0000950131-00-006333 10-Q 9 20000930 20001113 NOVASTAR FINANCIAL INC 0001025953 6798 742830661 MD 1231 10-Q 34 001-13533 760700 1901 W 47TH PLACE STE 105 WESTWOOD KS 66205 9133621090 1901 WEST 47TH PLACE WESTWOOD KS 66205 10-Q 1 0001.htm FORM 10-Q FORM 10-Q
 


 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2000.
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                to                
 
Commission File Number: 001-13533
 

 
NovaStar Financial, Inc.
(Exact name of registrant as specified in its charter)
 
Maryland

(State or other jurisdiction
of incorporation or organization)
74-2830661

(I.R.S. Employer
Identification Number
)
 
1901 W. 47 th Place, Suite 105, Westwood, KS 66205
(Address of principal executive offices)
(Zip Code)
 
(913) 362-1090
(Registrant’s telephone number, including area code)
 

(Former name, former address and former fiscal year, if changed since last report)
 

 
          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x  No  ¨
 
          The number of shares of the registrant’s common stock outstanding as of November 10, 2000 was 6,163,741.
 


 
NOVASTAR FINANCIAL, INC.
 
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
 
            Page
PART I      FINANCIAL INFORMATION     
 
Item 1.      Consolidated Financial Statements:     
          Balance Sheets      1
          Statements of Operations      2
          Statements of Cash Flows      3
          Notes      4
 
Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations      6
 
Item 3.      Quantitative and Qualitative Disclosures about Market Risk      44
 
PART II      OTHER INFORMATION     
 
Item 1.      Legal Proceedings      49
         
Item 2.      Changes in Securities      49
         
Item 3.      Defaults Upon Senior Securities      49
         
Item 4.      Submission of Matters to a Vote of Security Holders      49
         
Item 5.      Other Information      49
         
Item 6.      Exhibits and Reports on Form 8-K      50
         
       Signatures      54

NOVASTAR FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share amounts)  

       September 30, 2000
     December 31, 1999
     (unaudited)        
Assets          
  Cash and cash equivalents      $    2,767        $    2,395  
  Mortgage loans      424,547        620,406  
  Mortgage-backed securities—available-for-sale      41,784        6,775  
  Accrued interest receivable      9,782        12,452  
  Advances to and investment in NFI Holding Corporation      20,617        29,208  
  Assets acquired through foreclosure      15,315        16,891  
  Other assets      1,905        2,383  
   
   
 
          Total assets      $516,717        $690,510  
   
 
Liabilities and Stockholders’ Equity          
  Liabilities:
    Borrowings      $413,156        $586,868  
    Dividends payable      525        525  
    Accounts payable and other liabilities      2,173        1,803  
   
   
 
          Total liabilities      415,854        589,196  
 
  Stockholders’ equity:
    Capital stock, $0.01 par value, 50,000,000 shares authorized:          
      Class B, convertible preferred stock, 4,285,714
        shares issued and outstanding
     43        43  
      Common stock, 8,143,407 and 8,130,069 shares issued;
        6,206,441 and 7,460,523 shares outstanding, respectively
     81        81  
    Additional paid-in capital      151,197        151,173  
    Accumulated deficit      (39,742 )      (41,502 )
    Accumulated other comprehensive income      3,283        242  
    Cost of treasury stock, 1,936,966 and 673,400 shares, respectively      (7,153 )      (1,877 )
    Notes receivable from founders      (6,846 )      (6,846 )
   
   
 
          Total stockholders’ equity      100,863        101,314  
   
   
 
      Total liabilities and stockholders’ equity      $516,717        $690,510  
   
   
 

   See notes to consolidated financial statements.

 
 
NOVASTAR FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands)
 
 
        For the Nine Months
Ended September 30,

      For the Three Months
Ended September 30,

 
    2000
    1999
    2000
  1999
 
Interest income on mortgage loans   $    34,981     $    52,236     $    10,391     $    15,595  
Interest expense on mortgage loans        26,881          36,059          8,240          11,206  
    
    
    
    
  
Net interest income        8,100          16,177          2,151          4,389  
Prepayment penalty income        1,431          2,385          448          769  
Provision for credit losses        (4,004 )         (11,499 )        (1,212 )        (5,634 )
Premiums for mortgage loan insurance        (1,009 )        (1,339 )        (302 )        (427 )
Loan servicing fees paid to NovaStar Mortgage, Inc.        (1,982 )        (3,056 )        (599 )        (936 )
    
    
    
    
  
Net portfolio income (loss)        2,536          2,668          486          (1,839 )
                                 
Net interest income on mortgage-backed securities        1,329          100          602          100  
                                 
Other income (loss)        (453 )        706          (591 )        322  
                                 
Equity in net income of NFI Holding Corporation        646          1,518          787          576  
                                 
General and administrative expenses:                                            
     Net fees for other services provided by (to) NovaStar Mortgage, Inc.     (1,460 )     287       (1,458 )     (169 )
     Compensation and benefits.        1,042          1,358          325          421  
     Professional and outside services        467          546          210          181  
     Office administration        607          611          206          203  
     Other        66          156
 
       23          60  
    
    
  
 
    
  
     Total general and administrative expenses        722          2,958
 
       (694 )        696  
    
    
  
 
    
  
               
               
Net income (loss)   $   3,336     $   2,034
 
  $  1,978     $  (1,537 )
   
   
 
   
 
Dividends on preferred shares   $   (1,575 )   $   (1,081
)
  $    (525 )   $    (525 )
    
    
  
 
    
  
Net income (loss) available to common shareholders   $   1,761     $    953
 
  $   1,453     $   (2,062 )
    
    
    
    
  
                                 
Basic earnings (loss) per share       0.25         0.12         0.21        (0.25 )
    
    
    
    
  
Diluted earnings (loss) per share   $   0.25     $ 0.11     $  0.18     $  (0.25 )
    
    
    
    
  
                                 
Weighted average basic shares outstanding        7,087          8,130          6,900          8,130  
Weighted average diluted shares outstanding        7,094          8,326          11,192          8,130  
                                 
Dividends declared per common share   $     $  —     $  —     $  
    
    
    
    
  
 
See notes to consolidated financial statements.
 
NOVASTAR FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)

 
       For the Ninth Months
Ended September 30,

       2000      1999
Net cash provided by operating activities      $  13,945        $  23,504  
 
Cash flow from investing activities:          
     Mortgage loan repayments      176,799        201,034  
     Sales of assets acquired through foreclosure      15,295        17,542  
     Mortgage loans sold to others             4,900  
     Proceeds from paydowns on mortgage-backed securities      2,161         
     Net change in advances to NFI Holding Corporation      7,309        (15,360 )
     Purchase of mortgage-backed securities from NFI Holding Corporation      (33,767 )       
     
     
  
     Net cash provided by investing activities      167,797        208,116  
 
Cash flow from financing activities:          
     Payments on collateralized mortgage obligations      (185,502 )      (236,872 )
     Change in short-term borrowings      10,960        (18,029 )
     Net proceeds from issuance of capital stock and exercise of equity instruments      23        29,029  
     Dividends paid on preferred stock      (1,575 )      (556 )
     Dividends paid on common stock             (2,845 )
     Treasury stock purchases      (5,276 )       
     
     
  
     Net cash used in financing activities      (181,370 )      (229,273 )
     
     
  
     Net increase in cash and cash equivalents      372        2,347  
     Cash and cash equivalents, beginning of period      2,395         
     
     
  
     Cash and cash equivalents, end of period      $    2,767        $    2,347  
     
     
  
 
Supplemental disclosure of cash flow information:          
     Cash paid for interest      $  27,048        $  36,567  
     
     
  
     Assets acquired through foreclosure      $  12,136        $  22,570  
     
     
  
     Dividends payable      $       525        $       525  
     
     
  
     Issuance of warrants      $         —        $       350  
     
     
  
 
See notes to consolidated financial statements.
 
NOVASTAR FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 (Unaudited)
 

 
Note 1.    Financial Statement Presentation
 
          The consolidated financial statements as of and for the periods ended September 30, 2000 and 1999 are unaudited. In the opinion of management, all adjustments have been made which were of a normal and recurring nature, necessary for a fair presentation of the balance sheets and results of operations. The consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements of NovaStar Financial and the notes thereto, included in NovaStar Financial’s annual report to shareholders and annual report on Form 10-K for the fiscal year ended December 31, 1999.
 
          NovaStar Financial owns 100 percent of the common stock of three special purpose entities — NovaStar Assets Corporation, NovaStar Certificates Financing Corporation and NovaStar Mortgage Funding Corporation. NovaStar Financial formed these entities in connection with the issuance of collateralized mortgage obligations. The consolidated financial statements of NovaStar Financial include the accounts of these entities. Significant intercompany accounts and transactions have been eliminated in consolidation.
 
          NovaStar Financial owns 100 percent of the non-voting preferred stock of NFI Holding Corporation (Holding) for which it receives 99 percent of any dividends paid by NFI Holding. The founders of NovaStar Financial own the voting common stock of NFI Holding and receive 1% of any dividends paid by NFI Holding. NovaStar Mortgage, Inc., NovaStar Capital, Inc. and NovaStar Home Mortgage, Inc. are wholly owned subsidiaries of NFI Holding. NovaStar Mortgage Funding Corporation II, NovaStar Mortgage Funding Corporation III and NovaStar REMIC Financing Corporation are subsidiaries of NovaStar Mortgage. NovaStar Financial accounts for its investment in Holding using the equity method.
 
                New Accounting Pronouncements.    During 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 standardizes the accounting for derivative instruments, including certain instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the balance sheet and measure them at fair value. If certain conditions are met, an entity may elect to designate a derivative instrument either as a cash flow hedge, a fair value hedge or a hedge of foreign currency exposure. Generally, SFAS No. 133 provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of hedge asset or liability that is attributable to the hedge risk or the earnings effect of the hedge forecasted transaction. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133 an amendment of FASB Statement No. 133 was issued in June 1999 and postponed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. Management has reviewed all financial instruments of NovaStar Financial and has determined that NovaStar Financial’s interest rate cap agreements are derivative instruments under SFAS No. 133. These derivatives are used to hedge the interest rate risk on variable rate debt and will be accounted for as cash flow hedges under SFAS No. 133. Management does not expect the adoption of SFAS No. 133 to have a material impact on the financial statements of the NovaStar Financial, Inc.
 
           In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125. SFAS 125 was issued in June 1996 to revise the standards for accounting for securitization and other transfers of financial assets and requires certain disclosures regarding those transfers. SFAS 140 replaces SFAS 125 in its entirety. However, it carries over most of the provisions of SFAS 125. SFAS 140 also formalizes guidance provided by the FASB in various committee publications and technical bulletins. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Disclosures about securitization and collateral accepted need not be reported for periods ending on or before December 15, 2000, for which financial statements are presented for comparative purposes. Management does not expect the adoption of SFAS No. 140 to have a material impact on the financial statements of NovaStar Financial.
 
          In addition, Note 1 of the consolidated financial statements contained in the annual report on Form 10-K for the fiscal year ended December 31, 1999 describes certain recently issued accounting pronouncements. Management believes the implementation of these pronouncements and others that have gone into effect since the date of these reports will not have a material impact on the consolidated financial statements.
 
Note 2.    NovaStar Mortgage Funding Trust Series 2000-1 and 2000-2
 
          On March 31, 2000 and September 28, 2000, NovaStar Mortgage executed securitization transactions that were constructed to allow for accounting as sales of loans. Details of these transactions are as follows:
 
       Value of
Asset-Backed
Bonds Issued

     Economic Residual Value
as of September 30, 2000

     Value of
Collateral Sold

     Gain
Recognized

NMFT 2000-1      $226 million      $13,750,000      $229,846,000      $2,936,000
NMFT 2000-2 (A)      $334 million      $20,534,000      $188,734,000      $3,584,000


 
(A)       
A second closing for NMFT 2000-2 is scheduled for December 26, 2000 in which $151.3 million of loans will be added.
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
          The following discussion should be read in conjunction with the preceding consolidated financial statements of NovaStar Financial and the notes thereto as well as NovaStar Financial’s annual report to shareholders and annual report on Form 10-K for the fiscal year ended December 31, 1999.
 
Safe Harbor Statement
 
          “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: Statements in this discussion regarding NovaStar Financial, Inc. and its business, which are not historical facts, are “forward-looking statements” that involve risks and uncertainties. Certain matters discussed in this quarterly report may constitute forward-looking statements within the meaning of the federal securities laws that inherently include certain risks and uncertainties. Actual results and the time of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including general economic conditions, fluctuations in interest rates, fluctuations in prepayment speeds, fluctuations in losses due to defaults on mortgage loans, the availability of non-conforming residential mortgage loans, the availability and access to financing and liquidity resources, and other risk factors outlined in the annual report on Form 10-K for the fiscal year ended December 31, 1999. Other factors not presently identified may also cause actual results to differ. Management continuously updates and revises these estimates and assumptions based on actual conditions experienced. It is not practicable to publish all revisions and, as a result, no one should assume that results projected in or contemplated by the forward-looking statements will continue to be accurate in the future. Risks and uncertainties, which could cause results to differ from those discussed in the forward-looking statements herein, are listed in the “ Risk Management” section of the annual report on Form 10-K for the fiscal year ended December 31, 1999.
 
Basis of Presentation
 
          NovaStar Financial owns 100% of the common stock of NovaStar Assets Corporation, NovaStar Certificates Financing Corporation and NovaStar Mortgage Funding Corporation. These entities were established as special purpose entities used in issuance of collateralized mortgage obligations. The consolidated financial statements of NovaStar Financial include the financial condition and results of operations of these entities.
 
          NovaStar Financial also owns 100% of the non-voting preferred stock of NFI Holding Corporation for which it receives 99% of any dividends paid by NFI Holding. Scott Hartman and Lance Anderson, the founders of NovaStar Financial, own the voting common stock of NFI Holding and receive 1% of any dividends paid by NFI Holding. NovaStar Mortgage, Inc., NovaStar Capital and NovaStar Home Mortgage, Inc. are wholly owned subsidiaries of NFI Holding. NovaStar Mortgage Funding Corporation II, NovaStar Mortgage Funding Corporation III and NovaStar REMIC Financing Corporation are subsidiaries of NovaStar Mortgage. The business of NovaStar Mortgage is discussed in “Description of Business—Business of NovaStar Mortgage.” NovaStar Capital was formed to focus on acquiring non-conforming residential mortgage loans from banks, thrifts and credit unions. In February 2000, NovaStar Capital discontinued operations. NovaStar Home Mortgage was created in May 1999 to operate a network of mortgage brokers. Currently, NovaStar Home Mortgage operates 48 branches in 24 states.
 
           A significant component of the financial results of NovaStar Financial are derived from the operations of NovaStar Mortgage, Inc. Key officers of NovaStar Financial also serve as officers of NFI Holding, NovaStar Mortgage, NovaStar Capital, Inc and NovaStar Home Mortgage, Inc. The founders are the only members of the Board of Directors of NFI Holding, NovaStar Mortgage, NovaStar Capital and NovaStar Home Mortgage, Inc. NovaStar Mortgage owns 100% of NovaStar Mortgage Funding Corporation II, NovaStar Mortgage Funding Corporation III and NovaStar REMIC Financing Corporation. These special purpose entities were created for the issuance of interests in real estate mortgage investment conduits commonly known as REMICs. NovaStar Financial accounts for its investment in NFI Holding using the equity method, meaning the operations of NFI Holding are not consolidated with NovaStar Financial.
 
Recent Developments
 
          Federal Tax Legislation. REITs will be allowed to own directly all of the stock of taxable subsidiaries beginning in the tax year 2001. The value of all taxable subsidiaries of a REIT will be limited to 20% of the total value of the REIT’s assets. Accordingly, NovaStar Financial expects to acquire all of the common stock of NFI Holding Corporation from Scott Hartman and Lance Anderson in January 2001. As a result, NFI Holding will become a wholly-owned consolidated subsidiary of NovaStar Financial.
 
          Also, effective beginning with the 2001 tax year, the minimum dividend distributions of a REIT will have to equal 90% of taxable income, down from 95% of taxable income under current law. This provision will also first be effective beginning with the 2001 tax year. These and other federal tax legislation changes and proposals are discussed further in NovaStar Financial’s Annual Report on Form 10K under “Federal Income Tax Consequences”.
 
Description of Business
 
Business of NovaStar Financial:
 
·
Founded in 1996 as a specialty finance lender to invest in mortgage assets;
 
·
Assets have primarily come from the wholesale origination of nonconforming, single-family, residential mortgage loans of its affiliate, NovaStar Mortgage;
 
·
Operates as a long-term portfolio investor;
 
·
Loans are financed on a short-term basis through various warehouse facilities. Long-term financing is provided through securitization where asset-backed bonds are issued in financing-structured transactions;
 
·
Earnings are generated from spread income on the mortgage loan and securities portfolio and indirectly by gains associated with the sale of loans to outside parties or through securitization transactions of NovaStar Mortgage.
 
Business of NovaStar Mortgage:
 
·
Primary customer is the retail mortgage broker who deals with the borrower. NovaStar Mortgage’s account executives work with more than 4,500 brokers to solicit loans.
 
·
Borrowers generally are individuals or families who do not qualify for agency/conventional lending programs because of a lack of available documentation or previous credit difficulties. Often, these borrowers have built up high-rate consumer debt and are attempting to use equity in their home to consolidate debt and lower their total monthly payments.
 
·
Loans are financed on a short-term basis through warehouse facilities. Long-term financing is provided through securitization where asset-backed bonds are issued in transactions that are structured as a sale.
 
·
Loans are held for sale—either to affiliates, third parties for cash or subsidiaries as collateral for securitization.
 
Financial Condition of NovaStar Financial, Inc. as of September 30, 2000 and December 31, 1999
 
          NovaStar Financial’s balance sheets consist primarily of securitized mortgage loans originated by and purchased from NovaStar Mortgage, which serve as collateral for its collateralized mortgage obligations. The carrying value of mortgage loans as of September 30, 2000 was $425 million versus $620 million as of December 31, 1999. The carrying value of collateralized mortgage obligations as of September 30, 2000 was $402 million compared with $587 million as of December 31, 1999. The decline in both balance sheet items is primarily a result of principal paydowns that occurred during the first nine months of 2000. Even though NovaStar Financial is no longer purchasing the loans originated from NovaStar Mortgage, NovaStar Financial has been able to grow its mortgage asset portfolio by purchasing the residual assets of all NovaStar Mortgage’s securitization transactions. The carrying value of the residual assets of NovaStar Financial was $42 million as of September 30, 2000 compared with $7 million as of December 31, 1999. Mortgage loans collateralizing residual assets totaled $526 million as of September 30, 2000 compared with $143 million as of December 31, 2000 bringing the total carrying value of mortgage assets managed by NovaStar Financial to nearly $1 billion as of September 30, 2000 compared with $770 million as of December 31, 1999.
 
          Mortgage Loans.    Table 1 is a presentation of loans as of September 30, 2000 and December 31, 1999 and their credit grades. Table 2 is a summary of all mortgage loans owned by NovaStar Financial as of September 30, 2000 and December 31, 1999 by state. These tables also provide details regarding the collateral outstanding on NovaStar Mortgage’s REMIC transactions, which NovaStar Financial owns the residual interests. The REMIC transactions are discussed further in the “Mortgage Loans—Available for Sale” and “Mortgage Loans Sales” sections of this document.
 
Table 1
Mortgage Loans by Credit Grade
(dollars in thousands)
 
          September 30, 2000
  December 31, 1999
Credit
Grade

  Allowed
Mortgage
Lates (A)

  Maximum
Loan-to-
value

  Current
Principal

  Weighted
Average
Coupon

  Weighted
Average
Loan-to-
value

  Current
Principal

  Weighted
Average
Coupon

  Weighted
Average
Loan-to-
value

Retained loans collateralizing
asset-backed bonds:
                                                
AA        0 x 30        95   $  62,099        10.11 %        82.8 %   $  85,476        9.50 %        83.2 %
A        1 x 30        90        170,903        10.61          79.3          244,187        10.06          80.1  
A-        2 x 30        90        100,568        11.18          81.8          149,248        10.45          81.8  
B        3 x 30, 1 x 60        85        59,056        11.68          78.0          89,477        10.86          78.4  
         5 x 30, 2 x 60                                                 
C        1 x 90        75        26,353        12.11          72.8          42,766        11.35          72.5  
D        6 x 30, 3 x 60,        65        5,004        12.95          63.4          7,668        12.16          62.1  
              
           
         
         2 x 90                                                 
Total on balance sheet          $    423,983        10.94 %        79.6 %   $    618,822        10.31 %        80.0 %
              
 
    
    
 
    
  
 
                     September 30, 2000
     December 31, 1999
Credit
Grade

      Allowed
Mortgage
Lates (A)

      Maximum
Loan-to-
value

     Current
Principal

     Weighted
Average
Coupon

     Weighted
Average
Loan-to-
value

     Current
Principal

     Weighted
Average
Coupon

     Weighted
Average
Loan-to-
value

Sold loans collateralizing asset-
backed bonds:
                               
AAA        0 x 30        97 (B)      $115,453      9.69 %      80.8 %      $    3,474      9.18 %      80.7 %
AA        0 x 30        95        136,895      10.17        83.6        27,236      9.47        84.8  
A        1 x 30        90        106,876      10.39        81.2        43,119      9.86        83.1  
A-        2 x 30        90        75,505      10.49        81.4        35,311      10.09        83.1  
B        3 x 30, 1x 60        85      39,052      10.97        79.3        19,612      10.59        79.7  
         5 x 30, 2 x 60                                              
C        1 x 90        75        16,180      11.50        70.4        11,405      11.09        71.9  
D        6 x 30, 3 x 60,        65        2,071      12.29        70.0        3,171      12.16        62.1  
         2 x 90                                     
Other        Varies        97        36,525      11.42        92.6                     
                  
              
           
Total off balance sheet             $528,557      10.35 %      82.0 %      $143,328      10.08 %      81.5 %
                  
  
     
     
  
     
  

(A)
Represents the number of times a prospective borrower is allowed to be late more than 30, 60 or 90 days. For instance, a 3x30, 1x60 category would afford the prospective borrower to be more than 30 days late on three separate occasions and 60 days late no more than one time.
(B)
97% on fixed-rate purchases; all other maximum of 95%.
 
Table 2
Mortgage Loans by State
Percent of Portfolio
(based on current principal balance)
 
       Retained loans collateralizing asset-
backed bonds—on balance sheet

     Sold loans collateralizing asset-backed
bonds—off balance sheet

     September 30, 2000
     December 31, 1999
     September 30, 2000
     December 31, 1999
Collateral Location
                   
Florida      15 %      14 %      16 %      21 %
California      14        16        10        7  
Washington      6        7        4        4  
Texas      5        5        3        6  
Nevada      4        4        6        4  
Oregon      4        5        2        1  
Tennessee      4        3        6        5  
Michigan      3        3        8        5  
Ohio      3        3        6        4  
All other states      42        40        39        43  
     
     
     
     
  
Total      100 %      100 %      100 %      100 %
     
     
     
     
  
 
          Table 3 provides a summary of NovaStar Financial’s mortgage loans by type and carrying value as of September 30, 2000 and December 31, 1999.
 
Table 3
Carrying Value of Loans by Product/Type
September 30, 2000 and December 31, 1999
(in thousands)
 
Product/Type
     September 30, 2000
     December 31, 1999
 
     Retained loans collateralizing asset-backed bonds—
         on balance sheet:
         
               Two and three-year fixed.      $201,440        $343,193  
               Six-month LIBOR and one-year CMT      27,164        43,178  
               30/15-year fixed and other      195,379        232,451  
     
     
  
               Outstanding principal      423,983        618,822  
               Premium      8,696        12,689  
               Allowance for credit losses      (8,132 )      (11,105 )
     
     
  
               Carrying Value      $424,547        $620,406  
     
     
  
               Carrying value as a percent of principal      100.13 %      100.26 %
     
     
  
 
     Sold loans collateralizing asset-backed bonds—
         off balance sheet:
         
               Two and three-year fixed.      $357,210        $  78,238  
               Six-month LIBOR and one-year CMT      2,864        5,052  
               30/15-year fixed and other      168,483        60,038  
     
     
  
               Outstanding principal      $528,557        $143,328  
     
     
  
               Mortgage securities retained.      $  41,784        $    6,775  
     
     
  
 
          Substantially all mortgage loans are acquired at a premium. Premiums are amortized as a reduction of interest income over the lives of the assets. See Tables 4, 5, and 6 for the impact of principal payments on amortization. To mitigate the effect of prepayments on interest income from mortgage loans, NovaStar Financial generally strives to acquire mortgage loans that have prepayment penalties. During the nine months ended September 30, 2000, prepayment penalties collected from borrowers totaled $1.4 million in comparison with $2.4 million for the same period of 1999. Table 4 is an analysis of mortgage loans and prepayment penalties.
 
Table 4
Mortgage Loan Prepayment Penalties
September 30, 2000 and December 31, 1999
(dollars in thousands)
 
       Current
Principal

     Premium
     Percent with
Prepayment
Penalty

     Weighted Average
       Coupon
     Loan-to-
value

  Remaining
Prepayment Penalty
Period (in years) -
Loans with Penalty

As of September 30, 2000                             
Retained loans collateralizing asset-backed bonds:                              
          NHES 1997-1      $  58,054      $2,679      23 %      11.61 %      74.9 %  
0.33
          NHES 1997-2      63,337      1,269      22        11.34        79.1      
0.31
          NHES 1998-1      127,936      2,126      48        10.96        80.6    
0.57
          NHES 1998-2      174,393      2,609      58        10.54        81.0      
0.98
          All other loans      263      13             12.86        76.0      
     
  
                  
          Total on balance sheet      $423,983      $8,696      45 %      10.94 %      79.6 %    
0.67
     
  
  
     
     
   
Sold loans collateralizing asset-backed bonds (A):                               
          NMFT 1999-1      $119,327      $     —      66 %      10.43 %      81.7 %    
1.36
          NMFT 2000-1 (B)      221,963           93        10.15        81.1      
2.63
          NMFT 2000-2 (C)      187,267           90        10.54        83.3       
2.62
     
  
                  
          Total off balance sheet      $528,557      $     —      86 %      10.35 %      82.0 %    
2.34
     
  
  
     
     
   
 
       Current
Principal

     Premium
     Percent with
Prepayment
Penalty

     Weighted Average
       Coupon
     Loan-to-
value

  Remaining
Prepayment Penalty
Period (in years) -
Loans with Penalty

As of December 31, 1999                              
Retained loans collateralizing asset-backed bonds:                              
          NHES 1997-1      $  85,015      $  3,942      32      11.04  %      75.5  %     
0.51
          NHES 1997-2      101,031      1,917      35        10.90        79.3       
0.55
          NHES 1998-1      195,170      3,205      63        10.08        81.1       
0.93
          NHES 1998-2      237,223      3,606      74        9.97        81.1       
1.51
          All other loans      383      19      6        11.96        77.6       
0.10
     
  
                    
                    Total on balance sheet      $618,822      $12,689      58 %      10.31 %      80.0 %     
1.03
     
  
  
     
     
   
Sold loans collateralizing asset-backed bonds (A):                              
          Off balance sheet NMFT 1999-1      $143,328      $       —      84 %      10.08 %      81.5 %     
2.03
     
  
  
     
     
   

(A)
NovaStar Financial owns economic residual interests. The mortgage loans are not retained on the balance sheet of NovaStar Financial.
(B)
The economic residual interests in NMFT 2000-1 were purchased by NovaStar Financial April 1, 2000.
(C)
The economic residual interests in NMFT 2000-2 were purchased by NovaStar Financial September 29, 2000.
 
           In periods of decreasing interest rates, borrowers are more likely to refinance their mortgages to obtain a better interest rate. Even in rising rate environments, borrowers tend to repay their mortgage principal balances earlier than is required by the terms of their mortgages. Non-conforming borrowers, as they update their credit rating, are more likely to refinance their mortgage loan to obtain a lower interest rate.
 
          Prepayment rates in the table below represent the annualized principal prepayment rate in the most recent one, three and twelve month periods and over the life of the pool of loans.
 
Table 5
Prepayment Speeds
(dollars in thousands)
 
       Issue Date
     Current
Principal
Balance

     Weighted
Average Age
of Loans at
Inception
(in months)

     Constant Prepayment Rate
(Annual Percent)

       One-
month

     Three-
month

     Twelve-
month

     Life
September 30, 2000                                   
Retained loans
collateralizing asset-
backed bonds:
                                  
          NHES 1997-1      October 1, 1997      $  58,054      7      44      41      41      40
          NHES 1997-2      December 11, 1997      63,337      3      33      38      47      35
          NHES 1998-1      April 30, 1998      127,936      3      38      45      41      29
          NHES 1998-2      August 18, 1998      174,393      3      39      43      30      23
               
Sold loans collateralizing
asset—backed bonds:
                                  
          NMFT 1999-1      January 29, 1999      $119,327      5      36      31      23      18
          NMFT 2000-1      March 31, 2000      221,963      2      8      9           7
          NMFT 2000-2      September 28, 2000      187,267      1                    
 
       Issue Date
     Current
Principal
Balance

     Weighted
Average Age
of Loans at
Inception
(in months)

     Constant Prepayment Rate
(Annual Percent)

       One-
month

     Three-
month

     Twelve-
month

     Life
December 31, 1999                                   
Retained loans
collateralizing asset-
backed bonds:
                                  
          NHES 1997-1      October 1, 1997      $  85,015      7      44      42      50      40
          NHES 1997-2      December 11, 1997      101,031      3      64      58      42      32
          NHES 1998-1      April 30, 1998      195,170      3      47      36      29      23
          NHES 1998-2      August 18, 1998      237,223      3      26      21      21      18
               
Sold loans collateralizing
asset—backed bonds:
                                  
          NMFT 1999-1      January 29, 1999      $143,328      5      14      20      14      14
 
Table 6 details the amount of premium as a percent of principal at quarter end for 2000 and 1999.
 
Table 6 
Premium as a Percent of Principal
 
 
      Mortgage
Loans

  September 30, 2000   2.05 %
  June 30, 2000   2.03  
  March 31, 2000   2.05  
  December 31, 1999   2.05  
  September 30, 1999   2.09  
  June 30, 1999   2.15  
  March 31, 1999   2.22  
 
          Mortgage-Backed Securities – Available-For-Sale.    NovaStar Financial owns the economic residual certificates in NovaStar Mortgage Funding Trust Series 1999-1, 2000-1 and 2000-2. As the owner of the residual certificates, NovaStar Financial receives the net cash flow of the NovaStar Mortgage Funding Trust Series asset-backed bonds, which represent the right to receive, over the life of the securitizations, the excess of the weighted average coupon on the mortgage loan collateral over the sum of the interest rate on the bonds, a normal servicing fee, a trustee fee, insurance premiums and the credit losses relating to the securitized loans. As of September 30, 2000 and December 31, 1999, the carrying value of the residual interests was $41.8 million and $6.8 million. These values represent the present value of the residual cashflows that NovaStar Financial expects to receive over the life of the securitizations, taking into consideration estimated prepayment speeds and credit losses, and is discounted at a rate which management believes is an appropriate risk-adjusted market rate of return for the residual asset. The residual cashflows are realized over the life of the securitizations as cash distributions are received from the trusts. NovaStar Financial believes its residual assets are fairly valued as of September 30, 2000, but can provide no assurance that future prepayment and loss experience or changes in the required market discount rate will not require write-downs of the residual asset. Write-downs would reduce the income of future periods and could cause NovaStar Financial to report net losses.
 
          Key statistics, assumptions and characteristics of the NovaStar Mortgage Funding Trust Series mortgage loan collateral and bonds as of September 30, 2000 and December 31, 1999 are included in the table below and in Tables 4, 5 and 8 of this document.
 
          NovaStar Mortgage originated and securitized the loans serving as collateral in NMFT 1999-1, 2000-1 and 2000-2. Upon securitization, NovaStar Mortgage recognized gains on the transfer of the loans. Details of these transactions are provided in “Mortgage Loan Sales.”
 
Table 7
Residual Assets’ Key Statistics, Assumptions and Characteristics
September 30, 2000 and December 31, 1999
(dollars in thousands)
 
       September 30, 2000
    December 31, 1999
 
    1999-1     2000-1     2000-2     1999-1  
  Estimated Fair Value   $ 7,500     $ 13,750     $ 20,534     $ 6,775  
    
    
    
    
 
  Constant Prepayment Rate (weighted average life)     37       29       28       31  
    
    
    
    
 
  Static loss, net of mortgage insurance     2.5 %     1.0 %     1.0 %     2.5 %
 
 
 
 
  Discount Rate     17 %     15 %     15 %     17 %
 
 
 
 
As a percent of mortgage loan principal:        
  Delinquent loans (30 days and greater)     9.05 %     2.59 %     0.21 %     7.03 %
 
 
 
 
  Loans in foreclosure     4.16       0.13             3.22  
 
 
 
 
  Real Estate Owned     1.92                   1.26  
 
 
 
 
  Cumulative losses   $ 969     $        —     $        —     $  —  
 
 
 
 
 
          Assets Acquired through Foreclosure. As of September 30, 2000, NovaStar Financial had 174 loans in real estate owned with a carrying value of $15.3 million (principal of $16.7 million) compared to 192 loans with a carrying value of $16.9 million (principal of $24.4 million) as of December 31, 1999.
 
          Short-term and Long-term Financing Arrangements. Mortgage loan originations are funded with various financing facilities prior to securitization. Loans originated are funded initially using committed warehouse lines with First Union National Bank or Residential Funding Corporation (RFC) under which NovaStar Financial and NovaStar Mortgage are co-borrowers. NovaStar Financial and NovaStar Mortgage can borrow up to $75 million from First Union and $50 million from RFC under these warehouse agreements. NovaStar Financial and NovaStar Mortgage also use repurchase agreements as a means of warehousing loans prior to securitization. First Union provides a $175 million committed facility for this purpose. These First Union and RFC facilities are committed through July 27, 2001 and December 27, 2000, respectively.
 
          First Union also provides a $25 million committed facility secured by residual interests in asset-backed bonds that is committed through December 2001. Amounts outstanding as of September 30, 2000 under this financing arrangement were $11.0 million.
 
          Amounts outstanding under short-term financing arrangements as of September 30, 2000 are detailed in Table 25 of this document.
 
          On a long-term basis, NovaStar Financial has financed its mortgage loans using collateralized mortgage obligations commonly called CMOs. Investors in CMOs are repaid based on the performance of the mortgage loans collateralizing the CMOs. These non-recourse financing arrangements match the loans with the financing arrangement for long periods of time, as compared to repurchase agreements that mature frequently with interest rates that reset frequently and have liquidity risk in the form of margin calls. Under the terms of its CMOs, NovaStar Financial is entitled to repurchase the mortgage loan collateral and repay the remaining CMO when their aggregate principal balance falls below 35% for issue 97-01 and 25% for issues 97-02, 98-01 and 98-02. Non-conforming mortgage loans are not readily
 
obtainable financial assets. As a result, NovaStar Financial retains effective control over the transferred assets as defined in paragraph 9c. of Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and further clarified by paragraph 30 of SFAS No. 125. Accordingly, NovaStar Financial records its CMO transactions as secured borrowings, rather than sales of the transferred loans. The securitization transactions executed by NovaStar Mortgage have been structured as sales for financial reporting and tax purposes. NovaStar Financial as the residual owner does not have an option to call these bonds in the future. However, NovaStar Mortgage, as servicer of the collateral of these transactions, holds a small clean up call.
 
          Under its CMOs, NovaStar Financial retains the mortgage loans and incurs the obligation to pay the CMO bondholders. NovaStar Financial earns the net spread between the interest income on the loans and the interest expense on the bonds. The spread earned also is reduced by credit losses on the portfolio. Prepayments on the mortgage loans serve to reduce the term over which interest spread is earned. The longer the mortgage collateral is outstanding, the longer the period of cash flow. To the extent the borrowers prepay, it shortens the life of the CMO and the period over which cash flow is received. The cash flow will change when interest rates on the bonds fluctuate at amounts or times that are different from the mortgage loan collateral, thereby subjecting NovaStar Financial to interest rate risk. The carrying value of CMOs as of September 30, 2000 was $402 million compared with $587 million as of December 31, 1999. The decline in carrying value is primarily a result of principal paydowns.
 
          The following table provides details regarding NovaStar Financial’s CMOs as of September 30, 2000 and December 31, 1999. This table also provides details regarding the bonds and collateral outstanding underlying NovaStar Financial’s economic residual interests.
 
Table 8
Collateralized Mortgage Obligations
September 30, 2000 and December 31, 1999
(dollars in thousands)
 
       Collateralized
Mortgage Obligation

     Mortgage Loans
       Remaining
Principal

    
Current
Interest
Rate

    
Remaining
Principal
(A)

    
Weighted
Average
Coupon

     Estimated
Weighted
Average
Months to Call

As of September 30, 2000:                         
Retained loans collateralizing asset-backed bonds:                         
     NHES 1997-1      $  54,325        7.13 %      $59,297      11.61 %     
     NHES 1997-2      59,453        6.88        65,061      11.34       
 4
     NHES 1998-1      116,152        6.90        130,671      10.96       
13
     NHES 1998-2      173,663        6.84        183,913      10.54       
25
     Unamortized debt issuance costs, net      (1,397 )                    
     
                             
  
          Total on balance sheet      $402,196  
    
 
       Collateralized
Mortgage
Obligation

     Mortgage Loans
       Remaining
Principal

    
Current
Interest
Rate

    
Remaining
Principal
(A)

    
Weighted
Average
Coupon

     Estimated
Weighted
Average
Months
to Call

Sold loans collateralizing asset-backed bonds:                          
                           
     NMFT 1999-1      $116,659        7.14 %      $119,327      10.43 %      50
     NMFT 2000-1 (B)      218,166        7.02        221,963      10.15        63
     NMFT 2000-2 (C)      334,220        6.95        187,267      10.54        66
     
                                
          Total off balance sheet      $669,045                      
     
  
  As of December 31, 1999:                         
Retained loans collateralizing asset-backed bonds:                         
     NHES 1997-1      $  75,580        6.94        $  87,534      11.04       
     NHES 1997-2      95,053        6.72        104,851      10.90        12
     NHES 1998-1      186,493        6.55        200,625      10.08        22
     NHES 1998-2      231,969        6.71        244,109      9.97        29
     Unamortized debt issuance costs, net      (2,227 )                    
     
                                
          Total on balance sheet      $586,868                      
     
                                
Sold loans collateralizing asset-backed bonds:                         
     Off balance sheet NMFT 1999-1      $140,710        6.67 %      $143,328      10.08 %      55
     
                    

(A) Includes assets acquired through foreclosure.
(B) NovaStar Financial purchased the residual interests in NMFT 2000-1 on April 1, 2000.
(C) NovaStar Financial purchased the residual interests in NMFT 2000-2 on September 29, 2000.
 
          Stockholders’ Equity. The decrease in NovaStar Financial’s stockholders’ equity as of September 30, 2000 compared with December 31, 1999 is a result of the following:
 
·
$3.3 million increase due to net income recognized for the nine months ended September 30, 2000.
 
·
$5.3 million decrease as a result of common stock repurchases. NovaStar Financial’s Board of Directors amended its stock repurchase program to increase the amount of common stock authorized to be acquired up to an aggregate purchase price of $9 million. Stock repurchases may be made in the open market, in block purchase transactions, through put options or through privately negotiated transactions. The timing of repurchases and the number of shares ultimately repurchased will depend upon market conditions and corporate requirements. As of September 30, 2000, NovaStar Financial had repurchased 1,936,966 shares of its common stock. The number of shares repurchased by NovaStar Financial has increased to 1,979,666 through November 10, 2000 for an aggregate purchase price of $7.3 million.
 
·
$3.0 million increase in the unrealized gain on the economic residual interests in NovaStar Mortgage’s asset backed bond transactions that for tax and accounting purposes were treated by NovaStar Mortgage as sales. The residual interests in those transactions have been classified as available-for-sale securities and the unrealized gain is recognized as a component of accumulated other comprehensive income.
 
·
$1.6 million decrease due to dividends on Class B 7% cumulative convertible preferred stock in 2000.
 
          Notes Receivable from Founders. The founders of NovaStar Financial purchased 216,666 units in the 1996 private placement in exchange for forgivable promissory notes. A unit consisted of one share of convertible preferred stock and one common stock warrant. Principal on these notes is divided into three equal parts, called “tranches”, and is forgiven if certain incentive performance targets are achieved. The incentive tests relate to the return generated to investors in the private placement, including the appreciation in stock price, the value of the warrants, and dividends paid. One tranche will be forgiven for each fiscal year NovaStar Financial generates a return of 15% to investors in the private placement. All three tranches will be forgiven if a return of 100% is generated within five years.
 
          During the period from the closing of the private placement through December 31, 1997, NovaStar Financial’s stock price averaged $17.08 per share, dividends of $0.28 were declared and the value of each warrant was $2.08. The combination of these produced a return to investors in the private placement exceeding 15%. As a result, the first tranche of these notes was forgiven resulting in a non-cash charge of $1,083,000 during the fourth quarter of 1997. NovaStar Financial has not recognized any further forgiveness of the notes since 1997, as incentive performance targets have not been met.
 
          In March 1998, the founders exercised options to acquire 289,332 shares of common stock by executing notes payable to NovaStar Financial. The notes bear interest at one month LIBOR plus 1%, are collateralized by the common stock issued, and are non-recourse in nature which means that NovaStar Financial’s recourse is limited to the collateral. These notes and accrued interest are classified as part of the contra-equity account, notes receivable from founders. Unpaid principal on the notes was $4,340,000 as of September 30, 2000 and December 31, 1999. Accrued interest on these notes was $339,000 as of September 30, 2000 and December 31, 1999.
 
Results of Operations of NovaStar Financial, Inc.—Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999
 
Net Income
 
          During the nine months ended September 30, 2000, NovaStar Financial recorded net income of $3.3 million, $0.25 per diluted common share, compared with net income of $2.0 million, $0.11 per diluted common share, for the nine months ended September 30, 1999.
 
           NovaStar Financial’s primary sources of revenue are interest earned on its securitized mortgage loan portfolio and prepayment penalty income. In addition, results indirectly reflect gains from the sale of whole loans to third parties and securitization transactions executed by NovaStar Mortgage.
 
Net Interest Income
 
          Table 9 presents a summary of the average interest-earning assets, average interest-bearing liabilities and the related yields and rates thereon for the nine months ended September 30, 2000 and 1999.
 
Table 9
Interest Analysis
(dollars in thousands)
 
     Mortgage Loans
  Mortgage-Backed Securities
  Total
    Average
Balance

  Interest
Income/
Expense

   Annual
Yield/
Rate

   Average
Balance

  Interest
Income/
Expense

  Annual
Yield/
Rate

  Average
Balance

  Interest
Income/
Expense

  Annual
Yield/
Rate

Nine months ended September 30, 2000                     
Interest-earning mortgage assets   $475,419    $34,981   9.81 %   $13,648   $1,611    15.74 %   $489,067   $36,592   9.98 %
    
 
      
 
      
 
    
Interest-bearing liabilities                  
        Collateralized mortgage obligations   $499,805    $26,721   7.13 %           $499,805   $26,721   7.13 %
        Other borrowings           5,228   282   7.19 %   5,228   282   7.19  
    
        
        
      
        Cost of derivative financial                               
        Instruments hedging liabilities     160               160  
         
              
           
       
                Total borrowings   $499,805   $26,881   7.17 %   $  5,228   $  282    7.19 %   $505,033    $27,163   7.17 %
    
 
 
    
 
 
    
 
 
  
        Net interest income     $  8,100       $1,329       $  9,429  
         
              
              
       
        Net interest spread       2.64 %       8.55 %       2.81 %
              
              
              
  
        Net yield       2.27 %       12.98 %       2.57 %
              
              
              
  
 
    Mortgage Loans
  Mortgage-Backed Securities
  Total
    Average
Balance

  Interest
Income/
Expense

   Annual
Yield/
Rate

  Average
Balance

   Interest
Income/
Expense

  Annual
Yield/
Rate

  Average
Balance

  Interest
Income/
Expense

  Annual
Yield/
Rate

Nine months ended September 30, 1999                                
Interest-earning mortgage assets    $765,073    $52,236    9.10 %   $808   $100   16.50 %   $765,845   $52,336   9.11 %
    
 
      
 
 
    
 
    
Interest-bearing liabilities                               
        Collateralized mortgage obligations   $785,547   $33,782    5.73 %   $  —   $  —   %   $785,547   $33,782   5.73 %
        Other borrowings   5,623   541    12.83             5,623   541   12.83  
    
        
        
      
        Cost of derivative financial                               
        Instruments hedging liabilities     1,736              1,736  
         
              
              
       
                Total borrowings   $791,170   $36,059    6.08 %   $  —     %   $791,170   $36,059   6.08 %
    
 
 
    
 
 
    
 
 
  
        Net interest income     $16,177        $100       $16,277  
         
              
              
       
        Net interest spread        3.02 %       16.50 %       3.03 %
              
              
              
  
        Net yield        2.82 %       16.50 %       2.83 %
              
              
              
  
 
          Interest Income. During 2000, mortgage loans earned $35.0 million, or a yield of 9.8%, compared with $52.2 million, or a yield of 9.1% for the same period of 1999. Mortgage-backed securities income for 2000 consists of earnings on economic residual interests that NovaStar Financial purchased from NovaStar Mortgage starting in September 1999. In total, assets earned $36.6 million, or a yield of 10.0% for the nine months ended September 30, 2000. During the same period of 1999, assets earned $52.3 million or a 9.1% yield. As noted in Table 9, interest income is a function of volume and rates. Increasing the volume of assets will cause future increases in interest income, while declining balances will reduce interest income. Market interest rates will also affect future interest income.
 
          Interest Expense. The cost of borrowed funds for mortgage loans was $26.9 million for the nine months ended September 30, 2000, or 7.2% of average borrowings compared with $36.1 million, or 6.1% for the same period of 1999. Mortgage-backed securities’ cost of borrowed funds for the nine months
 
ended September 30, 2000 includes repurchase agreements secured by economic residual interests executed during the second and third quarters of 2000. Average interest-bearing liabilities for the nine months ended September 30, 2000 also consisted of financing costs on collateralized mortgage obligations compared with the same period of 1999, which also included a short-term financing arrangement with GMAC/RFC secured by residual interests in NovaStar Financial’s CMOs. In 1998, NovaStar Financial borrowed $15 million from GMAC/RFC, which included a $3 million financing fee. In February 1999, NovaStar Financial used the First Union residual facility to pay this debt in full. In March 1999, proceeds from the convertible preferred stock offering repaid all the outstanding debt on the residual facility.
 
          NovaStar Financial’s collateralized mortgage obligations are indexed to LIBOR. During the nine months ended September 30, 2000, one-month LIBOR averaged 6.33% compared with 5.07% for same period of 1999. Because the Federal Reserve Board increased the targeted federal funds interest rate in the latter part of 1999, effective borrowing costs have been higher in 2000. As with interest income, the cost of funds in the future will largely depend on market conditions, most notably levels of short-term interest rates. Rates on other borrowings generally fluctuate with short-term market interest rates, such as LIBOR or the federal funds rate.
 
          Net Interest Income and Spread.    Net interest income on mortgage loans for the nine months ended September 30, 2000 was $9.4 million, or 2.6% of average interest-earning mortgage loans, compared with $16.3 million, or 2.8% for the same period of 1999. Net interest spread on mortgage loans was 2.8% and 3.0%, respectively, for the nine months ended September 30, 2000 and 1999. Net interest income on mortgage-backed securities (economic residual interests) during the nine months ended September 30, 2000 was $1.3 million, or 13.0% of average interest-earning mortgage securities with a net interest spread of 8.6%. The volume of assets and liabilities and how well the spread between earnings on assets and the cost of funds is managed will dictate future net interest income.
 
          Impact of Interest Rate Agreements.    NovaStar Financial has entered into interest rate agreements designed to mitigate exposure to interest rate risk. Interest rate cap agreements require NovaStar Financial to pay a monthly fixed premium while allowing it to receive a rate that adjusts with LIBOR, when rates rise above a certain agreed-upon rate. These agreements are used to alter, in effect, the interest rates on funding costs to more closely match the yield on interest-earning assets.
 
          As part of the NMFT 2000-1 asset-backed bond transaction discussed under “Mortgage Securities— Available-For-Sale” and “Mortgage Loan Sales” sections of this document, NovaStar Financial sold a cap with a carrying value of $480,000 to NovaStar Mortgage recognizing a deferred gain of $880,000. The cap was hedging liabilities incurred to fund the mortgage loans sold to NMFT 2000-1 and the deferred gain will be amortized over the remaining cap term. This cap had a carrying value of $545,000 as of September 30, 2000. During the nine months ended September 30, 2000 and 1999, net interest expense incurred on hedging agreements was $160,000 and $1.7 million, respectively, which is included as a component of interest expense. The significant decline in this expense in 2000 compared with the same period of 1999 is a result of the majority of the caps’ quarterly LIBOR resets in 2000 were greater than their strike rates.
 
Prepayment Penalty Income
 
          NovaStar Financial strives to purchase loans that have some form of prepayment penalty fee to mitigate exposure to prepayment risk. During the nine months ended September 30, 2000 and 1999, 91% of the mortgage loans originated by NovaStar Mortgage had prepayment penalties. As of September 30, 2000, 45% of NovaStar Financial’s mortgage loan portfolio had prepayment penalties compared with 58% as of December 31, 1999. Prepayment penalties totaled $1.4 million during the nine months ended September 30, 2000 compared with $2.4 million for the same period of 1999. The decrease is due to NovaStar Financial no longer purchasing loans from NovaStar Mortgage, seasoning of the portfolio and prepayment penalty windows expiring in 2000 compared with 1999.
 
Premiums for Mortgage Loan Insurance
 
          NovaStar Financial and NovaStar Mortgage have executed agreements whereby lender-paid mortgage insurance coverage is purchased on selected mortgage loans. The use of mortgage insurance is one method of managing the credit risk in the mortgage asset portfolio.
 
          As of September 30, 2000 and December 31, 1999, approximately 66% and 39% of the loans owned by NovaStar Financial are covered under this agreement, including loans serving as collateral for the REMIC deals. The loans collateralizing REMIC deals are not recorded as loans of NovaStar Financial, but the performance of NovaStar’s investment in the residual interests of the REMIC deals is dependent on the credit losses of the underlying collateral.
 
          Premiums for mortgage insurance on loans maintained on the balance sheet of NovaStar Financial are recorded as a portfolio cost and included in the income statement under the caption “Premiums for Mortgage Loan Insurance.” During the nine months ended September 30, 2000, total premiums paid by NovaStar Financial totaled $1.0 million compared with $1.3 million for the same period of 1999. Premiums for mortgage insurance on loans serving as collateral for the residual interests owned by NovaStar Financial is paid from the loan collateral proceeds, and therefore are not included in the amount of total premiums paid as shown above.
 
Provisions for Credit Losses
 
          NovaStar Financial owns loans where the borrower possesses credit risk higher than that of conforming borrowers. Delinquent loans and losses are expected to occur. Most of the loans owned by NovaStar Financial were underwritten and funded by NovaStar Mortgage. All loans owned by NovaStar Financial are serviced by NovaStar Mortgage. NovaStar Mortgage uses several techniques to mitigate credit losses, including pre-funding audits by quality control personnel and in-depth appraisal reviews. Another loss mitigation technique allows a borrower to sell their property for less than the outstanding loan balance prior to foreclosure in transactions known as short sales, when it is believed that the resulting loss is less than what would be realized through foreclosure. While short sales serve to reduce the overall severity of losses incurred, they also accelerate the timing of losses. Loans are charged off in full when the cost of pursuing foreclosure and liquidation exceed recorded balances. Management also believes aggressive servicing is an important element to managing credit risk.
 
           As discussed further under the caption “Premiums for Mortgage Loan Insurance”, lender paid mortgage insurance is also used as a means of managing credit risk exposure. Generally, the exposure to credit loss on insured loans is considered minimal.
 
          Provisions for credit losses are made in amounts considered necessary to maintain the allowance at a level sufficient to cover probable losses inherent in the loan portfolio. Charge-offs are recognized at the time of foreclosure by recording the value of real estate owned property at its estimated realizable value. Subsequent gains or losses on dispositions, if any, are recorded in operations. The net gains or (losses) recognized on real estate owned properties are discussed further under “Other Income”. One of the principal methods used to estimate expected losses is a delinquency migration analysis. This analysis takes into consideration historical information regarding foreclosure and loss severity experience and applies that information to the portfolio at the reporting date.
 
          During the nine months ended September 30, 2000, NovaStar Financial made provisions for losses of $4.0 million and incurred net charge-offs of $7.0 million, compared to $11.5 million and $9.7 million during the same period of 1999. Charge-offs during the nine months of 2000 include $586,000 resulting from short sale transactions and loans charged off in full compared with $879,000 during the same period of 1999.
 
          In the opinion of management, the allowance for credit losses as of September 30, 2000 is adequate to cover losses inherent in the portfolio at that date. If losses do not develop in accordance with current expectations, future provisions will be increased or decreased as necessary. Management also believes that internal processes involving quality control, appraisal review and servicing that have been made as a result of experience to-date will result in lower losses being incurred on loans currently being originated.
 
          Table 10 is a rollforward of the activity in the allowance for credit losses during 2000 and 1999.
 
Table 10
Rollforward of Allowance for Credit Losses
(in thousands)
 
    2000
    1999
 
    September 30
    June 30
    March 31
    December 31
    September 30
    June 30
    March 31
 
Beginning balance      $  8,993     $  9,763     $11,105     $  5,370     $  3,573     $  3,492     $  3,573  
Provision for credit losses   1,212     1,213     1,579     10,579     5,634     3,566     2,299  
Amounts charged off, net
of recoveries
   (2,073 )    (1,983 )    (2,921 )    (4,844 )    (3,837 )    (3,485 )    (2,380 )
    
   
   
   
   
   
   
 
Ending Balance   $  8,132     $  8,993     $  9,763     $11,105     $  5,370     $  3,573     $  3,492  
    
   
   
   
   
   
   
 
 
          The following tables provide details regarding the delinquencies, defaults, and loss statistics of NovaStar Financial’s mortgage loan portfolio.
 
Table 11
Loan Delinquencies (90 days and greater) (A)
2000 and 1999
(in thousands)
 
       2000
   1999
       September 30
   June 30
   March 31
   December 31
   September 30
   June 30
   March 31
Mortgage loans Collateralizing
NovaStar Home Equity Series
(CMO):
                      
1997-1 Issued October 1, 1997      $3,410    $4,039    $3,434    $4,726    $6,093    $6,087    $6,454
1997-2 Issued December 11, 1997      5,222    6,336    6,311    6,047    5,934    5,671    8,388
1998-1 Issued April 30, 1998      8,131    6,455    5,987    8,467    11,411    9,687    11,818
1998-2 Issued August 18, 1998      10,621    11,159    11,433    12,754    10,247    10,808    10,832

(A)
Includes loans in foreclosure or bankruptcy.
 
Table 12
Loan Delinquencies (90 days and greater) as a Percent of Total Loan Principal(A)
2000 and 1999
 
       2000
   1999
       September 30
   June 30
   March 31
   December 31
   September 30
   June 30
   March 31
Mortgage loans Collateralizing
NovaStar Home Equity Series
(CMO):
                      
1997-1 Issued October 1, 1997      6.01 %    6.21 %    4.59 %    5.63 %    6.32 %    5.13 %    4.37 %
1997-2 Issued December 11, 1997      8.23      8.88      7.66      6.24      4.92      4.03      5.38  
1998-1 Issued April 30, 1998      6.44      4.40      3.58      4.42      5.32      4.13      4.64  
1998-2 Issued August 18, 1998 6.03 5.48 5.10 5.38 4.06 3.94 3.72

(A)
Includes loans in foreclosure or bankruptcy.
 
Table 13
Delinquencies, Defaults and Losses
September 30, 2000 and December 31, 1999
(dollars in thousands)
 
NovaStar Home Equity Series
September 30, 2000 1997-1
1997-2
1998-1
1998-2
All Loans
Allowance for Credit Losses:
          Balance, January 1, 2000      $2,335        $  2,861        $4,214        $  1,685        $11,105  
          Provision for credit losses      532        815        1,419        1,235        4,004  
          Amounts charged off, net of Recoveries      (1,154 )      (1,796      (2,246 )      (1,778 )      (6,977 )
     
     
     
     
     
  
          Balance, September 30, 2000      $1,713        $  1,880        $3,387        $  1,142        $  8,132  
     
     
     
     
     
  
Defaults as a percent of loan balance                                 
          Delinquent loans (A)    11.46 %      9.09 %      8.81 %      12.49 %      10.78 %
      
     
     
     
     
  
          Loans in foreclosure      3.99        6.71        4.80        4.53        4.86  
     
     
     
     
     
  
          Real estate owned      4.34        3.70        3.88        3.82        3.90  
     
     
     
     
     
  
Cumulative losses      $4,102        $  4,272        $4,015        $  2,345       
     
     
     
     
        
NovaStar Home Equity Series
December 31, 1999 1997-1
1997-2
1998-1
1998-2
All Loans
Allowance for Credit Losses:
          Balance, January 1, 1999      $  816        $  1,049        $1,163        $  346        $  3,573  
          Provision for credit losses      4,317        5,436        8,194        4,065        22,078  
          Amounts charged off, net of Recoveries      (2,798      (3,624      (5,143      (2,726      (14,546
     
     
     
     
     
  
Balance, December 31, 1999      $2,335        $  2,861        $4,214        $1,685        $11,105  
     
     
     
     
     
  
Defaults as a percent of loan balance
          Delinquent loans (A)      8.03 %      9.89 %      6.38 %      7.50 %      7.63 %
     
     
     
     
     
  
          Loans in foreclosure      4.73        4.32        3.75        4.02        4.09  
     
     
     
     
     
  
          Real estate owned      3.85        4.88        3.61        2.62        3.51  
     
     
     
     
     
  
Cumulative losses      $2,377        $  1,756        $  538        $  745       
     
     
     
     
        

(A)
Includes loans delinquent 30 days or greater
 
Loan Servicing Fees Paid to NovaStar Mortgage, Inc.
 
          Loan servicing fees paid to NovaStar Mortgage, Inc. include the 50 basis point fee charged by NovaStar Mortgage for servicing the loans owned by NovaStar Financial serving as collateral on CMOs. The fee charged is based on the loan principal balance of the mortgage loans serviced. Loan servicing fees for the first nine months of 2000 were $2.0 million compared with $3.1 million for the same period of 1999. The reduction is due to principal paydowns between the two periods.
 
Other Income
 
          Other income (loss) during the nine months ended September 30, 2000 primarily consists of net losses recognized on the sale of real estate owned properties of $722,000 compared with net gains on the sale of real estate owned properties of $74,000 during the same period of 1999. The net losses recognized in 2000 resulted from the liquidation of aged properties with slightly higher severities than
 
Novastar Financial’s historical average severity. Other income for the nine months ended September 30, 2000 also consists of interest earned on securitization funds held in trust of $169,000 and interest earned on money market funds of $101,000. Other income for the same period of 1999 also included interest earned on notes receivable from founders of $368,000 and interest earned on securitization funds held in trust of $173,000.
 
General and Administrative Expenses
 
          General and administrative expenses for the nine months ended September 30, 2000 and 1999 are provided in Table 14. Table 15 displays the relationship of portfolio expenses to stockholders’ equity during 2000 and 1999 by quarter.
 
Table 14
General and Administrative Expenses
(dollars in thousands)
 
       Nine Months Ended September 30,
       2000
     1999
              Percent of
Stockholders’
Equity
(Annualized)

            Percent of
Stockholders’
Equity
(Annualized)

Compensation and benefits      $1,042        1.38 %      $1,358      1.61 %
Professional and outside services      467        0.62        546      0.65  
Office administration      607        0.80        611      0.72  
Other      66        0.09        156      0.18  
     
     
     
  
  
Total general and administrative expenses before Intercompany fees      2,182        2.89 %      2,671      3.16 %
         
     
Net fees for other services provided by (to) NovaStar Mortgage, Inc.      (1,460 )           287     
     
              
        
Total general and administrative expenses.      $  722             $2,958     
     
              
        
 
Table 15
Portfolio Related Expenses as a
Percent of Stockholders’ Equity
2000 and 1999
 
       Percent of
Stockholders’
Equity

2000:     
Third quarter      3.05 %
Second quarter      2.80  
First quarter      2.80  
1999:     
Fourth quarter      3.63  
Third quarter      3.06  
Second quarter      2.07  
First quarter      3.94  
 
          Compensation and benefits includes employee base salaries, benefit costs and incentive compensation awards. The decrease in compensation and benefits for the nine months ended September 30, 2000 compared with the same period of 1999 is due to staff reductions and employee cost allocations to NovaStar Mortgage.
 
          Professional and outside services include fees for legal and accounting services. In the normal course of business, fees are incurred for professional services related to general corporate matters and specific transactions. The 2000 decline is a result of legal fees incurred on the structuring of various financing arrangements and general company growth experienced during the first nine months of 1999. Office administration includes items such as rent, depreciation, telephone, office supplies, postage, delivery, maintenance and repairs.
 
          The following is a summary of the fees, in thousands, paid to (received from) NovaStar Mortgage for the nine months ended September 30, 2000 and 1999.
 
      Nine Months Ended
September 30,

 
      2000
        1999
 
Amounts paid to NovaStar Mortgage:     
               
          Loan servicing fees $     1,982     $    3,056  
 
   
 
          Administrative fees      126          1,263  
Amounts received from NovaStar Mortgage:
          Guaranty, commitment, loan sale and securitization fees      (1,246 )         
          Interest income      (340 )        (976 )
 
   
 
  $    (1,460   $       287  
 
   
 
 
          The decline in these fees for the nine months ended September 30, 2000 compared with 1999 is due to the cancellation of the administrative fees intercompany agreement on April 1, 1999, since NovaStar Financial is no longer purchasing loans from NovaStar Mortgage. This agreement was replaced with an intercompany loan and guarantee agreement with NovaStar Mortgage. Under the terms of this agreement,

NovaStar Mortgage pays interest on amounts it borrows from NovaStar Financial. Interest on the borrowings accrues at the federal funds rate plus 1.75%. Under this agreement, NovaStar Mortgage is required to pay guaranty fees in the amount 0.25% of the loans sold by NovaStar Mortgage for which NovaStar Financial has guaranteed the performance of NovaStar Mortgage. In addition, beginning July 1, 2000, NovaStar Mortgage entered into the following intercompany agreements:

· Servicing support fee: NovaStar Mortgage pays NovaStar Financial a fee equal to five basis points of the weighted average mortgage loan servicing principal.
 
· Financing commitment fee: NovaStar Mortgage pays NovaStar Financial a fee equal to 25 basis points on a $150 million annual commitment
 
· Residual purchase commitment fee: NovaStar Mortgage pays NovaStar Financial a fee at each securitization close equal to 20 basis points of the collateral principal value.
 
· Securitization consulting fee: NovaStar Mortgage pays NovaStar Financial a fee at each securitization close equal to 12.5 basis points of the collateral principal value.
 
· Guaranty spread fee: NovaStar Mortgage pays NovaStar Financial a fee equal to one basis point of the weighted average mortgage loan warehouse and repurchase borrowings.
 
          NovaStar Financial provides liquidity resources for all operations and enhances the creditworthiness of NovaStar Mortgage. In addition, Novastar Financial provides substantial expertise to NovaStar Mortgage in its execution of loan sales and securitizations. The fees charged to NovaStar Mortgage are designed to recognize this liquidity, credit and financial support.
 
Equity in Earnings of NFI Holding Corporation
 
          For the nine months ended September 30, 2000, NFI Holding recorded net income of $652,000 compared with net income of $1.5 million for the same period of 1999. NovaStar Financial records its portion of the earnings as equity in net earnings of NFI Holding in its income statement. NFI Holding’s net earnings include the net earnings of NovaStar Mortgage, a subsidiary of NFI Holding as discussed under “Basis of Presentation”. NFI Holding’s financial position and results of operation for the nine months ended September 30, 2000 and 1999 are discussed further under the heading “NFI Holding Corporation”.
 
Results of Operations of NovaStar Financial, Inc.—Three Months Ended September 30, 2000 Compared to the Three Months Ended September 30, 1999
 
Net Income
 
          During the three months ended September 30, 2000, NovaStar Financial recorded net income of $2.0 million, $0.18 per diluted common share, compared with a net loss of $1.5 million, $0.25 per diluted common share, for the three months ended September 30, 1999.
 
Net Interest Income
 
          Table 16 presents a summary of the average interest-earning assets, average interest-bearing liabilities and the related yields and rates thereon for the three months ended September 30, 2000 and 1999.
 
Table 16
Interest Analysis
(dollars in thousands)
 
      Cost of derivative financial instruments hedging liabilities
       Mortgage Loans
     Mortgage-Backed Securities
     Average
Balance

     Total
     Annual
Yield/
Rate

Three months ended September 30, 2000
     Average
Balance

     Interest
Income/
Expense

     Annual
Yield/
Rate

     Average
Balance

     Interest
Income/
Expense

     Annual
Yield/
Rate

     Interest
Income/
Expense

Interest-earning mortgage assets      $417,846      $10,391        9.95 %      $18,701      $733      15.68 %      $436,548      $11,124        10.19 %
     
  
     
     
  
  
     
  
     
  
Interest-bearing liabilities                                              
      Collateralized mortgage obligations      $443,082      $  8,400        7.58 %                       $443,082      $  8,400        7.58 %
      Other borrowings                         6,787      131      7.72 %      6,787      131        7.72 %
     
                    
                 
                 
     Cost of derivative financial instruments hedging liabilities           (160 )                               (160 )     
           
                    
                 
           
          Total borrowings      $443,082      $  8,240        7.44 %      $  6,787      $131      7.72 %      $449,869      $  8,371        7.44 %
     
  
     
     
  
           
  
     
  
      Net interest income           $  2,151                  $602                $  2,753       
           
                    
                 
           
      Net interest spread                2.51 %                7.96 %                2.75 %
                    
                 
                    
  
      Net yield                2.06 %                12.88 %                2.52 %
                    
                 
                    
  
 
       Mortgage Loans
     Mortgage-Backed Securities
     Average
Balance

     Total
     Annual
Yield/
Rate

Three months ended September 30, 2000
     Average
Balance

     Interest
Income/
Expense

     Annual
Yield/
Rate

     Average
Balance

     Interest
Income/
Expense

     Annual
Yield/
Rate

     Interest
Income/
Expense

Interest-earning mortgage assets      $690,323      $15,595        9.04 %      $  2,424      $100      16.50 %      $692,747      $15,695        9.06 %
     
  
     
     
  
  
     
  
     
  
Interest-bearing liabilities                                              
      Collateralized mortgage obligations      $706,685      $10,626        6.01 %                       $706,685      $10,626        6.01 %
      Other borrowings                                                       
     
                    
                 
                 
      Cost of derivative financial instruments hedging liabilities           580                                 580       
           
                    
                 
           
          Total borrowings      $706,685      $11,206        6.34 %      $      —           %      $706,685      $11,206        6.34 %
     
  
     
     
  
           
  
     
  
      Net interest income           $  4,389                  $100                $  4,489       
           
                    
                 
           
      Net interest spread                2.70 %                16.50 %                2.72 %
                    
                 
                    
  
      Net yield                2.54 %                16.50 %                2.59 %
                    
                 
                    
  
 
          Average interest-earning assets were $436.5 million during the three months ended September 30, 2000, which included in $18.7 million of residual assets classified as mortgage-backed securities, compared with average interest-earning assets of $692.7 million for the same period of 1999, comprised primarily of mortgage loans. Mortgage securities earned $733,000 for the three months ended September 30, 2000, or a yield of 15.7% compared with $100,000, or a yield of 16.5% for the same period of 1999. During the three months ended September 30, 2000, mortgage loans earned $10.4 million, or a yield of 10.0%, compared with $15.6 million, or a yield of 9.0% for the same period of 1999. In total, assets earned $11.1 million—a 10.2% yield for three months ended September 30, 2000 compared to $15.7 million, or a 9.1% yield for the same period ended September 30, 1999.
 
          During the three months ended September 30, 2000, borrowed funds for NovaStar Financial averaged $443.1 million on which interest was incurred of $8.2 million, or 7.4%. In comparison, for the three months ended September 30, 1999, borrowed funds for NovaStar Financial averaged $706.7 million on which interest was incurred of $11.2 million, or 6.3%.
 
          Net interest income during the three months ended September 30, 2000 was $2.8 million or 2.5% of average interest-earning assets, compared with $4.4 million, or 2.6% of average interest-earning assets during the same period of 1999. Net interest spread was 2.8% during the three months ended September 30, 2000 compared with 2.7% during the three months ended September 30, 1999.
 
           During the three months ended September 30, 2000 and 1999, net interest expense was incurred on hedging agreements of $(160,000) and $580,000, respectively, which is included as a component of interest expense. The decline in this expense for the third quarter of 2000 compared with the same period of 1999 is due to the fact that quarterly LIBOR reset rates were higher than the interest rate agreement strike rates on a majority of NovaStar Financial’s interest rate agreements during the third quarter of 2000. NovaStar Financial receives credits against the quarterly premium payments to counterparties whenever LIBOR reset rates are higher than the strike rates.
 
Provisions for Credit Losses and Premium for Mortgage Loan Insurance
 
          During the three months ended September 30, 2000, NovaStar Financial provided $1.2 million to the allowance for credit losses, compared with $5.6 million during the same period of 1999. Charge-offs during the three months ended September 30, 2000 were $2.1 million compared with $3.8 million during the same period of 1999. See “Mortgage Insurance” and Provisions for Credit Losses“ under ”Results of Operations of NovaStar Financial, Inc.—Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 2000.“
 
          Premiums for mortgage loan insurance include the premiums paid to Radian Guaranty, Inc. and PMI, Inc. on certain loans held in NovaStar Financial’s portfolio.
 
Loan Servicing Fees Paid to NovaStar Mortgage, Inc.
 
          Loan servicing fees paid to NovaStar Mortgage, Inc. include the 50 basis point fee that NovaStar Mortgage charges NovaStar Financial for the loans collateralizing the CMOs. This fee is based on the collected principal balance of the mortgage loans serviced. The decrease in loan servicing fees paid to NovaStar Mortgage during the three months ended September 30, 2000 compared with the same period of 1999 is due to principal paydowns in NovaStar Financial’s CMO collateral during the two periods.
 
Other Income
 
          Other income during the three months ended September 30, 2000 primarily consists of prepayment penalties of $448,000, net loss recognized on the sale of real estate owned properties of $684,000, interest earned on securitization funds held in trust of $59,000 and interest earned on money market funds of $34,000. Other income for the same period of 1999 primarily consisted of prepayment penalties of $769,000, net gains on the sale of real estate owned properties of $91,000, interest earned on notes receivable from founders of $126,000 and interest earned on securitization funds held in trust of $62,000.
 
General and Administrative Expenses
 
          General and administrative expenses for the three months ended September 30, 2000 and 1999 are provided in Table 17.
 
Table 17
General and Administrative Expenses
(dollars in thousands)
 
      Three Months Ended September 30,
      2000
    1999
              Percent of
Stockholders’
Equity
(Annualized)

            Percent of
Stockholders’
Equity
(Annualized)

Compensation and benefits  $ 325        1.30 % $   421      1.49 %
Professional and outside services      210        0.84        181      0.64  
Office administration      206        0.82        203      0.72  
Other      23        0.09        60      0.21  
  
     
  
  
  
Total general and administrative expenses before Intercompany fees      764        3.05 %      865      3.06 %
                       
 
Net fees for other services provided by (to) NovaStar Mortgage, Inc.       (1,458 )            (169 )
  
           
        
     Total general and administrative expenses. $ (694 )      $    696     
  
           
        
 
          Compensation and benefits totaled $325,000 for the nine months ended September 30, 2000 compared with $421,000 for the same period of 1999. The decline is due to staff reductions and intercompany employee expense allocations to NovaStar Mortgage.
 
          Professional and outside services for the three months ended September 30, 2000 was $210,000 compared with $181,000 for the three months ended September 30, 1999. This line-item includes the cost of various accounting and legal services and varies based on the nature and timing of operational needs.
 
          The following is a summary of the fees, in thousands, paid to NovaStar Mortgage for the three months ended September 30, 2000 and 1999:
 
        Three Months
Ended
September 30,

    2000
      1999
Amounts paid to NovaStar Mortgage:              
     Loan servicing fees   $ 599     $  936  
    
    
  
     Administrative fees, net of guaranty fees.        (111 )        115  
Amounts received from NovaStar Mortgage:          
     Guaranty, commitment, loan sale and securitization fees        (1,239 )         
     Interest income        (108 )        (284 )
    
    
  
    $  (1,458)     $  (169 )
    
    
  
 
          The decline in loan servicing fees paid to NovaStar Mortgage for the three months ended September 30, 2000 compared with the three months ended September 30, 1999 is due to a decline in NovaStar Financial’s mortgage loan portfolio serviced by NovaStar Mortgage.
 
           The guaranty, commitment, loan sale and securitization fees are a result of the intercompany agreements NovaStar Mortgage and NovaStar Financial entered July 1, 2000. These agreements are discussed further under the “Results of Operations of NovaStar Financial, Inc.—Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999”.
 
          The decrease in the interest income paid to NovaStar Mortgage during these same periods is a result of the decline in average intercompany borrowings in 2000.
 
Equity in Earnings (Loss) of NFI Holding Corporation
 
          For the three months ended September 30, 2000, NFI Holding recorded net income of $795,000 compared with net income of $583,000 for the same period of 1999. NFI Holding’s financial position and results of operation for the three month period ended September 30, 2000 and 1999 are discussed further under the heading “NFI Holding Corporation”.
 
Estimated Taxable Income (Loss)
 
          Income reported for financial reporting purposes as calculated in accordance with generally accepted accounting principles (GAAP) differs from income computed for income tax purposes. This distinction is important as dividends paid are based on taxable income. Table 18 is a summary of the differences between net income or loss reported for GAAP and estimated taxable income for nine months ended September 30, 2000 and 1999.
 
Table 18
Estimated Taxable Income (Loss)
Nine Months Ended September 30, 2000 and 1999
(in thousands)
 
    September 30,
 
    2000
    1999
 
Net income   $ 3,336     $ 2,034  
Use of net operating loss carryforward        (176 )        (2,628 )
Results of NFI Holding and subsidiaries        (646 )        (1,518 )
Provision for credit losses        4,004          11,499  
Loans charged-off        (6,977 )        (9,702 )
Other, net        459          1,175  
    
    
  
Estimated taxable income (loss)   $     $ 860  
    
    
  
 
          NovaStar Financial has a net operating loss carryforward of approximately $2.3 million available to offset taxable income in 2000, and thereby reduce the amount of required distributions under REIT guidelines. In addition, dividends paid on convertible preferred stock serve to reduce the amount of required distributions to common shareholders.
 
NFI Holding Corporation
 
          Since NovaStar Financial discontinued purchasing loans from NovaStar Mortgage and holding them in portfolio in the latter part of 1998, NovaStar Mortgage has had a larger impact on NovaStar Financial’s operational results. Instead of selling loans to NovaStar Financial, NovaStar Mortgage has sold loans to outside third parties. Through its indirect equity ownership of NFI Holding, NovaStar Financial has shared in the profits of NovaStar Mortgage’s loan sales.
 
          The following table presents NFI Holding’s consolidated financial statements as of September 30, 2000 and 1999, which consists primarily of the assets, liabilities, and operational results of NovaStar Mortgage.
 
NFI Holding Corporation
Condensed Consolidated Balance Sheets
(unaudited, dollars in thousands)

         September 30,
2000
    December 31,
1999
Assets              
          Cash and cash equivalents   $ 3,272   $ 1,466
          Mortgage loans        68,750        107,916
          Other assets        12,647        10,061
    
 
                               Total assets   $  84,669   $ 119,443
    
 
Liabilities and Stockholders’ Equity              
          Liabilities:
                    Borrowings   $  44,805   $     78,448
                    Due to NovaStar Financial, Inc.        12,918        22,161
                    Accounts payable and other liabilities        19,247        11,787
    
 
                               Total liabilities        76,970        112,396
                    Stockholders’ equity        7,699        7,047
    
 
                               Total liabilities and stockholders’ equity   $ 84,669   $ 119,443
    
 
 
NFI Holding Corporation
Condensed Consolidated Statements of Operations
(unaudited, dollars in thousands)

       Nine Months Ended
September 30,

     Three Months Ended
September 30,

       2000
     1999
     2000
     1999
Interest income      $11,828      $  7,948        $ 4,723        $3,122  
Interest expense.      7,034      3,764        3,007        1,544  
     
  
     
     
  
     Net interest income      4,794      4,184        1,716        1,578  
Provision for credit losses      80      (284 )      97        (168 )
     
  
     
     
  
Net interest income after provision for credit losses      4,714      4,468        1,619        1,746  
Other income:                    
     Fees from third parties      5,057      706        2,826        152  
     Fees received from, net of paid to, NovaStar Financial, Inc.      522      3,343        (859 )      767  
                       
     Net gain on sales of mortgage assets      9,909      9,189        5,075        3,101  
     
  
     
     
  
          Total other income      15,488      13,238        7,042        4,020  
General and administrative expenses      19,550      16,172        7,866        5,183  
     
  
     
     
  
Net income before taxes      652      1,534        795        583  
Income tax expense                          
     
  
     
     
  
Net income      $     652      $  1,534        $    795        $   583  
     
  
     
     
  
 
Financial Condition of NFI Holding Corporation as of September 30, 2000 and December 31, 1999
 
          Mortgage Loan Originations.    NFI Holding originated 4,498 non-conforming residential mortgage loans during the nine months ended September 30, 2000 with an aggregate principal amount of $511 million. Virtually all of NFI Holding’s mortgage assets as of September 30, 2000 and December 31, 1999 consist of non-conforming mortgage loans that will be sold directly to independent buyers of whole loans or through securitization transactions that are treated for tax and accounting purposes as sales.
 
          Table 19 is a summary of NFI Holding’s wholesale loan originations for 2000 and 1999. Table 20 presents a summary of mortgage loan transfers of NFI Holding during 2000 and 1999. Table 21 is a summary of wholesale loan origination costs of production.
 
Table 19
2000 and 1999 Quarterly Wholesale Loan Originations
(dollars in thousands, except for average loan balance)
 
       Number
of Loans

     Principal
     Average
Loan
Balance

          Weighted Average
     Percent with
Prepayment
Penalty

  Price Paid
to
Broker

     Loan to
Value

     Credit
Rating (A)

     Coupon
2000:                                        
          Third quarter      1,793      $207,662      $115,818      101.1      84 %      5.20      10.72 %      90 %
          Second quarter      1,473      171,375      116,344      101.0      82        5.32      10.50        91  
          First quarter      1,232      132,072      107,201      101.1      80        5.45      10.16        93  
     
  
                                      
2000 total      4,498      $511,109      $113,630      101.1      82 %      5.30      10.50 %      91 %
     
  
  
  
  
     
  
     
  
1999:                                        
          Fourth quarter      1,265      $130,288      $102,994      101.0      82 %      5.30      10.04 %      91 %
          Third quarter      1,204      125,140      103,937      100.8      82        5.28      9.87        91  
          Second quarter      1,161      114,631      98,735      101.1      82        5.14      9.82        89  
          First quarter      865      82,495      95,370      100.5      80        4.95      9.85        89  
     
  
                                      
1999 total      4,495      $452,554      $100,679      100.9      82 %      5.19      9.90 %      90 %
     
  
  
  
  
     
  
     
  
 
(A)
AAA=7, AA=6, A=5, A-=4, B=3, C=2, D=1
 
Table 20
Quarterly Mortgage Loan Transfers
(dollars in thousands)
 
       Mortgage Loan Sales to Third
Parties

     Mortgage Loans
Transferred in
Securitizations

       Principal
Amount

     Net Gain
Recognized

     Weighted
Average
Price To
Par

     Principal
Amount

     Net Gain
Recognized

2000:                         
          Third quarter      $  50,334      $  1,552      104.0        $188,734      $3,584
          Second quarter      27,799      661      104.0        101,675      1,392
          First quarter      48,548      1,204      104.0        128,171      1,544
     
  
        
  
          2000 total      $126,681      $  3,417      104.0        $418,580      $6,520
     
  
  
     
  
1999:                         
          Fourth quarter      $109,443      $  2,583      104.1 %      $        —      $    —
          Third quarter      110,512      3,075      104.2            
          Second quarter      98,048      2,911      104.4        25,800      355
          First quarter      72,824      1,593      103.6        138,847      1,250
     
  
          
  
          1999 total      $390,827      $10,162      104.1        $164,647      $1,605
     
  
  
     
  
 
Table 21
Wholesale Loan Costs of Production
 
     Gross Loan
Production

     Premium paid to
broker, net of fees
collected

     Total
Acquisition
Cost

Costs as a percent of principal:
 
2000:
          Third quarter      2.6 %      0.5 %      3.1 %
     
     
     
  
          Second quarter      3.0 %      0.5 %      3.5 %
     
     
     
  
          First quarter      3.3 %      0.5 %      3.8 %
     
     
     
  
 
1999:
          Fourth quarter      3.1 %      0.5 %      3.6 %
     
     
     
  
          Third quarter      3.8 %      0.4 %      4.2 %
     
     
     
  
          Second quarter      4.2 %      0.5 %      4.7 %
     
     
     
  
          First quarter.      6.2 %      0.2 %      6.4 %
     
     
     
  
 
          As noted in the table above, NovaStar Mortgage’s quarter-to-quarter 1999 wholesale loan production costs steadily declined as a result of increased efficiencies in the mortgage lending operation. During the third quarter of 1999, NovaStar Mortgage introduced Internet Underwriter®, “IU”, a web-based origination system that has allowed NovaStar Mortgage to increase production volumes without adding infrastructure. First quarter 2000 production costs were slightly higher than fourth quarter 1999 due in part to more expense allocations from NovaStar Financial. In addition, NovaStar Mortgage hired more account executives during the first three months of 2000. Account executive costs typically are higher in the first few months of employment and are expected to decline, as a percent of principal, as the sales force becomes more productive with added experience and exposure to NovaStar Mortgage’s whole loan origination products and markets.
 
          Table 22 is a summary of loans originated by state for 2000 and 1999 by quarter. As of September 30, 2000, NovaStar Mortgage had 78 account executives 46 covering states.
 
Table 22
Mortgage Loan Originations by State
2000 and 1999
 
     Percent of Total Originations during Quarter
(based on original principal balance)

 
    2000
          1999
 
Collateral Location
   Third
    Second
    First
    Fourth
    Third
    Second
    First
 
Florida    12 %   13 %   14 %   12 %   15 %   12 %   15 %
California    11     10     10     10     10     8     6  
Ohio    7     8     7     8     12     10     8  
Michigan    10     11     11     12     10     10     12  
Nevada    6     7     7     5     4     4     3  
Arizona    5     5     5     8     5     7     4  
Colorado    5     5     4     2     1     1     2  
Tennessee    5     6     7     6     4     6     9  
Washington    5     5     5     4     4     5     3  
All other states    34     30     30     33     35     37     38  
 
          NFI Holding’s loan originations are funded through warehouse and repurchase facilities at First Union and GMAC/RFC. Table 25 of the “Liquidity Resources and Capital” section of this document detail borrowings outstanding under these financing arrangements as of September 30, 2000.
 
          Mortgage Loan Sales.     NovaStar Mortgage executed two securitizations during the first nine months of 2000, combining $570 million in loans, which were sold to a Special Purpose Entity (SPE), of which $151 million will settle in December 2000. A gain of $6.5 million was recognized on these transactions. Bonds issued by the SPE were $560 million and proceeds received were used to pay down warehouse and mortgage loan repurchase facilities of NovaStar Mortgage. The loans were sold without recourse. NovaStar Mortgage retained residual certificates issued by the SPE, which NovaStar Financial subsequently purchased. NovaStar Mortgage also retained loan servicing rights for the loans sold. The values of the retained interests and the mortgage servicing rights have been recorded as an asset and the loans sold have been removed from the balance sheet of NovaStar Mortgage.
 
          NovaStar Mortgage allocated its basis in the mortgage loans between the portion of the mortgage loans sold and the retained assets based on the relative fair values of those portions at the time of sale. The values of these assets are determined by discounting estimated future cash flows using the cash out method. The following table details the significant assumptions used to determine the value of the resulting retained assets in NMFT 2000-1 and 2000-2.
 
  Constant
prepayment rate
(weighted average
life)
Static loss, net of
mortgage insurance
(basis points)
Discount
Rate
    2000-1 27 1% 15%
    2000-2 28 1% 15%
 
          Details regarding loan collateral as of September 30, 2000 and December 31, 1999 are included in Tables 4, 5 and 8 of this document.
 
           NFI Holding also sold $126.7 million of its whole loan portfolio to unrelated third parties for cash at a net gain of $3.4 million at an average price to par of 104.0 during 2000. Table 20 of “Financial Condition of NFI Holding Corporation as of September 30, 2000 and December 31, 1999” provides a quarterly analysis of NFI Holding’s mortgage loan sales to third parties.
 
          Mortgage Loan Servicing.    Loan servicing is a critical part of NovaStar Mortgage’ s business. The majority of the loans serviced by NovaStar Mortgage are owned by NovaStar Financial. In the opinion of management, maintaining contact with borrowers is vital in managing credit risk and in borrower retention. Non-conforming borrowers are prone to late payments and are more likely to default on their obligations than conventional borrowers. NovaStar Mortgage strives to identify issues and trends with borrowers early and take quick action to address such matters.
 
          Table 23 provides summaries of delinquencies and default statistics of NovaStar Mortgage’s mortgage loan portfolio in 2000 and 1999 by quarter. The information presented in both tables includes mortgage loans owned by NovaStar Financial and its affiliates. Other information regarding the credit quality of NovaStar Financial’s mortgage loans is provided in Table 1.
 
    Table 23
Delinquencies and Defaults
(dollars in thousands)
 
       2000
     1999
     September 30
  June 30
  March 31
  December 31
   September 30
  June 30
  March 31
Loan servicing
portfolio
     $1,016,952   $970,016   $872,693   $894,572   $969,343   $1,032,065   $1,072,393
   
 
 
 
 
 
 
Total defaults:               
     Delinquent loans (A)         4.90%      4.82%       5.58%      6.28%      4.75%       5.21%       4.12%
   
 
 
 
 
 
 
     Loans in
          foreclosure
     3.34    3.25    3.55   3.62   3.79   3.36   3.39
   
 
 
 
 
 
 
     Real estate owned      1.97     2.07    2.65   2.71   2.24   2.20   1.66
   
 
 
 
 
 
 
 
(A)
Includes loans delinquent 30 days or greater
 
          The following table presents a summary of the mortgage loan activity of NFI Holding for 2000 and 1999 as a percent of the respective quarter’s beginning principal of mortgage loans held in portfolio and loan origination principal.
 
Table 24
Mortgage Loan Activity—NFI Holding Corporation
 
       Percent Sold
to NovaStar
Financial, Inc.

     Percent Sold
to Third
Parties

     Percent Sold
in
Securitizations

     Percent
Held in
Portfolio

     Percent of
Prepayments

     Total
2000                                   
Third quarter           9 %      60 %      30 %      1 %      100 %
Second quarter           12        44        43        1        100  
First quarter           20        53        26        1        100  
 
1999                              
Fourth quarter           52               46        2        100  
Third quarter           54               44        2        100  
Second quarter           32        13        54        1        100  
First quarter           25        45        29        1        100  
 
Results of Operations of NFI Holding Corporation—Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999
 
          For the nine months ended September 30, 2000, NFI Holding recorded net income of $652,000 compared with net income of $1.5 million during the same period of 1999. A summarized income statement of NFI Holding is presented in the “NFI Holding Corporation” section of this document.
 
          The following summarizes operating results of NFI Holding for the nine months ended September 30, 2000 compared with the same period of 1999:
 
·
Fees from third parties increased from $706,000 during the nine months ended September 30, 1999 to $5.1 million during the nine months ended September 30, 2000. The significant increase is due to broker fees received on loans originated through the mortgage brokers of NovaStar Home Mortgage. NovaStar Home Mortgage operates 48 mortgage broker offices in 24 states. The operations of NovaStar Home Mortgage began in November 1999.
 
·
Fees received from, net of paid to, Novastar Financial, Inc. declined from $3.3 million in 1999 to $522,000 in 2000, primarily due to the cancellation of the administrative fee agreement between NovaStar Financial and NovaStar Mortgage on April 1, 1999. A summary of the intercompany fees by type is included in the “Results of Operations of NovaStar Financial, Inc.—Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999” section of this document.
 
·
During the nine months ended September 30, 2000, NovaStar Mortgage recognized net gains of $9.9 million on the sale of whole loans. Of that amount, $6.5 million was recognized in two securitization transactions that closed during the period. The remainder of the gain was primarily due to various whole loan sales to third parties for cash. During the same period of 1999,
 
NovaStar Mortgage recognized gains of $9.2 million on the transfer of whole loans, including $1.6 million on the NMFT 1999-1 asset-backed bond transaction.
 
·
General and administrative expenses increased from $16.2 million during the first nine months of 1999 to $19.6 million during the same period of 2000. The increase is primarily attributable to various expenses incurred by the broker branches of NovaStar Home Mortgage, including the net income generated from the branches is expensed to the branch in the form of compensation. NovaStar Home Mortgage began providing various accounting and compensation services to mortgage brokerage companies during the fourth quarter of 1999.
 
·
No income tax expense has been recorded during the first nine months of 2000 because of the existence of substantial net operating loss carryforwards, which are expected to offset all of the pre-tax income in 2000.
 
Results of Operations of NFI Holding Corporation—Three Months Ended September 30, 2000 Compared to the Three Months Ended September 30, 1999
 
             For the three months ended September 30, 2000, NFI Holding recorded net income of $795,000 compared with net income of $583,000 for the same period of 1999. The following summarizes the explains the decline in net earnings for the three months ended September 30, 2000 compared with the same period of 1999:
 
·
Fees from third parties increased from $152,000 during the three months ended September 30, 1999 to $2.8 million during the three months ended September 30, 2000. The significant increase is due to broker fees received on loans originated through the mortgage brokers of NovaStar Home Mortgage.
 
·
Net gains on sales of mortgage assets increased from $3.1 million during the third quarter 1999 to $5.1 million during the third quarter 2000. During the three months ended September 30, 2000 NovaStar Mortgage recognized a gain of $3.6 million on the first close of the 2000-2 securitization transaction. The remainder of the gain recognized in the third quarter 2000 was primarily on mortgage loan sales to third parties. During the third quarter of 1999, all of NFI Holding’s net gain on sales of mortgage assets were on mortgage loan sales to third parties.
 
·
Fees received from, net of paid to, NovaStar Financial, Inc. decreased from $767,000 during the third quarter of 1999 to ($859,000) during the same period of 2000 as a result of the implementation of additional intercompany agreements July 1, 2000 as discussed under the “Results of Operations of NovaStar Financial, Inc.—Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999”.
 
·
General and administrative expenses increased from $5.2 million during the third quarter 1999 to $7.9 million during the third quarter 2000. The increase is primarily attributable to various expenses incurred by the broker branches of NovaStar Home Mortgage, including the net income (loss) generated from the branches is expensed to the branch in the form of compensation paid to
 
brokers. NovaStar Home Mortgage began providing various accounting and compensation services to mortgage brokerage companies during the fourth quarter of 1999.
 
·
No income tax expense has been recorded in the third quarter of 2000 because of the existence of substantial net operating loss carryforwards, which are expected to offset all of the pre-tax income in 2000.
 
Liquidity and Capital Resources
 
          Liquidity means the need for, access to and uses of cash. The primary needs for cash include the acquisition of mortgage loans, principal repayment and interest on borrowings, operating expenses and dividend payments. Substantial cash is required to support the operating activities of the business, especially the mortgage origination operation. Mortgage asset sales, principal, interest and fees collected on mortgage assets and residual interests on CMOs will serve to support cash needs. Drawing upon various borrowing arrangements typically satisfies major cash requirements.
 
          NovaStar Mortgage requires substantial cash to fund loan originations and operating costs. As of September 30, 2000, NFI Holding owned $68.8 million of non-conforming mortgage loans. NFI Holding provided financing for these loans through warehouse and repurchase credit facilities with First Union and GMAC/RFC. Loans financed with warehouse and repurchase credit facilities are subject to changing market valuation and margin calls. Management expects to continue selling loans originated by NovaStar Mortgage or securitizing those loans to meet the significant cash needs of the wholesale loan operation. Management believes NovaStar Financial can operate indefinitely in this manner, provided that the level of loan originations is at or near the capacity of its production infrastructure.
 
          Table 25 is a summary of cash, financing arrangements and available borrowing capacity for NovaStar Financial and NovaStar Mortgage, on a combined basis, as of September 30, 2000:
 
Table 25
Liquidity Resources
September 30, 2000
(in thousands)
 
      Maturity
  Maximum
Borrowing
Limit

  Lending
Value of
Collateral

  Borrowings
  Availability
Resource    
Cash                            $   6,039
Committed facilities with First Union National Bank  (A):                                
     Warehouse line of credit     7/27/01   $ 75,000   $ 43,950     $ 21,038   $ 22,912
      Secured whole loan repurchase agreement     7/27/01   $ 175,000   $ 224     $ 224   $
      Residual financing available     12/17/01   $ 25,000   $ (B )   $ 10,960   $ 14,040
Committed facility with GMAC/Residential Funding 
    Corporation (A):
                               
      Warehouse line of credit       12/27/00   $  50,000   $  23,543     $ 23,543   $
        
 
    
 
                    Total        $ 335,961   $ 81,024     $ 55,765   $ 42,991
          
 
    
 

(A)
Value of collateral and borrowings include amounts for NovaStar Financial and NovaStar Mortgage, as they are co-borrowers under the arrangements with First Union National Bank and GMAC/RFC.
 
(B)
Management estimates the value of the residuals range from $55 to $70 million and does not include the value of mortgage servicing rights.
 
          The warehouse line of credit and whole loan repurchase agreements with First Union National Bank expire on July 27, 2001.
 
          In the opinion of management, the available liquidity resources are sufficient to cover expected future production of NovaStar Mortgage.
 
          Cash activity during the nine months ended September 30, 2000 and 1999 are presented in the consolidated statement of cash flows.
 
          The capital of NovaStar Financial has come from
 
·
a private placement offering of preferred stock, raising net proceeds of $47 million.
 
·
an initial public offering of common stock, raising net proceeds of $67 million, and
 
·
a private offering of convertible preferred stock, raising net proceeds of $29 million.
 
          NovaStar Financial uses capital when financing loans on a long-term basis. Under short-term financing arrangements, NovaStar can borrow up to the lessor of 98% of the face amount or 95% of the market value of the loans it owns. In long-term financing (i.e. in the form of asset-backed bonds) NovaStar can finance approximately 95% of the market value of the loans. NovaStar must use its own capital resources to “finance” the difference between the financed portion and the full loan cost.
 
          During 1999 and 2000, most of the loans originated by NovaStar Mortgage were sold to third parties and in securitization transactions treated as sales for tax and financial reporting purposes. In
doing so, NovaStar does not use capital. In fact, if the sales prices are above the full cost to originate loans, this method of operation will generate capital for NovaStar.
 
          During 2000, management expects to finance half of the loans produced by NovaStar Mortgage. The remainder will be sold to third parties. NovaStar currently has excess capital available to support this mode of operation during 2000. When NovaStar Financial fully deploys its capital, management expects to either raise more equity from the capital markets or sell enough loans so that it operates without the need for additional capital.
 
Inflation
 
          Virtually all assets and liabilities of NovaStar Financial are financial in nature. As a result, interest rates and other factors drive company performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. The financial statements of NovaStar Financial are prepared in accordance with generally accepted accounting principles and the dividends are based on taxable income. In each case, financial activities and balance sheet are measured with reference to historical cost or fair market value without considering inflation.
 
Impact of Recently Issued Accounting Pronouncements
 
          During 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 standardizes the accounting for derivative instruments, including certain instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the balance sheet and measure them at fair value. If certain conditions are met, an entity may elect to designate a derivative instrument either as a cash flow hedge, a fair value hedge or a hedge of foreign currency exposure. Generally, SFAS No. 133 provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of hedge asset or liability that is attributable to the hedge risk or the earnings effect of the hedge forecasted transaction. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133 an amendment of FASB Statement No. 133 was issued in June 1999 and postponed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. Management has reviewed all financial instruments of NovaStar Financial and has determined that NovaStar Financial’s interest rate cap agreements are derivative instruments under SFAS No. 133. These derivatives are used to hedge the interest rate risk on variable rate debt and will be accounted for as cash flow hedges under SFAS No. 133. Management does not expect the adoption of SFAS No. 133 to have a material impact on the financial statements of the NovaStar Financial, Inc.
 
          In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125. SFAS 125 was issued in June 1996 to revise the standards for accounting for securitization and other transfers of financial assets and requires certain disclosures regarding those transfers. SFAS 140 replaces SFAS 125 in its entirety. However, it carries over most of the provisions of SFAS 125. SFAS 140 also formalizes guidance provided by the FASB in various committee publications and technical bulletins. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This Statement is

effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Disclosures about securitization and collateral accepted need not be reported for periods ending on or before December 15, 2000, for which financial statements are presented for comparative purposes. Management does not expect the adoption of SFAS No. 140 to have a material impact on the financial statements of NovaStar Financial.

        In addition, Note 1 of the consolidated financial statements contained in the annual report on Form 10-K for the fiscal year ended December 31, 1999 describes certain recently issued accounting pronouncements. Management believes the implementation of these pronouncements and others that have gone into effect since the date of these reports will not have a material impact on the consolidated financial statements.

 

 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
Interest Rate/Market Risk
 
          The investment policy for NovaStar Financial sets the following general goals:
 
(1)
Maintain the net interest margin between assets and liabilities, and
 
(2)
Diminish the effect of changes in interest rate levels on the market value of NovaStar Financial.
 
          Loan Price Volatility. Under its current mode of operation, NovaStar Financial depends heavily on the market for wholesale non-conforming mortgage loans. To conserve capital, NovaStar Mortgage may sell loans it originates. The financial results of NovaStar Financial will depend, in part, on the ability to find purchasers for the loans at prices that cover origination expenses. Exposure to loan price volatility will be reduced as NovaStar Financial resumes acquisition and retention of mortgage loans.
 
          Interest Rate Risk. Interest rate risk is the risk that the market value of assets will increase or decrease at different rates than that of the liabilities. Expressed another way, this is the risk that NovaStar Financial’s net asset value will experience an adverse change when interest rates change. When interest rates on the assets do not adjust at the same rates as the liabilities or when the assets are fixed rates and the liabilities are adjusting, future earnings potential is affected. Management primarily uses financing sources where the interest rate resets frequently. As of September 30, 2000 borrowings under all financing arrangements adjust daily, monthly, or quarterly. On the other hand, very few of the mortgage assets owned by NovaStar Financial, as of September 30, 2000, adjust on a monthly or daily basis. Most of the mortgage loans contain features where their rates are fixed for some period of time and then adjust frequently thereafter. For example, one of our loan products is the “2/28” loan. This loan is fixed for its first two years and then adjusts every six months thereafter.
 
       While short-term borrowing rates are low and long-term asset rates are high, this portfolio structure produces good results. However, if short-term interest rates rise rapidly, earning potential is significantly affected, as the asset rate resets would lag the borrowing rate resets. The converse can be true when sharp declines in short-term interest rates cause interest costs to fall faster than asset rate resets, thereby increasing earnings.

          In its assessment of the interest sensitivity and as an indication of exposure to interest rate risk, management relies on models of financial information in a variety of interest rate scenarios. Using these models, the fair value and interest rate sensitivity of each financial instrument, or groups of similar instruments is estimated, and then aggregated to form a comprehensive picture of the risk characteristics of the balance sheet. The risks are analyzed on both an income and market value basis.

          The following are summaries of the analysis as of September 30, 2000 and December 31, 1999.
 
          
Table 26
Interest Rate Sensitivity-Income
September 30, 2000 and December 31, 1999
(dollars in thousands)
 
       Basis Point Increase
(Decrease) in Interest
Rate(A)

 
As of September 30, 2000
     (100)
     Base
     100
 
Income from:       
Assets      $ 84,379        $ 86,755        $ 88,761  
Liabilities (B)        64,589          72,375          80,318  
Interest rate agreements        (1,882 )        221          3,961  
     
     
     
  
Net spread income      $ 17,908        $ 14,601        $ 12,404  
     
     
     
  
Cumulative change in income from base (C)      $ 3,307                 $ (2,197 )
     
     
     
  
Percent change from base spread income (D)        22.6 %                 (15.0 )%
     
     
     
  
Percent change of capital(E)        3.3 %                 (2.2 )%
     
     
     
  
 
As of December 31, 1999
     (100)
     Base
     100
 
Income from:       
Assets      $ 61,610        $ 64,419        $ 66,954  
Liabilities (B)        42,173          47,803          53,442  
Interest rate agreements        (1,379 )        (1,379 )        1,122  
     
     
     
  
Net spread income      $ 18,058        $ 5,237        $ 14,634  
     
     
     
  
Cumulative change in income from base (C)      $ 2,821                 $ (603 )
     
     
     
  
Percent change from base spread income (D)        18.5 %                 (4.0 )%
     
     
     
  
Percent change of capital(E)        2.8 %                 (0.6 )%
     
     
     
  

(A)
Income of asset, liability or interest rate agreement in a parallel shift in the yield curve, up and down 1%
(B)
Includes deal expenses, loan premium amortization, mortgage insurance premiums and provisions for credit losses.
(C)
Total change in estimated spread income, in dollars, from “base.” “Base” is the estimated spread income as of September 30, 2000 and December 31, 1999.
(D)
Total change in estimated spread income, as a percent, from base.
(E)
Total change in estimated spread income as a percent of total stockholders’ equity as of September 30, 2000 and December 31, 1999.
 
Table 27
Interest Rate Sensitivity—Market Value
September 30, 2000 and December 31, 1999
(dollars in thousands)
 
       Basis Point Increase
(Decrease) in
Interest Rate(A)

As of September 30, 2000
     (100)
     100
Change in market values of:          
          Assets     $ 12,254      $  (14,627 )
          Liabilities      (1,820 )      2,020  
          Interest rate agreements      (2,611 )      5,522  
     
     
  
Cumulative change in market value     $   7,823     $    (7,085 )
     
     
  
Percent change of market value portfolio equity (B)      8.4 %      (7.6 )%
     
     
  
 
As of December 31, 1999          

                 
Change in market values of:          
          Assets    $    9,112     $   (11,340 )
          Liabilities      (2,068 )      2,376  
          Interest rate agreements      (2,809 )      4,723  
     
     
  
Cumulative change in market value   $    4,235     $     (4,241 )
     
     
  
Percent change of market value portfolio equity (B)      4.4 %      (4.4 )%
     
     
  

(A)
Change in market value of assets, liabilities or interest rate agreements in a parallel shift in the yield curve, up and down 1%.
(B)
Total change in estimated market value as a percent of market value portfolio equity as of September 30, 2000 and December 31, 1999.
 
          Interest Rate Sensitivity Analysis.    The values under the heading “Base” are management’s estimates of spread income for assets, liabilities and interest rate agreements on September 30, 2000 and December 31, 1999. The values under the headings “100” and “(100)” are management’s estimates of the income and change in market value of those same assets, liabilities and interest rate agreements assuming that interest rates were 100 basis points, or 1 percent higher and lower. The cumulative change in income or market value represents the change in income or market value of assets, net of the change in income or market value of liabilities and interest rate agreements.
 
          The interest sensitivity analysis is prepared monthly. If the analysis demonstrates that a 100 basis point shift, up or down, in interest rates would result in 25 percent or more cumulative decrease in income from base, or a 10% cumulative decrease in market value from base, policy requires management to adjust the portfolio by adding or removing interest rate cap or swap agreements. The Board of Directors reviews and approves NovaStar Financial’s interest rate sensitivity and hedged position quarterly. Although management also evaluates the portfolio using interest rate increases and decreases less than and greater than one percent, management focuses on the one percent increase.
 
          Assumptions Used in Interest Rate Sensitivity Analysis.    Management uses a variety of estimates and assumptions in determining the income and market value of assets, liabilities and interest rate agreements. The estimates and assumptions have a significant impact on the results of the interest rate sensitivity analysis, the results of which are shown as of September 30, 2000 and December 31, 1999.
 
          Management’s analysis for assessing interest rate sensitivity on its mortgage loans relies significantly on estimates for prepayment speeds. The prepayment model used by management has been internally developed and is a function based on the borrowers’ payment change percentage. The factors affecting the size of the borrowers’ payment are as follows:
 
·
Refinancing incentives (the interest rate of the mortgage compared with the current mortgage rates available to the borrower)
 
·
Program Type
 
·
Borrower credit grades
 
·
Loan Term
 
·
Loan-to-value ratios
 
·
Loan size
 
·
Prepayment penalties (length and type)
 
·
Estimated closing costs
 
          Generally speaking, when market interest rates decline, borrowers are more likely to refinance their mortgages. The higher the interest rate a borrower currently has on his or her mortgage the more incentive he or she has to refinance the mortgage when rates decline. In addition, the higher the credit grade, the more incentive there is to refinance when credit ratings improve. When a borrower has a low loan-to-value ratio, he or she is more likely to do a “cash-out” refinance. When a borrower has a higher balance loan, as refinancing rates fall, the percent of potential payment decrease is greater than on a comparably smaller balance loan, thereby making higher balance loans prepay faster. Each of these factors increases the chance for higher prepayment speeds during the term of the loan. On the other hand, prepayment penalties serve to mitigate the risk that loans will prepay because the penalty is a deterrent to refinancing.
 
          These factors are weighted based on management’s experience and an evaluation of the important trends observed in the non-conforming mortgage origination industry and NovaStar Financial and NovaStar Mortgage’s mortgage loan portfolio. Actual results may differ from the estimates and assumptions used in the model and the projected results as shown in the sensitivity analyses. Management evaluates and updates the model periodically as the market changes and new data is collected.
 
          NovaStar Financial’s projected prepayment rates are based on a prepayment vector and in each interest rate scenario start at a prepayment speed less than 5% in month one and increase to a long-term prepayment speed in nine to 18 months, to account for the seasoning of the loans. The long-term

prepayment speed ranges from 20% to 40% and depends on the characteristics of the loan which include type of product (ARM or fixed rate), note rate, credit grade, LTV, gross margin, weighted average maturity and lifetime and periodic caps and floors. This prepayment vector is also multiplied by a factor of 55% to 70% depending on the length and type of penalty periods when a prepayment penalty is in effect on the loan. Prepayment assumptions are also multiplied by a factor of greater than 100% during periods around rate resets and prepayment penalty expirations. These assumptions change with levels of interest rates. The actual historical speeds experienced on NovaStar Financial’s loans shown in Table 5 are weighted average speeds of all loans in each deal.

           As shown in Table 5, actual prepayment rates on loans that have been held in portfolio for shorter periods are slower than long term prepayment rates used in the interest rate sensitivity analysis. This table also indicates that as pools of loans held in portfolio season, the actual prepayment rates are more consistent with the long term prepayment rates used in the interest sensitivity analysis.

           Hedging with Off-Balance-Sheet Financial Instruments.    In order to address a mismatch of assets and liabilities, the hedging section of the investment policy is followed, as approved by the Board. Specifically, the interest rate risk management program is formulated with the intent to offset the potential adverse effects resulting from rate adjustment limitations on its mortgage assets and the differences between interest rate adjustment indices and interest rate adjustment periods of its adjustable-rate mortgage loans and related borrowings.
 
          NovaStar Financial uses interest rate cap contracts to mitigate the risk of the cost of its variable rate liabilities increasing at a faster rate than the earnings on its assets during a period of rising rates. In this way, management intends generally to hedge as much of the interest rate risk as determined to be in the best interest of NovaStar Financial, given the cost of hedging transactions and the need to maintain REIT status.
 
          NovaStar Financial seeks to build a balance sheet and undertake an interest rate risk management program that is likely, in management’s view, to enable NovaStar Financial to maintain an equity liquidation value sufficient to maintain operations given a variety of potentially adverse circumstances. Accordingly, the hedging program addresses both income preservation, as discussed in the first part of this section, and capital preservation concerns.
 
          Interest rate cap agreements are legal contracts between NovaStar Financial and a third party firm or “ counter-party”. The counter-party agrees to make payments to NovaStar Financial in the future should the one- or three-month LIBOR interest rate rise above the strike rate specified in the contract. NovaStar Financial either makes quarterly premium payments or has chosen to pay the premiums upfront to the counterparties under contract. Each contract has a fixed notional face amount on which the interest is computed, and a set term to maturity. When the referenced LIBOR interest rate rises above the contractual strike rate, NovaStar Financial earns cap income. Payments on an annualized basis equal the contractual notional face amount times the difference between actual LIBOR and the strike rate.
 

PART II. OTHER INFORMATION

 
Item 1.
Legal Proceedings  
 
As of September 30, 2000, there were no material legal proceedings pending to which NovaStar Financial was a party or of which any of its property was subject.
 
Item 2.
Changes in Securities  
     
  Not applicable  
     
Item 3.  Defaults upon Senior Securities  
     
  Not applicable  
     
Item 4.  Submission of Matters of Vote of Security Holders  
     
  Not applicable  
     
Item 5. Other Information  
     
  None  
 
Item 6.  Exhibits and Reports on Form 8-K
 
(a)  Exhibit Listing
 
  Exhibit No.
     Description of Document
  3.1*      Articles of Amendment and Restatement of the Registrant
       
  3.2*      Articles Supplementary of the Registrant
       
  3.3*      Bylaws of the Registrant
       
  3.3a*****      Amendment to Bylaws of the Registrant, adopted February 2, 2000
       
  3.4****      Articles Supplementary of NovaStar Financial, Inc. dated as of March 24, 1999, as filed with the Maryland Department of Assessment and Taxation.
       
  4.1*      Specimen Common Stock Certificate
       
  4.2*      Specimen Warrant Certificate
       
  4.3****      Specimen certificate for Preferred Stock
       
  10.1*      Purchase Terms Agreement, dated December 6, 1996, between the Registrant and the Placement Agent.
       
  10.2*      Registration Rights Agreement, dated December 9, 1996, between the Registrant and the Placement Agent.
       
  10.3*      Warrant Agreement, dated December 9, 1996, between the Registrant and the Holders of the Warrants Acting Through the Registrant as the Initial Warrant Agent.
       
  10.4*      Founders’ Registration Rights Agreement, dated December 9, 1996, between the Registrant and the original holders of Common Stock of the Registrant.
       
  10.5*      Commitment Letter dated October 3, 1996 from General Electric Capital Group accepted by the Registrant.
       
  10.6*      Form of Master Repurchase Agreement for mortgage loan financing
 
  10.7*      Mortgage Loan Warehousing Agreement dated as of November 24, 1997 between First Union National Bank of North Carolina, NovaStar Mortgage, Inc. and the Registrant.
       
  10.7a***      Amendment No. 6 dated as of February 12, 1999 to Mortgage Loan Warehousing Agreement dated as of February 20, 1997 between First Union National Bank and Registrant.
       
  10.7b*****      Amendment No. 7 dated as of December 17, 1999 to Mortgage Loan Warehousing Agreement dated as of February 20, 1997 between First Union National Bank and Registrant.
       
  10.7c      Amendment No. 10 dated as of July 28, 2000 to Mortgage Loan Warehousing Agreement dated as of February 20, 1997 between First Union National Bank and Registrant.
       
  10.8*      Employment Agreement, dated September 30, 1996, between the Registrant and Scott F. Hartman.
       
  10.9*      Employment Agreement, dated September 30, 1996, between the Registrant and W. Lance Anderson.
       
  10.10*      Promissory Note by Scott F. Hartman to the Registrant, dated December 9, 1996.
       
  10.11*      Promissory Note by W. Lance Anderson to the Registrant, dated December 9, 1996.
       
  10.12*      Stock Pledge Agreement between Scott F. Hartman and the Registrant, dated December 9, 1996.
       
  10.13*      Stock Pledge Agreement between W. Lance Anderson and the Registrant, dated December 9, 1996.
       
  10.14*      1996 Executive and Non-Employee Director Stock Option Plan, as last amended December 6, 1996.
       
  10.15*      Administrative Services Outsourcing Agreement, dated June 30, 1997, between the Registrant and NovaStar Mortgage, Inc.
       
  10.16*      Mortgage Loan Sale and Purchase Agreement, dated as of June 30, 1997, between the Registrant and NovaStar Mortgage, Inc.
       
  10.17*      Flow Loan Subservicing Agreement, dated as of June 30, 1997, between the

      Registrant and NovaStar Mortgage, Inc.
       
  10.18*      Certificate of Incorporation of NFI Holding Corporation.
 
  10.19*      Agreement of Shareholders of Common Stock NFI Holding Corporation.
 
  10.20**      Term Loan and Security Agreement between NovaStar Certificates Financing Corporation and Reliance Funding Corporation dated as of October 13, 1998 and related agreements including Guaranty of even date by Registrant.
 
  10.21***      Addendum to Master Repurchase Agreement dated as of February 12, 1999 among NovaStar Financial, Inc., NovaStar Capital, Inc. and NovaStar Mortgage, Inc., as sellers, and First Union National Bank, as buyer.
 
  10.22***      Form of Addendum to Master Repurchase Agreement dated as of February 12, 1999 between Registrant’s taxable affiliate, as seller, and First Union Bank, as buyer, with respect to the residual interest on certain asset-backed bonds.
 
  10.23***      Warrant Agreement dated as of February 12, 1999 between the Registrant and First Union National Bank.
 
  10.24****      Warrant Agreement, dated as of March 10, 1999, by and between NovaStar Financial, Inc. and Residential Funding Corporation , and related Guaranty Warrant, Tag Along Warrant and Registration Rights Agreement as filed with April 6, 1999 8-K of NovaStar Financial, Inc.
 
  10.25****      Registration Rights Agreement, dated March 25, 1999 among NovaStar Financial and Stifel, Nicolaus & Company, Incorporated.
 
  10.26*****      Warehousing Credit and Security Agreement, dated as of December 29, 1999, between NovaStar Financial, Inc., NovaStar Mortgage, Inc., NovaStar Capital, Inc. and Residential Funding Corporation.
 
  10.27      Mortgage Loan Sale and Securitization Transaction Administration Personnel and Facilities Agreement, dated as of July 1, 2000 between the Registrant and NovaStar Mortgage, Inc.
 
  10.28      Lending and Credit Support Agreement, dated as of July 1, 2000 between the Registrant and NovaStar Mortgage, Inc.
 
  10.29      Software License Agreement, dated as of July 1, 2000 between the Registrant and

        NovaStar Mortgage, Inc.
         
  10.30     Amendment dated as of July 28, 2000 to the Master Repurchase Agreement, dated as of February 12, 1999 between First Union National Bank and the Registrant.
         
  11.1     Statement regarding computation of per share earnings.
         
  21.1     Subsidiaries of the Registrant
         
  27.1     Financial Data Schedule
     
 
  *   Incorporated by reference to the correspondingly numbered exhibit to the Registration Statement on Form S-11 (373-32327) filed by the Registrant with the SEC on July 29 1997, as amended.
  **   Incorporated by reference to the correspondingly numbered exhibit to Form 8-K filed by the Registrant with the SEC on December 22, 1998.
  ***   Incorporated by reference to the correspondingly numbered exhibit to Form 8-K filed by the Registrant with the SEC on February 23, 1999.
  ****   Incorporated by reference to the correspondingly numbered exhibit to Form 8-K filed by the Registrant with the SEC on April 5, 1999.
 
*****
 
Incorporated by reference to the correspondingly numbered exhibit to Annual Report on Form 10K filed by the Registrant with the SEC on March 20, 2000.
         
NovaStar Financial has filed the following Form 8-K’s:
         
  · NovaStar Financial filed a Form 8-K on September 29, 2000 regarding NovaStar Financial, Inc.’s expansion of its stock repurchase program and the repurchase of 9.7% of its outstanding common stock from GE Capital Equity in a negotiated bulk transaction.
         
         
         
 
NOVASTAR FINANCIAL, INC.
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
NOVASTAR FINANCIAL, INC.
 
DATE:  November 13, 2000 /s/ Scott F. Hartman

Scott F. Hartman
Chairman of the Board, Secretary and
Chief Executive Officer
(Principal Executive Officer)
 
DATE:  November 13, 2000 /s/ Rodney E. Schwatken

Rodney E. Schwatken
Vice President, Treasurer and Controller (Principal Accounting Officer)
EX-10.7C 2 0002.txt TENTH AMENDMENT TO MORTGAGE LOAN Exhibit 10.7c TENTH AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT THIS TENTH AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT (the "Amendment") is made as of the 28th day of July, 2000, by and between NOVASTAR MORTGAGE, INC., a Virginia corporation ("NovaStar Mortgage"), NOVASTAR FINANCIAL, INC., a Maryland corporation ("NovaStar Financial"), NOVASTAR CAPITAL, INC., a Delaware corporation ("NovaStar Capital" and, together with NovaStar Mortgage, and NovaStar Financial, the "Companies") and FIRST UNION NATIONAL BANK (formerly known as First Union National Bank of North Carolina), a national banking association (the "Lender"). W I T N E S S E T H - - - - - - - - - - WHEREAS, the Companies and the Lender are parties to a Mortgage Loan Warehousing Agreement dated as of November 24, 1997, as amended by a First Amendment to Mortgage Loan Warehousing Agreement dated as of February 19, 1998, by a Second Amendment to Mortgage Loan Warehousing Agreement dated as of April 30, 1998, by a Third Amendment to Mortgage Loan Warehousing Agreement dated as of September 3, 1998, by a Fourth Amendment to and Waiver of Mortgage Loan Warehousing Agreement dated as of October 15, 1998, by a Fifth Amendment to Mortgage Loan Warehousing Agreement dated as of November 30, 1998, by a Sixth Amendment to Mortgage Loan Warehousing Agreement dated as of February 12, 1999, by a Seventh Amendment to Mortgage Loan Warehousing Agreement dated as of December 17, 1999, by an Eighth Amendment to Mortgage Loan Warehousing Agreement dated as of May 30, 2000 and by a Ninth Amendment to Mortgage Loan Warehousing Agreement dated as of June 30, 2000 (as so amended, the "Credit Agreement"); and WHEREAS, the parties wish to amend the Credit Agreement as set forth below; and WHEREAS, subject to and upon the terms and conditions herein set forth, the Lender is willing to continue to make available to the Companies the credit facilities provided for in the Credit Agreement; and WHEREAS, a specific condition to the willingness of the Lender to continue to make available to the Companies the credit facilities provided for in the Credit Agreement is the re-affirmation by the Guarantor of the Guaranty; and WHEREAS, the Guarantor will derive a material benefit from the continued availability to the Companies of the credit facilities provided for in the Credit Agreement, and therefore the Guarantor is willing to reaffirm the Guaranty; NOW, THEREFORE, in consideration of the premises and agreements contained herein and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms used herein and not otherwise ----------- defined shall have the respective meanings provided to such terms in the Credit Agreement, as amended hereby. 2. Amendments to the Credit Agreement. ---------------------------------- a. The definition of the term "Maturity Date" contained in Section 10 of the Credit Agreement is deleted in its entirety and the following paragraph is substituted in lieu thereof: "'Maturity Date' shall mean the earlier of (a) July 27, 2001, as -------------- such date may be extended from time to time in writing by the Lender, in its sole discretion, and (b) the date the Lender terminates its obligation to make further Loans pursuant to the provisions hereof." 3. This Amendment shall become effective as of the date hereof, provided that the Lender shall have received by such date the following items: a. A copy of this Amendment executed by each of the Companies, the Guarantor and the Lender (whether such parties have signed the same or different copies); b. A reaffirmation of the Guaranty (the "Reaffirmation") executed by the Guarantor in favor of the Lender; c. Resolutions of each of the Companies and the Guarantor authorizing the execution of this Amendment and the Reaffirmation, respectively; and d. A certificate of even date herewith signed by the President, any Vice President or the Treasurer of each of the Companies and the Guarantor certifying that (i) the articles, bylaws and resolutions of each of the Companies and the Guarantor previously delivered to Lender remain in full force and effect except as provided therein, (ii) each of the Companies and the Guarantor remains in good standing, (iii) all representations and warranties of each of the Companies and the Guarantor previously made to Lender remain true, complete and accurate, and (iv) no Event of Default or Potential Default has occurred and is continuing. 4. This Amendment is limited, and except as set forth herein, shall not constitute the modification, acceptance or waiver of any provision of the Credit Agreement, or any other document or instrument entered into in connection therewith. 5. This Amendment may be executed in any number of counterparts by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which together shall constitute one in the same instrument. A complete set of counterparts shall be lodged with each of the Companies and the Lender. 6. This Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the laws of the State of North Carolina. 7. From and after the date hereof, all references in the Credit Agreement and any other document or instrument entered into in connection therewith, to the Credit Agreement shall be named to be references to the Credit Agreement as amended hereby. 8. The Guarantor joins in the execution and delivery of this Amendment to acknowledge and consent to the terms hereof and hereby reaffirms its obligations under the Guaranty. 9. THE LENDER, THE GUARANTOR AND THE COMPANIES EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AMENDMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY RELATING HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS AGREEMENT. [THE REMAINDER OF THIS PAGE WAS LEFT BLANK INTENTIONALLY] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. NOVASTAR MORTGAGE, INC., a Virginia corporation By: ___________________________________ Name: Rodney E. Schwatken Title: Treasurer NOVASTAR FINANCIAL, INC., a Maryland corporation By: ___________________________________ Name: Rodney E. Schwatken Title: Treasurer NOVASTAR CAPITAL, INC., a Delaware corporation By: ___________________________________ Name: Rodney E. Schwatken Title: Treasurer FIRST UNION NATIONAL BANK (formerly known as First Union National Bank of North Carolina), a national banking association By: ___________________________________ Name: _________________________________ Title: ________________________________ GUARANTOR: NFI HOLDING CORPORATION, a Delaware corporation By: ___________________________________ Name: Rodney E. Schwatken Title: Treasurer EX-10.27 3 0003.txt MORTGAGE LOAN SALE AND SECURITIZATION TRANSACTION Exhibit 10.27 ================================================================================ MORTGAGE LOAN SALE AND SECURITIZATION TRANSACTION, ADMINISTRATIVE PERSONNEL AND FACILITIES AGREEMENT _________________________ Dated as of July 1, 2000 _________________________ NOVASTAR FINANCIAL, INC. and NFI HOLDING CORPORATION ================================================================================ TABLE OF CONTENTS
Page Section 1. Transaction Fee............................................ 1 Section 2. Administrative Personnel and Facilities.................... 1 Section 3. Limits of Company Responsibility........................... 2 Section 4. Terms; Termination......................................... 2 Section 5. Action Upon Termination.................................... 2 Section 6. Assignment................................................. 2 Section 7. Notices.................................................... 2 Section 8. No Joint Venture........................................... 3 Section 9. Amendments................................................. 3 Section 10. Severability............................................... 3 Section 11. Entire Agreement........................................... 3 Section 12. Waiver..................................................... 3 Section 13. Governing Law.............................................. 3 Section 14. Headings and Cross References.............................. 3 Section 15. Execution in Counterparts.................................. 3
i MORTGAGE LOAN SALE AND SECURTIZATION TRANSACTION, ADMINISTRATIVE PERSONNEL AND FACILITIES AGREEMENT THIS AGREEMENT, made effective as of the 1st day of July, 2000 (the "Effective Date"), is by and between NovaStar Financial, Inc., Inc., a Maryland corporation ("REIT"), and NFI Holding Corporation, a Delaware corporation ("NFI Holding"). References to REIT or NFI Holding herein shall include any wholly- owned subsidiaries of REIT or NFI Holding from time to time, unless the context otherwise requires. BACKGROUND A. REIT owns all of the preferred stock of NFI Holding; B. NFI Holding desires that REIT share with NFI Holding, and REIT desires that NFI Holding share with REIT, certain administrative personnel and facilities in connection with the sale and securitization of mortgage loans. NOW, THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: 1. Transaction Fee --------------- (a) NFI Holding agrees to pay REIT a transaction fee of 0.25% of the aggregate unpaid balance of the mortgage loans subject to sale or securitization on the closing date of the sale or securitization. 2. Administrative Personnel and Facilities. --------------------------------------- (a) REIT and NFI Holding agree to share office space and equipment (including computer equipment), and the services of administrative and other personnel, and items ancillary to the foregoing, as each may require for mortgage loan securitizations and for third-party whole loan sale transactions. REIT and NFI Holding shall monitor the on-going use of facilities and personnel by REIT and NFI Holding, respectively, and within 15 days after the end of each fiscal quarter shall agree upon a written allocation (by time used or other appropriate measure) of facilities used by each and a list of personnel used by each setting forth a percentage allocation of time devoted by each person to each party. (b) REIT and NFI Holding shall pay to each of their respective share (as determined by their mutual agreement) of the following expenses that relate to the provision of any personnel or facilities pursuant to this Section 1: (i) rent (including related local property taxes and property insurance costs), telephone, utilities, office furniture, equipment and machinery (including computers, to the extent utilized) and other office expenses not specifically allocated to the activities of REIT or NFI Holding; and i (ii) personnel expense (including salary, bonuses, benefits and taxes); and (iii) other general overhead expenses related to the foregoing. Each party shall be responsible for all third-party fees and expenses billed separately to it, such as accounting and legal fees and expenses. 3. Limits of Company Responsibility. Neither party assumes responsibility -------------------------------- under this Agreement other than to share the facilities and personnel called for hereunder in good faith and neither party shall be responsible for any of its actions hereunder, including those of its shareholders, directors, officers and employees acting in accordance with this Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. Each party shall reimburse, indemnify and hold harmless the other party, its shareholders, directors, officers and employees of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever in respect of or arising from any acts or omissions of such party, its shareholders, directors, officers and employees constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. 4. Terms; Termination. This Agreement shall remain in force until the ------------------ second anniversary of the Effective Date, and thereafter, it shall be automatically renewed for a term of one (1) year unless a written notice is delivered by either party within 30 days prior to the end of the term or any renewal term of this Agreement. 5. Action Upon Termination. From and after the effective date of ----------------------- termination of this Agreement, each party shall forthwith: (a) Agree with the other party on written allocations of facilities and personnel covering the period following the date of the last quarterly allocation agreed upon to the date of termination; and (b) Based on such allocations, pay over to the other party any money due for the account of such party pursuant to this Agreement or otherwise. 6. Assignment. This Agreement shall not be assignable by either party ---------- without the consent of the other party, except in the case of an assignment by either party to a corporation or other organization which is a successor (by merger, consolidation or purchase of assets) to such party, in which case such successor organization shall be bound hereunder by the terms of said assignment in the same manner as the party succeeded is bound hereunder. 7. Notices. Any notice, report or other communication required or ------- permitted to be given hereunder shall be in writing, unless some other method of giving such notice, report or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses of the parties hereto: REIT: NovaStar Financial, Inc. ii 1901 W. 47/th/ Place, Suite 105 Westwood, KS 66205 Attn: Rodney E. Schwatken NFI Holding: NFI Holding Company 1901 W. 47/th/ Place, Suite 105 Westwood, KS 66205 Attn: Rodney E. Schwatken Either party may at any time give notice in writing to the other party of a change of its address for the purpose of this Section 10. 8. No Joint Venture. REIT and NFI Holding are not partners or joint ---------------- venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such on either of them. 9. Amendments. This Agreement shall not be amended, changed, modified, ---------- terminated or discharged in whole or in part, and the performance of any obligation hereunder may not be waived, except by an instrument in writing signed by both parties hereto, or their respective successors or permitted assigns, or otherwise as provided herein. 10. Severability. The invalidity or unenforceability of any provision of ------------ this Agreement shall not affect the validity of any other provision, and all other provisions shall remain in full force and effect. 11. Entire Agreement. This instrument contains the entire agreement ---------------- between the parties as to the rights granted and the obligations assumed in this instrument. 12. Waiver. Any forbearance by a party to this Agreement in exercising ------ any right or remedy under this Agreement or otherwise afforded by applicable laws shall not be a waiver of or preclude the exercise of that or any other right or remedy. 13. Governing Law. This Agreement shall be governed by, construed under ------------- and interpreted in accordance with the laws of the State of Kansas. 14. Headings and Cross References. The section headings hereof have been ----------------------------- inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. Any reference made in this Agreement to a "Section" or "Subsection" shall be construed, respectively, as referring to a section of this Agreement or a subsection of a section of this Agreement. 15. Execution in Counterparts. This Agreement may be executed in one or ------------------------- more counterparts, any of which shall constitute an original as against any party whose signature appears on it, and all of which shall together constitute a single instrument. This Agreement shall become binding when one or more counterparts individually or taken together, bear the signatures of both parties. iii IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers as of the day and year first above written. NOVATAR FINANCIAL, INC. By: _____________________________ Name: Scott F. Hartman Title: Chief Executive Officer NFI HOLDING CORPORATION By: _____________________________ Name: W. Lance Anderson Title: President iv
EX-10.28 4 0004.txt LENDING AND CREDIT SUPPORT AGREEMENT Exhibit 10.28 ================================================================================ LENDING AND CREDIT SUPPORT AGREEMENT _______________________ July 1, 2000 _______________________ NFI HOLDING CORPORATION NOVASTAR CAPITAL, INC. NOVASTAR MORTGAGE, INC. as Borrowers and NOVASTAR FINANCIAL, INC. as Lender ================================================================================ LENDING AND CREDIT SUPPORT AGREEMENT LENDING AND CREDIT SUPPORT AGREEMENT, dated as of July 1, 2000, between NFI HOLDING CORPORATION, a Delaware corporation ("Holding"), NOVASTAR CAPITAL, INC., a Delaware corporation ("Capital"), NOVASTAR MORTGAGE, INC., a Virginia corporation ("Mortgage"), and such other subsidiaries of Holding as may from time to time execute a copy of this Agreement and the Note (collectively, the "Borrowers" and each individually, a "Borrower") and NOVASTAR FINANCIAL, INC., a Maryland corporation (the "Lender"). RECITALS The Borrowers have requested that the Lender from time to time consider making revolving credit loans to them for working capital purposes or to finance certain residential and/or commercial mortgage loans owned or to be acquired by the Borrowers, and the Lender is prepared to consider making such loans upon the terms and conditions hereof. The Borrowers have further requested that the Lender from time to time consider lending credit support to the Borrowers to facilitate Borrowers' financings from third-party lenders and Borrowers' hedging arrangements with counterparties. Such credit support may be provided by the Lender by guarantying a Borrower's borrowings from third-party lenders or by entering into co-borrowing or co-obligor arrangements with a Borrower. Furthermore, credit support may be provided by the Lender by guarantying the performance under loan sale agreements, including sales of loans by a Borrower in an asset-securitization transaction executed by a Borrower. In addition, credit support may be provided by the Lender to the mortgage servicing operations of the Borrowers. The Lender is prepared to consider lending such credit support upon the terms and conditions hereof. Accordingly, the parties hereto agree as follows: Section 1. Definitions and Accounting Matters. ---------------------------------- 1.01 Certain Defined Terms. As used herein, the following terms shall --------------------- have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): ---- ----- "Adjusted Net Worth" shall mean at any date the sum of (1) GAAP Net Worth, plus (2) the amount of reserves of Holding and its consolidated Subsidiaries, if any, for credit losses (as reflected on the financial statements referred to in 6.01 below), minus (3) the amount of the unrealized gains on debt securities (as defined in FASB 115) of Holding and its consolidated Subsidiaries, if any, plus (4) the amount of unrealized losses on debt securities (as defined in FASB 115) of Holding and its consolidated Subsidiaries, if any, plus (5) the amount of Loan Indebtedness, minus (6) the excess of the amount of assets securing nonrecourse indebtedness over the amount of such nonrecourse indebtedness. "Affiliate" means, (i) with respect to Lender, NAC, NCFC, and NovaStar Capital Access Corporation, and any other wholly-owned subsidiaries in corporate, trust or other form, whether owned directly or indirectly, and (ii) with respect to the Borrowers, any affiliate of any Borrower as such term is defined in the United States Bankruptcy Code in effect from time to time. "Agreement" shall mean this Lending and Credit Support Agreement, as may be amended, supplemented or otherwise modified from time to time. 1 "Applicable Margin" shall mean 1.75% unless a different percentage shall be indicated in the related Loan Commitment pursuant to Section 2.03(b) hereof. "Bankruptcy Code" shall mean the United States Bankruptcy Code of 1978, as amended from time to time. "Borrower" and "Borrowers" shall have the meanings provided in the heading hereof. "Business Day" shall mean any day other than (i) a Saturday or Sunday, or (ii) a day in which the New York Stock Exchange or the Federal Reserve Bank of New York is authorized or obligated by law or executive order to be closed. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Commitment Amount" shall be the maximum aggregate outstanding principal amount of the Loans as specified in Section 4.02 hereof. "Credit Support" shall have the meaning specified in Section 2.B. hereof. "Credit Support Commitment" shall mean a commitment issued pursuant to Section 2.B. hereof. "Credit Support Documents" shall mean any form of guarantee or co-borrowing or co-obligor agreement and related documentation entered into pursuant to Section 2.B. "Default" shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. "Dollars" and "$" shall mean lawful money of the United States of America. "Effective Date" shall mean the date set forth in the first paragraph hereof. "Event of Default" shall have the meaning assigned thereto in Section 7 hereof. "Funding Date" shall mean the date on which a Loan is made hereunder or a Credit Support becomes effective hereunder. "GAAP" shall mean generally accepted accounting principles in effect in the United States. "GAAP Net Worth" shall mean the excess of total assets of Holding and its consolidated Subsidiaries, if any, over Total Liabilities of Holding determined in accordance with GAAP. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over a Borrower, any of its Subsidiaries or any of its properties. "Interest Period" shall mean with respect to any Loan: (a) initially, the period commencing on the Funding Date, with respect to such Loan and ending one month thereafter; and 2 (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Loan and ending one month thereafter. provided that, all of the foregoing provisions relating to Interest Periods are -------- subject to the following: (i) if any Interest Period pertaining to a Loan would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that would otherwise extend beyond the Termination Date shall end on the Termination Date; and (iii) any Interest Period pertaining to a Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the Last Business Day of a calendar month. "Lender" shall have the meaning assigned thereto in the heading hereto. "LIBOR" shall mean the arithmetic mean of the London interbank offered rates for one-month U.S. dollar deposits in the London market based on quotations at four major banks selected by the Lender, which rates appear in the display designated as page "LIUS01M" on the Bloomberg Financial Markets Commodities News (or such other comparable displaying LIBOR quotations on the Bloomberg service) as of 11:00 a.m., London Time, on the date of determination. LIBOR shall be determined separately for each Interest Period. "Lien" shall mean any mortgage, lien, pledge, charge, security interest or similar encumbrance. "Loan" shall have the meaning specified in Section 2.A. hereof. "Loan Commitment" shall mean a commitment issued pursuant to Section 2.B. hereof. "Loan Documents" shall mean, collectively, this Agreement and the Note. "Loan Indebtedness" shall mean, at any date, the principal amount of Loans outstanding on such date. "Note" shall mean the promissory note provided for by Section 2.02(a) hereof for Loans and any promissory note delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, limited liability company, trust, unincorporated association or government (or any agency, instrumentality or political subdivision thereof). "Post-Default Rate" shall mean, in respect of any principal of any Loan or any other amount under this Agreement, the Note or any other Loan Document that is not paid when due to the Lender 3 (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 2% per annum plus the rate otherwise applicable. ---- "Regulations G, T, U and X" shall mean Regulations G, T, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Requirements of Law" shall mean, as to any person, the Articles or Certificate of Incorporation and Bylaws or other organization or governing documents of such Person, and any law, treaty, rule or regulation, or a final and binding determination of an arbitration or a determination of a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such person or any of its property is subject. "Responsible Officer" shall mean, as to any Person, the chief executive officer or, with respect to financial matters, the chief financial officer of such Person. "Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Termination Date" shall mean July 1, 2001 or such earlier date on which this Agreement shall terminate in accordance with the provisions hereof or by operation of law. "Total Indebtedness" shall mean total indebtedness for borrowed monies of Holding and its consolidated Subsidiaries, if any, determined in accordance with GAAP, less the amount of any nonrecourse indebtedness of Holding and its consolidated Subsidiaries. "Total Liabilities" shall mean total liabilities of Holding and its consolidated Subsidiaries, if any, determined in accordance with GAAP. "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect on the date hereof in the State of Kansas; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non- perfection of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than Kansas, "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. 1.02 Accounting Terms and Determinations. Except as otherwise expressly ----------------------------------- provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lender hereunder shall be prepared, in accordance with GAAP. 4 Section 2.A. Loans, Notes and Prepayments. ---------------------------- 2.01 Loans. ----- (a) The Lender agrees to consider from time to time each Borrower's requests that the Lender make, on the terms and conditions of this Agreement, loans (individually, a "Loan"; collectively, the "Loans") to the Borrower in Dollars, from and including the Effective Date to and including the Termination Date. This Agreement is not a commitment to lend but rather sets forth the procedures to be used in connection with periodic requests for Loans. Each Borrower hereby acknowledges that the Lender is under no obligation to agree to make, or to make, any Loan pursuant to this Agreement. (b) Subject to the terms and conditions of this Agreement, during such period each Borrower may borrow, repay and reborrow hereunder. (c) In no event shall a Loan be made when any Default or Event of Default has occurred and is continuing. 2.02 Notes. ----- (a) The Loans made by the Lender shall be evidenced by a single promissory note of the Borrowers substantially in the form of Exhibit A hereto (the "Note"), dated the date hereof, payable to the Lender in a principal amount equal to the amount of the Loans outstanding from time to time. The Lender shall have the right to have its Note subdivided, by exchange for promissory notes of lesser denominations or otherwise. (b) The date, amount and interest rate of each Loan made by the Lender to a Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of the Note, endorsed by the Lender on the schedule attached to the Note or any continuation thereof; provided, that the failure of -------- the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing hereunder or under the Note in respect of the Loans. (c) The Borrowers shall be jointly and severally liable for all loans made hereunder. 2.03 Procedure for Borrowing. ----------------------- (a) Each Borrower may request a borrowing hereunder, on any Business Day during the period from and including the Effective Date to and including the Termination Date, by delivering to the Lender an irrevocable written request for borrowing, which request must be countersigned by Holding if Holding is not the requesting Borrower and must be received by the Lender prior to 10:00 a.m. (Central time) at least one (1) Business Day prior to the requested Funding Date unless otherwise agreed by the Lender. Such request for borrowing shall specify the requested Funding Date. (b) Upon the Borrower's request for a borrowing, the Lender may, at its option, offer to make a Loan to the Borrower by confirming to the Borrower (telephonically or via electronic communication) (i) the Funding Date, (ii) the amount of the Loan to be made on such Funding Date, and (iii) the Applicable Margin, and may contain additional terms or conditions which may or may 5 not be inconsistent with this Agreement (the "Loan Commitment"). In the event there is a conflict between the terms of this Agreement and the terms of the Loan Commitment, the terms of the Loan Commitment shall control. Each Loan Commitment, together with this Agreement, shall be conclusive evidence of the terms of the Loan(s) covered thereby. (c) The Borrower shall, no later than 3:00 p.m. (Central time) on the Business Day that it receives a Loan Commitment from the Lender, either: (i) decline the offer contained in such Loan Commitment by notifying the Lender by telephone or electronic communication to that effect; or (ii) accept such offer contained in such Loan Commitment by notifying the Lender by telephone or electronic communication to that effect. Notwithstanding the foregoing, the Borrower shall be deemed to have accepted such offer, and such Loan Commitment, together with this Agreement, shall be conclusive evidence of the terms of the Loan covered thereby, unless the Borrower has declined such offer by the time set forth above. Subject to Section 4 hereof, each loan will be made available to the Borrower by the Lender transferring, via wire transfer, to an escrow account or account maintained by the Borrower prior to 3:00 p.m., (Central time), on the Funding Date, the aggregate amount of such borrowing in funds immediately available to the Borrower. 2.04 Repayment of Loans; Interest. ---------------------------- (a) Each Borrower hereby promises to repay in full the outstanding principal amount of each Loan no later than the date (the "Stated Maturity") which is twelve (12) months after the Funding Date of such Loan. (b) Each Borrower hereby promises to pay to the Lender interest on the unpaid principal amount of each Loan for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at a rate per annum equal to LIBOR plus the Applicable Margin. Notwithstanding the ---- foregoing, each Borrower hereby promises to pay to the Lender interest at the applicable Post-Default Rate on any principal of any Loan and on any other amount payable by the Borrower hereunder or under the Note, that shall not be paid in full when due (whether at Stated Maturity, by acceleration or by mandatory prepayment or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable monthly commencing on the date one month from the Funding Date and on each successive date which is one month thereafter or the date of final payment of principal on such Loan, except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Lender shall give notice thereof to the Borrowers. 2.05 Voluntary Prepayments. The Borrowers may prepay the outstanding --------------------- principal of any Loan, in whole or in part, at any time prior to the Stated Maturity thereof. 6 Section 2.B. Credit Support. -------------- 2.06 Issuance of Credit Support. -------------------------- (a) The Lender agrees to consider from time to time each Borrower's requests that the Lender issue credit support of loans made to the Borrower by third parties or of mortgage sale and/or servicing agreements or hedging or other arrangements to be entered into by the Borrower with counterparties on the terms and conditions of this Agreement from and including the Effective Date to and including the Termination Date. Such credit support could be in the form of guarantees by the Lender or co- borrowing or co-obligor arrangements with the Borrower in which the Lender is jointly and severally liable for the Borrower's obligations thereunder (individually, a "Credit Support"; collectively, the "Credit Supports"). This Agreement is not a commitment to enter into Credit Supports but rather sets forth the procedures to be used in connection with periodic requests for Credit Supports. The Borrowers hereby acknowledge that the Lender is under no obligation to agree to enter into, or to enter into, any Credit Support pursuant to this Agreement. (b) Subject to the terms and conditions of this Agreement, during such period each Borrower may borrow, repay and reborrow amounts from third parties covered by Credit Supports issued hereunder. (c) In no event shall Credit Support Documents be entered into when any Default or Event of Default has occurred and is continuing. 2.07 Credit Supports. The Credit Supports entered by the Lender shall be --------------- evidenced by such Credit Support Documents as the Lender may from time to time approve. 2.08 Procedure for Obtaining Credit Supports. --------------------------------------- (a) Each Borrower may request Credit Support hereunder, on any Business Day during the period from and including the Effective Date to and including the Termination Date, by delivering to the Lender, an irrevocable written request for Credit Support, which request must be received by the Lender prior to 10:00 a.m. (Central time), at least one (1) Business Day prior to the requested Funding Date unless otherwise agreed by the Lender. Such request for Credit Support shall specify the requested Funding Date. (b) Upon the Borrower's request for Credit Support, the Lender may, at its option, offer to enter into Credit Support Documents in favor of the Borrower by confirming to the Borrower (telephonically or via electronic communication) (i) the Funding Date, (ii) the amount of the Credit Support to be entered into on such Funding Date, (iii) the Applicable Margin, (iv) Credit Support Fee and may contain additional terms and conditions which may or may not be inconsistent with this Agreement (the "Credit Support Commitment"). In the event there is a conflict between the terms of this Agreement and the terms of the Credit Support Commitment, the terms of the Credit Support Commitment shall control. Each Credit Support Commitment, together with this Agreement, shall be conclusive evidence of the terms of the Credit Support(s) covered thereby. (c) The Borrower shall, no later than 3:00 p.m. (Central time) on the Business Day that it receives a Credit Support Commitment from the Lender, either: 7 (i) decline the offer contained in such Credit Support Commitment by notifying the Lender by telephone or electronic communication to that effect; or (ii) accept such offer contained in such Credit Support Commitment by notifying the Lender by telephone or electronic communication to that effect. Notwithstanding the foregoing, the Borrower shall be deemed to have accepted such offer, and such Credit Support Commitment, together with this Agreement, shall be conclusive evidence of the terms of the Credit Support covered thereby, unless the Borrower has declined such offer by the time set forth above. 2.09 Repayment of Credit Support Disbursements; Interest. Each Borrower --------------------------------------------------- hereby promises to make payments to the Lender in respect of any amount expended by the Lender pursuant to any Credit Support on the following terms and conditions, unless otherwise provided in the related Credit Support Commitment: (a) The amount of any such expenditure, whether used to repay principal, interest or other amounts due to the third-party lender, shall be treated as principal of a Loan, the Stated Maturity of which is the first Business Day following the date of the expenditure; and (b) Interest will be payable on such constructive Loan at the Post-Default Rate and on the same terms as if such Loan was in default with respect to repayment of principal due on the Stated Maturity thereof as set forth in (a) above. 2.10 Credit Support Fee. As compensation for the Lender's issuance of ------------------ each Credit Support, the Borrowers agree to pay the Lender a Credit Support Fee on each Funding Date in the amounts as shown in the Schedule of Credit Support Fees (Exhibit B). These amounts may be amended from time to time by the parties hereto. Section 3. Payments; Computations; Etc. ---------------------------- 3.01 Payments. -------- (a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Borrowers under this Agreement and the Note, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Lender at the account maintained by the Lender and specified in writing to the Borrower, not later than 1:00 p.m., (Central time), on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). The Borrowers acknowledge that they have no rights of withdrawal from the foregoing account. (b) Except to the extent otherwise expressly provided herein, if the due date of any payment under this Agreement or the Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 3.02 Computations. Interest on the Loans shall be computed on the basis ------------ of a 360-day year for the actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. 8 Section 4. Conditions Precedent. -------------------- 4.01 Initial Loan and Credit Supports. The obligation of the Lender to -------------------------------- make its initial Loan and enter into the initial Credit Supports hereunder is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan and the issuance of such Credit Supports, of the following conditions precedent: (a) Loan Documents. The Lender shall have received the following -------------- documents, each of which shall be satisfactory to the Lender in form and substance: (i) Note. the Note, duly completed and executed; and ---- (ii) Credit Supports. one or more agreements constituting Credit Supports, --------------- duly executed and delivered by the Borrower and the Lender. In addition, the Borrowers shall have taken such other action as the Lender shall have requested in order to perfect the security interests created pursuant to the Agreement; and (b) Organization Documents. A good standing certificate and certified ---------------------- copies of the charter and bylaws (or equivalent documents) of each Borrower and of all corporate or other authority for each Borrower with respect to the execution, delivery and performance of the Loan Documents and each other document to be delivered by the Borrowers from time to time in connection herewith (and the Lender may conclusively rely on such certificate until it receives notice in writing from any Borrower to the contrary); (c) Other Documents. Such other documents as the Lender may reasonably --------------- request. 4.02 Initial and Subsequent Loans and Credit Supports. The making of each ------------------------------------------------ Loan to a Borrower and issuance of each Credit Support (including the initial Loan and initial Credit Supports) on any Business Day is subject to the following further conditions precedent, both immediately prior to the making of such Loan or issuance of such Credit Support and also after giving effect thereto and to the intended use thereof: (a) no Default or Event of Default shall have occurred and be continuing; (b) (i) both immediately prior to the making of such Loan or issuance of such Credit Support and also after giving effect thereto and to the intended use thereof, the representations and warranties made by each Borrower in Section 5 hereof, and in each of the other Loan Documents, shall be true and complete on and as of the date of the making of such Loan or issuance of such Credit Support in all material respects with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date) and (ii) with respect to any Credit Support being issued to support a third party borrowing to finance the acquisition or maintenance of assets, the value of such assets must be equal to or greater than the sum of such third party indebtedness plus any Loan obtained to facilitate such acquisition or maintenance. The Lender shall have received an officer's certificate signed by a Responsible Officer of the Borrower certifying as to the truth and accuracy of the above, which certificate shall specifically include a statement that the Borrower is in compliance with all governmental licenses and authorizations and is qualified to do business and in good standing in all required jurisdictions; and 9 (c) the aggregate outstanding principal amount of the Loans at the time shall not exceed $150,000,000 and the aggregate outstanding principal amount covered by Credit Supports at the time shall not exceed $5,000,000,000. Section 5. Representations and Warranties. ------------------------------ Each Borrower represents and warrants to the Lender that throughout the term of this Agreement: 5.01 Existence. The Borrower (a) is a corporation duly organized, validly --------- existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all governmental licenses, authorizations, consents and approvals, necessary to own its assets and carry on its business as now being or as proposed to be conducted, the lack of which would be reasonably likely to have a material adverse effect on its property, business or financial condition, or prospects; and (c) is qualified to do business and is in good standing in all other jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would be reasonably likely (either individually or in the aggregate) to have a material adverse effect on its property, business or financial condition, or prospects. 5.02 Financial Condition. Holdings has heretofore furnished to the Lender ------------------- a copy of its consolidated balance sheets and the consolidated balance sheets of its consolidated Subsidiaries for the fourth quarterly fiscal period of 1998. Holdings has also heretofore furnished to the Lender the related consolidated statements of operations, stockholders' equity and cash flows for Holdings and its consolidated Subsidiaries for the fourth quarterly fiscal period of 1998. All such financial statements are complete and correct and fairly present the consolidated financial condition of Holdings and its Subsidiaries and the consolidated results of their operations for the fiscal period needed on said date, all in accordance with GAAP applied on a consistent basis. 5.03 Litigation. There are no actions, suits, arbitrations, ---------- investigations or proceedings pending or, to its knowledge, threatened against the Borrower or any of its Subsidiaries or affecting any of the property thereof before any Governmental Authority, (i) as to which individually or in the aggregate there is a reasonable likelihood of an adverse decision which would be reasonably likely to have a material adverse effect on the property, business or financial condition, or prospects of the Borrower or (ii) which questions the validity or enforceability of any of the Loan Documents or any action to be taken in connection with the transactions contemplated hereby. 5.04 No Breach. Neither (a) the execution and delivery of the Loan --------- Documents or (b) the consummation of the transactions therein contemplated in compliance with the terms and provisions thereof will conflict with or result in a breach of the charter or bylaws of the Borrower, or any applicable law, rule or regulation, or any order, writ, injunction or decree of any Governmental Authority, or any Servicing Agreement or other material agreement or instrument to which the Borrower, or any of its Subsidiaries, is a party or by which any of them or any of their property is bound or to which any of them is subject, or constitute a default under any such material agreement or instrument, or (except for the Liens created pursuant to this Agreement) result in the creation or imposition of any Lien upon any property of the Borrower or any of its Subsidiaries pursuant to the terms of any such agreement or instrument. 10 5.05 Action. The Borrower has all necessary corporate or other power, ------ authority and legal right to execute, deliver and perform its obligations under each of the Loan Documents; the execution, delivery and performance by the Borrower of each of the Loan Documents have been duly authorized by all necessary corporate or other action on its part; and each Loan Document has been duly and validly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. 5.06 Approvals. No authorizations, approvals or consents of, and no --------- filings or registrations with, any Governmental Authority, or any securities exchange, are necessary for the execution, delivery or performance by the Borrower of the Loan Documents or for the legality, validity or enforceability thereof, except for filings and recordings in respect of the Liens created pursuant to this Agreement. 5.07 Margin Regulations. Neither the making of any Loan hereunder, nor ------------------ the use of the proceeds thereof, will violate or be consistent with the provisions of Regulation G, T, U or X. 5.08 Taxes. The Borrower and its Subsidiaries have filed all Federal ----- income tax returns and all other material tax returns that are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by any of them, except for any such taxes, if any, that are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Borrower, adequate. 5.09 Investment Company Act. Neither the Borrower nor any of its ---------------------- Subsidiaries is an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 5.10 Chief Executive Office. Holding's, Capital's and Mortgage's chief ---------------------- executive offices on the Effective Date are each located at 1901 West 47/th/ Place, Suite 105, Westwood, Kansas, 66205. 5.11 Location of Books and Records. The location where the Borrower keeps ----------------------------- its books and records is its chief executive office. Section 6A. Affirmative Covenants of the Borrower. ------------------------------------- Each Borrower covenants and agrees with the Lender that, so long as any Loan or Credit Support is outstanding and until payment in full of all Obligations: 6.01 Financial Statements. Holding shall deliver to the Lender as soon as -------------------- available all financial statements it prepares, including at a minimum the following: (a) as soon as available and in any event within forty-five (45) days after the end of each of the operations, stockholders' equity and quarterly fiscal periods of each fiscal year of Holdings, the consolidated balance sheets of Holdings and its consolidated Subsidiaries as at the end of such period and the related unaudited consolidated statements of operations, 11 stockholders' equity and cash flows for Holdings and its consolidated Subsidiaries for such period and the portion of the fiscal year through the end of such period; (b) as soon as available and in any event within ninety (90) days after the end of each fiscal year of Holdings, the consolidated balance sheets of Holdings and its consolidated Subsidiaries as at the end of such fiscal year and the related consolidated statements of operations, stockholders' equity and cash flows for Holdings and its consolidated Subsidiaries for such year, setting forth in each case in comparative form the figures for the previous year, accompanied by an opinion thereon of independent certified public accountants of recognized national standing previously approved by the Lender, which opinion shall not be qualified as to scope of audit or going concern and shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of Holdings and its consolidated Subsidiaries as at the end of, and for, such fiscal year in accordance with GAAP; (c) from time to time such other information regarding the financial condition, operations, or business of Holding as the Lender may reasonably request, including but not limited to quarterly audited financial statements. 6.02 Litigation. The Borrower will promptly, and in any event within 10 ---------- days after service of process on any of the following, give the Lender notice of all legal or arbitrable proceedings affecting the Borrower or any of its Subsidiaries that questions or challenges the validity or enforceability of any of the Loan Documents or as to which there is a reasonable likelihood of adverse determination which would result in a material adverse effect. 6.03 Existence, Etc. The Borrower will: --------------- (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (provided, that nothing in this -------- Section 6.03 shall prohibit any transaction expressly permitted under Section 6.04 hereof); (b) comply with the requirements of all applicable laws, rules, regulations and orders of Government Authorities (including, without limitation, all environmental laws) if failure to comply with such requirements would be reasonably likely (either individually or in the aggregate) to have a material adverse effect on its property, business or financial condition, or prospects; (c) keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied; and (d) not move its chief executive office from the address referred to in Section 6.11 unless it shall have provided the Lender 30 days prior written notice of such change. 6.04 Cooperation and Access to Records. The Borrower agrees to cooperate --------------------------------- fully and in a timely fashion with the Lender's requests for information or access to data, reports, records and personnel made for purposes of the Lender's compliance with securities law reporting and filing requirements, federal and state tax reporting and filing requirements or any other legal or regulatory reporting and filing requirements applicable to it. As part of this cooperation, the Borrower will agree to provide the following information: 12 (a) keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and (b) permit: (i) representatives of the Lender to (A) visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired by the Lender (but, prior to the occurrence of an Event of Default, only upon not less than two (2) Business Days' prior notice), and (B) discuss the business, operations, properties and financial and other condition of the Borrower with officers and employees of the Borrower, and with its independent certified public accountants, and (ii) representatives of the Lender to conduct periodic operational audits of the Borrower's business and operations 6.05 Notices. The Borrower shall give notice to the Lender: ------- (a) promptly of the occurrence of any Default or Event of Default; and (b) any event or change in circumstances, in each case which could reasonably be expected to have a material adverse effect on the Borrower's property, business or financial condition, or prospects. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what action the Borrower has taken or proposes to take with respect thereto. Section 6B. Negative Covenants. ------------------ Each Borrower covenants and agrees with the Lender that, so long as any Loan or Credit Support is outstanding: 6.07 Total Indebtedness to Adjusted Net Worth Ratio. Holding will not ---------------------------------------------- permit its ratio at any date of Total Indebtedness to Adjusted Net Worth to be more than 10.0:1.0. 6.08 Loan Indebtedness to GAAP Net Worth. Holding will not permit its ----------------------------------- ratio at any date of Loan Indebtedness to GAAP Net Worth to be more that 2.0:1.0. 6.09 Minimum GAAP Net Worth. Holding will not permit its GAAP Net Worth ---------------------- as of the last day of any fiscal quarter to be less than the sum of (1) $7,000,000, plus (2) fifty percent (50%) of (A) the cash proceeds of any sale or issuance of equity securities of any Borrower (or of any options, warrants or rights in respect of any such equity securities) which issuance takes place after the date of this Agreement, plus (B) cumulative after-tax earnings earned after the date hereof less cumulative dividends paid after the date of this Agreement. Section 7. Events of Default. ----------------- Each of the following events shall constitute an event of default (an "Event of Default") hereunder: 13 (a) the Borrowers shall default in the payment of any principal of or interest on any Loan when due (whether at Stated Maturity, upon acceleration or at mandatory or optional prepayment) or any Credit Support when due; or (b) the Borrowers shall default in the payment of any other amount payable hereunder or under any other Loan Document after notification by the Lender of such default, and such default shall have continued unremedied for five Business Days; or (c) any representation, warranty or certification made or deemed made herein or in any other Loan Document by any Borrower or any certificate furnished to the Lender pursuant to the provisions thereof, shall prove to have been false or misleading in any material respect as of the time made or furnished; or (d) any Borrower shall fail to comply with the requirements of Section 6.03 (as to existence), Section 6.04, Section 6.05, Section 6.06, Section 6.07 or Section 6.08 hereof; or any Borrower shall otherwise fail to comply with the requirements of Section 6.03 hereof and such default shall continue unremedied for a period of five Business Days; or any Borrower shall fail to observe or perform any other agreement contained in this Agreement or any other Loan Document and such failure to observe or perform shall continue unremedied for a period of seven Business Days; or (e) a final judgment or judgments for the payment of money in excess of $5,000,000 in the aggregate shall be rendered against any Borrower or any Subsidiary of a Borrower by one or more courts, administrative tribunals or other bodies having jurisdiction over them and the same shall not be discharged (or provision shall not be made for such discharge) or bonded, or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof and the Borrower or any such Subsidiary shall not, within said period of 60 days, or such longer period during which execution of the same shall have been stayed or bonded, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (f) any Borrower shall admit in writing its inability to pay its debts as such debts become due; or (g) any Borrower or any Subsidiary of a Borrower shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commerce a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate or other action for the purpose of effecting any of the foregoing; or (h) a proceeding or case shall be commenced with respect to any Borrower or any Subsidiary of a Borrower, without the application or consent of the Borrower or any such Subsidiary, in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the 14 Borrower or any such Subsidiary or of all or any substantial part of its property, or (iii) similar relief in respect of the Borrower or any such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against the Borrower or any such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (i) any Borrower grants, or suffers to exist, any Lien not contemplated herein; or (j) any materially adverse change in the properties, business or financial condition, or prospects of any Borrower or any Subsidiary of a Borrower, in each case as determined by the Lender in its sole discretion, or the existence of any other condition which, in the Lender's sole discretion, constitutes a material impairment of the Borrowers' collective ability to perform their obligations under this Agreement, the Note, the Credit Supports or any other Loan Document. Section 8. Remedies Upon Default. --------------------- (a) Upon the occurrence of one or more Events of Default other than those referred to in Section 7(g) or (h), the Lender may immediately declare the principal amount of the Loans then outstanding under the Note to be immediately due and payable, together with all interest thereon and fees and expenses accruing under this Agreement; provided that upon the -------- occurrence of an Event of Default referred to in Sections 7(g) or (h) such amounts shall immediately and automatically become due and payable without any further action by any Person. Upon such declaration or such automatic acceleration, the balance then outstanding on the Note shall become immediately due and payable, without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrowers. (b) Upon the occurrence of one or more Events of Default, the Lender shall be entitled to specific performance of all agreements of the Borrowers contained in this Agreement. Section 9. No Duty on Lender's Part. ------------------------ The powers conferred on the Lender shall not impose any duty upon it to exercise any such powers. The Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Borrowers for any act or failure to act hereunder, except for its own gross negligence or willful misconduct. Section 10. Miscellaneous. ------------- 10.01 Waiver. No failure on the part of the Lender to exercise and no ------ delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 15 10.02 Notices. Except as otherwise expressly permitted by this Agreement, ------- all notices, requests and other communications provided for herein (including, without limitation, any modifications of, or waivers, requests or consents under, this Agreement) shall be given or made in writing (including, without limitation, by telex or telecopy) delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof); or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. Except as otherwise provided in this Agreement and except for notices given under Section 2 (which shall be effective only on receipt), all such communications shall be deemed to have been duly given when transmitted by telex or telecopier or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 10.03 Indemnification and Expenses. ---------------------------- (a) The Borrowers agree, jointly and severally, to hold the Lender harmless from and indemnify the Lender against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, incurred by, or asserted against the Lender, relating to or arising out of, this Agreement, the Note, the Credit Supports, any other Loan Document or any transaction contemplated hereby or thereby, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the Note, the Credit Supports, any other Loan Document or any transaction contemplated hereby or thereby, that, in each case, results from anything other than the Lender's gross negligence or willful misconduct. The Borrowers also agree to reimburse the Lender for all of its costs and expenses incurred in connection with the enforcement or the preservation of the Lender's rights under this Agreement, the Note, the Credit Supports, any other Loan Document or any transaction contemplated hereby or thereby, including without limitation the reasonable fees and disbursements of its counsel. The Borrowers hereby acknowledge that the obligations of the Borrowers under the Note and Credit Supports are nonrecourse obligations of the Borrowers. (b) The Borrowers agree to pay as and when billed by the Lender all of the out-of-pocket costs and expenses incurred by the Lender in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement, the Note, the Credit Supports, any other Loan Document or any other documents prepared in connection herewith or therewith. The Borrowers agree to pay as and when billed by the Lender all of the out-of-pocket costs and expenses incurred in connection with the consummation and administration of the transactions contemplated hereby and thereby including, without limitation all the reasonable fees, disbursements and expenses of Tobin & Tobin, counsel to the Lender and any local counsel to the Lender. 10.04 Amendments. Except as otherwise expressly provided in this ---------- Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by the Borrowers and the Lender and any provision of this Agreement may be waived by the Lender. 10.05 Successors and Assigns. This Agreement shall be binding upon and ---------------------- inure to the benefit of the parties hereto and their respective successors and permitted assigns. 10.06 Survival. The obligations of the Borrowers under Sections 3.03 and -------- 10.03 hereof shall survive the repayment of the Loans and the Credit Supports and the termination of this 16 Agreement. In addition, each representation and warranty made, or deemed to be made by a request for a borrowing, herein or pursuant hereto shall survive the making of such representation and warranty, and the Lender shall not be deemed to have waived, by reason of making any Loan, any Default that may arise by reason of such representation or warranty proving to have been false or misleading, notwithstanding that the Lender may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such Loan was made. 10.07 Captions. The table of contents and captions and section headings -------- appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 10.08 Counterparts. This Agreement may be executed in any number of ------------ counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 10.09 Agreement Constitutes Security Agreement; Governing Law. This ------------------------------------------------------- Agreement shall be governed by Kansas law without reference to choice of law doctrine, and shall constitute a security agreement within the meaning of the Uniform Commercial Code. 10.10 SUBMISSION TO JURISDICTION; WAIVERS. EACH BORROWER HEREBY ----------------------------------- IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, THE NOTE, THE CREDIT SUPPORTS, AND THE OTHER LOAN DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF KANSAS, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR KANSAS, AND APPELLATE COURTS FROM ANY THEREOF; (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR THEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED; AND (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. 17 10.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWERS AND THE LENDER HEREBY -------------------- IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 10.12 Acknowledgments. Each Borrower hereby acknowledges that: --------------- (a) the Lender has no fiduciary relationship to the Borrower, and the relationship between the Borrower and the Lender is solely that of debtor and creditor; and (b) no joint venture exists between the Lender and the Borrower. 10.13 Termination. This Agreement may be terminated by the Lender or ----------- Holding by delivering written notice of such termination to each of the other parties hereto at least 60 days prior to the effective date of termination. Termination of this Agreement shall not affect the terms of Loans or Credit Supports at the time outstanding and shall otherwise be subject to Section 10.06 hereof. [remainder of page intentionally left blank] 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. BORROWERS --------- NFI HOLDING CORPORATION By: __________________________ Name: W. Lance Anderson Title: President Address for Notices: ------------------- 1901 West 47/th/ Place, Suite 105 Westwood, Kansas 66205 Attn: Rodney E. Schwatken Telecopier No.: 913.514.3567 Telephone No.: 913.514.3532 NOVASTAR CAPITAL, INC. By: __________________________ Name: Mike Bamburg Title: President Address for Notices: ------------------- 1901 West 47/th/ Place, Suite 105 Westwood, Kansas 66205 19 Attn: Rodney E. Schwatken Telecopier No.: 913.514.3567 Telephone No.: 913.514.3532 NOVASTAR MORTGAGE, INC. By: __________________________ Name: W. Lance Anderson Title: President Address for Notices: ------------------- 1901 West 47/th/ Place, Suite 105 Westwood, Kansas 66205 Attn: Rodney E. Schwatken Telecopier No.: 913.514.3567 Telephone No.: 913.514.3532 20 LENDER ------ NOVASTAR FINANCIAL, INC. By: __________________________ Name: Scott F. Hartman Title: Chief Executive Officer Address for Notices: ------------------- 1901 West 47/th/ Place, Suite 105 Westwood, Kansas 66205 Attn: Rodney E. Schwatken Telecopier No.: 913.514.3567 Telephone No.: 913.514.3532 21 EXHIBIT A [FORM OF PROMISSORY NOTE] FOR VALUE RECEIVED, NFI HOLDING CORPORATION, a Delaware corporation ("Holding"), NOVASTAR CAPITAL, INC., a Delaware corporation ("Capital"), NOVASTAR MORTGAGE, INC., a Virginia corporation ("Mortgage"), and each additional subsidiary of Holding that may sign this Note (collectively, the "Borrowers" and each individually, a "Borrower") hereby promise, jointly and severally, to pay to the order of NOVASTAR FINANCIAL, INC., a Maryland corporation (the "Lender"), at the principal office of the Lender at 1901 West 47th Place, Suite 105, Westwood, Kansas, 66205, in lawful money of the United States, and in immediately available funds, the principal sum of the aggregate unpaid principal amount of the Loans made by the Lender to the Borrowers under the Agreement, on the dates and in the principal amounts provided in the related Loan Commitments issued under the Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in each such Loan Commitment. The date, amount and interest rate of each Loan made by the Lender to a Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of the Note, endorsed by the Lender on the schedule attached hereto or any continuation thereof; provided, that the failure of the Lender to make any -------- such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing under the Agreement or hereunder in respect of the Loans made by the Lender. This Note is the Note referred to in the Lending and Credit Support Agreement dated as of July _, 2000 (as amended, supplemented or otherwise modified and in effect from time to time, the "Agreement") between the Borrowers and the Lender, and evidences Loans made by the Lender thereunder. Terms used but not defined in this Note have the respective meanings assigned to them in the Agreement. The Borrowers agree to pay all the Lender's costs of collection and enforcement (including reasonable attorneys' fees and disbursements of Lender's counsel) in respect of this Note when incurred, including, without limitation, reasonable attorneys' fees through appellate proceedings. Each Borrower hereby acknowledges, admits and agrees that the Borrower's obligations under this Note are nonrecourse obligations of the Borrower. The Borrowers, and any indorsers or guarantors hereof, (a) severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayments of this Note, (b) expressly agree that this Note, or any payment hereunder, may be extended from time to time, and (c) expressly agree that it will not be necessary for the Lender, in order to enforce payment of this Note, to first institute or exhaust the Lender's remedies against the Borrowers or any other party liable hereon. No extension of time for the payment of this Note, or any installment hereof, made by agreement by the Lender with any person now or hereafter liable for the payment of this Note, shall affect the liability under this Note of any Borrower, even if the Borrower is not a party to such agreement; provided, -------- 22 however, that the Lender and any Borrower, by written agreement between ------- them, may affect the liability of the Borrower. Any reference herein to the Lender shall be deemed to include and apply to every subsequent holder of this Note. Reference is made to the Agreement for provisions concerning prepayments, acceleration and other material terms affecting this Note. This Note shall be governed by and construed under the laws of the State of Kansas (without reference to choice of law doctrine) whose laws the Borrower expressly elects to apply to this Note. The Borrower agrees that any action or proceeding brought to enforce or arising out of this Note may be commenced in the courts of the State of Kansas. NFI HOLDING CORPORATION By: __________________________ Name:_________________________ Title:________________________ NOVASTAR CAPITAL, INC. By: __________________________ Name:_________________________ Title:________________________ 23 NOVASTAR MORTGAGE, INC. By:__________________________ Name:________________________ Title:______________________ 24 SCHEDULE OF LOANS This Note evidences Loans made under the within-described Agreement to the Borrowers, on the dates, in the principal amounts and bearing interest at the rates set forth below, and subject to the payments and prepayments of principal set forth below:
Principal Amount Amount Paid Unpaid Principal Notation Date Made Borrower of Loan Or Prepaid Amount Made By --------- -------- ---------------- ---------- ---------------- --------
EXHIBIT B SCHEDULE OF CREDIT SUPPORT FEES Description of Credit Support Fee Credit support for obligations under mortgage loan 1.00% of the outstanding warehouse and repurchase agreements borrowings* Commitment fee for the purchase of residual interests in 0.20% of unpaid principal balance asset-backed bonds issued by Borrower of securitized assets Guaranty of loan sales to third parties 0.125% of the unpaid principal balance of the loans sold, payable upon settlement of the sale Credit support for loan servicing operations 0.1% of the outstanding, unpaid principal balance of loans serviced* Financing commitment fee Annually, 0.25% of the Commitment Amount, payable quarterly
* Calculated based on the actual number of days Credit Support is in effect and a 360-day year and will be payable monthly, in arrears. 25
EX-10.29 5 0005.txt SOFTWARE LICENSE Exhibit 10.29 SOFTWARE LICENSE BUSINESS TERMS -------------- NovaStar Financial, Inc., a Maryland corporation ("Supplier"), licenses NovaStar Mortgage, Inc., a Virginia corporation ("Licensee") to copy, market and use the computer programs and related documentation identified below (the "Software") in the territory specified below (the "Territory"). This License is subject to all the attached terms and conditions (the "Terms and Conditions"). 1. The Software. ------------ The Software consists of the loan submission software used and developed under the mark Internet Underwriter and related user documentation in the form available for distribution on the Effective Date. 2. License Fees and Payments due Supplier. -------------------------------------- Annual License Fee: $50,000 Per Loan Submission License Fee: $15.00 The Annual License Fee is due on the Effective Date and annually thereafter. Licensee will report and pay Per Loan Submission License Fees monthly as provided in the Terms and Conditions. 4. Delivery. -------- Subject to the Terms and Conditions, Supplier will deliver the Software in object code form. 5. Effective Date of this License: July 1, 2000 ------------------------------ 6. Supplier's Address for Notice: ----------------------------- NovaStar Financial, Inc. 1901 West 47/th/ Place, Suite 105 Westwood, Kansas 66205 1 7. Licensee's Address for Notice: ----------------------------- NovaStar Mortgage, Inc. 1901 West 47/th/ Place, Suite 105 Westwood, Kansas 66205 TERMS AND CONDITIONS OF SOFTWARE LICENSE ---------------------------------------- 1. Term; Termination. This Agreement shall remain in force until the ----------------- second anniversary of the Effective Date, and thereafter, it shall be automatically renewed for a term of one (1) year unless a written notice is delivered by either party within 30 days prior to the end of the term or any renewal term of this Agreement. 2. Software. The term "the Software" includes, and this License governs, -------- the object code for all computer programs and any related documentation and information provided by Supplier. 3. License. Supplier grants Licensee a nonexclusive, nontransferable ------- license throughout the Territory to copy, market and distribute the Software in object code form only, and to sublicense the Software for that use, subject to the following: (a) Reports and Payment. Licensee will make all reports and ------------------- payments to Supplier as provided in this License. (b) Sublicensing and End-Users. Copies of the Software may be -------------------------- distributed to other end-users only if they have executed written end-user sublicense agreements with Licensee. Each written sublicense agreement will provide substantially the same protection of Supplier's interests as this Software License Agreement. (c) User Documentation. Licensee may copy for distribution the ------------------ user documentation for the Software. Unless otherwise agreed in writing, Licensee will have no right to prepare, use, copy, market or distribute any translation of the User Documentation for any part of the Software into a language other than the English language. (d) Notices. Licensee will include copies of a notice regarding ------- proprietary rights approved in writing by Supplier in all copies of the Software that Licensee distributes. Licensee's performance of this obligation is a condition of Supplier's authorization of Licensee's distribution of copies of the Software. Object code will have an appropriate notice embedded in it. (e) No Modification or Reverse Engineering. Licensee will not -------------------------------------- attempt to modify, reverse compile, disassemble or otherwise reverse engineer the object code for the Software. 2 4. Warranty. For a period of ninety (90) days after the Effective Date: -------- (a) Limited Warranty. Supplier warrants only that the latest release ---------------- of the Software delivered to Licensee by Supplier will meet and comply in all material respects with Supplier's most current user documentation for the Software as of the Effective Date. (b) Remedy. During the warranty period, Supplier will use its best ------ efforts to supply an avoidance procedure within fifteen (15) days and to supply a correction within ninety (90) days for any defect or error in the Software following receipt of notice thereof from Licensee, as long as the notice is accompanied by documentary evidence in a mutually agreeable form that permits the defect or error to be demonstrated on Supplier's premises. (c) Notification of Defects or Errors. Supplier agrees to inform --------------------------------- Licensee of defects or errors in the Software discovered by Supplier or reported by others within a reasonable time after their discovery by or reporting to Supplier, and, at Licensee's request, to perform the obligations set forth in subparagraph (b) above with respect to those defects or errors. (d) Limitation. Under the warranty set out above, Supplier accepts no ---------- responsibility for all or any part of the Software that has been modified since delivery unless Supplier has reviewed the modifications, has determined that they constitute valid corrections of the Software and has approved them in writing. Supplier will in any event be free to use and copy any modifications of the Software so approved for Supplier's normal business purposes in all versions of the Software, without payment or obligation to Licensee. 5. Maintenance. ----------- (a) Notification or Defects or Errors. After the expiration of the --------------------------------- warranty period provided above, Supplier agrees to notify Licensee of defects or errors in the then most current version of the Software used by Licensee within a reasonable time after their discovery by or reporting to Supplier. If so requested, Supplier agrees to use diligent efforts to supply an avoidance procedure and a correction for those defects or errors at a reasonable price to be mutually agreed upon in each individual case. (b) Updates. After the expiration of the warranty period provided ------- above, Supplier will make available to Licensee, at Supplier's then-standard prices and upon Supplier's then-standard terms and conditions, Supplier's standard updates for the Software that Supplier makes available to its customers generally. 6. LIMITATIONS AND DISCLAIMERS OF WARRANTY. THE FOREGOING WARRANTIES ARE --------------------------------------- FOR LICENSEE'S EXCLUSIVE BENEFIT AND ARE NONTRANSFERABLE. THE FOREGOING WILL BE LICENSEE'S EXCLUSIVE REMEDIES FOR BREACH OF WARRANTY BY SUPPLIER. SUPPLIER DISCLAIMS ALL OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING IMPLIED WARRANTIES OR MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE. SUPPLIER DOES NOT PROMISE THAT THE SOFTWARE WILL BE ERROR FREE OR WILL OPERATE WITHOUT INTERRUPTION. 3 7. Additional Services. Supplier will consider Licensee's requests for ------------------- additional services not required by this License, such as installation, consulting, modification and training. If Supplier agrees to provide these services, it will do so at its standard rates and under its standard terms and conditions then in effect. Supplier may change its standard rates and/or terms and conditions on thirty (30) days' prior notice to Licensee, but changes will not apply to any project undertaken by Supplier before the changes become effective. 8. New Releases. From time to time Supplier may provide new releases of ------------ the Software containing corrections of errors then available, but Supplier will have no obligation to do so. (a) During Warranty Period. If provided during the warranty period, ---------------------- new releases containing only corrections of errors will be provided without additional charge, but Supplier may impose a charge for new releases that in Supplier's opinion contain other modifications, improvements or new material. (b) Service. After the expiration of the warranty period described ------- above, Supplier agrees to make available to Licensee an annual maintenance service for the then-current release of the Software, to the extent and on terms and conditions Supplier makes such a service available to its customers generally. (c) Licensee's Duties. Licensee agrees to use diligent efforts to ----------------- provide all its sublicensees with all new releases and corrections that Supplier may provide without additional charge. 9. Delivery and Acceptance. The Software will be deemed accepted thirty ----------------------- (30) days after delivery unless Licensee first gives Supplier notice of a material noncompliance under Paragraph 4(a), specifying the nature of the noncompliance. If Licensee gives that notice, the Software product will be deemed accepted on the seventh (7th) day after Supplier has delivered a revised version of it unless Licensee gives Supplier notice before then that all material noncompliances reported by Licensee have not been cured. Nonmaterial errors will not affect acceptance, but Supplier will provide warranty or maintenance service for them as provided above. 10. Payment and Reports. Licensee agrees to pay Supplier the Annual ------------------- License Fee as shown on the face page of this License. Licensee also agrees to report and pay Per Loan Submission License Fees, as follows: (a) Reporting. Within thirty (30) days after the end of each calendar --------- quarter, Licensee will send Supplier a written report on the Loan Submissions during the quarter. (b) Contents of Report; Payments. Each report will specify the number ---------------------------- of loan submissions and Per Loan Submission License Fees. Licensee agrees to pay those fees by the time the report is due. 4 (c) Form of Payment. Unless otherwise specified on the face page, all --------------- payments will be in United States dollars and will be made by check or by wire transfer to a bank account specified by Supplier. (d) Taxes and Similar Charges. Licensee on demand will pay or ------------------------- reimburse Supplier for all taxes, other taxes and other charges relating to the Software, this License or payments hereunder imposed by the United States and their political subdivisions, with the sole exception of taxes on Supplier's income. 11. Proprietary Rights Indemnification. Supplier will indemnify Licensee ---------------------------------- against any claim that the Software as delivered by Supplier infringes any third party's patent, copyright or trade secret under the laws of the United States. 12. Supplier's and its Suppliers' Proprietary Rights. Licensee ------------------------------------------------ acknowledges and agrees that Supplier and its suppliers have and will retain all ownership rights in the Software, including all patent rights, copyrights, copyright registrations, trade secrets, trademarks, service marks, trademark and service mark registrations, related goodwill and confidential and proprietary information. Licensee will have no rights in the Software except as explicitly stated in this License. 13. Confidential Information. Each party agrees to use reasonable effort, ------------------------ and at least the same care that is uses to protect its own confidential information of like importance, to prevent unauthorized dissemination or disclosure of the other party's confidential information during and after the term of this License. 14. LIMITATIONS OF LIABILITY. SUPPLIER WILL NOT BE LIABLE FOR ANY SPECIAL, ------------------------ INCIDENTAL OR CONSEQUENTIAL DAMAGES, EVEN IF INFORMED OF THE POSSIBILITY THEREOF IN ADVANCE. IN NO EVENT WILL SUPPLIER'S LIABILITY IN CONNECTION WITH THE SOFTWARE OR THIS LICENSE EXCEED AMOUNTS PAID TO SUPPLIER BY LICENSEE HEREUNDER. THESE LIMITATIONS APPLY TO ALL CAUSES OF ACTION IN THE AGGREGATE, INCLUDING WITHOUT LIMITATION BREACH OF CONTRACT, BREACH OF WARRANTY, SUPPLIER'S NEGLIGENCE, STRICT LIABILITY, MISREPRESENTATION AND OTHER TORTS. 15. Termination. This License will terminate: ----------- (a) End of Term. As provided in Paragraph 1; ----------- (b) Breach. On the thirtieth (30th) day after either party gives the ------ other notice of a material breach by the other of any term or condition of this License, unless the breach is cured before that day; or (c) Bankruptcy or Insolvency. When either party at its discretion ------------------------ gives the other notice of termination after the other has been for more than sixty (60) days the subject of any voluntary or involuntary proceeding relating to bankruptcy, insolvency, liquidation, receivership, composition of or assignment for the benefit of creditors. 5 16. Effect of Termination. After termination: --------------------- (a) End of Licenses. Licensee will have no right to copy, market or --------------- distribute the Software and will promptly destroy or return to Supplier all copies of the Software in its possession or under its control. (b) Other End-Users' Rights. Other end-users properly sublicensed ----------------------- prior to termination may continue to use the Software under the terms of their written sublicense agreements, but all sublicense agreements will inure to Supplier's benefit, and Licensee will execute documents and provide assistance as reasonably requested by Supplier to enable Supplier to enforce them. (c) No Damages for Termination; No Effect on other Rights and --------------------------------------------------------- Remedies. Neither party will be liable for damages of any kind as a result of exercising its right to terminate this License according to these Terms and Conditions, and termination will not affect any other right or remedy of either party. (d) Continuing Obligations. Payment and indemnification obligations ---------------------- arising prior to termination and the obligations of each party to keep the other's confidential information confidential will remain in force. 17. Assignment. Either party may assign this License to the surviving ---------- entity in a merger or consolidation in which it participates or to a purchaser of all or substantially all of its assets or capital stock. In addition, Supplier may assign this license to any person to whom Supplier transfers all or substantially all of its rights in the Software. Otherwise, neither party may assign any rights or delegate any duties under this License without the other's prior written consent, and any attempt to do so without that consent will be void. This License will bind and inure to the benefit of the parties and their respective successors and permitted assigns. 18. Miscellaneous. ------------- (a) Choice of Law. This License will be governed by and construed ------------- according to the laws of Kansas, without regard to principles of conflicts of law. (b) Amendment. This License may be amended or supplemented only by a --------- writing signed on behalf of both parties. No purchase order, invoice, or similar form will amend this License even if accepted by the receiving party in writing. (c) Waiver. No waiver will be implied from conduct or failure to ------ enforce rights. No waiver will be effective unless in a writing signed on behalf of the party claimed to have waived. (d) Contingencies. Neither party will have the right to claim damages ------------- or to terminate this License as a result of the other's failure or delay in performance due to circumstances beyond its reasonable control, such as labor disputes, strikes, lockouts, shortages 6 of or inability to obtain labor, fuel, raw materials or supplies, war, riot, insurrection, epidemic, act of God, or governmental action not the fault of the nonperforming party. (e) Severability. If any part of this License is found invalid or ------------ unenforceable, it will be enforced to the maximum extent permitted by law, and other parts of this License will remain in force. (f) Equitable Relief. Either party may have injunctive, preliminary ---------------- or other equitable relief to remedy any actual or threatened unauthorized disclosure of confidential information or unauthorized use, copying, marketing, distribution or sublicensing of the Software. (g) Entire Agreement. This License represents the entire agreement ---------------- between the parties relating to the Software and supersedes all prior representations, discussions, negotiations and agreements, whether written or oral. (h) Notices. All notices, reports, requests and other communications ------- required or permitted hereunder must be in writing. (i) Attorneys' Fees. In any suit to enforce this agreement, the --------------- prevailing party will have the right to recover its costs and reasonable attorneys' fees and expenses, including costs, fees and expenses on appeal. (j) Relationship of Parties. The parties to this License are ----------------------- independent contractors. There is no relationship of partnership, agency, employment, franchise or joint venture between the parties. Neither party has the authority to bind the other or incur any obligation on its behalf. NOVASTAR FINANCIAL, INC. NOVASTAR MORTGAGE, INC. ("Supplier") ("Licensee") By:_______________________________ By:_____________________________________ Name: Scott F. Hartman Name: W. Lance Anderson Title: Chief Executive Officer Title: President 7 EX-10.30 6 0006.txt FIRST UNION NATIONAL BANK LETTER Exhibit 10.30 First Union National Bank One First Union Center 301 South College Street Charlotte, North Carolina 28288-0610 NovaStar Financial, Inc. NovaStar Capital, Inc. NovaStar Mortgage, Inc. 1901 West 47/th/ Place, Suite 105 Westwood, Kansas 66205 As of July 28, 2000 Gentlemen Reference is made to that certain Master Repurchase Agreement dated as of February 12, 1999 (together with the Addendum to the Master Repurchase Agreement dated as of February 12, 1999) among NovaStar Financial, Inc ("NFI"), NovaStar Capital, Inc. ("NCI") and NovaStar Mortgage, Inc. ("NSM" and together with NFI and NCI, each, individually and jointly and severally, "Seller") and First Union National Bank ("Buyer") (as amended, modified, restated or supplemented from time to time, the "Agreement"). Seller has requested that Buyer amend the Agreement as hereinafter set forth and Buyer is willing to do so on the terms and conditions hereinafter set forth. Seller and Buyer agree that the following definitions set forth in Section 2 of the Agreement are hereby amended in their entirety as follows: "Eligible Mortgage Loans" shall mean (a) Mortgage Loans with respect to which each of the representations and warranties set out in Exhibit A hereto is --------- accurate and complete as of the date of the related confirmation and on each day thereafter (and the Seller by including any such Mortgage Loan in any such transaction shall be deemed to so represent and warrant to Buyer at and as of the date of such Transaction) and (b) solely for the period commencing on July 28, 2000 and ending September 30, 2000, the specific Mortgage Loans listed on Exhibit A-1 hereto up to an aggregate sum of $3,200,000. ----------- "Term" shall mean the period commencing on February 12, 1999 and ending on July 27, 2001. Seller represents and warrants that (a) expect as specifically set forth herein, the Agreement, and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed, (b) this letter and the Agreement, as amended hereby, constitute legal, valid and binding obligations of Seller and are enforceable against Seller in accordance with their respective terms, (c) no Event of Default or Default has occurred and is continuing or would exist after giving effect to this letter and (d) Seller has no defense, counterclaim or offset with respect to the Agreement. The execution, delivery and effectiveness of this letter shall not operate as a waiver of any right, power or remedy of Buyer, nor constitute a waiver of any provision of the Agreement, or any other documents, instruments or agreements executed and/or delivered thereunder or in connection therewith. This letter may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same agreement. Any signature delivered by a party via telecopier shall be deemed an original signature hereto. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -2- If you are in agreement with the foregoing, kindly execute this letter agreement ("Letter Agreement") in the space provided below and return same to the undersigned. This Letter Agreement shall become effective upon Buyer's receipt of four (4) copies of this Letter Agreement executed by each of the undersigned. Very truly yours, FIRST UNION NATIONAL BANK By: /s/ [SIGNATURE ILLEGIBLE]^^ -------------------------------- Name: [ILLEGIBLE] Title Vice President CONSENTED AND AGREED TO: NOVASTAR FINANCIAL, INC., as a Seller By: /s/ Rodney E. Schwatken ---------------------------------- Name: Rodney E. Schwatken Title:__ Treasurer NOVASTAR MORTGAGE, INC., as a Seller By: /s/ Rodney E. Schwatken ---------------------------------- Name: Rodney E. Schwatken Title:__ Treasurer NOVASTAR CAPITAL, INC., as a Seller By: /s/ Rodney E. Schwatken ---------------------------------- Name: Rodney E. Schwatken Title:__ Treasurer [SIGNATURES CONTINUED ON NEXT PAGE] -3- NOVASTAR MORTGAGE, INC., as a Servicer By: /s/ Rodney E. Schwatken ---------------------------------- Name: Rodney E. Schwatken Title: Treasurer NFI HOLDING CORPORATION, as Guarantor By: /s/ Rodney E. Schwatken ---------------------------------- Name: Rodney E. Schwatken Title: Treasurer -4- EX-11.1 7 0007.txt SCHEDULE REGARDING COMPUTATION OF PER SHARE Exhibit 11.1 Schedule Regarding Computation of Per Share Earnings ------------------------------------------------------ (OOO's except per share data)
Nine Months Three Months Ended September 30, Ended September 30, ------------------- ---------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Net income (loss) $ 3,336 $ 2,034 $ 1,978 $(1,537) Less: preferred stock dividends (1,575) (1,081) (525) (525) ------- ------- ------- ------- Income (loss) available to common stockholders $ 1,761 $ 953 $ 1,453 $(2,062) ======= ======= ======= ======= Weighted average common shares 7,087 8,130 6,900 8,130 Common equivalent shares: Dilutive preferred stock -- -- 4,286 -- Dilutive stock options 7 19 6 -- Dilutive warrants -- 177 -- -- ------- ------- ------- ------- Common and common equivalent shares 7,094 8,326 11,192 8,130 ======= ======= ======= ======= Net income (loss) per common share $ 0.25 $ 0.12 $ 0.21 $ (0.25) ======= ======= ======= ======= Net income (loss) common equivalent share $ 0.25 $ 0.11 $ 0.18 $ (0.25) ======= ======= ======= =======
EX-21.1 8 0008.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 Subsidiaries of the Registrant ------------------------------ NovaStar Financial, Inc., a Maryland corporation, and its subsidiaries NovaStar Assets Corporation, a Delaware corporation NovaStar Mortgage Funding Corporation, a Delaware corporation NovaStar Certificates Financing Corporation, a Delaware corporation NovaStar Capital Access Corporation, a Delaware corporation NFI Holding Corporation, a Delaware corporation, and its subsidiaries NovaStar Mortgage, Inc., a Virginia corporation NovaStar Mortgage Funding Corporation II, a Delaware corporation NovaStar REMIC Financing Corporation, a Delaware corporation NovaStar Home Mortgage, Inc., a Delaware corporation NovaStar Capital, Inc., a Delaware corporation EX-27.1 9 0009.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NOVA STAR FINANCIAL'S FORM 10Q FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS 3-MOS DEC-31-1999 DEC-31-1999 JAN-01-2000 JUL-01-2000 SEP-30-2000 SEP-30-2000 2,767 2,767 41,784 41,784 424,547 424,547 8,132 8,132 0 0 0 0 0 0 0 0 516,717 516,717 0 0 0 0 0 0 81 81 43 43 100,739 100,739 516,717 516,717 36,310 10,993 37,288 10,850 0 0 34,598 9,659 0 0 4,004 1,212 26,881 8,240 3,336 1,978 0 0 3,336 1,978 0 0 0 0 0 0 3,336 1,978 0.25 0.21 0.25 0.18