[LOGO] NOVASTAR FINANCIAL, INC
NOVASTAR FINANCIAL, INC.
8140 Ward Parkway, Suite 300
Kansas City, MO 64114
(816) 237-7000
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
29, 2003 at 10:00 a.m., Central Daylight Time, at our corporate offices, 8140
Ward Parkway, Suite 300, Kansas City, Missouri, for the following purposes:
1. The election of the Class I directors of NovaStar Financial's Board of
Directors to serve until NovaStar Financial's annual meeting of
stockholders to be held in 2006 or until each such director's
successor is elected and qualified;
2. Ratification of the selection of Deloitte & Touche LLP as NovaStar
Financial's independent public accountants for the fiscal year ended
December 31, 2003; 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, 2003 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
Chairman of the Board and
Kansas City, Missouri Chief Executive Officer
April 3, 2003
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YOUR VOTE IS IMPORTANT
PLEASE PROMPTLY MARK, DATE, SIGN AND RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE.
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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 .................................................. 5
Compensation of Directors ............................................... 6
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
Principal Accounting Firm Fees .......................................... 16
Change in Certifying Accountants ........................................ 17
OTHER BUSINESS ............................................................. 17
STOCKHOLDER PROPOSALS - 2004 ANNUAL MEETING ............................... 17
NOVASTAR
8140 Ward Parkway, Suite 300
Kansas City, MO 64114
(816) 237-7000
-----------------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 29, 2003
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 29, 2003
at 10:00 a.m., central daylight time, at our corporate offices, 8140 Ward
Parkway, Suite 300, 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 April 3, 2003.
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, 2003, the record date, are entitled
to notice of, and to vote at, the annual meeting. On that date, 10,502,767
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 directors, and (2) the affirmative vote of the majority
of the votes cast, in person or by proxy, at the annual meeting is required for
all other matters. Cumulative voting in the election of directors is not
permitted.
1
Abstentions are considered shares present and entitled to vote, and under
Maryland law an abstention is not a vote cast. 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 a director, and FOR the appointment of Deloitte & Touche
LLP as independent public accountants for the fiscal year ending December 31,
2003.
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 2002 annual report including financial statements for the year ended
December 31, 2002, 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, 2003 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
---------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT
------------------------------------ ------ -------
Wallace R. Weitz & Company........................ 2,482,362 23.64%
1125 South 103rd Street, Suite 600
Omaha, NE 68124-6008
Wellington Management Company, LLP................ 914,300 8.71%
75 State Street
Boston, MA 02109
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, 2003 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 AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT
------------------------------------ ------ -------
Scott F. Hartman(2) ........................................... 393,912 3.73%
W. Lance Anderson(3)........................................... 350,407 3.32%
Michael L. Bamburg(4).......................................... 146,559 1.40%
Edward W. Mehrer(5)........................................... 64,295 *
Gregory T. Barmore(6) ......................................... 91,217 *
Art N. Burtscher(7) ........................................... 3,750 *
Rodney Schwatken .............................................. 14,015 *
All directors and executive officers as a group (7 persons) ... 1,064,155 10.10%
---------------
* Less than 1%.
(1) Assuming no exercise of options (except options exercisable within 60
days of March 1, 2003 by the listed securityholder named, separately).
(2) Consists of 348,912 shares of common stock, including 42,000 shares of
common stock owned jointly with his wife and 45,000 shares of common
stock issuable upon the exercise of options.
(3) Consists of 305,407 shares of common stock, including 25,000 shares of
common stock owned jointly with his wife and 45,000 shares of common
stock issuable upon the exercise of options.
(4) Consists of 146,559 shares of common stock (owned individually by Mr.
Bamburg or by his wife or jointly with his wife).
(5) Consists of 54,295 shares of common stock, including 2,000 shares
owned by his wife and 10,000 shares of common stock issuable upon the
exercise of options.
(6) Consists of 90,592 shares of common stock and 625 shares of common
stock issuable upon the exercise of options.
(7) Consists of 3,750 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 2002, 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. The Class I directors, whose terms will
expire in three years, are to be elected at this year's annual meeting. The
nominees for the Class I directors are set forth below. 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 a nominee is unable or declines to serve as a director at the time of the
annual meeting, the proxies will be voted for a 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 nominees 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
---- --------------------------------
Art N. Burtscher Director
Edward W. Mehrer Director
NOMINEES AND DIRECTORS
CLASS I NOMINEES - TERMS EXPIRING 2006
ART N. BURTSCHER, age 52, 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.
EDWARD W. MEHRER, age 64, has been a member of the Board of Directors since
1996. He is presently the President & Chief Executive Officer and 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.
5
CLASS III DIRECTOR - TERM EXPIRING 2005
SCOTT F. HARTMAN, age 43, 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.
CLASS II DIRECTORS - TERMS EXPIRING 2004
W. LANCE ANDERSON, age 42, 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 61, 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.
COMPENSATION OF DIRECTORS
NovaStar Financial paid independent directors, who are not employed by
NovaStar Financial, $15,000 per year plus $1,000 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 February 2002, each independent director was granted an
additional 2,500 options at the fair market value of the common stock as of the
grant date. 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.
6
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
2002, there were five meetings of the Board of Directors, four meetings of the
Audit Committee and one 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.
7
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF NOVASTAR
FINNANCIAL'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 three directors, each of whom is independent as defined by the
listing standards of the New York Stock Exchange. The Board adopted a written
Audit Committee charter on April 26, 2000 and has not since amended that
charter.
The Audit Committee has reviewed and discussed with management and the
independent accountants the Company's audited financial statements for fiscal
2002. 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. 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 2002 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
Art N. Burtscher
9
PERFORMANCE GRAPH
The following graph presents a total return comparison of NovaStar
Financial's common stock, from December 31, 1997 through December 31, 2002, 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 DECEMBER 31, 1997
THROUGH DECEMBER 31, 2002
[PERFORMANCE GRAPH]
$100 invested on December 31, 1997 in stock or index, including investment of
dividend.
DECEMBER 31,
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
NovaStar Financial, Inc. $ 40.55 $ 21.54 $ 25.80 $128.40 $254.89
S&P Composite-500 Index $126.67 $151.40 $136.05 $118.31 $ 90.66
Bloomberg Mortgage REIT Index $ 75.49 $ 59.99 $ 60.49 $ 92.27 $ 95.52
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 and 43
Chief Executive Officer
W. Lance Anderson Director, President and 42
Chief Operating Officer
Michael L. Bamburg Senior Vice President and 40
Chief Investment Officer
Rodney E. Schwatken Vice President, Secretary, Treasurer and 39
Controller (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 40, 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 39, is Vice President, Secretary, 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 1993, 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 ACCRUED
ANNUAL UNDERLYING DER'S ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION OPTIONS (#) (#) COMPENSATION
-------------------------- ------ -------- ----------- ------------ ------------- --------- --------------
Scott F. Hartman 2002 $315,000 $1,260,000 -- 25,000 7,751 --
Chairman of the Board and 2001 300,000 600,000 -- 20,000 1,119 --
Chief Executive Officer 2000 280,000 95,000 -- 100,000 -- --
W. Lance Anderson 2002 $315,000 $1,260,000 -- 25,000 7,751 --
President and 2001 300,000 600,000 -- 20,000 1,119 --
Chief Operating Officer 2000 280,000 95,000 -- 100,000 -- --
Michael L. Bamburg 2002 $219,450 $548,625 -- 12,500 1,613 --
Senior Vice President and 2001 211,080 313,500 -- 10,000 186 --
Chief Investment Officer 2000 190,000 142,000 -- 10,000 -- --
Rodney E. Schwatken 2002 $94,500 $70,875 -- 5,000 757 --
Vice President, Secretary, 2001 90,000 60,750 -- 5,000 93 --
Treasurer and Controller 2000 85,000 32,300 -- 5,000 -- --
STOCK OPTION PLAN. NovaStar Financial's 1996 stock option plan provides for
the grant of qualified incentive stock options or ISOs, non-qualified stock
options or NQSOs, deferred stock, restricted stock, performance shares, stock
appreciation and limited stock awards, and dividend equivalent rights or DERs.
ISOs may be granted to the officers and employees. NQSOs and awards may be
granted to the directors, officers, employees, agents and consultants. Unless
previously terminated by the Board of Directors, the plan will terminate on
September 1, 2006.
All options have been granted at exercise prices greater than or equal to
the estimated fair value of the underlying stock. Outstanding options vest over
four years and expire ten years after the date of grant.
12
The following table sets forth information concerning stock options granted
during 2002 for each of the directors and executive officers.
INDIVIDUAL GRANTS
------------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE AT
OPTIONS EXERCISE ASSUMED ANNUAL RATES OF
GRANTED TO PRICE OR STOCK PRICE APPRECIATION FOR
EMPLOYEES BASE OPTION TERM(1)
NUMBER DURING THE PRICE EXPIRATION ----------------------------
NAME GRANTED YEAR ($/SHARE) DATE 5% 10%
------------------------ ---------- -------------- ------------- ------------ ----------- ------------
W. Lance Anderson 25,000 15.9 24.44 12/18/12 $995,255 $1,584,777
Michael L. Bamburg 12,500 7.8 24.44 12/18/12 497,627 792,388
Gregory T. Barmore 2,500 1.6 15.82 2/11/12 64,423 102,583
Gregory T. Barmore 2,500 1.6 25.93 5/30/12 105,593 168,139
Scott F. Hartman 25,000 15.9 24.44 12/18/12 995,255 1,584,777
Edward W. Mehrer 2,500 1.6 15.82 2/11/12 64,423 102,583
Edward W. Mehrer 2,500 1.6 25.93 5/30/12 105,593 168,139
Art N. Burtscher 2,500 1.6 15.82 2/11/12 64,423 102,583
Art N. Burtscher 2,500 1.6 25.93 5/30/12 105,593 168,139
Rodney E. Schwatken 5,000 3.2 24.44 12/18/12 199,051 316,955
------- -----
Total to Directors and
Executive Officers 82,500 52.4
======= =====
Total shares granted 157,000 100.0
======= =====
---------------
(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.
13
The following table sets forth certain information with respect to the
value of the options as of December 31, 2002 held by the named directors and
executive officers.
FISCAL YEAR END OPTION VALUE
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AS OF OPTIONS AS OF
SHARES DECEMBER 31, 2002 DECEMBER 31, 2002(2) (3)
ACQUIRED ON VALUE ------------------------------ -----------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------- ------------- ------------ -------------- --------------- ------------- ---------------
Scott F. Hartman 29,500 $686,140 49,000 90,000 $713,870 $1,779,400
W. Lance Anderson 36,000 816,480 46,000 90,000 632,030 1,779,400
Michael L. Bamburg 22,500 420,175 2,500 25,000 41,775 344,100
Gregory T. Barmore 9,375 92,331 -- 8,750 -- 143,438
Art N. Burtscher -- -- 1,875 10,625 48,338 195,788
Edward W. Mehrer -- -- 9,375 8,750 137,531 143,438
Rodney E. Schwatken 3,875 46,959 3,625 11,250 82,719 163,813
------------------------
(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, 2002.
(3) Assuming a stock price of $31.03 per share, which was the closing price of
a share of common stock reported for the New York Stock Exchange on
December 31, 2002.
EMPLOYMENT AGREEMENTS. NovaStar Financial has entered into employment
agreements with the founders, Mr. Hartman and Mr. Anderson. Each employment
agreement provided for an initial five-year term through December 31, 2001, and
is automatically extended for an additional year at the end of each year of the
agreement commencing December 31, 1997, unless either party provides a
prescribed prior written notice to the contrary. 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
14
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
INDEBTEDNESS OF MANAGEMENT. In transactions approved by the Audit and
Compensation Committees of the Board of Directors, Mr. Hartman and Mr. Anderson
have executed 10-year promissory notes, dated as of January 1, 2001, aggregating
to $1,393,208. Each has 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. If the
notes are forgiven over the anticipated 10-year period, there will be an annual
charge to earnings of $139,321 plus the amount of any personal tax liability
bonuses paid that year. In 2002, the aggregate charge to earnings was $139,321.
ITEM 2 - RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon recommendation of its Audit Committee, has
selected the accounting firm of Deloitte & Touche 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, 2003.
The Board of Director's selection of Deloitte & Touche LLP for the current
fiscal year is being presented to stockholders for ratification at the annual
meeting. To NovaStar Financial's knowledge, neither Deloitte & Touche 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 Deloitte & Touche
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 DELOITTE & Touche LLP as independent certified public
accountants.
15
PRINCIPAL ACCOUNTING FIRM FEES
Aggregate fees we were billed for the fiscal years ended December 31, 2002
and 2001 by our principal accounting firm, Deloitte & Touche LLP, the member
firms of Deloitte Touche Tohmatsu, and their respective affiliates
(collectively, "Deloitte & Touche") are as follows:
FISCAL YEAR ENDED
DECEMBER 31,
-----------------------
2002 2001
-------- --------
Audit fees.................................. $243,085 $152,095
Audit-related fees (A)...................... 69,655 37,425
-------- --------
Total audit and audit-related fees.......... 312,740 189,520
Tax fees (B)................................ 295,175 58,333
All other fees (C).......................... 107,000 55,000
-------- --------
Total (D)................................... $714,915 $302,853
======== ========
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(A) Audit-related fees consist principally of fees for the issuance of stand
alone financial statements of consolidated subsidiaries and compliance
reporting regarding the servicing of mortgage loans.
(B) Tax fees principally include assistance with statutory filings and income
tax consultations and planning.
(C) All other fees include assistance in securitization transactions.
(D) As the rules associated with audit committee pre-approval policies and
procedures were not in place, such disclosures are not considered
applicable to this proxy statement.
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CHANGE IN CERTIFYING ACCOUNTANTS
KPMG LLP was previously our principal accountants. On July 26, 2001, that
firm's appointment as principal accountants was terminated and Deloitte & Touche
LLP was engaged as principal accountants. The decision to change accountants was
recommended by the Audit Committee and approved by the Board of Directors.
In connection with the audits of the fiscal year ended December 31, 2000,
and the subsequent interim period through July 26, 2001, there were no
disagreements with KPMG LLP on any matter of accounting principles and
practices, financial statement disclosure, or auditing scope or procedures,
which make reference in connection with their opinion to the subject matter of
the disagreement.
The audit reports of KPMG LLP on the consolidated financial statements of
NovaStar Financial, Inc. and subsidiaries as of and for the year ended December
31, 2000, did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope, or accounting
principles.
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 - 2004 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 2004 annual meeting of
stockholders must be received at NovaStar Financial's offices on or before
December 5, 2003 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
Kansas City, Missouri
April 3, 2003
17
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NOVASTAR FINANCIAL, INC.
REVOCABLE PROXY
FOR ANNUAL MEETING OF SHAREHOLDERS ON MAY 29,2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned herby appoints W. Lance Anderson, 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 2003 Annual Meeting of
Shareholders to be held at the NovaStar Financial, Inc. corporate offices, 8140
Ward Parkway, Suite 300, Kansas City, Missouri on May 29, 2003 at 10:00 a.m.
Central Daylight Time and at any and all adjournments thereof.
THE BOARD RECOMMENDS A VOTE FOR EACH OF THE LISTED ITEMS
Item 1 - ELECTION OF DIRECTORS / / FOR all nominees listed below
(except as marked to the contrary)
/ / WITHHOLD AUTHORITY to vote for all
nominees listed below
Nominees: Art. N. Burtscher Edward W. Mehrer
Item 2 - RATIFICATION OF Deloitte & Touche LLP as independent public
accountants for the fiscal year ending December 31, 2003.
/ / FOR / / AGAINST / / ABSTAIN
(Please See Reverse Side)
--------------------------------------------------------------------------------
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 THE 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: , 2003
-----------------------------
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SIGNATURE
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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.