonus Compensation Options(#) $(6) Compensation
<S> <C> <C> <C> <C> <C> <C> <C>
Scott F. Hartman................ 1999 $280,000 -- -- -- -- $50,633(1)
Chairman of the Board, 1998 $185,000 -- -- -- -- $94,033(1)
Secretary and Chief 1997 $130,833 -- $549,635(2) 40,000 -- --
Executive Officer
W. Lance Anderson............... 1999 $280,000 -- -- -- -- $50,633(1)
President and Chief 1998 $185,000 -- -- -- -- 94,033(1)
Operating Officer 1997 $130,833 -- $549,635(2) 40,000 -- --
Mark J. Kohlrus(3).............. 1999 $170,000 $ 89,250 -- 20,000(7) -- --
Senior Vice President, Treasurer 1998 $120,000 $ 86,500 -- 10,000 $3,300 --
and Chief Financial Officer 1997 $100,000 $ 90,000 -- -- -- --
Michael L. Bamburg(4)........... 1999 $190,000 $114,000 -- 30,000(7) -- --
Senior Vice President and 1998 $128,333 $105,000 -- 20,000 -- --
Chief Investment Officer 1997 -- -- -- -- -- --
Rodney Schwatken (5) 1999 $ 80,000 $ 22,800 -- 6,000(7) -- --
Vice President, Treasurer and 1998 $ 75,000 $ 16,875 -- 4,500 -- --
Controller...................... 1997 $ 62,500 $ 18,750 -- -- -- --
</TABLE>
- ---------------------
(1) Represents dividend paym ents on 144,666 shares of common stock, each
owned by Mr. Hartman and Mr. Anderson, serving as collateral on
non-recourse promissory notes issued in 1998 upon the exercise of options.
The dividend payments are treated as compensation for personal income tax
purposes.
(2) Represents forgiveness of one tranche of founders' forgivable debt.
(3) Mr. Kohlrus was employed by NovaStar Financial from December 16, 1996
through March 15, 2000.
(4) Mr. Bamburg's employment with NovaStar Financial began in February 1998
and provided for an annual salary of $140,000 through December 31, 1998.
Mr. Bamburg is eligible to receive an annual bonus of up to 75% of his
annual salary.
(5) Mr. Schwatken's employment with NovaStar Financial began on March 20, 1997
and provided for an annual salary of $75,000.
(6) 1996 options granted to Mr. Hartman and Mr. Anderson which vested on the
closing of the initial public offering were granted without dividend
equivalent rights or DERs. Options granted to Mr. Kohlrus which began to
vest in December 1997 were granted with DERs. None of the 1997,1998 and
1999 options listed were granted with DERs.
(7) Pursuant to resolutions of the Compensation Committee dated December 21,
1999, certain options issued to employees were repriced to $7.00 per
share. Options "granted" in 1999 replace 1997 options "canceled" for
Messrs. Kohlrus and Schwatken and 1998 options "canceled" for Mr. Bamburg.
The repricing is described under the heading "Report on Repricing of
Options".
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Bonus Incentive Compensation Plan. A bonus incentive compensation plan was
established for certain executive and key officers of NovaStar Financial and its
affiliates, effective commencing with the fiscal year beginning January 1, 1998.
The annual bonus pursuant to the bonus incentive compensation plan will be paid
one-half in cash and one-half in shares of common stock, annually, following
receipt of the audit for the related fiscal year. This program will award
bonuses annually to those officers out of a total pool determined by stockholder
return on equity ("ROE") as follows:
Bonus as percent of Average
ROE(1) in Excess of Base Rate(2) By: Net Worth(3) Outstanding
------------------------------------ ------------------------
Zero or less 0%
Greater than 0% but less than 6% 10% x (Actual ROE - Base Rate)
Greater than 6% (10% x 6%) + 15% x (Actual
ROE - (Base Rate + 6%))
Of the amount so determined, one-half will be deemed contributed to the total
pool in cash and the other half deemed contributed to the total pool in the form
of shares of common stock, with the number of shares to be calculated based on
the average price per share during the preceding year. The total pool may not
exceed $1 million for fiscal years ending December 31, 1998, and December 31,
1999. For 1998 and 1999, NovaStar did not contribute to this pool and no bonuses
were awarded.
- --------------
(1) "ROE" is determined for the fiscal year by averaging the monthly ratios
calculated each month by dividing the monthly net income (adjusted to an
annual rate) by its average net worth for such month. For such
calculations, the "net income" means the net income or net loss determined
according to GAAP, but after deducting any dividends paid or payable on
preferred stock that may be issued before giving effect to the bonus
incentive compensation or any valuation allowance adjustment to
stockholders' equity. The definition "ROE" is used only for purposes of
calculating the bonus incentive compensation payable pursuant to the bonus
incentive compensation plan and is not related to the actual distributions
received by stockholders. The bonus payments will be an operating expense
of NovaStar Financial.
(2) "Base rate" is the average for each month of the ten-year U.S. Treasury
rate, plus 4%.
(3) "Average net worth" for any month means the arithmetic average of the sum
of (1) the net proceeds from all offerings of equity securities since
formation including exercise of warrants and stock options and pursuant to
the proposed Dividend Reinvestment Plan (but excluding any offerings of
preferred stock in the future), after deducting any underwriting discounts
and commissions and other expenses and costs relating to the offerings,
plus (2) the retained earnings (without taking into account any losses
incurred in prior fiscal years, after deducting any amounts reflecting
taxable income to be distributed as dividends and without giving effect to
any valuation allowance adjustment to stockholders' equity) computed by
taking the daily average of such values during such period.
Units Acquired with Forgivable Debt. Messrs. Hartman and Anderson each
acquired 108,333 units, each unit consisting of one share of preferred stock
which converted to common stock at the closing of the initial public offering
and one warrant, which were acquired at the price of $15 per unit on December 9,
1996. Payment for such units was made by delivering to NovaStar Financial
promissory notes, each in the amount of $1,624,995, bearing interest at 8% per
annum compounded annually and secured by the units being acquired. Interest
began accruing during the first year and is added to principal due under the
note. Thereafter, interest became payable quarterly and upon forgiveness or at
maturity of the notes, which is at the end of the fifth fiscal period.
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The principal amount of the notes is divided into three equal tranches.
Payment of principal on each tranche will be forgiven, if the following
incentive performance tests are achieved:
o During the first five fiscal periods after issuance of the notes:
-- One tranche will be forgiven for each fiscal period as to
which NovaStar Financial generates a total return to investors
in units equal to or greater than 15%. The debt on the first
tranche was forgiven and NovaStar Financial recognized a
non-cash charge against earnings of $1,083,330 for the fiscal
period ending December 31, 1997.
-- At the end of each of the five fiscal periods, all remaining
tranches will be forgiven if NovaStar Financial has generated
a total cumulative return to investors in units (from date of
initial issuance of the notes) equal to or greater than 100%.
o For purposes of calculating the returns to such investors:
-- The term "fiscal period" will refer to each of five periods.
The first period commenced with the closing of the private
placement on December 9, 1996, and ended on December 31, 1997,
and, thereafter, each succeeding fiscal period extends for
twelve months and ends on each December 31.
o The term "return" for each fiscal period will mean the sum of (on a
per unit basis) (a) all cash dividends paid during (or declared with
respect to) such fiscal period per share of preferred stock (or per
share of common stock following conversion of the preferred stock
upon completion of the initial public offering), (b) any increase or
decrease in the price per share of preferred stock (or resulting
common stock) during such fiscal period, measured by using the price
per unit to investors in the private placement as the starting price
($15.00), and using the average public trading price during the last
90 days of each succeeding fiscal period for such succeeding periods
(except such shorter period as the common stock was traded in 1997),
and (c) any increase or decrease in the price per warrant during
such fiscal period, determined in the same manner as in (b). For
purposes of the fiscal period 15% return test, the total return for
a given period will be equal to the sum of (a), (b) and (c) during
the period, and for purposes of the cumulative 100% return test, the
amounts in (a), (b) and (c) will all be measured from the beginning
of the first fiscal period. The amount of that "return" will then be
measured as a percentage of the investor's investment in the units
(on a per unit basis) without regard to timing of receipt of
dividends or timing of increases in per share or per warrant prices.
o If one of the incentive tests is met, the amount of loan forgiveness
for each tranche will be the principal amount of such tranche of the
note. In addition, a loan will be made by NovaStar Financial to
Messrs. Hartman and Anderson in the amount of (1) personal tax
liability resulting from the forgiveness of debt, and (2)
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<PAGE>
interest accrued during the first year of the forgiven tranches. The
note will bear interest at a floating market rate, will be secured
by that proportionate number of shares that had secured the forgiven
tranche of the note and will mature upon the earlier of the sale of
those shares or the termination of the officer's employment. Messrs.
Hartman and Anderson have issued notes payable to NovaStar Financial
for the repayment of the tax liability and interest accrued on
forgivable notes through December 31, 1997 and notes payable for the
founders' contributions to capital of NFI Holding in 1999. For
further discussion on these notes see "Indebtedness of Management".
Stock Option Plan. NovaStar Financial's 1996 stock option plan provides
for the grant of qualified incentive stock options or ISOs, non-qualified stock
options or NQSOs, deferred stock, restricted stock, performance shares, stock
appreciation and limited stock awards, and dividend equivalent rights or DERs.
ISOs may be granted to the officers and employees. NQSOs and awards may be
granted to the directors, officers, employees, agents and consultants. Unless
previously terminated by the Board of Directors, the plan will terminate on
September 1, 2006.
All options have been granted at exercise prices greater than or equal to
the estimated fair value of the underlying stock. Outstanding options vest over
four years and expire ten years after the date of grant.
The following table sets forth information concerning stock options
granted during 1999 for each of the directors and executive officers.
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------
Percent of
Total Potential Realizable Value at
Options Assumed Annual Rates of Stock
Granted to Exercise Price Appreciation for Option
Employees Price or Term(2)
No. During the Base Price Expiration ------------------------------
Name Granted Year ($/Share) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Michael L. Bamburg 30,000(1) 25% $7.00 1/28/08 $139,440 $203,290
Gregory T. Barmore 2,500 2% 6.75 6/9/09 26,999 42,991
Edward W. Mehrer 2,500 2% 6.75 6/9/09 26,999 42,991
Mark J. Kohlrus 20,000(1) 17% 7.00 11/4/07 91,909 132,552
Rodney E. Schwatken 6,000(1) 5% 7.00 11/4/07 27,573 39,766
------- --
Total to Directors and
Executive Officers 61,000 51%
======= ==
Total shares granted 119,000
=======
</TABLE>
- --------------
(1) Certain 1998 and 1997 stock options repriced in 1999 as discussed in the
"Report on Repricing of Options". The original stock options were treated
as cancelled and the options repriced at $7.00 per share were treated as
granted in 1999.
(2) Options granted to non-employee directors were priced at the market price
of NovaStar Financial's common stock on the NYSE at the date of grant.
Repriced options were priced in excess of the then current market price of
$3.13 per share. In each case, the assumed annual rates represent the
potential appreciation in value over the exercise price.
12
<PAGE>
The following table sets forth certain information with respect to the
value of the options as of December 31, 1999 held by the named directors and
executive officers.
Fiscal Year End Option Value
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options as of Options as of
Acquired on December 31, 1999 December 31, 1999(2)(3)
Name Exercise Value Realized (1) Exercisable Unexercisable Exercisable Unexercisable
----- -------- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott F. Hartman -- -- 20,000 20,000 -- --
W. Lance Anderson -- -- 20,000 20,000 -- --
Gregory T. Barmore 1,250 4,363 3,125 8,125 -- $ 3,900
Edward W. Mehrer -- -- 6,875 8,125 $11,700 3,900
Michael L. Bamburg -- -- 12,500 37,500 -- --
Rodney E. Schwatken -- -- 4,125 6,375 -- --
</TABLE>
- ---------------------
(1) The "value realized" represents the difference between the exercise price
of the option shares and the market price of the option shares on the date
the option was exercised. The value realized was determined without
considering any taxes which may have been owed.
(2) "In-the-money" options whose exercise was less than the market price of
common stock at December 31, 1999.
(3) Assuming a stock price of $3.13 per share, which was the closing price of
a share of common stock reported for the New York Stock Exchange on
December 31, 1999.
Report on Repricing of Options
On December 21, 1999, the Compensation Committee changed the exercise
price for 104,000 stock options issued to employees to $7.00 per share. Of
these, 69,000 were originally issued in 1997 with an exercise price of $18.00
per share and 35,000 in 1998 at an exercise price of $17.01 per share. The New
York Stock Exchange closing price on that date was $3.13 per share. The $7.00
options are considered granted and the $18.00 and $17.01 options are considered
cancelled during 1999. No changes were made to the vesting periods or expiration
dates. The Compensation Committee adopted the following report on repricing of
options:
The Compensation Committee finds that the repricing is necessary
because equity incentives are a significant component of the total
compensation package and play a substantial role in NovaStar Financial's
ability to retain the services of individuals essential to NovaStar
Financial's long-term financial success. Prior to the implementation of
the program, the market price of NovaStar Financial's common stock had
fallen as a result of market factors which adversely impacted NovaStar
Financial's financial results and which did not necessarily reflect the
optionees' contributions to NovaStar Financial's progress. The
Compensation Committee finds that NovaStar Financial's ability to retain
key employees would be significantly impaired unless value is restored to
their options through repricing. The Compensation Committee believes that
the program strikes an appropriate balance between the interests of the
option holders
13
<PAGE>
and those of the shareowners. The lower exercise price, although in excess
of current fair market value, make those options valuable once again to
the optionees.
Compensation Committee
Gregory T. Barmore
Edward W. Mehrer
10-Year Option Repricings
<TABLE>
<CAPTION>
Length of
Option Market Value Exercise Original Option
Date of Shares at Time of Price at Time New Exercise Term at Time of
Name Repricing Repriced Repricing of Repricing Price Repricing
---- --------- -------- --------- ------------ ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Scott F. Hartman
Chairman of the
Board, Secretary and
Chief Executive Officer -- -- -- -- -- --
W. Lance Anderson
President and Chief
Operating Officer -- -- -- -- -- --
Gregory T. Barmore
Director -- -- -- -- -- --
Edward W. Mehrer
Director -- -- -- -- -- --
Mark J. Kohlrus
Senior Vice President
and Chief Financial
Officer 12/21/99 20,000 $ 3.13 $18.00 $7.00 7 yrs 318 days
Michael L. Bamburg
Senior Vice President
and Chief Investment
Officer 12/21/99 30,000 3.13 17.01 7.00 8 yrs 38 days
Rodney E. Schwatken
Vice President, Treasurer
and Controller 12/21/99 6,000 3.13 18.00 7.00 7 yrs 318 days
</TABLE>
Employment Agreements. NovaStar Financial has entered into employment
agreements with the founders, Mr. Hartman and Mr. Anderson. Each employment
agreement provides for a term through December 31, 2001, and will be
automatically extended for an additional year at the end of each year of the
agreement, unless either party provides a prescribed prior written notice to the
contrary. Each employment agreement provides for the annual base salary
described above and for participation by the subject officer in the bonus
incentive compensation plan. Each employment agreement provides for the subject
officer to receive his annual base salary and bonus compensation to the date of
the termination of employment by reason of death, disability
14
<PAGE>
or resignation and to receive base compensation to the date of the termination
of employment by reason of a termination of employment for cause as defined in
the agreement. Each employment agreement also provides for the subject officer
to receive, if the subject officer resigns for "good reason" or is terminated
without cause after a "change in control" as those terms are defined in the
agreement, an amount, 50% payable immediately and 50% payable in monthly
installments over the succeeding twelve months, equal to three times such
officer's combined maximum base salary and actual bonus compensation for the
preceding year, subject in each case to a maximum amount of 1% of the book
equity value (exclusive of valuation adjustments) and a minimum of $360,000. In
that instance, the subject officer is prohibited from competing with NovaStar
Financial for a period of one year. In addition, all outstanding options granted
to the subject officer under the 1996 stock option plan shall immediately vest.
Section 280G of the Code may limit the deductibility of the payments to such
officer for federal income tax purposes. "Change of control" for purposes of the
agreements would include a merger or consolidation of NovaStar Financial, a sale
of all or substantially all of the assets of NovaStar Financial, changes in the
identity of a majority of the members of the Board of Directors of NovaStar
Financial (other than due to the death, disability or age of a director) or
acquisitions of more than 25% of the combined voting power of NovaStar
Financial's capital stock, subject to certain limitations. Absent a "change in
control," if NovaStar Financial terminates the officer's employment without
cause, or if the officer resigns for "good reason," the officer receives an
amount, payable immediately, equal to such officer's combined maximum base
salary and actual bonus compensation for the preceding year, subject in each
case to a maximum amount of 1% of book value (exclusive of valuation
adjustments) and a minimum of $120,000. If the officer resigns for any other
reason, there is no severance payment and the officer is prohibited from
competing with NovaStar Financial for a period of one year following the
resignation.
Certain Transactions
Transactions with Management. In May 1996, Messrs. Hartman and Anderson
formed NovaStar Mortgage, Inc. for the purpose of engaging in the non-conforming
lending business. Following NovaStar Financial's private placement, NovaStar
Mortgage began obtaining required licenses and permits, developing guidelines
for the origination of mortgage loans through its wholesale lending channel and
hiring critical senior personnel to put in place the infrastructure for its
mortgage lending and servicing operations.
Following the close of the private placement in December 1996, NovaStar
Financial moved to implement the portion of its business strategy to be
conducted through taxable affiliates. In February 1997, NFI Holding Corporation
was formed to serve as a holding company for such taxable affiliates. In March
1997, Messrs. Hartman and Anderson acquired all of the outstanding voting common
stock of NFI Holding for a total price of $20,000 and NovaStar Financial
acquired all of the outstanding non-voting preferred stock of NFI Holding for a
total price of $1,980,000. NFI Holding was additionally capitalized with
NovaStar Financial and Messrs. Hartman and Anderson contributing $6,930,000 and
$70,000, respectively, in 1999 and $990,000 and $10,000, respectively, in 1998.
The voting common stock is entitled to 1% of the dividend distributions of NFI
Holding and the preferred stock is entitled to 99% of such distributions. At the
time of acquisition of the common stock, Messrs. Hartman and Anderson entered
into an agreement of shareholders, to which NovaStar Financial is a party, which
contains certain management and control provisions and restrictions on transfer
of the common stock. The obligations of Messrs.
15
<PAGE>
Hartman and Anderson under the agreement of shareholders are secured by the
pledge of their common stock in NFI Holding.
In February 1997, NFI Holding acquired all of the outstanding common stock
of NovaStar Mortgage from Messrs. Hartman and Anderson. NovaStar Mortgage
thereby became a wholly-owned subsidiary of Holding. Through NFI Holding,
NovaStar Financial owns a beneficial interest in 99% of the future dividend
distributions attributable to NovaStar Mortgage.
NovaStar Financial and NovaStar Mortgage also entered into a loan
subservicing agreement under which NovaStar Mortgage agrees to service mortgage
loans for NovaStar Financial initially for a fixed dollar fee per loan based on
the fee in comparable subservicing arrangements. The subservicing agreement
became effective with the commencement of NovaStar Mortgage's servicing
operation in July 1997. Separate agreements have been executed for each pool of
loans serving as collateral for NovaStar Financial's collateralized mortgage
obligations.
NovaStar Financial and NovaStar Mortgage further entered into an
administrative services outsourcing agreement, dated June 30, 1997, pursuant to
which NovaStar Mortgage provides to NovaStar Financial on a fee basis certain
administrative services, including consulting with respect to the development of
mortgage loan products, loan underwriting, loan funding and quality control.
Effective April 1, 1999, NovaStar Financial entered an intercompany loan
and guarantee agreement with NovaStar Mortgage. Under the terms of this
agreement, NovaStar Mortgage pays interest on amounts it borrows from NovaStar
Financial. As of December 31, 1999 and 1998, NovaStar Mortgage had $27,663,000
and $48,486,000 in borrowings from NovaStar Financial outstanding. Interest on
the borrowings accrues at the federal funds rate plus 1.75%. In addition,
NovaStar Mortgage is required to pay guaranty fees in the amount 0.25% of the
loans sold by NovaStar Mortgage for which NovaStar Financial has guaranteed the
performance of NovaStar Mortgage.
Following is a summary of the fees, in thousands, which NovaStar Financial
paid to and received from NovaStar Mortgage:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------
1999 1998 1997
<S> <C> <C> <C>
Amounts paid to NovaStar Mortgage
Loan servicing fees ........... $ 3,886 $ 3,803 $ 505
------- ------- -------
Administrative fees ........... $ 1,258 $ 7,800 $ 3,650
Amounts received from NovaStar Mortgage:
Intercompany interest income (1,113) -- --
Purchase commitment fees ...... -- (5,117) --
------- ------- -------
Net fees paid ........ $ 145 $ 2,683 $ 3,650
======= ======= =======
</TABLE>
Indebtedness of Management. In connection with the initial formation and
capitalization of NovaStar Financial, Mssrs. Hartman and Anderson acquired
216,666 shares of common stock and warrants to acquire 216,666 additional shares
for $15.00 in exchange for forgivable promissory notes. Pursuant to the terms of
the original warrant agreement, the effective exercise
16
<PAGE>
price of the warrants was reduced to $11.62 upon NovaStar Financial's subsequent
issuance of warrants to unrelated entities at exercise prices lower than $15.00.
The notes bear interest at 8% and are secured by the shares and warrants.
Interest is payable quarterly and the notes mature December 31, 2001. The
principal is payable in three equal tranches. Payment of principal on each
tranche will be forgiven if NovaStar Financial meets certain incentive targets.
During 1997, the first incentive target was met resulting in the forgiveness of
one-third of the note and the recognition of compensation expense in 1997 of
$1,083,000. The incentive targets were not met in 1998 or 1999 and, accordingly,
no debt forgiveness occurred in those years.
During 1998, the founders exercised options to acquire 289,332 shares of
common stock in exchange for non-recourse promissory notes aggregating
$4,340,000. The notes bear interest at one-month LIBOR plus 1%, are secured by
the shares of common stock and mature at the earlier of the founders' employment
termination or the sale of the stock.
The notes have been recorded in the consolidated balance sheets as a
contra-equity account. Accrued interest related to the forgivable notes is
recorded as amounts due from founders. The accrued interest related to the
non-recourse notes is recorded as an additional component of the contra-equity
account. The following table summarizes amounts of these notes as of December 31
(in thousands).
1999 1998
Notes receivable from founders:
Forgivable ............................ $2,167 $2,167
Non-recourse .......................... 4,340 4,340
Accrued interest ...................... 339 142
------ ------
Total .................................. $6,846 $6,649
====== ======
NovaStar Financial advanced funds to the founders for the payment of their
personal tax liability arising from the forgiveness of the first tranche of the
forgivable notes, as discussed above. The founders have issued notes payable to
NovaStar Financial for the repayment of the tax liability, interest accrued on
the forgivable notes through December 31, 1997 and notes payable for the
founders' contributions to NFI Holding capital in 1999. Amounts due from
founders outstanding as of December 31, 1999 and 1998 are shown below (in
thousands).
1999 1998
Amounts due from founders:
Founders' personal tax liability ...................... $ 584 $ 584
Interest on notes receivable from founders
through December 31, 1997 ........................... 260 260
Accrued interest on amounts due from founders ......... 239 117
Advances for capitalization of NFI Holding ............ 70 --
------ ------
Amounts due from founders .............................. $1,153 $ 961
====== ======
Interest income recorded by NovaStar Financial related to the notes
aggregated $496,000, $441,000 and $260,000 in 1999, 1998 and 1997, respectively.
Interest paid by the founders aggregated $177,000 and $199,000 in 1999 and 1998,
respectively.
17
<PAGE>
Certain Business Relationships with Large Securityholders. In connection
with a commitment from General Electric Capital Corporation to purchase units in
the private placement of units in 1996, NovaStar Financial agreed that so long
as GE Capital owns at least 10% of the outstanding common stock, assuming full
exercise of all warrants, GE Capital will have the right to appoint one director
(of up to six authorized directors) or, alternatively, to have board observation
rights so long as it maintains more than 20% of its initial investment in
NovaStar Financial. The current director serving pursuant to these provisions is
Bart Johnson, who replaced Jenne K. Britell in 1998. GE Capital's common stock
ownership is currently below the 10% threshold.
On February 12, 1999, NovaStar Financial entered into several lending
arrangements with First Union National Bank for one year. The warehouse line of
credit and master repurchase agreements with First Union allow NovaStar
Financial to borrow up to $75 million and $300 million, respectively, and are
secured by mortgage loans. At the same time, two additional lending arrangements
were executed with First Union whereby NovaStar Financial can borrow up to $20
million secured by the residual interests of asset-backed bonds. NovaStar
Financial issued First Union 350,000 warrants to purchase common stock at
$6.9375 per share, the closing price on February 11, 1999, in exchange for
186,667 existing warrants at $15.00 per share.
On December 17, 1999, NovaStar Financial amended several lending
arrangements with First Union Corporation, including the Mortgage Loan
Warehousing Agreement dated as of February 20, 1997 between NovaStar Financial,
NovaStar Mortgage, Inc. and First Union Corporation, the Master Repurchase
Agreement, dated as of February 12, 1999, between NovaStar Financial, NovaStar
Mortgage, Inc. and First Union Corporation, together with the Addendum thereto
dated as of February 12, 1999, and the Master Repurchase Agreement, dated as of
February 12, 1999, between NovaStar Certificates Financing Corporation and First
Union Corporation, together with the Addendum thereto dated as of February 12,
1999. These amendments extended existing warehouse and securitization facilities
beyond the February 12, 2000 maturity date to June 1, 2000, reduced the
securitization facility from $300 million to $175 million and resulted in an
increased commitment to $25 million on the residential financing facility with a
term of two years.
On March 29, 1999, NovaStar Financial completed the private placement and
issuance of 4,285,714 shares of Class B 7% Cumulative Convertible Preferred
Stock at a price of $7.00 per share, resulting in total proceeds of
approximately $30 million, which includes approximately $25 million acquired by
Wallace R. Weitz & Company. Weitz's present beneficial ownership of NovaStar
Financial is 52% which includes 1.5 million shares of common stock outstanding,
1.3 million of the 1996 warrants and over 3.5 million shares of convertible
preferred stock. Each share of the preferred stock is convertible, at the option
of the holder, into one share of common stock and is redeemable at par by
NovaStar Financial at any time after March 31, 2002.
On March 10, 1999, NovaStar Financial issued to GMAC/Residential Funding
Corporation 812,731 warrants to purchase NovaStar Financial common stock at a
price of $4.5625 per share, the closing price of NovaStar Financial's common
stock on October 12, 1998. These warrants were issued pursuant to the terms of a
credit facility entered into on October 13, 1998. These warrants will expire on
October 13, 2003. In connection with this same warrant agreement, NovaStar
Financial issued to GMAC/Residential Funding Corporation 364,982 warrants to
purchase NovaStar Financial common stock at the effective price of the 1996
warrants, which is $11.62 per share, which are exercisable until February 3,
2001.
18
<PAGE>
On December 29, 1999, NovaStar Financial entered into certain lending
arrangements with GMAC/Residential Funding Corporation secured by mortgage loans
and pledged securities. Under the terms of all the agreements required in
connection with a one-year Revolving Warehouse Line of Credit, NovaStar
Financial and NovaStar Mortgage, with NFI Holding as guarantor, can borrow $50
million to finance the acquisition of residential mortgage loans. Obligations
under this arrangement bear interest at a rate indexed to one-month LIBOR.
Notwithstanding anything to the contrary set forth in any of NovaStar
Financial's previous or future filings under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, that might
incorporate future filings, including this proxy statement, in whole or in part,
the following report and the performance graph shall not be incorporated by
reference into any such filings.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors, which is comprised
exclusively of independent outside directors, administers NovaStar Financial's
executive compensation program.
NovaStar Financial's compensation programs are designed to help attract
and retain qualified and motivated individuals that will provide the leadership
required to achieve our strategic goals, which includes sustaining long-term
value based growth for stockholders. Our philosophy is to link management's
compensation to NovaStar Financial's profitability (return on stockholder
equity, or ROE) and stock price. Our philosophy is also intended to encourage
stock ownership by not only management, but all levels of employees. We believe
a significant percentage of total executive compensation should be provided
through incentive equity compensation that aligns management's interests with
those of stockholders. Our goal is to make our executives' personal net worth
heavily dependent on appreciation in the value of NovaStar Financial stock over
the long-term and their income dependent on NovaStar Financial's dividends.
NovaStar Financial strives to integrate (1) reasonable levels of base
salary, (2) annual incentive equity bonus awards tied to operating performance,
and (3) stock option awards, to ensure management has a continuing stake in the
long-term success of NovaStar Financial.
The Committee believes that senior management's base salaries are
relatively low as compared to other comparable companies with whom NovaStar
Financial competes for management personnel. However, these executives have
significant compensation potential if there are substantial returns generated to
stockholders. Executive officers are eligible to receive equity-based
compensation through the incentive bonus plan. The bonus is paid annually
one-half in cash and one-half in common stock. The program awards bonuses to
executive officers out of a total pool determined by stockholder return on
equity. The bonus pool is determined as follows:
<TABLE>
<CAPTION>
ROE in excess of Base Rate Bonus as a percent of Average Equity
- -------------------------- ------------------------------------
<S> <C>
Greater than 0% but less than 6% 10% x (Actual ROE - Base Rate)
Greater than 6% (10% x 6%) + 15% x (Actual ROE - (Base Rate + 6%)
</TABLE>
Base Rate is the average Ten Year U.S. Treasury Rate plus 4%
19
<PAGE>
Under the 1996 stock option plan, annual grants of stock options are
awarded to officers and other key employees to retain and motivate such persons
to sustain and improve long-term stock performance. Stock options are granted at
the prevailing market value and have value to the holders only if NovaStar
Financial's stock price increases. Typically, grants become exercisable in four
equal annual increments.
Compensation Committee
Gregory T. Barmore
Edward W. Mehrer
PERFORMANCE GRAPH
The following graph presents a total return comparison of NovaStar
Financial's common stock, since the initial public offering on October 30, 1997
through December 31, 1999, to the S&P Composite-500 Stock Index and the
Bloomberg Mortgage REIT Index. The total returns reflect stock price
appreciation and the value of dividends. The information has been obtained from
sources believed to be reliable but neither its accuracy nor its completeness is
guaranteed. The total return performance shown on the graph is not necessarily
indicative of future total return performance.
Total Return Comparison Since the Initial Public Offering
Through December 31, 1999
[GRAPHIC OMITTED]
$100 invested on October 31, 1997 in stock or index, including investment
of dividend.
------------------------------------------------------------------------
10/30/97 12/31/97 12/31/98 12/31/99
------------------------------------------------------------------------
NovaStar Financial, Inc. $100.00 $ 87.85 $ 34.38 $ 17.39
------------------------------------------------------------------------
S&P Composite-500 Index $100.00 $106.10 $134.40 $160.64
------------------------------------------------------------------------
Bloomberg Mortgage REIT Index $100.00 $ 83.22 $ 62.82 $ 49.92
------------------------------------------------------------------------
20
<PAGE>
ITEM 2 - RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected the accounting firm of KPMG LLP to
audit NovaStar Financial's financial statements for, and otherwise act as the
independent certified public accountants with respect to, the year ending
December 31, 2000. The Board of Director's selection of KPMG LLP for the current
fiscal year is being presented to stockholders for ratification at the annual
meeting. To NovaStar Financial's knowledge, neither KPMG LLP nor any of its
partners has any direct financial interest or any material indirect financial
interest in NovaStar Financial, or has had any connection since the inception of
NovaStar Financial in the capacity of promoter, underwriter, voting trustee,
director, officer or employee. A representative of KPMG LLP is expected to be
present at the annual meeting, will have the opportunity to make a statement if
he or she has the desire to do so and will be available to respond to
appropriate questions from stockholders.
The Board of Directors recommends that the shareholders vote "FOR" the
proposal to select KPMG LLP as independent certified public accountants.
ITEM 3 - PROPOSAL TO APPROVE AN AMENDMENT TO THE BYLAWS
At its meeting February 2, 2000, the Board of Directors approved
amendments to the NovaStar Financial bylaw provisions relating to the call of
special meetings of stockholders and the required advance notice to NovaStar
Financial of stockholder proposals. These changes were consistent with the 1999
revisions to the Maryland General Corporation Law. One such amendment which
would require a majority of the Board rather than a single director in order to
call a special meeting needs the approval of 2/3 of the votes entitled to be
cast. The proposed amendment, certain provisions on the Maryland General
Corporation Law and other provisions of the NovaStar Financial charter and
bylaws may have the effect of delaying, deterring or preventing a takeover
attempt or other change in control which would be beneficial to shareholders and
might otherwise result in a premium over prevailing market prices. The Board of
Directors recommends that the stockholders approve the amendment.
Section 2 of Article I of the bylaws of NovaStar Financial would be
amended as follows:
SECTION 2. Special Meetings. Special meetings of the stockholders
for any purpose or purposes may be called at any time by the President,
the Board of Directors or the written request of stockholders entitled to
cast a majority of the votes which all stockholders are entitled to cast
at the particular meeting, addressed to the Secretary and then the
Secretary shall proceed to call a special meeting only as may be required
by law.
The Board of Directors recommends that the shareholders vote "FOR" the
proposal to amend the bylaws.
21
<PAGE>
OTHER BUSINESS
The Board of Directors knows of no other matters which may be presented
for stockholder action at the meeting. However, if other matters do properly
come before the meeting, it is intended that the persons named in the proxies
will vote upon them in accordance with their best judgments.
LEGAL PROCEEDINGS
NovaStar Financial occasionally becomes involved in litigation arising in
the normal course of business. Management believes that any liability with
respect to such legal actions, individually or in the aggregate, will not have a
material adverse effect on NovaStar Financial's financial position or results of
operations.
STOCKHOLDER PROPOSALS -2000 ANNUAL MEETING
Stockholders are entitled to present proposals for action at a forthcoming
stockholders' meeting if they comply with the requirements of the proxy rules.
Any proposals intended to be presented at the 2001 annual meeting of
stockholders must be received at NovaStar Financial's offices on or before
November 18, 2000 in order to be considered for inclusion in the proxy
statement and form proxy relating to such meeting. In addition, the NovaStar
Financial bylaws provide that any stockholder wishing to bring any matter before
the annual meeting must deliver notice to the Secretary at the principal
executive offices of NovaStar Financial not less than 90 days before the first
anniversary of the mailing date of the notice of the preceding year's annual
meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Scott F. Hartman
Chairman of the Board and Secretary
Westwood, Kansas
March 17, 2000
22
<PAGE>
- --------------------------------------------------------------------------------
NOVASTAR FINANCIAL, INC.
REVOCABLE PROXY
For Annual Meeting of Shareholders on May 25, 2000
This Proxy is solicited on Behalf of the Board of Directors
The undersigned hereby appoints W. Lance Anderson, Scott F. Hartman, or
Rodney E. Schwatken, and each of them, with full power of substitution to act as
attorneys and proxies for the undersigned to vote, as designated on the reverse
side of this proxy, all shares of the common stock of NovaStar Financial, Inc.
which the undersigned is entitled to vote at NovaStar Financial's 2000 Annual
Meeting of Shareholders to be held at the Sheraton Suites, 770 West 47th Street,
Kansas City, MO on May 25, 2000 at 10:00 am., Central Daylight Time and at any
all adjournments thereof.
The Board recommends a vote FOR each of the listed items
Item 1 - ELECTION OF DIRECTORS |_| FOR the nominee |_| WITHHOLD authority to
listed below vote for the nominee
listed below.
Nominee: Edward W. Meheer
Item 2 - RATIFICATION OF KPMG LLP as independent public accountants for the
fiscal year ending December 31, 2000.
FOR AGAINST ABSTAIN
|_| |_| |_|
Item 3 - PROPOSAL TO APPROVE AN AMENDMENT TO THE BYLAWS
FOR AGAINST ABSTAIN
|_| |_| |_|
(Please See Reverse Side)
<PAGE>
- --------------------------------------------------------------------------------
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE NOMINEES FOR DIRECTOR AND FOR EACH PROPOSAL IN THEIR
DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE MEETING. AT THE PRESENT TIME THE BOARD OF DIRECTORS
KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
DATE:___________________________,2000
_____________________________________
SIGNATURE
_____________________________________
SIGNATURE
(Please sign exactly as name appears
on stock certificate. Where stock is
registered jointly, all others must
sign. Corporate owners should sign
full corporate name by an authorized
person. Executors, administrators,
trustees, or guardians should
indicate their status when signing.)
Please Complete, sign and date this
proxy and return it in the enclosed
envelope.
