SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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/ / Definitive Additional Materials
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NOVASTAR FINANCIAL, INC.
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(Name of Registrant as Specified In Its Charter)
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[LOGO] NOVASTAR
FINANCIAL, INC.
NOVASTAR FINANCIAL, INC.
8140 Ward Parkway, Suite 300
Kansas City, MO 64114
(816) 237-7000
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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 Tuesday, May
25, 2004 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 II directors of NovaStar Financial's
Board of Directors to serve until NovaStar Financial's annual
meeting of stockholders to be held in 2007 or until each such
director's successor is elected and qualified;
2. Approval of the NovaStar Financial, Inc. 2004 Incentive Stock
Plan;
3. Ratification of the selection of Deloitte & Touche LLP as
NovaStar Financial's independent public accountants for the
fiscal year ended December 31, 2004; and
4. 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 11, 2004 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
March 18, 2004
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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........................................... 2
Beneficial Ownership of Common Stock by Directors and Management........................................ 2
Compliance with Section 16(a) of the Securities Exchange Act of 1934.................................... 3
ITEM 1 - ELECTION OF DIRECTORS
Nominees and Directors.................................................................................. 4
Director Independence................................................................................... 5
Compensation of Directors............................................................................... 5
Compensation Committee Interlocks....................................................................... 6
Committees of the Board and Meeting Attendance.......................................................... 6
Executive Sessions...................................................................................... 6
Communications with the Board........................................................................... 6
Consideration of Director Nominees...................................................................... 6
Audit Committee Report.................................................................................. 8
Compensation Committee Report........................................................................... 9
Performance Graph....................................................................................... 10
Management of NovaStar Financial........................................................................ 11
Executive Compensation.................................................................................. 12
Certain Transactions.................................................................................... 14
ITEM 2 - APPROVAL OF NOVASTAR FINANCIAL, INC. 2004 INCENTIVE STOCK PLAN
General................................................................................................. 15
Purpose................................................................................................. 15
Administration.......................................................................................... 15
Eligible Persons........................................................................................ 16
Shares Subject to the 2004 Incentive Stock Plan......................................................... 16
Term of Options and SARs................................................................................ 17
Option Exercise......................................................................................... 17
Limited Transferability of Non-Qualified Stock Options.................................................. 17
Dividend Equivalent Rights (DERs)....................................................................... 17
Grants to Non-Employee Directors........................................................................ 17
Amendment and Termination of 2004 Incentive Stock Plan.................................................. 18
Federal Income Tax Consequences......................................................................... 18
ITEM 3 - RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
Principal Accounting Firm Fees.......................................................................... 21
OTHER BUSINESS..................................................................................................... 21
STOCKHOLDER PROPOSALS - 2005 ANNUAL MEETING........................................................................ 22
APPENDIX A: AUDIT COMMITTEE CHARTER
APPENDIX B: NOMINATING AND CORPORATE GOVERNANCE COMMITTEE CHARTER
APPENDIX C: NOVASTAR FINANCIAL, INC. 2004 INCENTIVE STOCK PLAN
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NOVASTAR
8140 Ward Parkway, Suite 300
Kansas City, MO 64114
(816) 237-7000
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PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 25, 2004
To our stockholders:
The Board of Directors of NovaStar Financial, Inc., a Maryland
corporation, is furnishing this proxy statement in connection with its
solicitation of proxies for use at the annual meeting of stockholders to be held
on May 25, 2004 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 March 18, 2004.
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 11, 2004, the record date, are
entitled to notice of, and to vote at, the annual meeting. On that date,
24,790,517 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. 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
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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, FOR approval of the 2004 Incentive Stock
Plan, and FOR ratification of the appointment of Deloitte & Touche LLP as
independent public accountants for the fiscal year ending December 31, 2004.
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 2003 annual report including financial statements for the year ended
December 31, 2003, 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.
SECURITIES OWNERSHIP
BENEFICIAL OWNERSHIP OF COMMON STOCK BY LARGE SECURITYHOLDERS
As of March 11, 2004, NovaStar Financial is unaware of any
securityholder beneficially owning more than 5% of the common stock.
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
11, 2004 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.
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BENEFICIAL OWNERSHIP OF
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NAME OF BENEFICIAL OWNER COMMON STOCK (1)
------------------------ ----------------
SHARES PERCENT
------ -------
Scott F. Hartman(2)..................................................... 1,017,000 4.08%
W. Lance Anderson(3).................................................... 636,783 2.56%
Michael L. Bamburg(4)................................................... 335,329 1.35%
Gregory T. Barmore(5)................................................... 214,465 *
Edward W. Mehrer(6)..................................................... 120,404 *
Rodney E. Schwatken(7).................................................. 25,803 *
Art N. Burtscher(8)..................................................... 20,392 *
All directors and executive officers as a group (7 persons)............. 2,370,176 9.46%
------------------
* Less than 1%.
(1) Assuming no exercise of options (except options exercisable within 60 days of March 1, 2004
by the listed securityholder named, separately).
(2) Consists of 877,424 shares of common stock, including 84,000 shares of common stock owned
jointly with his wife and 139,576 shares of common stock issuable upon the exercise of
options.
(3) Consists of 597,381 shares of common stock, including 50,000 shares of common stock owned
jointly with his wife and 39,402 shares of common stock issuable upon the exercise of
options.
(4) Consists of 328,149 shares of common stock (owned individually by Mr. Bamburg or by his wife
or jointly with his wife) and 7,180 shares of common stock issuable upon the exercise of
options.
(5) Consists of 203,559 shares of common stock and 10,906 shares of common stock issuable upon
the exercise of options.
(6) Consists of 79,590 shares of common stock, including 4,000 shares owned by his wife and
40,814 shares of common stock issuable upon the exercise of options.
(7) Consists of 25,803 shares of common stock only.
(8) Consists of 20,392 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 2003, all Section 16(a) filing requirements were satisfied. Securities acquired
in January 2002 for the benefit of each executive officer by the trustee of the deferred compensation plan
and the related reinvested dividends for 2002 were reported on Form 5s in February 2004.
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 II
directors, whose terms will expire in three years, are to be elected at this year's annual meeting. The
nominees for the Class II 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
3
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
---- --------------------------------
W. Lance Anderson President and Chief Operating
Officer, Director
Gregory T. Barmore Director
NOMINEES AND DIRECTORS
CLASS II NOMINEES - TERMS EXPIRING 2007
W. LANCE ANDERSON, age 43, 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's
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 62, has served on the Board of Directors since
1996. Since 1997, he has been a director and is currently Chairman of the Board
of Directors of Mortgage Electronic Registration Services, Inc. (MERSCORP,
Inc.), Vienna, Virginia, a company which acts as nominee in county records for
mortgage lenders and servicers. He retired as Chairman of the Board of GE
Capital Mortgage Corporation (GECMC), a subsidiary of General Electric Capital
Corporation (GE Capital) headquartered in Raleigh, North Carolina in 1997. 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.
CLASS I DIRECTORS - TERMS EXPIRING 2006
ART N. BURTSCHER, age 53, 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., an Omaha,
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Nebraska asset management organization. From 1988 to 2000, Mr. Burtscher served
as President and Chief Executive Officer of Great Western Bank in Omaha,
Nebraska.
EDWARD W. MEHRER, age 65, has been a member of the Board of Directors
since 1996. From November 2002 through June 2003, he served as Interim President
& Chief Executive Officer of Cydex, a pharmaceutical company based in Overland
Park, Kansas. From 1996 through December 2003, he served as Chief Financial
Officer of Cydex. For approximately ten years and until December 1995, Mr.
Mehrer was associated with Hoechst Marion Roussel, formerly Marion Merrell Dow,
Inc., an international pharmaceutical company. From December 1991 to December
1995, he served as Executive Vice President and Chief Financial Officer and a
director of Marion. Prior to joining Marion, Mr. Mehrer was a partner with the
public accounting firm of Peat, Marwick, Mitchell & Co., a predecessor firm to
KPMG LLP, in Kansas City, Missouri.
CLASS III DIRECTOR - TERM EXPIRING 2005
SCOTT F. HARTMAN, age 44, 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. Mr. Hartman also serves as a director and Vice Chairman of NovaStar
Mortgage.
DIRECTOR INDEPENDENCE
The Board of Directors has reviewed a number of factors to evaluate the
independence of each of its members within NYSE listed company standards. These
factors include the member's current and historic (within the last three years)
relationships with our competitors, suppliers and customers; the member's
relationships with our management and our other directors; the relationships
their current and former (within the last three years) employers have with us;
and our relationships with companies and charities where the member is a
director or executive officer. The Board of Directors has determined that a
relationship may be material if amounts involved in any one year exceed the
lesser of $1 million or 2% of either party's gross revenues. Gregory T. Barmore,
Art N. Burtscher, and Edward W. Mehrer, having no relationships that would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director, are independent directors.
COMPENSATION OF DIRECTORS
NovaStar Financial pay independent directors $25,000 per year plus
$1,000 for each day of board or committee meetings attended. In addition, each
independent director has been granted options to purchase 10,000 shares of
common stock at the fair market value of the common stock upon becoming a
director and options to purchase 5,000 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 5,000 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
5
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 three committees, Audit, Compensation and
Nominating and Corporate Governance. During 2003, there were five meetings of
the Board of Directors, five meetings of the Audit Committee and three meetings
of the Compensation Committee. The Nominating and Corporate Governance
Committee's first meeting was held in February 2004. Each director participated
in at least 75% of the meetings of the Board and the committees on which he
served.
Directors are not expected to attend the annual meeting of stockholders
and none of the independent directors attended the 2003 meeting
EXECUTIVE SESSIONS
Executive sessions of non-management directors are held at least two
times a year. The sessions are scheduled and chaired by the Chair of the
Nominating and Corporate Governance Committee. Any non-management director can
request that an additional executive session be scheduled.
COMMUNICATIONS WITH THE BOARD
Individuals may communicate directly with any member of the Board of
Directors or any individual chairman of a Board committee by writing directly to
those individuals at the following address: NovaStar Financial, Inc., 8140 Ward
Parkway, Suite 300, Kansas City, MO 64114. Communications that are intended for
the non-management directors generally should be marked to the attention of the
Chair of the Nominating and Corporate Governance Committee.
CONSIDERATION OF DIRECTOR NOMINEES
The Nominating and Corporate Governance Committee of the Board of
Directors is comprised exclusively of independent directors as defined by the
listed company standards of the NYSE. Members of the Nominating and Corporate
Governance Committee include Art N. Burtscher, Gregory T. Barmore and Edward W.
Mehrer with Mr. Burtscher serving as the Chair. The charter of the Nominating
and Corporate Governance Committee is available at
HTTP://WWW.NOVASTARMORTGAGE.COM and is also included as Appendix B to this proxy
statement.
SHAREOWNER NOMINEES
The policy of the Nominating and Corporate Governance Committee is to
consider properly submitted shareowner nominations for candidates for membership
on the Board.
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IDENTIFYING AND EVALUATING NOMINEES FOR DIRECTORS
The Nominating and Corporate Governance Committee intends to utilize a
variety of methods for identifying and evaluating nominees for director. The
Nominating and Corporate Governance Committee will regularly assess the
appropriate size of the Board, and whether any vacancies on the Board are
expected due to retirement or otherwise. In the event that vacancies are
anticipated, or otherwise arise, the Nominating and Corporate Governance
Committee will consider various potential candidates for director. Candidates
may come to the attention of the Nominating and Corporate Governance Committee
through current Board members, professional search firms, stockholders or other
persons. These candidates are evaluated at regular or special meetings of the
Nominating and Corporate Governance Committee, and may be considered at any
point during the year. Stockholder nominations should be addressed to: NovaStar
Financial, Inc., 8140 Ward Parkway, Suite 300, Kansas City, MO 64114. The
Nominating and Corporate Governance Committee will consider properly submitted
stockholder nominations for candidates for the Board, following verification of
the stockholder status of persons proposing candidates. If any materials are
provided by a stockholder in connection with the nominating of a director
candidate, such material will be forwarded to the Nominating and Corporate
Governance Committee. The Nominating and Corporate Governance Committee will
also review materials provided by professional search firms or other parties. In
evaluating such nominations, the Nominating and Corporate Governance Committee
seeks to achieve a balance of knowledge, experience and capability on the Board.
DIRECTORS MINIMUM QUALIFICATIONS
We consider candidates for the Board based upon several criteria,
including their broad-based business and professional skills and experience,
concern for the long-term interest of stockholders, personal integrity and
judgment, and knowledge and experience in the mortgage banking industry. The
majority of directors on the Board of Directors should be independent. Each
director must have time available to devote to Board duties and
responsibilities.
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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 three directors, each of whom is independent as defined by the
listing standards of the New York Stock Exchange. The Committee revised and
restated its written Audit Committee charter on February 24, 2004. The Charter
is available at HTTP:///WWW.NOVASTARMORTGAGE.COM and is also included as
Appendix A.
The Audit Committee has reviewed and discussed with management and the
independent accountants the Company's audited financial statements for fiscal
2003. 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 2003 for filing with the Securities and
Exchange Commission.
Audit Committee
Edward W. Mehrer, Chair
Gregory T. Barmore
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-based compensation 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.
The compensation of executive officers for 2003, and in particular that
of Chief Executive Officer is dependent on earnings per share, operating growth,
including the volume of loans originated and profit from fee income business
units, the financial strength of the organization, and the development and
implementation of our strategic plan. During 2003, the Compensation Committee
determined that NovaStar Financial's executive officers generally exceeded
expectations in each of these areas.
Under the 1996 stock option plan, annual grants of stock-based
compensation is awarded to officers and other key employees to retain and
motivate such persons to sustain and improve long-term stock performance.
Stock-based compensation is granted at the prevailing market value and have
value to the holders only if NovaStar Financial's stock price increases.
Typically, grants vest in four equal annual increments. The charter of the
Compensation Committee is available at HTTP://WWW.NOVASTARMORTGAGE.COM.
Compensation Committee
Gregory T. Barmore, Chair
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, 1998 through December 31, 2003, 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, 1998
THROUGH DECEMBER 31, 2003
[PERFORMANCE GRAPH]
$100 invested on December 31, 1998 in stock or index, including investment of
dividend.
December 31,
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
NovaStar Financial, Inc. $ 50.59 $ 60.61 $289.45 $501.49 $1,388.61
S&P Composite-500 Index $119.53 $107.41 $ 93.40 $ 71.57 $ 90.46
Bloomberg Mortgage REIT Index $ 79.46 $ 80.13 $117.06 $126.54 $ 148.05
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 Chief 44
Executive Officer
W. Lance Anderson Director, President and Chief Operating Officer 43
Michael L. Bamburg Senior Vice President and Chief 41
Investment Officer
Rodney E. Schwatken Vice President, Secretary, Treasurer and Controller 40
(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 41, 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 40, 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 OR (#)(B) COMPENSATION
RESTRICTED STOCK
AWARDS(#)(B)
Scott F. Hartman 2003 $491,667 $1,200,000 (A) 8,000 (C) 11,074
Chairman of the Board 2002 315,000 1,260,000 -- 50,000 (D) 15,502 --
and Chief Executive Officer 2001 300,000 600,000 -- 40,000 (D) 2,238 --
W. Lance Anderson 2003 $491,667 $1,200,000 (A) 8,000 (C) 3,717
President and Chief 2002 315,000 1,260,000 -- 50,000 (D) 15,502 --
Operating Officer 2001 300,000 600,000 -- 40,000 (D) 2,238 --
Michael L. Bamburg 2003 $298,805 $ 700,000 (A) 4,000 (C) 1,320
Senior Vice President and 2002 219,450 548,625 -- 25,000 (D) 3,226 --
Chief Investment Officer 2001 211,080 313,500 -- 20,000 (D) 372 --
Rodney E. Schwatken 2003 $107,837 $ 74,500 750 (C) 599
Vice President, Secretary, 2002 94,500 70,875 -- 10,000 (D) 1,514 --
Treasurer and Controller 2001 90,000 60,750 -- 10,000 (D) 186 --
-------------------------------
(A) Half of the officer's bonus was awarded in cash and the other in restricted common stock of NovaStar Financial.
(B) Share amounts have been restated to reflect the 2-for-1 stock split on December 1, 2003.
(C) Restricted stock awards were granted in 2004 relating to 2003 compensation. Restricted stock vests 25% each succeeding
year.
(D) Stock options were granted in 2002 and 2001.
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 and
restricted stock 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 2003 for each of the directors and executive officers.
INDIVIDUAL GRANTS
---------------------------------------------------
PERCENT OF
TOTAL
OPTIONS POTENTIAL REALIZABLE VALUE
GRANTED TO EXERCISE AT ASSUMED ANNUAL RATES OF
EMPLOYEES PRICE OR STOCK PRICE APPRECIATION FOR
DURING THE BASE PRICE OPTION TERM (1)
NUMBER YEAR ($/SHARE) EXPIRATION ------------------------------------
NAME GRANTED DATE 5% 10%
Gregory T. Barmore 5,000 33% $22.66 5/29/13 $71,238 $180,531
Edward W. Mehrer 5,000 33 22.66 5/29/13 71,238 180,531
Art N. Burtscher 5,000 33 22.66 5/29/13 71,238 180,531
Total to Directors and
Executive Officers 15,000 100%
====== ====
Total shares granted
--------------------
(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, 2003 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 DECEMBER 31, 2003 DECEMBER 31, 2003 (2) (3)
VALUE
NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----- -------- ------------ ----------- ------------- ----------- -------------
Scott F. Hartman 21,000 $601,785 149,500 107,500 $5,337,195 $3,923,000
W. Lance Anderson 132,000 3,005,400 32,500 107,500 1,100,250 3,923,000
Michael L. Bamburg 15,000 396,275 6,250 33,750 192,125 1,139,800
Gregory T. Barmore -- -- 6,250 16,250 231,056 494,194
Art N. Burtscher -- -- 10,000 20,000 383,819 647,956
Edward W. Mehrer -- -- 25,000 16,250 883,181 494,194
Rodney E. Schwatken 7,250 82,248 7,500 15,000 269,063 512,263
-----------------------
(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 price was less than the market price of common stock at December 31, 2003.
(3) Assuming a stock price of $42.96 per share, which was the closing price of a share of common stock reported for
the New York Stock Exchange on December 31, 2003.
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
13
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 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.
14
ITEM 2 - APPROVAL OF THE 2004 INCENTIVE STOCK PLAN
On March 11, 2004, our Board of Directors adopted, subject to approval
of the stockholders, the NovaStar Financial, Inc. 2004 Incentive Stock Plan. The
2004 Incentive Stock Plan is intended to replace the Company's 1996 Executive
and Non-Employee Director Stock Option Plan, as amended (the Prior Plan), with
respect to all future grants of stock-related awards. The Board of Directors
believes that the 2004 Incentive Stock Plan will be an important and effective
means of attracting, retaining, and motivating qualified personnel for NovaStar
Financial and its subsidiaries.
GENERAL
The 2004 Incentive Stock Plan provides for the grant of qualified
incentive stock options (ISOs) which meet the requirements of Section 422 of the
Code, stock options not so qualified (NQSOs and, together with ISOs, Options),
stock appreciation rights and limited stock appreciation rights (collectively,
SARs), deferred stock, restricted stock, and performance share awards (Stock
Awards), and dividend equivalent rights (DERs). The effective date of the 2004
Incentive Stock Plan will be the date it is approved by stockholders and it will
remain in effect, unless terminated by the Board, for a period of ten years.
PURPOSE
The 2004 Incentive Stock Plan is intended to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to employees, officers, directors, and
others whose job performance affects our success, to encourage proprietary
interest in NovaStar Financial, to encourage such employees to remain in our
employ, to attract new employees with outstanding qualifications, and to afford
additional incentive to others to increase their efforts in providing
significant services to us. In particular, the 2004 Incentive Stock Plan will
enhance our ability to grant awards structured to qualify as performance-based
under the Internal Revenue Code of 1986, as amended (the Code). The Board
believes that performance-based compensation is in our best interest and, in
addition, will serve to preserve the deductibility of related compensation under
applicable Code rule described under "Federal Tax Consequences" below. The
performance measures that may be used in connection with the granting of awards
under the Plan will be based on any one or more of the following: revenue;
revenue per employee; GAAP earnings; taxable earnings; GAAP or taxable earnings
per employee; GAAP or taxable earnings per share (basic or diluted); operating
income; total shareholder return; dividends paid or payable; market share;
profitability as measured by return ratios, including return on revenue, return
on assets, return on equity, and return on investment; cash flow; or economic
value added (economic profit). Such criteria generally must be specified in
advance and may relate to one or any combination of two or more corporate,
group, unit, division, affiliate, or individual performances.
ADMINISTRATION
The 2004 Incentive Stock Plan is administered by the Compensation
Committee of the Board (Compensation Committee or Committee), which is composed
solely of independent directors. Members of the Compensation Committee are
eligible to receive only grants reserved to non-employee directors discussed
below.
All grants of awards under the 2004 Incentive Stock Plan will be made
by the Committee and will be subject to the terms and restrictions made by the
Committee, subject to the terms of
15
the Plan. The Committee has discretionary authority to select participants from
among eligible persons and to determine at the time an award is granted when and
in what increments the awards become exercisable or vest. In addition, in the
case of Options, the Committee determines whether they are intended to be ISOs
or NQSOs.
ELIGIBLE PERSONS
Our officers, directors, and employees, and other persons expected to
provide significant services to us, are eligible to participate in the 2004
Incentive Stock Plan. ISOs may only be granted to our officers and employees.
Under current law, ISOs may not be granted to any director who is not also an
employee, or to directors, officers, and other employees of entities unrelated
to us. NQSOs, SARs, Stock Awards and DERs may be granted to our directors,
officers, employees, agents and consultants, or any of our subsidiaries, or any
other venture in which we have a significant interest. No grants may be made
under the 2004 Incentive Stock Plan to any person who, assuming exercise or
vesting of all awards held by such person, would own or be deemed to own
beneficially more than 9.8% (by number of shares or value) of our outstanding
shares of equity stock.
SHARES SUBJECT TO THE 2004 INCENTIVE STOCK PLAN
Subject to anti-dilution provisions for stock splits, stock dividends
and similar events, the 2004 Incentive Stock Plan authorizes the grant of awards
with respect to a maximum number of shares equal to 2,500,000 shares of common
stock. The Plan will become effective upon approval by our stockholders and our
Prior Plan will terminate except for outstanding awards that remain to become
vested, exercised or free of restrictions. Awards with respect to 1,599,866
shares of common stock have been exercised under the Prior Plan. Awards with
respect to 718,050 shares of common stock are still outstanding under the Prior
Plan.
Any shares of common stock covered by an award under the 2004 Incentive
Stock Plan that is forfeited or canceled, or shares of stock not delivered
because the award is settled in cash or used to satisfy the applicable tax
withholding obligation, will not be deemed to have been granted for purposes of
determining the maximum number of shares of common stock available for future
awards under the Plan. In addition, shares of common stock issued under the Plan
or covered by awards granted under the Plan pursuant to the settlement,
assumption or substitution of outstanding awards or obligations to grant future
awards as a condition of our acquiring another entity shall not count against
the maximum number of shares available for future awards under the Plan.
If the exercise price of any Option is satisfied by tendering shares of
common stock to us, only the number of shares issued net of the shares tendered
will be deemed granted for purposes of determining the maximum number of shares
of common stock available for future awards under the Plan.
The 2004 Incentive Stock Plan also provides for sublimits on the number
of shares with respect to which awards may be granted for ISOs, Stock Awards,
and Options and SARs. In addition, no more than 250,000 shares of common stock
may be the subject of awards to any one individual during any calendar-year
period if such awards are intended to be "performance-based compensation" (as
the term is used for purposes of Code Section 162(m)). Any shares that are
canceled or forfeited, and any shares subject to such awards that are
surrendered, shall count against these sub-limits for purposes of determining
compliance therewith.
16
The Plan provides that, in connection with any reorganization, merger,
consolidation, recapitalization, stock split, or similar transaction, the
Compensation Committee may adjust awards to preserve the benefits or potential
benefits of the awards.
TERM OF OPTIONS
Options must terminate no more than 10 years from the date granted.
Options may be granted on terms providing for exercise either in whole or in
part at any time or times during their respective terms, or only in specified
percentages at stated time periods or intervals.
OPTION EXERCISE
The exercise price of any Option granted under the 2004 Incentive Stock
Plan may be made payable in cash, with shares of common stock owned by the
optionee or subject to a grant, or by any other method as determined by the
Committee. We may make loans available to Option holders to exercise options
evidenced by a promissory note executed by the option holder and secured by a
pledge of common stock with fair value at least equal to the principal of the
promissory note unless otherwise determined by the Committee.
LIMITED TRANSFERABILITY OF NON-QUALIFIED STOCK OPTIONS
NQSOs may be granted on terms which permit transfer by the optionee to
family members or trusts, or partnerships for the exclusive benefit of such
immediate family members or any other persons or entities as may be approved by
the Committee, subject in all cases to the terms of the Plan.
DIVIDEND EQUIVALENT RIGHTS (DERS)
The Plan provides for granting of dividend equivalent rights or DERs in
tandem with unexercised Options. DERs entitle the optionee to receive
distributions of cash, stock, or other property, or to accrue rights to future
distributions of stock, in amounts equal to the value of dividends that would
have been paid on such date if the shares of stock that are the subject of the
award were outstanding on such date. DERs can be granted in "accrued" or
"current-pay" form. Accrued DERs accrue for the account of the optionee shares
of common stock upon the payment of cash dividends on the outstanding shares of
common stock. The number of shares accrued is determined by a formula, and such
shares are transferred to the optionee only upon exercise of the related Option.
Shares of common stock accrued for the account of the optionee can be made
eligible to receive dividends and distributions. DERs issued in current-pay form
provide that payments are made to the optionee at the same time as dividends are
paid to holders of the outstanding common stock. Current-pay DERs can be made
payable not only in cash distributions but also in distributions of stock or
other property. The right of the holder of a DER to receive any dividend
equivalent payment or accrual may be made subject to vesting of the related
Options, the satisfaction of specified performance objectives, or other
conditions. Current-pay DERs have been determined by the Compensation Committee
to be performance-based compensation because their value and the amount of
distributions and accruals thereon depend on our future performance and dividend
paying capability, which is influenced by the optionee.
GRANTS TO NON-EMPLOYEE DIRECTORS
Each non-employee director shall be automatically granted a stock-based
award in an amount, determined by the Board, not to exceed 10,000 shares of
common stock upon becoming a director, and is also eligible to receive
additional grants by the Board on the day after each
17
annual meeting of stockholders in an amount, determined by the Board, not to
exceed 15,000 shares. Such grants to non-employee directors will vest on such
date or dates as the Board may determine. The price for such grants to
non-employee directors is the fair market value of the common stock on the date
of grant.
AMENDMENT AND TERMINATION OF 2004 INCENTIVE STOCK PLAN
The Board may from time to time revise or amend the 2004 Incentive Stock
Plan, and may suspend or discontinue it at any time. However, no such revision
or amendment may (i) impair the rights of the recipients of outstanding awards,
without their consent, or (ii) without stockholder approval, increase the number
of shares for which awards may be granted under the Plan, modify the class of
participants eligible to receive awards granted under the Plan, materially
change the performance measures from those specified therein, or extend the
maximum term of Options.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following is a brief summary of the principal U.S. federal
income tax consequences, based on current federal income tax laws, of the
issuance and exercise of awards under our 2004 Incentive Stock Plan. This
summary is not intended to be exhaustive and does not describe state, local, or
foreign tax consequences. Grantees are strongly urged to consult their tax
advisors regarding the federal, state, local or other tax consequences of the
receipt and exercise of Options and SARs, DERs and Stock Awards under the Plan.
INCENTIVE STOCK OPTIONS (ISOS). No taxable income will be recognized by
a grantee upon the grant or exercise of an ISO. If shares of common stock are
issued to a grantee pursuant to the exercise of an ISO granted under the Plan
and if no disqualifying disposition of such shares is made by such grantee
within two years after the date of grant or within one year after the receipt of
such shares by such grantee, then (a) upon the sale of such shares, any amount
realized in excess of the option price generally will be taxed to such grantee
as a long-term capital gain and any loss sustained generally will be a long-term
capital loss and (b) no deduction will be allowed to us. Additionally, the
exercise of an ISO will give rise to an item of tax preference that may result
in alternative minimum tax liability of the grantee.
If shares of common stock acquired upon the exercise of an ISO are
disposed of prior to the expiration of two years from date of grant or one year
from exercise, generally (a) the grantee will recognize ordinary income in the
year of disposition in an amount equal to the excess (if any) of the fair market
value of the shares at exercise (or, if less, the amount realized on the
disposition of the shares) over the option price thereof, and (b) we will be
entitled to deduct such amount. Any further gain or loss recognized by the
grantee will be subject to tax as capital gain or loss, generally will be
long-term capital gain or loss if the stock has been held for more than one
year, and will not result in any deduction by us.
If an ISO is exercised at a time when it no longer qualifies as an ISO,
the option will be treated as an NQSO. Subject to certain exceptions for
disability or death, an ISO generally will not be eligible for the federal
income tax treatment described above if it is exercised more than three months
following the termination of employment.
NON-QUALIFIED OPTIONS (NQSOS) and Stock Appreciation Rights (SARs). No
taxable income will be recognized by a grantee upon the grant of an NQSO or SAR.
Upon exercise, however, the grantee will generally recognize ordinary income in
an amount equal to the
18
difference between the exercise price and the fair market value of the shares on
the date of exercise, and we will be entitled to deduct a like amount. In the
case of NQSOs, the grantee will have a basis in such stock in an amount equal to
such fair market value.
Upon subsequent sale of any shares of common stock acquired pursuant to
the exercise of an NQSO, a grantee will have capital gain or loss equal to the
difference between the amount realized upon such sale and the grantee's adjusted
tax basis in the shares of common stock. Such gain or loss will be capital gain
or loss and will be long term if the shares of common stock have been held for
more than one year from the date the option is exercised.
STOCK AWARDS. No taxable income will be recognized by a grantee of
Restricted Stock, Deferred Stock or Performance Shares until the taxable year in
which the common stock that is the subject of such grant becomes transferable or
is no longer subject to forfeiture. At such time, the grantee will realize
income equal to the then fair market value of the common stock received pursuant
to such grant (less the amount, if any, paid therefore). Any such income will be
subject to tax at ordinary income rates. Alternatively, a grantee who makes an
election under Section 83(b) of the Code within 30 days of the date of receipt
of such grant will include in income on the date of such grant an amount equal
to the fair market value of the common stock received (less the amount, if any,
paid for such shares), determined assuming they were then unrestricted and could
be sold immediately. If the shares of common stock subject to such election are
subsequently forfeited, the grantee will only be entitled to a deduction, refund
or loss for federal income tax purposes equal to the amount, if any, paid for
the forfeited shares.
A grantee generally will have a tax basis in any shares of common stock
received that is equal to the amount, if any, included in income as described
above. If shares are then sold after the forfeiture period expires, the holding
period to determine whether the grantee has long-term or short-term capital gain
or loss begins when the restriction period lapses, unless the grantee has made a
Section 83(b) election, in which case such grantee's holding period begins on
the date of grant. Except as noted below, we generally will be entitled to claim
a tax deduction equal to the amount that is taxable as ordinary compensation
income to the grantee.
DIVIDEND EQUIVALENT RIGHTS (DERS). No taxable income will be recognized
by a grantee upon the grant of an accrued DER. If the underlying option to which
an accrued DER relates is exercised, the grantee will realize income equal to
the fair market value of the common stock received pursuant to the DER (less the
amount, if any, paid for such stock) at the time of exercise. Any such income
will be subject to tax at ordinary income rates. Similar rules with respect to
tax basis and holding period as are described above under Stock Awards will
apply with respect to common stock received pursuant to an accrued DER.
No taxable income will be recognized by a grantee upon the grant of a
current-pay DER. Rather, such income will be recognized when the grantee
receives cash or other property, if any, pursuant to such DER. Such income will
be subject to tax at ordinary income rates.
COMPANY DEDUCTIONS. If applicable withholding requirements are met, we
generally will be entitled to a tax deduction in an amount equal to the ordinary
income realized by the participant at the time the participant recognizes such
income. However, Code Section 162(m) contains specific rules regarding the
federal income tax deductibility of compensation paid to our chief executive
officer and to each of the other four most highly compensated executive
officers. The general rule is that annual compensation paid to any of these
specified executives will be deductible only to the extent that it does not
exceed $1 million. However, we can preserve the
19
deductibility of certain compensation in excess of $1 million if it complies
with conditions imposed by the rules, including (1) the establishment of a
maximum number of shares with respect to which awards may be granted to any one
employee during a specified time period, (2) for Stock Awards and DERs,
inclusion in the grant of performance goals which must be achieved prior to
accrual or payment, (3) disclosure to, and approval by, the stockholders of
certain material terms of the Plan and (4) certification by the Compensation
Committee that the performance goals have been met. Assuming approval by
stockholders at the annual meeting the Plan has been designed to permit the
Compensation Committee to grant and certify awards which satisfy the
requirements of Section 162(m).
The actual number and terms of awards which will be granted in the
remainder of 2004 and in future periods is not presently determinable as the
Compensation Committee has sole discretion to determine whether to grant awards
and the terms thereof.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR THIS PROPOSAL.
20
ITEM 3 - 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, 2004.
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.
PRINCIPAL ACCOUNTING FIRM FEES
Aggregate fees we were billed for the fiscal years ended December 31,
2003 and 2002 by our principal accounting firm, Deloitte & Touche LLP, the
member firms of Deloitte Touche Tohmatsu, and their respective affiliates
(collectively, the "Deloitte Entities") are as follows:
FISCAL YEAR ENDED
DECEMBER 31,
------------
2003 2002
---- ----
Audit fees................................. $ 408,047 $243,085
Audit-related fees (A)..................... 304,341 69,655
------- ------
Total audit and audit-related fees......... 712,388 312,740
Tax fees (B)............................... 301,741 295,175
All other fees (C)......................... 112,000 107,000
------- -------
Total...................................... $1,126,129 $714,915
========== ========
---------------
(A) Audit-related fees consist principally of fees for the issuance
of stand alone financial statements of consolidated
subsidiaries, compliance reporting regarding the servicing of
mortgage loans, and work performed related to equity offerings
and the Sarbanes-Oxley Act.
(B) Tax fees principally include assistance with statutory filings
and income tax consultations and planning.
(C) All other fees include assistance in securitization
transactions.
The Audit Committee has adopted policies with respect to the
pre-approval of all audit and non-audit services provided by the external
auditors.
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.
21
STOCKHOLDER PROPOSALS OR NOMINATIONS - 2005 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 proposal, including the nomination of a director, intended to
be presented at the 2005 annual meeting of stockholders must be received at
NovaStar Financial's offices on or before November 18, 2004 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, including the nomination of a director, 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.
The stockholder's notice must set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors pursuant to Regulation 14A
under the Securities Act of 1934, as amended (including such person's written
consent to being named in the proxy statement as a nominee and to servicing as a
director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and of
the beneficial owner, if any, on whose behalf the proposal is made; and (c) as
to the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, (i) the name and address of such
stockholder, as they appear on our corporate books, and of such beneficial owner
and (ii) the class and number of shares of our stock which are owned
beneficially and of record by such stockholder and such beneficial owner.
You may contact our corporate Secretary at our executive offices
regarding the requirements for making stockholder proposals and nominating
director candidates.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Scott F. Hartman
Scott F. Hartman
Chairman of the Board
Kansas City, Missouri
March 18, 2004
22
APPENDIX A
NOVASTAR FINANCIAL, INC.
Audit Committee Charter
I. Mission
The Audit Committee of NovaStar Financial Inc. (NovaStar) is a standing
committee of the Board of Directors (Board). The purpose of the Committee is to
assist the Board in fulfilling its oversight responsibility relating to:
i. The integrity of NovaStar's financial statements and financial
reporting process and its system of internal accounting and
financial controls;
ii. The performance of the internal audit function;
iii. The performance of the external independent auditors, which
would include an evaluation of the independent auditor's
qualifications and independence.
iv. NovaStar's compliance with legal and regulatory requirements,
including disclosure controls and procedures;
v. Prepare an Audit Committee report to be included in NovaStar's
annual proxy statement; and
vi. The fulfillment of the other responsibilities set out herein
While the Audit Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Audit Committee to plan or conduct audits or
determine that NovaStar's financial statements and disclosures are complete and
accurate and are in accordance with generally accepted accounting principles and
applicable rules and regulations. These are the responsibilities of management
and the external independent auditors.
II. ORGANIZATION AND AUTHORITY
A. The Audit Committee shall be comprised of at least three members
of the Board, and the members shall meet the independence,
experience, and expertise requirements of the New York Stock
Exchange and other applicable laws and regulations (including
the Sarbanes-Oxley Act of 2002).
B. At least one member of the Audit Committee will be a financial
expert as defined by the Securities and Exchange Commission.
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.
D. The Board of Directors shall review the background of all
members at least annually and make the determination as to
whether the members are independent
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and financially literate and at least one member has the
appropriate level of financial expertise.
E. The members of the Audit Committee shall have the sole authority
to select, evaluate, appoint, and replace the independent
auditors (subject to stockholder ratification) and shall approve
in advance all audit engagement fees and terms and all non-audit
engagements with the independent auditors. The independent
auditors shall report directly to the Audit Committee. The Audit
Committee shall consult with management, but shall not delegate
these responsibilities.
F. The Audit Committee shall have the authority, to the extent it
deems necessary or appropriate, to retain special legal,
accounting, or other consultants to advise the Committee.
NovaStar shall provide funding, as determined by the Audit
Committee, for payment of compensation to the independent
auditors and to any advisors employed by the audit committee.
III. Responsibilities
The Committee shall have the following duties and responsibilities:
A. COMMUNICATION AND ASSESSMENT
1) Meet as often as it is determined, but not less
frequently than quarterly.
2) Meet separately, periodically, with management, internal
audit, and external independent auditors.
3) Regularly report to the Board on the Committee's
activities.
4) Annually review and evaluate its own performance.
5) Review and assess the adequacy of this Charter annually
and recommend any proposed changes to the Board for
approval.
B. Financial Statement and Disclosure Matters
1) Review and discuss with management and the external
independent auditors the annual audited financial
statements, including disclosures made in "Management's
Discussion and Analysis of Financial Conditions and
Results of Operations," and recommend to the Board
whether the audited financial statements should be
included in NovaStar's Form 10-K.
2) Review and discuss with management and the external
independent auditors NovaStar's quarterly financial
statements prior to the filing of its Form 10-Q,
including the results of the external independent
auditors' reviews of the quarterly financial statements.
3) Discuss generally NovaStar's earnings press releases, as
well as financial information and earnings guidance
provided to analysts and rating agencies to the extent
required by applicable law or listing standards. The
A-2
Committee need not discuss in advance each earnings
release or each instance in which NovaStar may provide
earnings guidance.
4) Receive a disclosure from the Chief Executive Officer
and Chief Financial Officer during their certification
process for the 10-K and 10-Q's about (1) any
significant deficiencies in design or operation of
internal controls or material weaknesses therein and (2)
any fraud, whether or not material, involving management
or other employees who have a significant role in
NovaStar's internal controls.
5) Review and discuss periodically oral or written reports
from the external independent auditors on, among other
things, certain:
|X| Critical accounting policies and practices to be
used;
|X| Alternative treatments of financial information
within generally accepted accounting principles;
|X| Other material written communications between
the independent auditors and management, such as
any management letter and NovaStar's response to
such letter or schedule of unadjusted
differences; and
|X| Difficulties encountered in the course of the
audit work, including any restrictions on the
scope of activities or access to requested
information, any significant disagreements with
management, and communications between the audit
team and the audit firm's national office with
respect to difficult auditing or accounting
issues presented by the engagement.
|X| Responsibilities, budget and staffing of the
Internal Audit Department.
6) Discuss with the external independent auditors the
matters required to be discussed in Statement on
Auditing Standards No 61 relating to the conduct of the
audit.
7) Review and discuss with management and the independent
auditors, at least annually:
|X| Developments and issues with respect to
reserves.
|X| Regulatory and accounting initiatives as well as
off-balance sheet structures, and their effect
on NovaStar's financial statements.
|X| Accounting principles used in the preparation of
NovaStar's financial statements (Specifically
those polices for which management is required
to exercise discretion or judgment regarding the
implementation thereof)
A-3
8) Review with management its evaluation of NovaStar's
internal control structure and procedures for financial
reporting and review periodically, but in no event less
frequently than quarterly, management's conclusions
about the efficiency of such internal controls and
procedures, including any significant deficiencies in,
or material non-compliance with such controls and
procedures.
9) Discuss with management NovaStar's major financial risk
exposures and the steps management has taken to monitor
and control such exposures, including NovaStar's risk
assessment and management policies.
10) Establish and evaluate going forward, procedures for the
receipt, retention, and treatment of complaints received
by NovaStar regarding accounting, internal accounting
controls, and auditing matters, and the confidential,
anonymous submission by employees of NovaStar of
concerns regarding questionable accounting or auditing
matters.
C. OVERSIGHT OF NOVASTAR'S RELATIONSHIP WITH THE EXTERNAL
INDEPENDENT AUDITORS
1) Receive and discuss a report from the external
independent auditors at least annually regarding:
|X| The external independent auditor's internal
quality-control procedures:
|X| Any material issues raised by the most recent
quality-control review, or peer review (if
applicable), of the external independent
auditors or by any inquiry or investigation by
governmental professional authorities within the
preceding five years respecting one or more
independent audits carried out by the external
independent auditors;
|X| Any steps taken to deal with any such issues;
and
|X| All relationships between the external
independent auditors and NovaStar, in order to
assess the independent auditors' independence.
2) Approve guidelines for the retention of the external
independent auditors for any non-audit services and
determine procedures for the approval of the audit and
non-audit services in advance. In accordance with such
procedures, the Committee shall approve in advance any
audit or non-audit services provided to NovaStar by the
external independent auditors, all as required by
applicable law of listing standards. Pre-approval may be
delegated to one or more members of the Committee.
3) Review and discuss the scope and plan of the external
independent audit.
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4) Evaluate the qualifications, performance and
independence of the external independent auditors,
including whether the provisions of non-audit services
is compatible with maintaining the auditor's
independence, and taking into account the opinions of
management and internal audit. This shall include a
review and discussion of the annual communications as to
independence delivered by the external independent
auditors (Independent Standards Board no.
1-"Independence Discussions with Audit Committees.")
This evaluation should include a review of and
evaluation of the lead partner of the external
independent auditor, and a review to ensure the lead
auditor partner is meeting the regular rotation
requirements. To assure continuing auditor independence
the Audit Committee shall consider whether there should
be a regular rotation of the audit firm itself. The
Audit Committee shall present its conclusions to the
Board, and if so determined by the Audit Committee,
recommend that the Board take additional action to
satisfy itself of the qualifications, performance and
independence of the auditors.
5) Set clear hiring policies for NovaStar's hiring of
employees or former employees of the independent
auditors which guidelines shall meet the requirements of
applicable law and listing standards.
D. OVERSIGHT OF INTERNAL AUDIT SERVICES
1) Review and discuss the appointment and replacement of
the Chief Auditor.
2) Review and discuss internal audit's findings that been
reported to management, -management's responses and the
progress of the related corrective action plans.
3) Review and evaluate the adequacy of the work performed
by the Chief Auditor and Internal Audit Services and
ensure internal audit is independent and has adequate
resources to fulfill its duties, including
implementation of the annual audit plan.
E. OVERSIGHT OF COMPLIANCE
1) Review periodically with management, including the
General Counsel, and the independent auditors any
correspondence with, or other action by, regulators or
governmental agencies, any material legal affairs of
NovaStar and NovaStar's compliance with the applicable
law and listing standards.
2) Review and discuss reports from management on an annual
and/or as needed basis relating to; fiduciary
compliance; compliance with HUD requirements; compliance
with individual state banking regulators; tax
developments and issues; fraud and operating losses;
technology and information security; business resumption
planning; and NovaStar and subsidiaries.
A-5
APPENDIX B
NOVASTAR FINANCIAL, INC.
NOMINATING & Corporate Governance Committee Charter
I. Mission
The Nominating & Corporate Governance Committee (the "Committee") of NovaStar
Financial Inc. ("NovaStar" or the "Company") is a standing committee of the
Board of Directors (the "Board"). The purpose of the Committee is to fulfill its
responsibilities relating to:
i. Identifying individuals qualified to become Board members,
consistent with the criteria established by the Board.
ii. Recommending to the Board the director nominees for the next
annual meeting of shareholders.
iii. The Committee also leads the Board in the annual review of the
Board's performance and the review of management's performance.
iv. Shaping the corporate governance policies and practices
including developing a set of corporate governance principles
applicable to the company and recommending them to the Board.
II. ORGANIZATION AND AUTHORITY
A. The Nominating & Corporate Governance Committee shall be
comprised of at least three members of the Board, and the
members shall meet the independence, experience, and expertise
requirements of the New York Stock Exchange and other applicable
laws and regulations (including the Sarbanes-Oxley Act of 2002).
B. The members of the Committee shall be appointed by the Board,
based upon the recommendations of the Committee, and shall serve
for such term or terms as the Board may determine and until
their qualified successors are appointed.
C. The Nominating and Corporate Governance Committee shall have the
authority, to the extent it deems necessary or appropriate, to
elect, retain, terminate and approve the fees and other
retention terms of external legal, consultants, accounting,
search firms or other advisors without seeking the approval of
management or the Board.
D. The Nominating and Corporate Governance Committee may form and
delegate authority to subcommittees, comprised of one or more
members of the Committee, as necessary or appropriate. Each
subcommittee shall have the full power and authority of the
Nominating and Corporate Governance Committee.
III. RESPONSIBILITIES
The Committee shall have the following duties, responsibilities and authority:
B-1
A. COMMUNICATION AND ASSESSMENT
1) Meet as often as it determines, but not less frequently
than quarterly.
2) Regularly report to the Board on the Committee's
activities.
3) Annually review and evaluate its own performance.
4) Review and assess the adequacy of this Charter annually
and recommend any proposed changes to the Board for
approval.
B. DIRECTOR CANDIDATE IDENTIFICATION AND RECOMMENDATION TO THE
BOARD
1) Develop criteria to identify and evaluate prospective
candidates for the Board. The criteria should reflect at
a minimum all applicable laws, rules, regulations and
listing standards, including a potential candidates
education, business experience, accounting and financial
expertise, age, diversity, reputation, civic and
community relationships, knowledge and experience in
matters impacting the industry of NovaStar.
2) Recommend to the Board the slate of nominees for
election to the Board at the Company's annual meeting of
stockholders, or if applicable, at a special meeting of
stockholders, or to fill a vacancy on the Board.
C. OVERSIGHT OF BOARD MATTERS
1) Develop and recommend to the Board appropriate criteria
for determining director independence.
2) Evaluate each outside director against the established
criteria and present the findings and recommendations to
the Board.
3) Recommend Board committee assignments and committee
chairs on all active committees of the Board, and
recommend committee members to fill vacancies on
committees as necessary.
4) Review the appropriateness of the size of the Board
relative to its various responsibilities. Make
recommendations to the Board from time to time as to the
structure and operations of the various committees of
the Board.
5) Recommend to the Board an evaluation process of the
Board, its committees and management, as appropriate,
and provide oversight for this process.
6) The Nominating & Corporate Governance Committee will
determine whether each director satisfies the criteria
necessary to be deemed a "financial expert" by
evaluating each director against established criteria.
The Committee will present the findings and
recommendations from this evaluation to the Board. The
Board will then make a formal determination on whether a
director can be deemed a "financial expert".
B-2
D. OVERSIGHT OF CORPORATE GOVERNANCE
1) Develop and recommend to the Board a set of corporate
governance policies, practices and guidelines as
appropriate to the Company and review these policies,
practices and guidelines at least annually and recommend
changes as necessary.
2) Serve as a resource for the Board in addressing any
corporate governance issues or matters that may arise.
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APPENDIX C
NOVASTAR FINANCIAL, INC. 2004 INCENTIVE STOCK PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the NovaStar Financial, Inc. 2004 Incentive
Stock Plan (the "Plan"). The Plan was adopted by the Board on March 11, 2004 and
approved by the Company's stockholders on May [__], 2004. The purpose of the
Plan is to enable the Company and its Subsidiaries to obtain and retain
competent personnel who will contribute to the Company's success by their
ability, ingenuity, and industry, to give the Company's non-employee directors a
proprietary interest in the Company, and to provide incentives to the
participating directors, officers and other key employees, and agents and
consultants, that are linked to performance measures and will therefore inure to
the benefit of all stockholders of the Company.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(1) "ACCRUED DERS" means DERs with the accrual rights described in
Section 5(8).
(2) "ADMINISTRATOR" means the Board, or as long as the Company is
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, or as required under Section 162(m) of the Code, the Committee
appointed by the Board.
(3) "BOARD" means the Board of Directors of the Company.
(4) "CODE" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor thereto.
(5) "COMMITTEE" means the Compensation Committee of the Board, which
shall be composed of not less than three Board members who shall be (i)
Independent as defined by the rules of the New York Stock Exchange, as they may
be amended from time to time; (ii) a Non-Employee Director as defined in Rule
16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as
amended; and (iii) an Outside Director as defined under Section 162(m) of the
Internal Revenue Code of 1986, as amended, and rules promulgated thereunder.
(6) "COMPANY" means NovaStar Financial, Inc., a corporation
organized under the laws of the State of Maryland (or any successor
corporation).
(7) "CURRENT-PAY DERS" means DERs with the current-pay rights
described in Section 5(8).
(8) "DERS" shall mean dividend equivalent rights, in the form of
Accrued DERs or Current-pay DERs.
(9) "DEFERRED STOCK" means an award granted pursuant to Section 7 of
the right to receive Stock at the end of a specified deferral period or on such
other bases as the Administrator may determine.
C-1
(10) "DISABILITY" means permanent and total disability as determined
under the Company's disability program or policy.
(11) "EFFECTIVE DATE" shall mean the date provided pursuant to
Section 11.
(12) "ELIGIBLE EMPLOYEE" means an employee of the Company or any
Subsidiary, and any person to whom an offer of employment is made by the Company
or any Subsidiary, eligible to participate in the Plan pursuant to Section 4.
(13) "ELIGIBLE NON-EMPLOYEE DIRECTOR" means a member of the Board or
the board of directors of any Subsidiary who is not a bona fide employee of the
Company or any Subsidiary and who is eligible to participate in the Plan
pursuant to Section 5A.
(14) "FAIR MARKET VALUE" means, as of any given date, with respect to
any awards granted hereunder, at the discretion of the Administrator and subject
to such limitations as the Administrator may impose, (A) the closing sale price
of the Stock on the next preceding business day as reported in the Wall Street
Journal, or (B) the average of the closing price of the Stock on each day on
which the Stock was traded over a period of up to twenty trading days
immediately prior to such date, or (C) if the Stock is not publicly traded, the
fair market value of the Stock as otherwise determined by the Administrator in
the good faith exercise of its discretion.
(15) "GAAP" means, for any day, generally accepted accounting
principles, applied on a consistent basis, stated in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants, or in statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by another
entity or entities as may be approved by a significant segment of the accounting
profession, that are applicable to the circumstances for that day.
(16) "INCENTIVE STOCK OPTION" means any Stock Option intended to be
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
(17) "LIMITED STOCK APPRECIATION RIGHT" means a Stock Appreciation
Right that can be exercised only in the event of a "Change of Control" (as
defined in Section 6 below).
(18) "NON-EMPLOYEE DIRECTOR" shall have the meaning set forth in Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended.
(19) "NON-QUALIFIED STOCK OPTION" means any Stock Option that is not
an Incentive Stock Option, including any Stock Option that provides (as of the
time such option is granted) that it will not be treated as an Incentive Stock
Option.
(20) "PARENT CORPORATION" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations in the chain (other than the Company) owns stock possessing
50% or more of the combined voting power of all classes of stock in one of the
other corporations in the chain.
(21) "PARTICIPANT" means any Eligible Employee or any consultant or
agent of the Company or any Subsidiary selected by the Committee, pursuant to
the Administrator's authority in Section 2, to receive grants of Stock Options,
DERs, Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted
Stock awards, Deferred Stock awards, Performance Shares
C-2
or any combination of the foregoing, or any Eligible Non-Employee Director
eligible to receive stock-based grants pursuant to Section 5A below.
(22) "PRIOR PLAN" means the Company's 1996 Executive and Non-Employee
Director Stock Option Plan, as amended.
(23) "PERFORMANCE SHARE" means an award of shares of Stock granted
pursuant to Section 7 that is subject to restrictions based upon the attainment
of specified performance objectives.
(24) "RESTRICTED STOCK" means an award granted pursuant to Section 7
of shares of Stock, subject to restrictions that will lapse with the passage of
time or on such other bases as the Administrator may determine.
(25) "STOCK" means the common stock, $0.01 par value, of the Company.
(26) "STOCK APPRECIATION RIGHT" means the right pursuant to an award
granted under Section 6 to receive an amount equal to the difference between (A)
the Fair Market Value, as of the date such Stock Appreciation Right or portion
thereof is surrendered, of the shares of Stock covered by such right or such
portion thereof, and (B) the aggregate exercise price of such right or such
portion thereof.
(27) "STOCK OPTION" means an option to purchase shares of Stock
granted pursuant to Section 5 or Section 5A.
(28) "SUBSIDIARY" means (A) any corporation (other than the Company)
or other entity whose assets and liabilities are consolidated with those of the
Company on the Company's consolidated balance sheet and (B) any other business
venture designated by the Administrator in which the Company has a significant
interest, as determined in the discretion of the Administrator.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Administrator, except as otherwise
expressly provided herein.
The Administrator shall have the power and authority to grant to
Participants pursuant to the terms of the Plan: (a) Stock Options (with or
without DERs), (b) Stock Appreciation Rights or Limited Stock Appreciation
Rights, (c) Restricted Stock, (d) Deferred Stock, (e) Performance Shares or (f)
any combination of the foregoing.
In addition, the Administrator shall have the authority:
(a) to select those employees and prospective employees of the
Company or any Subsidiary who shall be Eligible Employees;
(b) to determine whether and to what extent Stock Options (with or
without DERs), Stock Appreciation Rights, Limited Stock Appreciation Rights,
Restricted Stock, Deferred Stock, Performance Shares or a combination of the
foregoing, are to be granted to Participants hereunder;
C-3
(c) to determine the number of shares to be covered by each such
award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder (including, but not limited
to, (x) the restricted period applicable to Restricted or Deferred Stock awards
and the date or dates on which restrictions applicable to such Restricted or
Deferred Stock shall lapse during such period, and (y) the performance goals and
periods applicable to the award of Performance Shares); and
(e) to determine the terms and conditions, not inconsistent with the
terms of the Plan, which shall govern all written instruments evidencing the
Stock Options, DERs, Stock Appreciation Rights, Limited Stock Appreciation
Rights, Restricted Stock, Deferred Stock, Performance Shares or any combination
of the foregoing.
The Administrator may designate whether any award being granted to any
Participant is intended to be "performance-based compensation" as that term is
used in Section 162(m) of the Code. Any such awards designated as
"performance-based compensation" shall be conditioned on the achievement of one
or more performance measures. The performance measures that may be used by the
Administrator for such awards shall be based on any one or more of the
following, as selected by the Administrator: revenue; revenue per employee; GAAP
earnings; taxable earnings; GAAP or taxable earnings per employee; GAAP or
taxable earnings per share (basic or diluted); operating income; total
stockholder return; dividends paid or payable; market share; profitability as
measured by return ratios, including return on revenue, return on assets, return
on equity, and return on investment; cash flow; or economic value added
(economic profit); and such criteria generally must be specified in advance and
may relate to one or any combination of two or more corporate, group, unit,
division, affiliate, or individual performances. For awards intended to be
"performance-based compensation," the grant of the awards, the establishment of
the performance measures, and the certification that the performance goals were
satisfied shall be made during the period and in the manner required under Code
Section 162(m).
The Administrator shall have the authority, in its discretion, to adopt,
alter, and repeal such administrative rules, guidelines, and practices governing
the Plan as it shall from time to time deem advisable; to interpret the terms
and provisions of the Plan and any award issued under the Plan (and any
agreements relating thereto); and to otherwise supervise the administration of
the Plan.
All decisions made by the Administrator pursuant to the provisions of
the Plan shall be final and binding on all persons, including the Company, any
Subsidiaries and the Participants.
Notwithstanding anything to the contrary herein, no award hereunder may
be made to any Participant to the extent that, following such award, the shares
subject or potentially subject to such Participant's control (including, but not
limited to, (i) shares of the Company's equity stock owned by the Participant,
(ii) shares of Stock subject to awards granted to the Participant under the
Prior Plan (whether such awards are then exercisable or vested), (iii) Stock
Options, whether or not then exercisable, held by the Participant to purchase
additional such shares, (iv) Restricted Stock, Deferred Stock, and Performance
Share awards to the Participant, whether or not then vested, and (v) Accrued
DERs credited to the Participant) would constitute more than 9.8% of the
outstanding capital stock of the Company.
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SECTION 3. STOCK SUBJECT TO PLAN.
The shares of Stock for which awards may be granted under the Plan shall
be subject to the following:
(1) Subject to the following provisions of this Section 3, the
maximum number of shares of Stock with respect to which awards may be granted to
Participants and their beneficiaries under the Plan shall be equal to 2,500,000
shares of Stock.
(2) Any shares of Stock covered by an award that is forfeited or
canceled, or shares of stock not delivered because the award is settled in cash
or used to satisfy the applicable tax withholding obligation, shall not be
deemed to have been granted for purposes of determining the maximum number of
shares of Stock available for future awards under the Plan.
(3) If the exercise price of any Stock Option granted under the Plan
is satisfied by tendering shares of Stock to the Company (by either actual
delivery or by attestation), only the number of shares of Stock issued net of
the shares of Stock tendered shall be deemed granted for purposes of determining
the maximum number of shares of Stock available for future awards under the
Plan.
(4) If any shares of Stock have been pledged as collateral for
indebtedness incurred by a Participant in connection with the exercise of a
Stock Option and such shares are returned to the Company in satisfaction of such
indebtedness, such shares shall be available for future awards under the Plan.
(5) Subject to Section 3(6), the following additional maximums are
imposed under the Plan:
(a) The maximum number of shares of Stock that may be the
subject of awards granted as Incentive Stock Options under the Plan shall be
2,500,000 shares (regardless of whether the awards are canceled, forfeited, or
re-priced or the shares subject to any such award are surrendered).
(b) The maximum number of shares that may be the subject of
awards granted to any one individual pursuant to Sections 5 and 6 (relating to
Stock Options and Stock Appreciation Rights and Limited Stock Appreciation
Rights) shall be 250,000 shares during any calendar year (regardless of whether
such awards are canceled, forfeited, or re-priced or the shares subject to any
such award are surrendered).
(c) No more than 250,000 shares of Stock may be the subject
of awards under the Plan granted to any one individual during any
one-calendar-year period (regardless of when such shares are deliverable or
whether the awards are forfeited, canceled, or re-priced or the shares subject
to any such award are surrendered) if such awards are intended to be
"performance-based compensation" (as the term is used for purposes of Code
Section 162(m)).
(d) Shares of Stock issued under the Plan or covered by
awards granted under the Plan pursuant to the settlement, assumption or
substitution of outstanding awards or obligations to grant future awards as a
condition of the Company acquiring another entity shall not count against the
maximum number of shares available for future awards under the Plan.
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(6) In the event of a corporate transaction involving the Company
(including, without limitation, any stock dividend, stock split, extraordinary
cash dividend, recapitalization, reorganization, merger, consolidation,
split-up, spin-off, combination, or exchange of shares), the Administrator may
adjust awards to preserve the benefits or potential benefits of the awards.
Action by the Administrator may include: (i) adjustment of the number and kind
of shares which may be delivered under the Plan; (ii) adjustment of the number
and kind of shares subject to outstanding awards; (iii) adjustment of the
exercise price of outstanding Stock Options, Stock Appreciation Rights, and
Limited Stock Appreciation Rights; and (iv) any other adjustments that the
Administrator determines to be equitable, in its sole discretion.
SECTION 4. ELIGIBILITY.
Officers and other key employees of the Company or Subsidiaries who are
responsible for or contribute to the management, growth, and/or profitability of
the business of the Company or its Subsidiaries and consultants and agents of
the Company or its Subsidiaries, shall be eligible to be granted Stock Options,
DERs, Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted
Stock awards, Deferred Stock awards or Performance Shares hereunder. The
Participants under the Plan shall be selected from time to time by the
Administrator, in its sole discretion, from among the Eligible Employees and
consultants and agents recommended by the senior management of the Company, and
the Administrator shall determine, in its sole discretion, the number of shares
covered by each award; provided, however, that Eligible Non-Employee Directors
shall only be eligible to receive stock-based awards as provided in Section 5A
and provided further, however, that any grant made to any person to whom an
offer of employment is made shall cease to be effective unless such person
accepts such offer and commences employment with the Company or any Subsidiary
within 90 days after the date of the grant.
SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone or in addition to other awards
granted under the Plan, including DERs as described in Section 5(8). Any Stock
Option granted under the Plan shall be in such form as the Administrator may
from time to time approve, and the provisions of Stock Option awards need not be
the same with respect to each optionee. Recipients of Stock Options shall enter
into a stock option agreement with the Company, in such form as the
Administrator shall determine, which agreement shall set forth, among other
things, the exercise price of the option, the term of the option and provisions
regarding exercisability of the option granted thereunder.
The Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options.
The Administrator shall have the authority under this Section 5 to grant
any optionee (except Eligible Non-Employee Directors) Incentive Stock Options,
Non-Qualified Stock Options, or both types of Stock Options (in each case with
or without DERs, Stock Appreciation Rights, or Limited Stock Appreciation
Rights), provided, however, that Incentive Stock Options may not be granted to
any individual who is not an employee of the Company or its Subsidiaries. To the
extent that any Stock Option does not qualify as an Incentive Stock Option, it
shall constitute a separate Non-Qualified Stock Option. More than one option may
be granted to the same optionee and be outstanding concurrently hereunder.
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Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Administrator shall deem
desirable:
(1) OPTION PRICE. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Administrator in its sole
discretion at the time of grant but shall not be less than 100% of the Fair
Market Value of the Stock on such date, and shall not, in any event, be less
than the par value of the Stock. If an employee owns or is deemed to own (by
reason of the attribution rules applicable under Section 425(d) of the Code)
more than 10% of the combined voting power of all classes of stock of the
Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is
granted to such employee, the option price of such Incentive Stock Option (to
the extent required by the Code at the time of grant) shall be no less than 110%
of the Fair Market Value of the Stock on the date such Incentive Stock Option is
granted.
(2) OPTION TERM. The term of each Stock Option shall be fixed by the
Administrator, but no Stock Option shall be exercisable more than ten years
after the date such Stock Option is granted; provided, however, that if an
employee owns or is deemed to own (by reason of the attribution rules of Section
425(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any Parent Corporation or Subsidiary and an Incentive
Stock Option is granted to such employee, the term of such Incentive Stock
Option (to the extent required by the Code at the time of grant) shall be no
more than five years from the date of grant.
(3) EXERCISABILITY. Stock Options shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined by the
Administrator at or after grant. The Administrator may provide, in its
discretion, that any Stock Option shall be exercisable only in installments, and
the Administrator may waive such installment exercise provisions at any time in
whole or in part based on such factors as the Administrator may determine, in
its sole discretion. To the extent not exercised, installments shall accumulate
and be exercisable in whole or in part at any time after becoming exercisable
but not later than the date the Stock Option expires.
(4) METHOD OF EXERCISE. Subject to Section 5(3), Stock Options may
be exercised in whole or in part at any time during the option period, by giving
written notice of exercise to the Company specifying the number of shares to be
purchased, accompanied by payment in full of the purchase price in cash or its
equivalent as determined by the Administrator. The Administrator may also permit
a Participant to elect to pay the exercise price upon the exercise of a Stock
Option by irrevocably authorizing a third party to sell shares of Stock (or a
sufficient portion of the shares) acquired upon exercise of the Stock Option and
remit to the Company a sufficient portion of the sale proceeds to pay the entire
exercise price and any tax withholding resulting from such exercise. As
determined by the Administrator, in its sole discretion, payment in whole or in
part may also be made by surrendering unrestricted Stock already owned by the
optionee, or, in the case of the exercise of a Non-Qualified Stock Option,
Restricted Stock, or Performance Shares subject to an award hereunder (based, in
each case, on the Fair Market Value of the Stock on the date the option is
exercised); provided, however, that in the case of an Incentive Stock Option,
the right to make payment in the form of already owned shares may be authorized
only at the time of grant. Any payment in the form of stock already owned by the
optionee may be effected by use of an attestation form approved by the
Administrator. If payment of the option exercise price of a Non-Qualified Stock
Option is made in whole or in part
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in the form of Restricted Stock or Performance Shares, the shares received upon
the exercise of such Stock Option (to the extent of the number of shares of
Restricted Stock or Performance Shares surrendered upon exercise of such Stock
Option) shall be restricted in accordance with the original terms of the
Restricted Stock or Performance Share award in question, except that the
Administrator may direct that such restrictions shall apply only to that number
of shares equal to the number of shares surrendered upon the exercise of such
option. An optionee shall generally have the rights to dividends and other
rights of a stockholder with respect to shares subject to the option only after
the optionee has given written notice of exercise, has paid in full for such
shares, and, if requested, has given the representation described in paragraph
(1) of Section 11.
(5) LOANS. The Company may make loans available to Stock Option
holders in connection with the exercise of outstanding options granted under the
Plan, as the Administrator, in its discretion, may determine. Such loans shall
(i) be evidenced by promissory notes entered into by the Stock Option holders in
favor of the Company, (ii) be subject to the terms and conditions set forth in
this Section 5(5) and such other terms and conditions, not inconsistent with the
Plan, as the Administrator shall determine, and (iii) bear interest at such rate
as the Administrator shall determine. In no event may the principal amount of
any such loan exceed the sum of (x) the exercise price less the par value of the
shares of Stock covered by the option, or portion thereof, exercised by the
holder, and (y) any federal, state, and local income tax attributable to such
exercise. The initial term of the loan, the schedule of payments of principal
and interest under the loan, the extent to which the loan is to be with or
without recourse against the holder with respect to principal or interest and
the conditions upon which the loan will become payable in the event of the
holder's termination of employment shall be determined by the Administrator;
provided, however, that the term of the loan, including extensions, shall not
exceed seven years. Unless the Administrator determines otherwise, when a loan
is made, shares of Stock having a Fair Market Value at least equal to the
principal amount of the loan shall be pledged by the holder to the Company as
security for payment of the unpaid balance of the loan, and such pledge shall be
evidenced by a pledge agreement, the terms of which shall be determined by the
Administrator, in its discretion; provided, however, that each loan shall comply
with all applicable laws, regulations and rules of the Board of Governors of the
Federal Reserve System and any other governmental agency having jurisdiction.
(6) LIMITS ON TRANSFERABILITY OF OPTIONS.
(a) Subject to Section 5(6)(b), no Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution or pursuant to a "qualified domestic relations order," as such
term is defined in the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee or in accordance with the terms of a
qualified domestic relations order.
(b) The Administrator may, in its discretion, authorize all
or a portion of the Non-Qualified Stock Options to be granted to an optionee to
be on terms which permit transfer by such optionee to (i) the spouse, qualified
domestic partner, children, or grandchildren of the optionee and any other
persons related to the optionee as may be approved by the Administrator
("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit
of such Immediate Family Members, (iii) a partnership or partnerships in which
such Immediate Family Members are the only partners, or (iv) any other persons
or entities as may be approved by the
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Administrator, provided that (x) there may be no consideration for any transfer
unless approved by the Administrator, (y) the stock option agreement pursuant to
which such options are granted must be approved by the Administrator, and must
expressly provide for transferability in a manner consistent with this Section
5(6)(b), and (z) subsequent transfers of transferred Stock Options shall be
prohibited except those in accordance with Section 5(6)(a) or expressly approved
by the Administrator. Following transfer, any such Stock Options shall continue
to be subject to the same terms and conditions as were applicable immediately
prior to transfer, provided that, except for purposes of Sections 5(7) and 10(3)
hereof, the terms "optionee," "Stock Option holder" and "Participant" shall be
deemed to refer to the transferee. The events of termination of employment
contained in the option agreement with respect to such Stock Options shall
continue to be applied with respect to the original optionee, following any
which event the Stock Options shall be exercisable by the transferee only to the
extent, and for the periods specified in such option agreements. Notwithstanding
the transfer, the original optionee will continue to be subject to the
provisions of Section 10(3) regarding payment of taxes, including the provisions
entitling the Company to deduct such taxes from amounts otherwise due to such
optionee. Any transfer of a Stock Option that was originally granted with DERs
related thereto shall automatically include the transfer of such DERs, any
attempt to transfer such Stock Option separately from such DERs shall be void,
and such DERs shall continue in effect according to their terms. "Qualified
domestic partner" for the purpose of this Section 5(6)(b) shall mean a domestic
partner living in the same household as the optionee and registered with,
certified by, or otherwise acknowledged by the county or other applicable
governmental body as a domestic partner or otherwise establishing such status in
any manner satisfactory to the Administrator.
(7) Annual Limit on Incentive Stock Options. To the extent that the
aggregate Fair Market Value (determined as of the date the Incentive Stock
Option is granted) of shares of Stock with respect to which Incentive Stock
Options granted to an optionee under this Plan and all other option plans of the
Company, its Parent Corporation or any Subsidiary become exercisable for the
first time by the optionee during any calendar year exceeds $100,000, such Stock
Options shall be treated as Non-Qualified Stock Options.
(8) DERs. The Administrator shall have the discretion to grant DERs
in conjunction with grants of Stock Options pursuant to this Section 5. DERs may
be granted in either of two forms, "Current-pay DERs" and "Accrued DERs" and the
Administrator may condition the payment or accrual of amounts in respect thereof
subject to satisfaction of such performance objectives as the Administrator may
specify at the time of grant. Assuming satisfaction of any applicable
conditions, Current-pay DERs shall be paid concurrently with any dividends or
distributions paid on the Stock during the time the related Stock Options are
outstanding, or such portion of such time as the Administrator may determine, in
an amount equal to the value of the cash dividend (or Stock or other property
being distributed) per share being paid on the Stock times the number of shares
subject to the related Stock Options. Current-pay DERs are payable in cash,
Stock or such other property as may be distributed to stockholders, as the
Administrator shall determine at the time of grant. Accrued DERs may be accrued
in respect of cash dividends only or cash dividends and the value of any Stock
or other property distributed to stockholders, as the Administrator shall
determine at the time of grant. Assuming satisfaction of any applicable
conditions, Accrued DERs shall be accrued with respect to the related Stock
Options outstanding as of the date dividends are declared on the Company's Stock
in accordance with the following formula:
(A x B) / C
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under which "A" equals the number of shares subject to such Stock Options, "B"
equals the cash dividend per share or the value per share of the Stock or other
property being distributed, as the case may be, and "C" equals the Fair Market
Value per share of Stock on the dividend payment date. The Accrued DERs shall
represent shares of Stock which shall be issuable to the holder of the related
Stock Option proportionately as the holder exercises the Stock Option to which
the Accrued DERs relate, rounded down to the nearest whole number of shares.
DERs shall expire upon the expiration of the Stock Options to which they relate.
The Administrator shall specify at the time of grant whether dividends shall be
payable or credited on the shares of Stock represented by Accrued DERs.
Notwithstanding anything to the contrary herein, Accrued DERs granted with
respect to Stock Options shall be accrued only to the extent of the number of
shares of stock then reserved and available for issuance under the Plan in
excess of the number of shares subject to issuance pursuant to outstanding Stock
Option, Accrued DER, Stock Appreciation Right, Limited Stock Appreciation Right,
Deferred Stock, or Performance Share Awards.
SECTION 5A. STOCK OPTIONS FOR ELIGIBLE NON-EMPLOYEE DIRECTORS.
This Section 5A shall apply only to grants of Stock Options to Eligible
Non-Employee Directors.
(1) Each Eligible Non-Employee Director shall automatically be
granted, upon first becoming a director of the Company Non-Qualified Stock
Options, Restricted Stock, Stock Appreciation Rights or such other stock-based
award allowable under the Plan in an amount not to exceed 10,000 shares of Stock
as determined by the Board, provided that no Eligible Non-Employee Director may
receive more than one such grant for serving as a director of the Company and
one or more Subsidiaries. In addition, on the day after the annual meeting of
stockholders of the Company to be held in the calendar year 2004, and on the day
after each annual stockholders' meeting of the Company thereafter during the
term of the Plan, each Eligible Non-Employee Director of the Company shall be
granted Non-Qualified Stock Options, Restricted Stock, Stock Appreciation
Rights, Limited Stock Appreciation Rights or other stock-based award allowable
under the Plan in an amount not to exceed 15,000 shares of Stock as the Board
may determine. The price per share of Stock for these grants shall be 100% of
the Fair Market Value on the date of grant. Each grant to an Eligible
Non-Employee Director shall vest as the Board may determine. To the extent not
exercised, installments shall accumulate and be exercisable in whole or in part
at and time after becoming exercisable but not later than the date the Stock
Option expires. Exercise shall be pursuant to any method described in Section
5(4) and no Stock Option shall be exercisable more than ten years after the date
of grant. Any Stock Option issued under this Section may include DERs, in the
discretion of the Board.
(2) Eligible Non-Employee Directors who receive grants of Stock
Options shall enter into a stock option agreement with the Company, which
agreement shall set forth, among other things, the exercise price of the option,
the term of the option and provisions regarding exercisability of the option
granted thereunder. The Stock Options granted under this section shall be
Non-Qualified Stock Options.
(3) Non-Qualified Stock Options granted to Eligible Non-Employee
Directors hereunder shall be transferable only to the extent provided in
Sections 5(6)(a) and (b).
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SECTION 6. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS.
(1) GRANT AND EXERCISE. Stock Appreciation Rights and Limited Stock
Appreciation Rights may be granted either alone ("Free Standing Rights") or in
conjunction with all or part of any Stock Option granted under the Plan
("Related Rights"). In the case of a Non-Qualified Stock Option, Related Rights
may be granted either at or after the time of the grant of such Stock Option. In
the case of an Incentive Stock Option, Related Rights may be granted only at the
time of the grant of the Incentive Stock Option.
A Related Right or applicable portion thereof granted in conjunction
with a given Stock Option shall terminate and no longer be exercisable upon the
termination or exercise of the related Stock Option, except that, unless
otherwise provided by the Administrator at the time of grant, a Related Right
granted with respect to less than the full number of shares covered by a related
Stock Option shall only be reduced if and to the extent that the number of
shares covered by the exercise or termination of the related Stock Option
exceeds the number of shares not covered by the Stock Appreciation Right.
A Related Right may be exercised by an optionee, in accordance with
paragraph (2) of this Section 6, by surrendering the applicable portion of the
related Stock Option. Upon such exercise and surrender, the optionee shall be
entitled to receive an amount determined in the manner prescribed in paragraph
(2) of this Section 6. Stock Options which have been so surrendered, in whole or
in part, shall no longer be exercisable to the extent the Related Rights have
been so exercised.
(2) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject
to such terms and conditions, not inconsistent with the provisions of the Plan,
as shall be determined from time to time by the Administrator, including the
following:
(a) Stock Appreciation Rights that are Related Rights
("Related Stock Appreciation Rights") shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate shall be
exercisable in accordance with the provisions of Section 5 and this Section 6;
provided, however, that no Related Stock Appreciation Right shall be exercisable
during the first six months of its term, except that this additional limitation
shall not apply in the event of death or Disability of the optionee prior to the
expiration of such six-month period.
(b) Upon the exercise of a Related Stock Appreciation Right,
an optionee shall be entitled to receive up to, but not more than, an amount in
cash or that number of shares of Stock (or in some combination of cash and
shares of Stock) equal in value to the excess of the Fair Market Value of one
share of Stock as of the date of exercise over the option price per share
specified in the related Stock Option multiplied by the number of shares of
Stock in respect of which the Related Stock Appreciation Right is being
exercised, with the Administrator having the right to determine the form of
payment.
(c) Related Stock Appreciation Rights shall be transferable
or exercisable only when and to the extent that the underlying Stock Option
would be transferable or exercisable under paragraph (6) of Section 5.
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(d) Upon the exercise of a Related Stock Appreciation Right,
the Stock Option or part thereof to which such Related Stock Appreciation Right
is related shall be deemed to have been exercised for the purpose of the
limitation set forth in Section 3 on the number of shares of Stock to be issued
under the Plan.
(e) A Related Stock Appreciation Right granted in connection
with an Incentive Stock Option may be exercised only if and when the Fair Market
Value of the Stock subject to the Incentive Stock Option exceeds the exercise
price of such Stock Option.
(f) Stock Appreciation Rights that are Free Standing Rights
("Free Standing Stock Appreciation Rights") shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Administrator at or after grant; provided, however, that no Free Standing Stock
Appreciation Right shall be exercisable during the first six months of its term,
except that this limitation shall not apply in the event of death or Disability
of the recipient of the Free Standing Stock Appreciation Right prior to the
expiration of such six-month period.
(g) The term of each Free Standing Stock Appreciation Right
shall be fixed by the Administrator, but no Free Standing Stock Appreciation
Right shall be exercisable more than ten years after the date such right is
granted.
(h) Upon the exercise of a Free Standing Stock Appreciation
Right, a recipient shall be entitled to receive up to, but not more than, an
amount in cash or that number of shares of Stock (or any combination of cash or
shares of Stock) equal in value to the excess of the Fair Market Value of one
share of Stock as of the date of exercise over the price per share specified in
the Free Standing Stock Appreciation Right (which price shall be no less than
100% of the Fair Market Value of the Stock on the date of grant) multiplied by
the number of shares of Stock with respect to which the right is being
exercised, with the Administrator having the right to determine the form of
payment.
(i) Free Standing Stock Appreciation Rights shall be
transferable or exercisable subject to the provisions governing the
transferability and exercisability of Stock Options set forth in paragraphs (3)
and (6) of Section 5.
(j) In the event of the termination of an employee who has
been granted one or more Free Standing Stock Appreciation Rights, such rights
shall be exercisable to the same extent that a Stock Option would have been
exercisable in the event of the termination of the optionee.
(k) Limited Stock Appreciation Rights may only be exercised
within the 30-day period following a "Change of Control" (as defined by the
Administrator at the time of grant), and, with respect to Limited Stock
Appreciation Rights that are Related Rights ("Related Limited Stock Appreciation
Rights"), only to the extent that the Stock Options to which they relate shall
be exercisable in accordance with the provisions of Section 5 and this Section
6; provided, however, that no Related Limited Stock Appreciation Right shall be
exercisable during the first six months of its term, except that this additional
limitation shall not apply in the event of death or Disability of the optionee
prior to the expiration of such six-month period.
(l) Upon the exercise of a Limited Stock Appreciation Right,
the recipient shall be entitled to receive an amount in cash equal in value to
the excess of the "Change of
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Control Price" (as defined by the Administrator at the time of grant) of one
share of Stock as of the date of exercise over (A) the option price per share
specified in the related Stock Option, or (B) in the case of a Limited Stock
Appreciation Right which is a Free Standing Stock Appreciation Right, the price
per share specified in the Free Standing Stock Appreciation Right, such excess
to be multiplied by the number of shares in respect of which the Limited Stock
Appreciation Right shall have been exercised.
(m) For the purpose of the limitation set forth in Section 3
on the number of shares to be issued under the Plan, the grant or exercise of
Free Standing Stock Appreciation Rights shall be deemed to constitute the grant
or exercise, respectively, of Stock Options with respect to the number of shares
of Stock with respect to which such Free Standing Stock Appreciation Rights were
so granted or exercised.
SECTION 7. RESTRICTED STOCK, DEFERRED STOCK, AND PERFORMANCE SHARES.
(1) GENERAL. Restricted Stock, Deferred Stock, or Performance Share
awards may be issued either alone or in addition to other awards granted under
the Plan. The Administrator shall determine the Eligible Employees to whom, and
the time or times at which, grants of Restricted Stock, Deferred Stock, or
Performance Share awards shall be made; the number of shares to be awarded; the
price, if any, to be paid by the recipient of Restricted Stock, Deferred Stock,
or Performance Share awards; the Restricted Period (as defined in Section 7(3))
applicable to Restricted Stock, Deferred Stock, or Performance Share awards; the
performance objectives applicable to Performance Share, Restricted Stock, or
Deferred Stock awards; the date or dates on which restrictions applicable to
such Restricted Stock or Deferred Stock awards shall lapse during such
Restricted Period; and all other conditions of the Restricted Stock, Deferred
Stock, and Performance Share awards. The Administrator may also condition the
grant of Restricted Stock, Deferred Stock, or Performance Share awards upon the
exercise of Stock Options or upon such other criteria as the Administrator may
determine, in its sole discretion. The provisions of Restricted Stock, Deferred
Stock or Performance Share awards need not be the same with respect to each
recipient.
(2) AWARDS AND CERTIFICATES. The prospective recipient of a
Restricted Stock, Deferred Stock, or Performance Share award shall not have any
rights with respect to such award, unless and until such recipient has executed
an agreement evidencing the award (a "Restricted Stock Award Agreement,"
"Deferred Stock Award Agreement," or "Performance Share Award Agreement," as
appropriate) and delivered a fully executed copy thereof to the Company, within
a period of sixty days (or such other period as the Administrator may specify)
after the award date. Except as otherwise provided below in this Section 7(2),
(i) each Participant who is awarded Restricted Stock or Performance Shares shall
be issued a stock certificate in respect of such shares of Restricted Stock or
Performance Shares; and (ii) such certificate shall be registered in the name of
the Participant, and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award, substantially in the
following form:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and conditions
(including forfeiture) of the NovaStar Financial, Inc. 2004 Incentive
Stock Plan and a Restricted Stock Award Agreement or Performance Share
Award Agreement entered into between the
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registered owner and NovaStar Financial, Inc. Copies of such Plan and
Agreement are on file in the offices of NovaStar Financial, Inc."
The Company shall require that the stock certificates evidencing such
shares be held in the custody of the Company until the restrictions thereon
shall have lapsed, and that, as a condition of any Restricted Stock award or
Performance Share award, the Participant shall have delivered a stock power,
endorsed in blank, relating to the Stock covered by such award.
(3) RESTRICTIONS AND CONDITIONS. The Restricted Stock, Deferred
Stock, and Performance Share awards granted pursuant to this Section 7 shall be
subject to the following restrictions and conditions:
(a) Subject to the provisions of the Plan and the Restricted
Stock, Deferred Stock, or Performance Share award agreement, during such period
as may be set by the Administrator commencing on the grant date (the "Restricted
Period"), the Participant shall not be permitted to sell, transfer, pledge, or
assign shares of Restricted Stock, Performance Shares, or Deferred Stock awarded
under the Plan; provided, however, that the Administrator may, in its sole
discretion, provide for the lapse of such restrictions in installments and may
accelerate or waive such restrictions in whole or in part based on such factors
and such circumstances as the Administrator may determine, in its sole
discretion, including, but not limited to, the attainment of certain performance
related goals, the Participant's termination, death, or Disability or the
occurrence of a "Change of Control" (as defined by the Administrator at the time
of grant).
(b) Except as provided in paragraph (3)(a) of this Section
7, the Participant shall have, with respect to the shares of Restricted Stock or
Performance Shares, all of the rights of a stockholder of the Company, including
the right to vote the shares, and the right to receive any dividends thereon
during the Restricted Period. With respect to Deferred Stock awards, the
Participant shall generally not have the rights of a stockholder of the Company,
including the right to vote the shares during the Restricted Period; provided,
however, that, except as otherwise specified by the Administrator at time of
grant, dividends declared during the Restricted Period with respect to the
number of shares covered by a Deferred Stock award shall accrue to the
Participant. Certificates for shares of unrestricted Stock shall be delivered to
the Participant promptly after, and only after, the Restricted Period shall
expire without forfeiture in respect of such shares covered by the award of
Restricted Stock, Performance Shares, or Deferred Stock, except as the
Administrator, in its sole discretion, shall otherwise determine.
(c) Subject to the provisions of the Restricted Stock,
Deferred Stock, or Performance Share award agreement and this Section 7, upon
termination of employment for any reason during the Restricted Period, all
shares subject to any restriction as of the date of such termination shall be
forfeited by the Participant, and the Participant shall only receive the amount,
if any, paid by the Participant for such Restricted Stock or Performance Shares,
plus simple interest on such amount at the rate of 8% per year.
SECTION 8. AMENDMENT AND TERMINATION.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation (1) may impair the rights of a Participant under
any award theretofore granted without such Participant's consent, or (2) without
the approval of the stockholders:
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(a) except as provided in Section 3, increase the total number of
shares of Stock for which awards may be granted under the Plan;
(b) change the employees or class of employees eligible to
participate in the Plan;
(c) materially change the performance measures set forth in Section
2 of the Plan; or
(d) extend the maximum option period under paragraph (2) of Section
5 of the Plan.
The Administrator may amend the terms of any award theretofore granted,
prospectively or retroactively, but, subject to Section 3, no such amendment
shall impair the rights of any holder without his or her consent.
SECTION 9. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a Participant or
optionee by the Company, nothing contained herein shall give any such
Participant or optionee any rights that are greater than those of a general
creditor of the Company.
SECTION 10. GENERAL PROVISIONS.
(1) The Administrator may require each person purchasing shares
pursuant to a Stock Option to represent to and agree with the Company in writing
that such person is acquiring the shares without a view to distribution thereof.
The certificates for such shares may include any legend which the Administrator
deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations, and other
requirements of the Commission, any stock exchange upon which the Stock is then
listed, and any applicable federal or state securities law, and the
Administrator may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
(2) Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of the
Plan shall not confer upon any employee of the Company or any Subsidiary any
right to continued employment with the Company or a Subsidiary, as the case may
be, nor shall it interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees at any time.
(3) Each Participant shall, no later than the date as of which the
value of an award first becomes includable in the gross income of the
Participant for federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Administrator regarding payment of, any
federal, state, or local taxes of any kind required by law to be withheld with
respect to the award. The obligations of the Company under the Plan shall be
conditional on the making of such payments or arrangements, and the Company
(and, where applicable, its Subsidiaries) shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the Participant.
C-15
(4) No member of the Board or the Administrator, nor any officer or
employee of the Company acting on behalf of the Board or the Administrator,
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of the
Board or the Administrator and each and any officer or employee of the Company
acting on their behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company in respect of any such action,
determination or interpretation.
(5) The Administrator may permit or require a Participant to subject
any award granted hereunder to any deferred compensation, deferred stock
issuance, or similar plan that may be made available to Participants by the
Company from time to time. The Administrator may establish such rules and
procedures for participation in such deferral plans as it may deem appropriate,
in its sole discretion.
SECTION 11. EFFECTIVE DATE OF PLAN.
The Plan became effective (the "Effective Date") on May 25, 2004, the
date the Company's stockholders formally approved the Plan; and the Prior Plan
was terminated except with respect to outstanding awards that remain to become
vested, exercised or free of restrictions.
SECTION 12. TERM OF PLAN.
The Plan shall remain in full force and effect unless terminated by the
Board or no further shares of Stock remain available for awards to be granted
under Section 3 and there are no outstanding awards that remain to become
vested, exercised, or free of restrictions.
C-16
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 PROPOSALS. 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:_________________________________, 2004
____________________________________________
SIGNATURE
____________________________________________
SIGNATURE
(Please sign exactly as name appears on
stock certificate. Where stock is registered
jointly, all others must sign. Corporate
owners should sign full corporate name by an
authorized person. Executors,
administrators, trustees, or guardians
should indicate thier status when signing.)
PLEASE COMPLETE, SIGN AND DATE THIS PROXY
AND RETURN IT IN THE ENCLOSED ENVELOPE.
NOVASTAR FINANCIAL, INC.
REVOCABLE PROXY
FOR ANNUAL MEETING OF SHAREHOLDERS ON MAY 25, 2004
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Scott F. Hartman, or Rodney E. Schwatken, and each of them, with full power of
substitution to act as attorneys and proxies for the undersigned to vote, as designated on the reverse side of this proxy, all
shares of the common stock of NovaStar Financial, Inc. which the undersigned is entitled to vote at NovaStar Financial's 2004
Annual Meeting of Shareholders to be held at the Novastar Financial, Inc. corporate offices, 8140 Ward Parkway, Suite 300
Kansas City, Missouri on May 25, 2004 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 [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for all
(EXCEPT AS MARKED TO THE CONTRARY BY nominees listed below
STRIKING OUT THE NAME OF ANY NOMINEE)
Nominees: W. Lance Anderson Gregory T. Barmore
Item 2 - APPROVAL OF the NovaStar Financial, Inc. 2004 Incentive Stock Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Item 3 - RATIFICATION OF Deloitte & Touche LLP as independent public accountants for the fiscal year ending December 31, 2004.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Please See Reverse Side)