SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
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Novastar Financial, Inc.
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[LOGO]
NOVASTAR FINANCIAL, INC.
1901 West 47th Place, Suite 105
Westwood, Kansas 66205
(913) 362-1090
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To our stockholders:
You are cordially invited to attend the annual meeting of stockholders of
NovaStar Financial, Inc., a Maryland corporation, to be held on Thursday, May
24, 2001 at 10:00 a.m., Central Daylight Time, at NovaStar Financial, Inc.
Corporate Headquarters, 1901 West 47th Place, Suite 100, Westwood, Kansas, for
the following purposes:
1. The election of the Class II directors of NovaStar Financial's Board of
Directors to serve until NovaStar Financial's annual meeting of
stockholders to be held in 2004 or until each such director's successor is
elected and qualified;
2. Ratification of the selection of KPMG LLP as NovaStar Financial's
independent public accountants for the fiscal year ended December 31, 2001;
and
3. To transact such other business as may properly come before the annual
meeting.
A proxy statement describing the matters to be considered at the annual
meeting is attached to this notice. The Board of Directors has fixed the close
of business on March 13, 2001 as the record date for determination of
stockholders entitled to notice of, and to vote at, the annual meeting.
In order that your shares may be represented at the annual meeting, please
date, execute and promptly mail the enclosed proxy in the accompanying
postage-paid envelope. A proxy may be revoked by a shareholder by notice in
writing to the Secretary of NovaStar Financial at any time prior to its use, by
presentation of a later-dated proxy, or by attending the annual meeting and
voting in person.
By Order of the Board of Directors
/s/ Scott F. Hartman
-----------------------------------
SCOTT F. HARTMAN
Westwood, Kansas Chairman of the Board and Secretary
March 19, 2001
YOUR VOTE IS IMPORTANT
PLEASE PROMPTLY MARK DATE, SIGN, and RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE
TABLE OF CONTENTS
PAGE
----
ANNUAL MEETING INFORMATION
Solicitation of Proxies ........................................................................................ 1
Voting Rights .................................................................................................. 1
Voting of Proxies .............................................................................................. 2
Revocability of Proxy .......................................................................................... 2
Annual Report .................................................................................................. 2
SECURITIES OWNERSHIP
Beneficial Ownership of Common Stock by Large Securityholders .................................................. 3
Beneficial Ownership of Common Stock by Directors and Management ............................................... 4
Compliance with Section 16(a) of the Securities Exchange Act of 1934 ........................................... 4
ITEM 1 - ELECTION OF DIRECTORS
Nominees and Directors ......................................................................................... 6
Compensation of Directors ...................................................................................... 7
Compensation Committee Interlocks .............................................................................. 7
Committees of the Board and Meeting Attendance ................................................................. 7
Audit Committee Report ......................................................................................... 8
Compensation Committee Report .................................................................................. 9
Performance Graph .............................................................................................. 10
Management of NovaStar Financial ............................................................................... 11
Executive Compensation ......................................................................................... 12
Certain Transactions ........................................................................................... 15
ITEM 2 - RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
Audit Fees ..................................................................................................... 18
Financial Information Systems Design and Implementation Fees ................................................... 18
All Other Fees ................................................................................................. 18
OTHER BUSINESS .......................................................................................................... 19
STOCKHOLDER PROPOSALS - 2002 ANNUAL MEETING ............................................................................. 19
APPENDIX A - AUDIT COMMITTEE CHARTER .................................................................................... A-1
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 24, 2001
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 24, 2001
at 10:00 a.m., Central Daylight Time, at the NovaStar Financial, Inc. Corporate
Headquarters, 1901 West 47th Place, Suite 100, Westwood, Kansas. This proxy
statement, the accompanying proxy card and the notice of annual meeting are
being provided to stockholders beginning on or about March 22, 2001.
ANNUAL MEETING 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 13, 2001, the record date, are entitled
to notice of, and to vote at, the annual meeting. On that date, 5,721,941 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 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, and (2) 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 the matters presented to this annual
meeting.
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, and FOR the appointment of KPMG LLP as
independent public accountants for the fiscal year ending December 31, 2001.
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 2000 annual report including financial statements for the year ended
December 31, 2000, 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.
2
SECURITIES OWNERSHIP
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, 2001 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) ............................... 5,069,962 54.58%
1125 South 103rd Street, Suite 600
Omaha, NE 68124-6008
McCarthy Group, Inc.(3) ..................................... 1,584,925 24.64%
1125 South 103rd Street, Suite 450
Omaha, NE 68124
GMAC/Residential Funding Corporation(4) ..................... 812,731 12.45%
8400 Normandale Lake Boulevard
Bloomington, MN 55437
First Union Corporation(5) .................................. 536,667 8.84%
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 and 3,571,429 shares of common
stock issuable upon conversion of preferred stock.
(3) Consists of 870,640 shares of common stock and 714,285 shares of common
stock issuable upon conversion of preferred stock.
(4) Consists of 812,731 shares of common stock issuable upon the exercise of
warrants.
(5) Consists of 186,667 shares of common stock and 350,000 shares of common
stock issuable upon the exercise of warrants.
3
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, 2001 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 COMMON STOCK(1)
NAME OF BENEFICIAL OWNER SHARES PERCENT
------------------------ ------ -------
Scott F. Hartman(2) .................................................. 272,155 4.74%
W. Lance Anderson(3) ................................................. 245,155 4.27%
Michael L. Bamburg(4) ................................................ 100,888 1.75%
Edward W. Mehrer(5) .................................................. 30,941 *
Gregory T. Barmore(6) ................................................ 25,373 *
Art N. Burtscher(7) .................................................. -- --
Rodney Schwatken(8) .................................................. 9,650 *
All directors and executive officers as a group (7 persons) .......... 674,162 11.74%
- -----------------
* Less than 1%.
(1) Assuming no exercise of the warrants and exercisable options (except by the
listed securityholder named, separately).
(2) Consists of 242,155 shares of common stock, including 17,000 of common
stock owned jointly with his wife and 30,000 shares of common stock
issuable upon the exercise of options.
(3) Consists of 215,155 shares of common stock, and 30,000 shares of common
stock issuable upon the exercise of options.
(4) Consists of 68,388 shares of common stock (owned individually by Mr.
Bamburg or by his wife or jointly with his wife) and 32,500 shares of
common stock issuable upon the exercise of options.
(5) Consists of 24,066 shares of common stock, including 2,000 shares owned by
his wife and 6,875 shares of common stock issuable upon the exercise of
options.
(6) Consists of 9,748 shares of common stock and 5,625 shares of common stock
issuable upon the exercise of options.
(7) Does not include 1,584,925 shares of common stock and convertible preferred
stock owned by McCarthy Group, Inc., which wholly owns McCarthy Group Asset
Management of which Mr. Burtscher is President.
(8) Consists of 2,900 shares of common stock and 6,750 shares of common stock
issuable upon the exercise of options
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. 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 2000, all Section 16(a) filing
requirements were satisfied.
4
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 II directors, whose term will expire in
three years, are to be elected at this year's annual meeting. The nominees for
Class II directors of the Board of Directors are set forth below. In addition,
in March 2001 the Board of Directors filled a vacancy on the Board and that
individual is also a nominee at this year's annual meeting, standing for
election as a Class I director, whose term will expire in two years.
The proxy holders intend to vote all proxies received by them in the
accompanying form for the nominees 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 nominees 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 nominees listed below
already serve as directors 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 nominees identified below:
NAME POSITION WITH NOVASTAR FINANCIAL
---- --------------------------------
W. Lance Anderson Director, President and Chief
Operating Officer
Gregory T. Barmore Director
Art N. Burtscher Director
5
NOMINEES AND DIRECTORS
CLASS II NOMINEES - TERMS EXPIRING 2004
W. LANCE ANDERSON, age 40, 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 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 59, 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 I NOMINEE - TERM EXPIRING 2003
ART N. BURTSCHER, age 50, was appointed to the Board of Directors in March
2001 to fill a vacancy on the Board of Directors. In 2000, Mr. Burtscher became
President of McCarthy Group Asset Management, a wholly-owned subsidiary of
McCarthy Group, Inc., a large holder of NovaStar Financial, Inc. securities.
From 1988 to 2000, Mr. Burtscher served as President and Chief Executive Officer
of Great Western Bank in Omaha, Nebraska. Mr. Burtscher has agreed to serve on
the Audit Committee.
CLASS III DIRECTOR - TERM EXPIRING 2002
SCOTT F. HARTMAN, age 41, 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
6
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.
CLASS I DIRECTOR- TERM EXPIRING 2003
EDWARD W. MEHRER, age 62, 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.
COMPENSATION OF DIRECTORS
NovaStar Financial paid independent directors, who are not employed by
NovaStar Financial, $10,000 per year plus $500 for each meeting attended in
person. Based upon a review of compensation practices within the industry, in
January 2001 this amount was increased to $15,000 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. 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.
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.
COMMITTEES OF THE BOARD AND MEETING ATTENDANCE
The Board of Directors has two committees, Audit and Compensation. During
2000, there were five meetings of the Board of Directors, four meetings of the
Audit Committee and six meetings of the Compensation Committee. Each director
participated in at least 75% of the meetings of the Board and the committees on
which he served.
7
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 reports of the Audit Committee and the Compensation Committee and
the performance graph shall not be incorporated by reference into any such
filings.
AUDIT COMMITTEE REPORT
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. The Audit Committee is
composed of two directors, each of whom is independent as defined by the listing
standards of the New York Stock Exchange. The Board has adopted a written Audit
Committee charter, a copy of which is included as an appendix to this proxy
statement.
The Audit Committee has reviewed and discussed with management and the
independent accountants the Company's audited financial statements for fiscal
2000. In addition, the Committee has discussed with the independent accountants
the matters required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees."
The Audit Committee has received from the independent accountants written
disclosures and a letter concerning the independent accountants' independence
from the Company, as required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees." These disclosures have been
reviewed by the Committee and discussed with the independent accountants. The
Audit Committee has considered whether the provision of non-audit services and
financial information systems design and implementation services by KPMG LLP is
compatible with maintaining KPMG LLP's independence.
Based on these reviews and discussions, the Committee has recommended to
the Board that the audited financial statements be included in the Company's
Annual Report on Form 10-K for fiscal 2000 for filing with the Securities and
Exchange Commission.
Audit Committee
Gregory T. Barmore
Edward W. Mehrer
Art N. Burtscher
8
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 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 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.
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
9
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, 2000, 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, 2000
[PERFORMANCE GRAPH]
$100 invested on October 31, 1997 in stock or index, including investment
of dividend.
12/31/97 12/31/98 12/31/99 12/31/00
---------- ---------- ---------- ----------
NovaStar Financial, Inc. $ 87.85 $ 34.38 $ 17.39 $ 20.83
S&P Composite-500 Index 106.10 134.40 160.64 144.35
Bloomberg Mortgage REIT Index 83.22 62.82 49.92 50.34
10
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 and Chief 41
Executive Officer
W. Lance Anderson Director, President and Chief Operating Officer 40
Michael L. Bamburg Senior Vice President and Chief Investment 38
Officer
Rodney E. Schwatken Vice President, Treasurer and Controller (Chief 37
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 38, 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 37, 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.
11
EXECUTIVE COMPENSATION
EXECUTIVE OFFICER SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
-------------
OTHER SECURITIES
ANNUAL UNDERLYING DER'S ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#) $(3) COMPENSATION
- ----------------- ------ --------- --------- ------------ ---------- ------ -------------
Scott F. Hartman 2000 $280,000 $ 95,000 -- 100,000 -- --
Chairman of the Board, 1999 $280,000 -- -- -- $50,633(1)
Secretary and Chief 1998 $185,000 -- -- -- $94,033(1)
Executive Officer
W. Lance Anderson 2000 $280,000 $ 95,000 -- 100,000 -- --
President and Chief 1999 $280,000 -- -- -- $50,633(1)
Operating Officer 1998 $185,000 -- -- -- $94,033(1)
Michael L. Bamburg 2000 $190,000 $142,000 -- 10,000 -- --
Senior Vice President and 1999 $190,000 $114,000 -- 30,000(4) --
Chief Investment Officer 1998(2) $128,333 $105,000 -- 20,000 -- --
Rodney E. Schwatken 2000 $ 85,000 $ 32,000 -- 5,000 -- --
Vice President, Treasurer 1999 $ 80,000 $ 22,800 -- 6,000(4) --
and Controller 1998 $ 75,000 $ 16,875 -- 4,500 -- --
- ---------------------
(1) Represents dividend payments 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) 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.
(3) None of the options listed were granted with DERs.
(4) Pursuant to resolutions of the Compensation Committee dated December 21,
1999, certain options issued to employees were repriced to $7.00 per share.
Options granted" in 1999 replace 1997 options canceled" for Mr. Schwatken
and 1998 options canceled" for Mr. Bamburg.
STOCK OPTION PLAN. NovaStar Financial's 1996 stock option plan provides for
the grant of qualified incentive stock options or ISOs, non-qualified stock
options or NQSOs, deferred stock, restricted stock, performance shares, stock
appreciation and limited stock awards, and dividend equivalent rights or DERs.
ISOs may be granted to the officers and employees. NQSOs and awards may be
granted to the directors, officers, employees, agents and consultants. Unless
previously terminated by the Board of Directors, the plan will terminate on
September 1, 2006.
All options have been granted at exercise prices greater than or equal to
the estimated fair value of the underlying stock. Outstanding options vest over
four years and expire ten years after the date of grant.
12
The following table sets forth information concerning stock options granted
during 2000 for each of the directors and executive officers.
INDIVIDUAL GRANTS
----------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
OPTIONS EXERCISE ANNUAL RATES OF STOCK
GRANTED TO PRICE OR PRICE APPRECIATION
NO. EMPLOYEES BASE FOR OPTION TERM(1)
NO. DURING THE PRICE EXPIRATION ---------------------------
NAME GRANTED YEAR ($/SHARE) DATE 5% 10%
------ --------- ---------- ----------- -------------- ----------- -----------
W. Lance Anderson 100,000 40% $3.75 12/20/10 $610,835 $972,653
Michael L. Bamburg 10,000 4% 3.75 12/20/10 61,084 97,265
Gregory T. Barmore 2,500 1% 3.06 5/26/10 12,461 19,842
Scott F. Hartman 100,000 40% 3.75 12/20/10 610,835 972,653
Edward W. Mehrer 2,500 1% 3.06 5/26/10 12,461 19,842
Rodney E. Schwatken 5,000 2% 3.75 12/20/10 30,542 48,633
----- ----
Total to Directors and
Executive Officers 220,000 88%
======= ====
Total shares granted 249,500
=======
- --------------
(1) Options granted to non-employee directors and options granted to employees
were priced at the market price of NovaStar Financial's common stock on the
NYSE at the date of grant. The assumed annual rates represent the potential
appreciation in value over the exercise price.
The following table sets forth certain information with respect to the
value of the options as of December 31, 2000 held by the named directors and
executive officers.
FISCAL YEAR END OPTION VALUE
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE- MONEY
SHARES OPTIONS AS OF OPTIONS AS OF
ACQUIRED ON VALUE DECEMBER 31, 2000 DECEMBER 31, 2000(2)(3)
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----- --------- ------------- ---------- ------------ ----------- -----------
Scott F. Hartman -- -- 30,000 110,000 -- --
W. Lance Anderson -- -- 30,000 110,000 -- --
Gregory T. Barmore 1,250 4,675 5,625 6,875 -- $1,725
Edward W. Mehrer 3,750 12,150 6,875 6,875 $4,675 1,725
Michael L. Bamburg -- -- 25,000 25,000 -- --
Rodney E. Schwatken -- -- 6,750 8,750 -- --
- ---------------------
(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, 2000. (3) Assuming a stock price of $3.75 per
share, which was the closing price of a share of common stock reported for
the New York Stock Exchange on December 31, 2000.
13
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 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.
14
CERTAIN TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT. 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. The REIT Modernization Act, enacted December 15, 1999,
permits a REIT to own, after December 31, 2000, 100% of the outstanding voting
securities of a taxable subsidiary. Previously, to comply with REIT rules,
NovaStar Financial, Inc. owned all of the preferred stock of its taxable
affiliate NFI Holding which represented a nonvoting 99% economic interest in NFI
Holding. The common voting stock of NFI Holding was owned by the two founders of
NovaStar Financial, Scott F. Hartman and W. Lance Anderson. Effective January 1,
2001, NovaStar Financial acquired the common voting stock of NFI Holding from
the two founders for $370,000. Following the acquisition of the common voting
stock of NFI Holding, NovaStar Financial exchanged all of its preferred stock
for additional common voting stock of NFI Holding. As a result, NovaStar
Financial now owns 100% of the common voting stock of NFI Holding. NovaStar
Financial's consolidated financial statements beginning with fiscal year 2001
will include NFI Holding as a consolidated wholly-owned subsidiary.
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. 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 NFI Holding.
NovaStar Financial and NovaStar Mortgage 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, 2000, 1999
15
and 1998, NovaStar Mortgage had $2,729,000, $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:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
Amounts paid to NovaStar Mortgage
Loan servicing fees............................................... $2,502 $3,886 $3,803
====== ====== ======
Administrative fees............................................... $625 $1,258 $7,800
Amounts received from NovaStar Mortgage:
Intercompany interest income...................................... (395) (1,113)
Purchase commitment fees.......................................... -- -- (5,117)
------
Guaranty, commitment, loan sale and
securitization fees............................................. (2,025) -- --
Net fees paid....................................................... $ 82 $ 145 $2,683
====== ====== ======
INDEBTEDNESS OF MANAGEMENT. In related transactions approved by the Audit
and Compensation Committees of the Board of Directors, NovaStar Financial, Inc.
restructured the promissory notes given in connection with the initial issuance
of NFI Holding common stock and three other outstanding promissory notes given
by each of the founders arising out of the acquisition of units in our 1997
private placement. NovaStar Financial acquired 72,222 shares of its common stock
held by the founders at an aggregate purchase price of $270,833 ($3.75 per
share). The promissory notes, aggregating to $1,541,267, were cancelled in
exchange for the proceeds of the two stock sales (totaling $640,833) and new
10-year nonrecourse noninterest-bearing promissory notes executed by Mr. Hartman
and Mr. Anderson. Finally, NovaStar Financial accepted the return of 288,332
shares of common stock issued upon the exercise of options by Mr. Hartman and
Mr. Anderson in satisfaction of indebtedness of $4,339,980 incurred in
connection with that exercise, with $492,774 of accrued interest added to the
principal amount of the 10-year promissory notes.
The new 10-year notes aggregate to $1,393,208. The founders have each
pledged 72,222 shares of NovaStar Financial common stock as security for each
note and the notes will be forgiven in equal annual installments over a 10-year
period so long as the founders remain in the employ of NovaStar Financial. A
bonus will be paid in the amount of personal tax liability resulting from the
forgiveness of debt in excess of the after-tax value to each founder of
dividends paid on the common stock securing the note. In addition, the notes
will be forgiven in the event of a change of control of NovaStar Financial,
termination other than for cause or resignation for good reason as those terms
are defined in each founder's employment agreement. There is no financial impact
to NovaStar Financial from these transactions for the year ending December 31,
2000. If the notes are forgiven over the anticipated 10-year period, there will
be an annual charge to earnings of $139,321 plus any personal tax liability
bonuses.
16
CERTAIN BUSINESS RELATIONSHIPS WITH LARGE SECURITYHOLDERS. 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 54.58% which includes 1.5 million shares of common stock
outstanding 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.
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
17
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.
ITEM 2 - RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon recommendation of its Audit Committee, 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, 2001. 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.
AUDIT FEES
The aggregate fees billed by KPMG LLP for professional services rendered
for the audit of NovaStar Financial's annual financial statements for the fiscal
year ended December 31, 2000 and for the reviews of the financial statements
included in NovaStar Financial's Quarterly Reports on Form 10-Q for that fiscal
year were $108,000.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
There were no professional services rendered for information technology
services relating to financial information systems design and implementation
during 2000.
ALL OTHER FEES
The aggregate fees billed by KPMG LLP for services rendered to NovaStar
Financial, other than the services described above for the fiscal year ended
December 31, 2000 were approximately $87,075.
18
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.
STOCKHOLDER PROPOSALS - 2002 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 2002 annual meeting of
stockholders must be received at NovaStar Financial's offices on or before
November 20, 2001 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
Scott F. Hartman
Chairman of the Board and Secretary
Westwood, Kansas
March 19, 2001
19
APPENDIX A
NOVASTAR FINANCIAL, INC.
AUDIT COMMITTEE CHARTER
APRIL 26, 2000
I. ORGANIZATION
A. The Audit Committee is a committee of the Board of Directors.
B. The Audit Committee must be composed of three or more directors who
are independent of the Company's management and are free of any
relationship that, in the opinion of the Board of Directors, would
interfere with their exercise of independent judgment as a Audit
Committee member. All members of the Audit Committee shall have a
working familiarity with basic finance and accounting practices, and
at least one member of the Audit Committee shall have accounting or
related financial management expertise.
C. The members of the Audit Committee shall be elected by the Board of
Directors at the annual organizational meeting of the Board to serve
until their successors shall be duly elected and qualified. Unless a
Chair is elected by the full Board, the members of the Audit Committee
may designate a Chair by majority vote of the full Audit Committee
membership.
II. MEETINGS
A. The Audit Committee shall meet at least four times annually, or more
frequently as circumstances dictate.
III. STATEMENT OF POLICY
A. The Audit Committee provides assistance to the Board of Directors in
fulfilling their responsibilities to shareholders and the investment
community relating to corporate accounting and reporting practices of
the Company.
IV. RESPONSIBILITIES
A. The Audit Committee will annually, or more frequently as circumstances
warrant:
1. Review the performance of the independent accountants and make
recommendations to the Board of Directors regarding the
appointment or termination of the independent accountants.
A-1
2. Discuss with the independent accountants all significant
relationships the auditors have with the Company, including
management consulting services provided and related fees
received.
3. Meet with management and independent accountants to review
adequacy and effectiveness of the accounting and financial
processes and controls of the Company, including controls and
security relating to computerized information systems, and elicit
any recommendations for the improvement of such internal control
procedures.
4. Inquire of management and the independent accountants about
significant risks or exposures and assess the steps management
has taken to minimize such risks.
B. Prior to their release, the Audit Committee will review with
management and the independent accountants the annual and quarterly
financial statements, including quarterly and annual filings with the
Securities and Exchange Commission.
C. At the conclusion of each audit, the Audit Committee will meet with
the independent accountants and management to discuss conclusions or
recommendations of the independent accountants and the reports to
management and the Board prepared by the independent accountants.
D. Periodically, the Audit Committee will meet with the independent
accountants without members of management present to discuss internal
controls, the completeness and accuracy of the Company's financial
statements and disclosures therein, and the independent accountants'
evaluation of financial/accounting personnel.
E. Perform activities and functions as assigned by law, the Company's
bylaws or charter, or the Board of Directors, including investigations
falling within the scope of the Audit Committee's responsibilities.
The Audit Committee shall be empowered to retain independent counsel,
accountants, or others to assist it in the conduct of any
investigation.
F. Review legal and regulatory matters that could have a material impact
on the financial statements, related compliance policies and programs,
and any reports received from regulatory agencies.
A-2