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
/ / Soliciting Material Pursuant to Section 240.14a-12
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
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 Friday, May
20, 2005 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 III director of NovaStar Financial's
Board of Directors to serve until NovaStar Financial's annual
meeting of stockholders to be held in 2008 or until such
director's successor is elected and qualified;
2. Ratification of the selection of Deloitte & Touche LLP as
NovaStar Financial's independent registered public accounting
firm for the fiscal year ended December 31, 2005; and
3. The transaction of 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 25, 2005 as the record date for determination of
stockholders entitled to notice of, and to vote at, the annual meeting.
In order that your shares may be represented at the annual meeting,
please date, execute and promptly mail the enclosed proxy in the accompanying
postage-paid envelope. A proxy may be revoked by a shareholder by notice in
writing to the Secretary of NovaStar Financial at any time prior to its use, by
presentation of a later-dated proxy, or by attending the annual meeting and
voting in person.
By Order of the Board of Directors
/s/ Scott F. Hartman
SCOTT F. HARTMAN
Chairman of the Board and
Kansas City, Missouri Chief Executive Officer
April 18, 2005
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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..... 4
ITEM 1 - ELECTION OF DIRECTOR
Nominee and Directors.................................................... 4
Director Independence.................................................... 6
Audit Committee Financial Expert......................................... 6
Compensation of Directors................................................ 6
Compensation Committee Interlocks........................................ 7
Committees of the Board and Meeting Attendance........................... 7
Executive Sessions....................................................... 7
Communications with the Board............................................ 7
Consideration of Director Nominees....................................... 8
Audit Committee Report................................................... 9
Compensation Committee Report............................................ 10
Performance Graph........................................................ 11
Management of NovaStar Financial......................................... 12
Executive Compensation................................................... 14
Employment Agreements.................................................... 18
Certain Transactions..................................................... 20
ITEM 2 - RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Principal Accounting Firm Fees........................................... 21
OTHER BUSINESS............................................................... 21
STOCKHOLDER PROPOSALS - 2006 ANNUAL MEETING.................................. 22
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NOVASTAR FINANCIAL, INC.
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 20, 2005
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 20, 2005 at 10:00 a.m., central daylight time, at our corporate offices,
8140 Ward Parkway, Suite 300, Kansas City, Missouri. This proxy statement, the
accompanying proxy card and the notice of annual meeting are being provided to
stockholders beginning on or about April 18, 2005.
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 25, 2005, the record date, are
entitled to notice of, and to vote at, the annual meeting. On that date,
27,890,431 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 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, shares will be voted FOR the election of the nominee named in this
proxy statement as a director and FOR ratification of the appointment of
Deloitte & Touche LLP as independent public accountants for the fiscal year
ending December 31, 2005.
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 2004 annual report including financial statements for the year ended
December 31, 2004, 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 25, 2005, 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
25, 2005 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
COMMON STOCK (1)
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NAME OF BENEFICIAL OWNER SHARES PERCENT
------------------------ ------ -------
Scott F. Hartman (2)............................................... 1,173,649 4.16%
W. Lance Anderson (3).............................................. 752,755 2.67%
Michael L. Bamburg (4)............................................. 373,420 1.32%
Gregory T. Barmore (5)............................................. 226,536 *
David A. Pazgan (6) ............................................... 146,836 *
Edward W. Mehrer (7)............................................... 141,389 *
Art N. Burtscher (8)............................................... 40,632 *
Rodney E. Schwatken (9)............................................ 40,527 *
Gregory S. Metz (10) .............................................. 1,909 *
Jeffrey D. Ayers - -
All directors and executive officers as a group (10 persons)....... 2,897,653 10.28%
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* Less than 1%.
(1) Assuming no exercise of options (except options exercisable within 60
days of March 25, 2005 by the listed security holder named, separately).
(2) Consists of 1,109,785 shares of common stock, including 84,000 shares of
common stock owned jointly with his wife, 23,932 shares of common stock
held in our 401(k) plan and 29,532 shares of common stock issuable upon
the exercise of options. Includes 6,000 shares of restricted stock that
vest in three equal annual installments on January 28th of the years
2006 through 2008. Also included are 4,400 shares of restricted stock
that vest on February 7, 2015 as long as Mr. Hartman is still employed
by NovaStar Financial. Until vested, the shares of restricted stock are
subject to forfeiture under certain conditions and may not be sold or
otherwise transferred. Mr. Hartman has the right to receive dividends on
and to vote the restricted shares.
(3) Consists of 657,086 shares of common stock, including 50,000 shares of
common stock owned jointly with his wife, 23,932 shares of common stock
held in our 401(k) plan and 79,532 shares of common stock issuable upon
the exercise of options. Includes 6,000 shares of restricted stock that
vest in three equal annual installments on January 28th of the years
2006 through 2008. Also included are 4,400 shares of restricted stock
that vest on February 7, 2015 as long as Mr. Anderson is still employed
by NovaStar Financial. Until vested, the shares of restricted stock are
subject to forfeiture under certain conditions and may not be sold or
otherwise transferred. Mr. Anderson has the right to receive dividends
on and to vote the restricted shares.
(4) Consists of 352,715 shares of common stock (owned individually by Mr.
Bamburg or by his wife or jointly with his wife) and 15,780 shares of
common stock issuable upon the exercise of options. Includes 3,000
shares of restricted stock that vest in three equal annual installments
on January 28th of the years 2006 through 2008. Also included are 1,925
shares of restricted stock that vest on February 7, 2015 as long as Mr.
Bamburg is still employed by NovaStar Financial. Until vested, the
shares of restricted stock are subject to forfeiture under certain
conditions and may not be sold or otherwise transferred. Mr. Bamburg has
the right to receive dividends on and to vote the restricted shares.
(5) Consists of 216,441 shares of common stock and 10,095 shares of common
stock issuable upon the exercise of options.
(6) Consists of 139,190 shares of common stock, 2,821 shares of common stock
held in our 401(k) plan and 3,000 shares of restricted stock that vest
in three equal annual installments on January 28th of the years 2006
through 2008. Also included are 1,825 shares of restricted stock that
vest on February 7, 2015 as long as Mr. Pazgan is still employed by
NovaStar Financial. Until vested, the shares of restricted stock are
subject to forfeiture under certain conditions and may not be sold or
otherwise transferred. Mr. Pazgan has the right to receive dividends on
and to vote the restricted shares.
(7) Consists of 83,590 shares of common stock, including 4,000 shares owned
by his wife and 57,799 shares of common stock issuable upon the exercise
of options.
(8) Consists of 4,500 shares of common stock and 36,132 shares of common
stock issuable upon the exercise of options.
(9) Consists of 36,093 shares of common stock, 3,697 shares of common stock
held in our 401(k) plan and 562 shares of restricted stock that vest in
three equal annual installments on January 28th of the years 2006
through 2008. Also included are 175 shares of restricted stock that vest
on February 7, 2015 as long as Mr. Schwatken is still employed by
NovaStar Financial. Until vested, the shares of restricted stock are
subject to forfeiture under certain conditions and may not be sold or
otherwise transferred. Mr. Schwatken has the right to receive dividends
on and to vote the restricted shares.
(10) Consists of 953 shares of common stock, 56 shares of common stock held
in our 401(k) plan and 900 shares of restricted stock that vest on
February 7, 2015 as long as Mr. Metz is still employed by NovaStar
Financial. Until vested, the shares of restricted stock are subject to
forfeiture under certain conditions and may not be sold or otherwise
transferred. Mr. Metz has the right to receive dividends on and to vote
the restricted shares.
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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 2004, all Section 16(a)
filing requirements were satisfied.
ITEM 1 - ELECTION OF DIRECTOR
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 III director, whose term will
expire in three years, is to be elected at this year's annual meeting. The
nominee for the Class III director is set forth below. The proxy holders intend
to vote all proxies received by them in the accompanying form for the nominee
for director listed below unless otherwise specified by the stockholder. In the
event the nominee is unable or declines to serve as a director at the time of
the annual meeting, the proxies will be voted for a nominee who shall be
designated by the present Board of Directors to fill the vacancy. In the event
that additional persons are nominated for election as directors, the proxy
holders intend to vote all proxies received by them for the nominee listed below
and against any other nominee. As of the date of this proxy statement, the Board
of Directors is not aware of any nominee who is unable or will decline to serve
as director. The nominee listed below already serves as director of NovaStar
Financial.
The election to the Board of Directors of the nominee identified in the
proxy statement will require the affirmative vote of a plurality of the
outstanding shares of common stock present in person or represented by proxy at
the annual meeting.
The Board of Directors unanimously recommends that stockholders vote FOR
the nominee identified below:
NAME POSITION WITH NOVASTAR FINANCIAL, INC.
Scott F. Hartman Chairman and Chief Executive Officer
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NOMINEE AND DIRECTORS
CLASS III NOMINEE - TERM EXPIRING 2008
SCOTT F. HARTMAN, age 45, 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.
CLASS II DIRECTORS - TERMS EXPIRING 2007
W. LANCE ANDERSON, age 44, 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 63, has served on the Board of Directors since
1996. 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. Mr. Barmore also serves on the Board of Directors of
ICO, Inc., a Houston, Texas based plastics products company.
CLASS I DIRECTORS - TERMS EXPIRING 2006
ART N. BURTSCHER, age 54, has been a member of the Board of Directors
since 2001. In 2000, Mr. Burtscher became Chairman of McCarthy Group Advisors,
LLC, an Omaha, Nebraska asset management organization. Mr. Burtscher also serves
on the Underwriting Committee of McCarthy Group, Inc., an Omaha, Nebraska
merchant banking company. From 1988 to 2000, Mr. Burtscher served as President
and Chief Executive Officer of Great Western Bank in Omaha, Nebraska. Mr.
Burtscher also serves on the Board of Directors of Great Western Bancorporation,
Inc., an Omaha, Nebraska multi-bank holding company and NIC Inc., an Overland
Park, Kansas eGovernment service provider.
EDWARD W. MEHRER, age 66, 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
5
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. Mr. Mehrer also serves on the Board of Directors of Winn Dixie Stores,
Inc., a Jacksonville, Florida food and drug retailer, FBL Financial Group, Inc.,
a Des Moines, Iowa insurance company and MGI Pharma Inc., a Bloomington,
Minnesota biopharmaceutical company.
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.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that Edward W. Mehrer qualifies as
an audit committee financial expert, as such term is defined by Item 401 of
Regulation S-K.
COMPENSATION OF DIRECTORS
Pursuant to its 2005 Compensation Plan for Independent Directors,
NovaStar Financial pays independent directors $35,000 per year plus $1,500 for
each day of board or committee meetings attended. In addition, each independent
directors is granted (i) upon becoming a director, options to purchase that
number of our shares which have a fair market value of $100,000 at the time of
the grant, exercisable in accordance with the NovaStar Financial 2004 Incentive
Stock Plan and subject to a four year vesting schedule, and (ii) options to
purchase 5,000 shares at the fair market value of the common stock immediately
vesting on the day after each annual meeting of stockholders and exercisable in
accordance with the NovaStar Financial 2004 Incentive Stock Plan. Finally, the
chairperson of the Audit, Compensation and Nominating and Corporate Governance
Committees are granted annual retainer fees of $10,000, $5,000 and $5,000,
respectively.
Pursuant to the previous compensation plan for independent directors
applicable through fiscal year 2004, NovaStar Financial paid independent
directors $25,000 per year plus $1,000 for each day of board or committee
meetings attended and each independent director had 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 of 2005, NovaStar Financial established a revised
supplemental compensation arrangement for its independent directors for their
service as directors during fiscal year 2004. Pursuant to the
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supplemental compensation arrangement, each independent director received, in
addition to its 2004 compensation, a supplemental retainer fee of $10,000 and a
supplemental daily fee per board or committee meeting of $500. In addition, to
these supplemental fees, the chairperson of the Audit Committee, the
Compensation Committee and the Nominating and Corporate Governance Committee
were granted additional retainer fees of $10,000, $5,000 and $5,000,
respectively. 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 who
is an employee of NovaStar Financial will receive separate compensation for
services rendered as a director.
In an action alleging violations of 16(b) of the Securities Exchange Act
of 1934 against Gregory T. Barmore filed in federal court we are advancing
expenses and reasonable attorneys' fees to Mr. Barmore subject to his
undertaking to repay the amounts advanced if it is ultimately determined that
the standard of conduct necessary for indemnification has not been met. Mr.
Barmore has been advanced $43,768 during the fiscal year ended December 31, 2004
under this arrangement.
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 2004, there were six meetings of the
Board of Directors, six meetings of the Audit Committee, four meetings of the
Nominating and Corporate Governance Committee and five meetings of the
Compensation Committee. Each director participated in at least 75% of the
meetings of the Board and the committees on which he served.
Directors are not expected to attend the annual meeting of stockholders
and none of the independent directors attended the 2004 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.
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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 the Corporate Governance
section of our website (WWW.NOVASTARMORTGAGE.COM) and will be mailed to any
stockholder upon request.
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 as described below.
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
of the Audit Committee is available at the Corporate Governance section of our
website (WWW.NOVASTARMORTGAGE.COM) and will be mailed to any stockholder upon
request.
The Audit Committee has reviewed and discussed with management and the
independent accountants our audited financial statements for fiscal 2004. 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 NovaStar Financial, 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 our Annual Report
on Form 10-K for fiscal 2004 for filing with the Securities and Exchange
Commission.
Audit Committee
Edward W. Mehrer, Chair
Gregory T. Barmore
Art N. Burtscher
9
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 2004, 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 2004, the Compensation Committee
determined that NovaStar Financial's executive officers generally exceeded
expectations in the aggregate for these areas.
Under the 2004 Incentive Stock Plan, annual grants of stock-based
compensation are awarded to officers and other key employees to retain and
motivate such persons to sustain and improve long-term stock performance. Stock
option-based compensation is granted at the prevailing market value and has
value to the holders only if NovaStar Financial's stock price increases.
Typically these grants vest in four equal annual increments. Restricted
stock-based compensation awards have value to the holders only if certain
performance targets or employment tenures are met. The restricted stock grants
have vesting periods which vary based on the type of award. The charter of the
Compensation Committee is available at the Corporate Governance section of our
website (WWW.NOVASTARMORTGAGE.COM) and will be mailed to any stockholder upon
request.
Compensation Committee
Gregory T. Barmore, Chair
Edward W. Mehrer
Art N. Burtscher
10
PERFORMANCE GRAPH
The following graph presents a five-year performance comparison of our
common stock to the Bloomberg REIT Mortgage Index and the Standard and Poor's
500 Stock Index (S&P 500). The graph assumes that the value of the investment in
our common stock and each index was $100 at December 31, 1999, and that all
dividends were reinvested. 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.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
(Among NovaStar Financial Inc. Common Stock,
the Bloomberg REIT Mortgage Index and the S&P 500 Index)
[PERFORMANCE GRAPH]
PERFORMANCE GRAPH INDEX
DECEMBER 31,
---------------------------------------------------------------------
1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ----
NovaStar Financial, Inc.
Common Stock $100.00 $120.00 $591.95 $1,212.77 $3,884.91 $5,170.07
Bloomberg REIT Mortgage Index $100.00 $111.54 $213.53 $263.42 $353.00 $450.16
S&P 500 Index $100.00 $90.89 $80.14 $62.47 $80.35 $89.07
11
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 45
Executive Officer
W. Lance Anderson Director, President and Chief Operating Officer 44
Michael L. Bamburg Senior Vice President and Chief 42
Investment Officer
Gregory S. Metz Senior Vice President and Chief Financial Officer 49
Jeffrey D. Ayers Senior Vice President, General Counsel and Secretary 44
David A. Pazgan Executive Vice President NovaStar Mortgage, Inc. 34
Rodney E. Schwatken Vice President, Treasurer and Controller (Chief 41
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, Mr. Metz, Mr.
Ayers, Mr. Pazgan, and Mr. Schwatken is set forth below.
MICHAEL L. BAMBURG, age 42, 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.
GREGORY S. METZ, age 49, became Senior Vice President and Chief
Financial Officer of NovaStar Financial in July 2004. From November 2002 to July
2004 Mr. Metz was Senior Vice President and Director of Corporate Tax for Union
Planters Corporation, a NYSE-listed regional bank holding company located in
Memphis. Prior to his work at Union Planters, Mr. Metz spent more than 15 years
in public accounting, most recently from 1997 to 2002 as a partner with Ernst &
Young LLP in Chicago.
12
JEFFREY D. AYERS, age 44, became Senior Vice President, General Counsel
and Secretary of NovaStar Financial in February 2005. From April 2003 to January
2005 Mr. Ayers was Vice President and Associate General Counsel with General
Electric's insurance subsidiary, Employers Reinsurance Corporation. From 1999 to
2002 Mr. Ayers was General Counsel and Corporate Secretary of Aquila Merchant
Services, Inc. in Kansas City. From 1996 to 1999 Mr. Ayers was a partner with
the Blackwell Sanders law firm in Kansas City and managing partner of its
London, England office.
DAVID A. PAZGAN, age 34, became Executive Vice President of NovaStar
Mortgage, Inc. in February 2005. Mr. Pazgan is responsible for managing
wholesale origination sales and operations for both broker and correspondent
channels. Mr. Pazgan has been with NovaStar Financial since 1997 and most
recently held the position of Senior Vice President of Wholesale East where he
was responsible for managing the operations of that division. Mr. Pazgan has
also held the positions of Regional Vice President and Account Executive.
RODNEY E. SCHWATKEN, age 41, is Vice President, Treasurer and Controller
(Chief Accounting Officer) of NovaStar Financial and NovaStar Mortgage. Mr.
Schwatken is responsible for Corporate accounting, including implementation of
accounting policies and procedures and developing and implementing proper
internal control over all financial recordkeeping. From June 1993 to March 1997,
when he joined NovaStar Financial, Mr. Schwatken was Accounting Manager with U.
S. Central Credit Union, a $30 billion dollar investment, liquidity and
technology resource for the credit union industry. From January 1987 to June
1993, Deloitte & Touche LLP in Kansas City, Missouri employed Mr. Schwatken,
most recently as an audit manager.
13
EXECUTIVE COMPENSATION
EXECUTIVE OFFICER SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
----------------------------------------------- ---------------------------------------------------
AWARDS PAYOUTS
------ -------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
BONUS COMPENSATION STOCK AWARD(S) OPTIONS PAYOUTS COMPENSATION
NAME AND POSITION (A) YEAR SALARY (B) (C) ($)(D)(E) (#)(D) ($) ($)(F)
Scott F. Hartman 2004 $619,010 $621,000 -- $454,960 -- -- $44,033
Chairman of the Board 2003 491,667 600,000 -- 654,831 -- -- 43,033
and Chief Executive Officer 2002 315,000 1,260,000 -- -- 50,000 -- 42,033
W. Lance Anderson 2004 $619,010 $621,000 -- $454,960 -- -- $44,033
President and Chief 2003 491,667 600,000 -- 654,831 -- -- 43,033
Operating Officer 2002 315,000 1,260,000 -- -- 50,000 -- 41,113
Michael L. Bamburg 2004 $361,089 $362,250 -- $202,640 -- -- $13,000
Senior Vice President and 2003 298,805 350,000 -- 381,976 -- -- 12,000
Chief Investment Officer 2002 219,450 548,625 -- -- 25,000 -- 11,000
Rodney E. Schwatken 2004 $118,619 $59,500 -- $37,995 -- -- $11,990
Vice President, Treasurer and 2003 107,837 74,500 -- -- -- -- 12,000
Controller 2002 94,500 70,875 -- -- 10,000 -- 10,270
Gregory S. Metz (G) 2004 $112,500 $125,000 -- -- -- -- --
Senior Vice President and -- -- -- -- -- -- -- --
Chief Financial Officer -- -- -- -- -- -- -- --
----------------
(A) David A. Pazgan became an Executive Officer in February of 2005. Jeffrey
D. Ayers joined us in February of 2005 as Senior Vice President, General
Counsel and Secretary. They did not earn any compensation as Executive
Officers during the periods covered by this table.
(B) A portion of the 2003 and 2004 bonus for Mr. Hartman and Mr. Anderson
was paid in restricted stock. A portion of the 2003 bonus for Mr.
Bamburg was also paid in restricted stock. The fair value of this
restricted stock on the date of the award is reflected in the Restricted
Stock Awards column of this table.
(C) Perquisites and other personal benefits did not exceed the lesser of
either $50,000 or 10 percent of the total of annual salary and bonus
reported for any named Executive Officer.
(D) Share amounts have been restated to reflect the 2-for-1 stock split on
December 1, 2003.
(E) Restricted stock grants of 8,000, 8,000, 4,000 and 750 shares were
awarded on January 28, 2004 to Mr. Hartman, Mr. Anderson, Mr. Bamburg
and Mr. Schwatken, respectively. The dollar value of each award of
restricted stock was calculated using the closing market price of our
common stock on the date of the award. This restricted stock vests in
equal annual installments over four years (25% per year) beginning on
January 28, 2005 and ending on January 28, 2008. Dividends will be paid
on these shares on dividend payment dates commencing from the date of
grant until the vesting of the restricted stock or the forfeiture of the
unvested restricted stock prior to January 28, 2008. A portion of the
2004 bonus for Mr. Hartman and Mr. Anderson was paid in restricted
stock, which was awarded on March 30, 2005. This restricted stock was
fully vested on the date of the award and had a market value on that
date of $49,680 and $49,680, respectively. A portion of the 2003 bonus
for Mr. Hartman, Mr. Anderson and Mr. Bamburg was also paid in
restricted stock, which was awarded on January 28, 2004. This restricted
stock was fully vested on the date of the award and had a market value
on that date of $654,831, $654,831 and $381,976, respectively. Dividends
will be paid on these shares
14
on dividend payment dates commencing from the date of grant. Based on
the closing market price of our common stock on December 31, 2004 of
$49.50, the aggregate number of shares and value of all restricted
shares on that date were 8,000 shares valued at $396,000 for Mr.
Hartman; 8,000 shares valued at $396,000 for Mr. Anderson; 4,000 shares
valued at $198,000 for Mr. Bamburg and 750 shares valued at $37,125 for
Mr. Schwatken.
(F) Includes matching contributions to the deferred compensation plan. The
amount of matching contributions for fiscal 2004, 2003 and 2002 were as
follows: Mr. Hartman - $13,000, $12,000 and $11,000; Mr. Anderson -
$13,000, $12,000 and $10,080; Mr. Bamburg - $13,000, $12,000 and $11,000
and Mr. Schwatken - $11,990, $12,000 and $10,270. This column also
includes annual amounts for the forgiveness of promissory notes between
NovaStar Financial and Mr. Hartman and Mr. Anderson. (Detailed further
in the "Certain Transactions - Indebtedness of Management" section of
this document.) The annual amount of this debt forgiveness for Mr.
Hartman and Mr. Anderson is $31,033 for the three years shown.
(G) Mr. Metz joined us in July of 2004 as Senior Vice President and Chief
Financial Officer.
INCENTIVE BONUS PLAN
As part of our executive compensation program, the Compensation
Committee has recommended to the Board of Directors annual incentive cash bonus
awards for our executive officers. The amount of the bonus awards is generally
determined for each executive officer based on the following business
objectives, as applied to that officer's business unit, and such officer's
contribution to achieving those objectives: earnings per share growth; operating
growth, including the volume of loans originated and profit from fee income
business units; financial strength of the organization; and development and
implementation of strategic plans. The specific objectives for each executive
officer may be included in his or her employment agreement or agreed upon with
the Compensation Committee on an annual basis. Bonuses awarded are paid in cash
and/or restricted stock in the year after they are earned unless deferred by the
officer pursuant to our Deferred Compensation Plan.
INCENTIVE STOCK PLAN
NovaStar Financial's 2004 Incentive Stock Plan which became effective on
May 25, 2004 provides for the grant of qualified incentive stock options or
ISOs, non-qualified stock options or NQSOs, deferred stock, restricted stock,
and performance shares (collectively, Stock Awards), stock appreciation rights
and limited stock appreciation rights (collectively, SARs), and dividend
equivalent rights or DERs. ISOs may only be granted to the officers and
employees. NQSOs, SARs, Stock Awards and DERs may be granted to the directors,
officers, employees, agents and consultants. Unless previously terminated by the
Board of Directors, the plan will terminate when no further shares of stock
remain available for awards to be granted under the plan.
Outstanding options and restricted stock vest over variable periods as
fixed by the Administrator of the plan but shall expire ten years after the date
of grant.
15
Prior to stockholder's approval of the NovaStar Financial's 2004
Incentive Stock Plan, on May 25, 2004, stock options were granted pursuant to
NovaStar Financial's 1996 stock option plan which was terminated upon such
approval, except for outstanding awards that remain to become vested, exercised,
or free of restrictions.
The following table sets forth information concerning stock options
granted during 2004 for each of the directors and executive officers.
INDIVIDUAL GRANTS
---------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES OF
GRANTED TO EXERCISE STOCK PRICE APPRECIATION FOR
EMPLOYEES PRICE OR OPTION TERM (1)
NUMBER DURING THE BASE PRICE EXPIRATION ------------------------------
NAME GRANTED YEAR ($/SHARE) DATE 5% 10%
Gregory T. Barmore 5,000 33% $33.59 5/26/14 $105,623 $267,669
Edward W. Mehrer 5,000 33% 33.59 5/26/14 105,623 267,669
Art N. Burtscher 5,000 33% 33.59 5/26/14 105,623 267,669
------
Total to Directors and
Executive Officers 15,000
======
Total stock options granted 15,000
---------------------
(1) Options granted to non-employee directors and options granted to
employees were priced at the lesser of (1) the closing price of our
common stock on the NYSE on the business day preceding the date of the
grant, or (2) the average of the closing prices of our common stock on
each day on which the stock was traded over a period of up to twenty
trading days immediately prior to such date. The assumed annual rates
represent the potential appreciation in value over the exercise price.
16
The following table sets forth certain information with respect to the
value of the options as of December 31, 2004 held by the named directors and
executive officers.
FISCAL YEAR END OPTION VALUE
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AS OF OPTIONS AS OF
DECEMBER 31, 2004 DECEMBER 31, 2004 (2) (3)
---------------------------- -----------------------------
SHARES
CQUIRED ON VALUE
NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Scott F. Hartman 199,500 $8,870,455 22,500 35,000 $889,400 $1,355,400
W. Lance Anderson 32,500 1,494,800 72,500 35,000 3,270,650 1,355,400
Michael L. Bamburg 7,000 374,045 15,500 17,500 593,020 677,700
Gregory T. Barmore 7,500 184,944 5,000 15,000 195,844 432,188
Art N. Burtscher -- -- 17,500 17,500 756,213 551,313
Edward W. Mehrer -- -- 31,250 15,000 1,294,513 432,188
Rodney E. Schwatken 7,500 271,463 7,500 7,500 318,113 292,250
Jeffrey D. Ayers -- -- -- -- -- --
Gregory S. Metz -- -- -- -- -- --
David A. Pazgan -- -- -- -- -- --
---------------------
(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, 2004.
(3) Assuming a stock price of $49.50 per share, which was the closing price
of a share of common stock reported for the New York Stock Exchange on
December 31, 2004.
17
EMPLOYMENT AGREEMENTS
NovaStar Financial has entered into employment agreements with Mr.
Hartman, Mr. Anderson and Mr. Bamburg. Mr. Hartman and Mr. Anderson's employment
agreements are automatically extended for an additional year at the end of each
year of the agreement unless either party provides a prescribed prior written
notice to the contrary. Mr. Bamburg's employment agreement is automatically
extended for an additional year at the end of each year of the agreement unless
either party provides a prescribed prior written notice to the contrary. Each
employment agreement provides for the 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
stock based compensation awards granted to the subject officer 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 (this minimum applies to Mr. Hartman and
Mr. Anderson only). 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.
NovaStar Financial has entered into employment agreements with Mr. Metz
on July 15, 2004. NovaStar Mortgage, Inc. has entered into an employment
agreement with Mr. Pazgan on November 10, 2004. Neither of these employment
agreements provide for a specified term or period of employment. Each employment
agreement provides for the subject officer to receive his annual base salary and
bonus compensation pro-rated to the date of the termination of employment in
case of resignation by the employee for "good reason" or termination by the
employer "without cause" and to receive his annual base salary pro-rated to the
date of the termination of employment in case of a termination of employment by
reason of death or by the employer due to disability or "for cause" or by the
employee without "good reason" as those terms are defined in the agreement. In
addition, in case of termination of employment by the employer for cause or by
the employee for good reason, the vesting period of all outstanding
18
stock options granted to the subject officer under the applicable stock option
plan shall immediately cease. The vesting period of all outstanding stock
options granted to the subject officer continues without acceleration upon the
employee's termination of employment by NovaStar Financial, due to disability.
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
employment agreement, an amount, 50% payable within five days after the
termination date and 50% payable in monthly installments over the succeeding
twelve months, equal to two times such officer's combined current year base
salary and actual bonus compensation for the preceding fiscal year, subject in
each case to a maximum amount of 1% of the book equity value of NovaStar
Financial and a minimum of $500,000. In addition, all outstanding options
granted to the subject officer shall immediately vest if the subject officer
resigns for good reason or is terminated without cause after a change in control
or if the employment is terminated due to the death of the employee. 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. If the officer resigns or is terminated
for any other reason, there is no severance payment. Absent a "change in
control," if NovaStar Financial terminates the officer's employment without
cause, or if the officer resigns for "good reason," the employment agreement
provides that the officer and NovaStar Financial shall immediately enter into a
twelve months consultancy agreement pursuant to which the officer shall receive
payment in an amount equal to twelve months base salary in exchange for
consulting services with respect to matters related to the officer's job
description during the course of his employment with NovaStar Financial. In
addition, absent a change in control, the vesting period for the year in which
the termination occurs will accelerate to the date of termination if the subject
officer resigns for good reason or is terminated without cause. All other
vesting shall cease upon such termination. Each employment agreement provides
that the officer is prohibited from competing with NovaStar Financial during
employment and for a period of one year following the termination of his
employment with NovaStar Financial.
NovaStar Financial has entered into oral employment at-will agreements
with Mr. Ayers and Mr. Schwatken pursuant to which the subject officer:
1. will be entitled to a salary, adjusted annually by the
Compensation Committee;
2. will participate in the NovaStar Financial annual incentive
bonus program, as determined by the Compensation Committee;
3. will be eligible for incentive awards under the NovaStar
Financial Incentive Stock Plan, as determined by the
Compensation Committee;
4. will be eligible to participate in our Deferred Compensation
Plan;
5. will be covered by medical and disability insurance and other
forms of health, life and other insurance and/or benefits
provided by NovaStar Financial to its employees; and
19
6. will be entitled to vacation, paid sick leave and all other
employee benefits provided by NovaStar Financial to its
employees.
CERTAIN TRANSACTIONS
INDEBTEDNESS OF MANAGEMENT In transactions approved by the Audit and
Compensation Committees of the Board of Directors two of our Executive Officers,
Mr. Hartman and Mr. Anderson, executed 10-year non-recourse, non
interest-bearing promissory notes dated January 1, 2001, aggregating to
$1,393,208. These transactions were executed to restructure previously issued
promissory notes outstanding with the two Executive Officers. Each Executive
Officer has pledged 144,444 shares of NovaStar Financial common stock as
security for the promissory notes. The notes will be forgiven in equal annual
installments over a 10-year period so long as the named Executive Officers
remain in the employ of NovaStar Financial. 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. The balance of these notes aggregated
$975,246 as of January 1, 2004, which was the largest aggregate amount of
indebtedness outstanding under these promissory notes for the fiscal year ended
December 31, 2004. As of December 31, 2004 the aggregate amount outstanding of
these promissory notes was $835,925.
ITEM 2 - RATIFICATION OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
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, 2005.
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 THE INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
20
PRINCIPAL ACCOUNTING FIRM FEES
Aggregate fees we were billed for the fiscal years ended December 31,
2004 and 2003 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,
------------------------
2004 2003
Audit fees (A)....................................... $ 1,467,121 $ 408,047
Audit-related fees (B)............................... 165,975 304,341
----------- -----------
Total audit and audit-related fees................... 1,633,096 712,388
Tax fees (C)......................................... 374,020 301,741
All other fees (D)................................... 115,500 112,000
----------- -----------
Total................................................ $ 2,122,616 $ 1,126,129
=========== ===========
---------------
(A) Audit fees consist principally of fees for the annual and quarterly
reviews of the consolidated financial statements. The increase in 2004
Audit Fees is mainly attributable to audit work in connection with the
Sarbanes-Oxley Act.
(B) 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 planning for the Sarbanes-Oxley Act.
(C) Tax fees principally include assistance with statutory filings and
income tax consultations and planning.
(D) 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.
FINANCIAL STATEMENTS
A copy of our Annual Report on Form 10-K for the year ended December 31,
2004, which contains audited financial statements and financial statement
schedules, accompanies this Proxy Statement. THIS FORM 10-K MAY ALSO BE OBTAINED
WITHOUT CHARGE BY VISITING OUR WEBSITE (WWW.NOVASTARMORTGAGE.COM) OR UPON
WRITTEN REQUEST TO JEFF GENTLE, DIRECTOR OF INVESTOR RELATIONS, NOVASTAR
FINANCIAL, INC., 8140 WARD PARKWAY, SUITE 300, KANSAS CITY, MISSOURI 64114.
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.
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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 2006 annual meeting of stockholders must be received at
NovaStar Financial's offices on or before December 19, 2005 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
April 18, 2005
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THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE NOMINEE FOR DIRECTOR AND FOR THE PROPOSAL. IN THEIR
DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE MEETING. AT THE PRESENT TIME THE BOARD OF DIRECTORS
KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
DATE:____________________________________, 2005.
________________________________________________
SIGNATURE
________________________________________________
SIGNATURE
(Please sign exactly as name appears on stock
certificate. Where stock is registered jointly,
all others must sign. Corporate owners should
sign full corporate name by an authorized
person. Executors, administrators, trustees, or
guardians should indicate their status when
signing.)
PLEASE COMPLETE, SIGN AND DATE THIS PROXY AND
RETURN IT IN THE ENCLOSED ENVELOPE.
NOVASTAR FINANCIAL, INC.
REVOCABLE PROXY
FOR ANNUAL MEETING OF SHAREHOLDERS ON MAY 20, 2005
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Jeffrey D. Ayers, or Gregory S. Metz, and each of them, with
full power of substitution to act as attorneys and proxies for the undersigned to vote all shares of
the common stock of NovaStar Financial, Inc. which the undersigned is entitled to vote at NovaStar
Financial, Inc.'s 2005 Annual Meeting of Shareholders to be held at the Novastar Financial, Inc.'s
corporate offices, 8140 Ward Parkway, Suite 300, Kansas City, Missouri on May 20, 2005 at 10:00 a.m.
Central Daylight Time and at any and all adjournments thereof.
THE BOARD RECOMMENDS A VOTE FOR THE NOMINEE IDENTIFIED BELOW AND THE LISTED PROPOSAL
Item 1 - ELECTION OF DIRECTOR [ ] FOR the nominee listed below [ ] WITHHOLD AUTHORITY to vote for the
(EXCEPT AS MARKED TO THE nominee listed below
CONTRARY BY STRIKING OUT THE
NAME OF THE NOMINEE)
Nominee: Scott F. Hartman
Item 2 - RATIFICATION OF Deloitte & Touche LLP as independent public accountants for the fiscal year ending
December 31, 2005.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Please See Reverse Side)