<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
- --------------------------------------------------------------------------------
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act
Rule 0-11 (Set forth the amount on which the filing fee is calculated and
state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
90 WEST STREET, SUITE 1508
NEW YORK, NEW YORK 10006
NOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 21, 1999
TO OUR STOCKHOLDERS:
The 1999 Annual Meeting of the Stockholders of Hanover Capital Mortgage
Holdings, Inc. will be held on Friday, May 21, 1999, at 11:00 a.m. at the New
York Marriott World Trade Center Hotel, 3 World Trade Center, New York, New
York, for the following purposes:
1. To elect three Directors, to serve for a term of three years as
more fully described in the accompanying Proxy Statement.
2. To consider and act upon a proposal to ratify, confirm and approve
the selection of Deloitte & Touche LLP as the independent certified public
accountants of the Company for the fiscal year ending December 31, 1999.
3. To consider and act upon any other business which may properly come
before the meeting.
The Board of Directors has fixed the close of business on April 21, 1999 as
the record date for the meeting. All stockholders of record on that date are
entitled to notice of and to vote at the meeting.
Your proxy is enclosed. You are cordially invited to attend the meeting,
but if you do not expect to attend, or if you plan to attend, but desire the
proxy holders to vote your shares, please date and sign your proxy and return it
in the enclosed postage paid envelope. The giving of this proxy will not affect
your right to vote in person in the event you attend. Please return the proxy
promptly to avoid the expense of additional proxy solicitation.
By order of the Board of Directors
JOYCE S. MIZERAK,
Managing Director, Director and
Secretary
New York, New York
April 23, 1999
<PAGE> 3
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Hanover Capital Mortgage Holdings, Inc.
(the "Company") for use at the 1999 Annual Meeting of Stockholders to be held on
Friday, May 21, 1999, at the time and place set forth in the notice of the
meeting, and at any adjournments thereof. The approximate date on which this
Proxy Statement and form of proxy are first being sent to stockholders is April
23, 1999.
If the enclosed proxy is properly executed and returned, it will be voted
in the manner directed by the stockholder. If no instructions are specified with
respect to any particular matter to be acted upon, proxies will be voted in
favor thereof. Any person giving the enclosed form of proxy has the power to
revoke it by voting in person at the meeting, or by giving written notice of
revocation to the Secretary of the Company at any time before the proxy is
exercised.
The holders of a majority in interest of all Common Stock issued,
outstanding and entitled to vote are required to be present in person or to be
represented by proxy at the meeting in order to constitute a quorum for the
transaction of business. The election of the nominees for Director will be
decided by plurality vote. The affirmative vote of the holders of at least a
majority of the shares of Common Stock voting in person or by proxy at the
meeting are required to approve all other matters listed in the notice of the
meeting.
The Company will bear the cost of the solicitation. It is expected that the
solicitation will be made primarily by mail, but regular employees or
representatives of the Company (none of whom will receive any extra compensation
for their activities) may also solicit proxies by telephone, telegraph and in
person and arrange for brokerage houses and other custodians, nominees and
fiduciaries to send proxies and proxy material to their principals at the
expense of the Company.
The Company's Annual Report on Form 10-K for the year ended December 31,
1998 is concurrently being provided to each stockholder.
The Company's principal executive offices are located at 90 West Street,
Suite 1508, New York, New York, 10006, telephone number (212) 732-5086.
RECORD DATE AND VOTING SECURITIES
Only stockholders of record at the close of business on April 21, 1999 are
entitled to notice of and to vote at the meeting. On that date, the Company had
outstanding and entitled to vote 6,126,899 shares of Common Stock, par value
$.01 per share. Each outstanding share of the Company's Common Stock entitles
the record holder to one vote.
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes, with each class as
nearly equal in number as possible. One class is elected each year for a term of
three years. In addition, any director that was appointed by the Board of
Directors to fill a vacancy holds office until the next annual meeting of
stockholders, at which time the stockholders elect a director to hold office for
the balance of the term then remaining. It is proposed that each nominee listed
below whose term expires at this meeting be elected to serve a term of three
years and until his or her successor is duly elected and qualified or until he
or she sooner dies, resigns or is removed.
<PAGE> 4
The persons named in the accompanying proxy will vote, unless authority is
withheld, for the election of the nominees named below, all of whom are now
members of the Company's Board of Directors. The Company is advised that all of
the nominees have indicated their availability and willingness to serve if
elected. If such nominees should become unavailable for election, which is not
anticipated, the persons named in the accompanying proxy will vote for such
substitute as the Board of Directors may recommend. The nominees are not related
to any executive officer of the Company or its subsidiaries.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY OR PRINCIPAL
NAME OF DIRECTOR AGE OCCUPATION DURING THE PAST FIVE YEARS
- ---------------- --- --------------------------------------
<S> <C> <C>
NOMINATED FOR THE
TERM ENDING IN 2002:
Robert E. Campbell................... 65 Robert E. Campbell has served as a Director of the
Company since January 1998. Mr. Campbell is a retired
Vice Chairman of the Board of Directors of Johnson &
Johnson. Mr. Campbell had assumed this position in April
1989. Among his professional affiliations, Mr. Campbell
is Chairman of the Board of The Cancer Institute of New
Jersey and past Chairman of the Board of Trustees of
Fordham University. He is also a member of the Board of
The Robert Wood Johnson Foundation, ARGOMed, Inc., and
The Parker Memorial Home. He is a member of the Advisory
Council for the College of Science of the University of
Notre Dame and Chairman of the Board of New Brunswick
Affiliated Hospitals.
Joyce S. Mizerak..................... 43 Joyce S. Mizerak has been a Director, Managing Director
and Secretary of the Company since its inception in June
1997. Ms. Mizerak has also been a Managing Director and
Director of Hanover Capital Partners Ltd ("HCP"), a
subsidiary of the Company, since its formation in 1989.
Prior to joining HCP, Ms. Mizerak had responsibilities
at Bankers Trust Company from 1988 to 1989 for mortgage
transaction contracts. Before joining Bankers Trust
Company, Ms. Mizerak held a variety of positions at
Citicorp Investment Bank from 1984 to 1988, including
the trading of whole mortgage loans for Citicorp's
Citimae residential mortgage conduit.
Irma N. Tavares...................... 44 Irma N. Tavares has been a Director and Managing
Director of the Company since its inception in June
1997. Ms. Tavares has also been a Managing Director and
Director of HCP since its formation in 1989. Prior to
joining HCP, Ms. Tavares held trading positions at both
Citicorp Investment Bank from 1983 to 1987 and Bankers
Trust Company from 1987 to 1989.
</TABLE>
2
<PAGE> 5
The following are the continuing members of the Board of Directors whose
terms of service are indicated below:
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY OR PRINCIPAL
NAME OF DIRECTOR AGE OCCUPATION DURING THE PAST FIVE YEARS
- ---------------- --- --------------------------------------
<S> <C> <C>
SERVING A TERM ENDING IN 2000:
John A. Burchett..................... 56 John A. Burchett has been the Chairman of the Board,
President and Chief Executive Officer of the Company
since its inception in June 1997. Mr. Burchett has also
been the Chairman of the Board, President and Chief
Executive Officer of each of HCP and Hanover Capital
Mortgage Corporation, a subsidiary of HCP, since each of
their formations in 1989 and 1992, respectively. Prior
to the founding of HCP, Mr. Burchett held executive
positions in the national mortgage finance operations of
two global financial institutions: Citicorp Investment
Bank from 1980 to 1987 and Bankers Trust Company from
1987 to 1989.
John A. Clymer....................... 50 John A. Clymer has served as a Director of the Company
since the consummation of the Company's initial public
offering in September 1997. Since September 1994, Mr.
Clymer has been employed by the Resource Companies, Inc.
as a Managing Director. From 1972 until January 1994,
Mr. Clymer was employed by Minnesota Mutual Life
Insurance and for the period from 1991 to 1994 was the
President of Minnesota Mutual Life Insurance. Among his
professional affiliations, Mr. Clymer is a member of the
Board of Hudson Medical Center, Inc., Hudson Hospital
Corporation, Inc., Resource Companies, Inc. and St. Paul
Foundation. Mr. Clymer has also been a Director of WTC
Industries, Inc. since 1994.
Saiyid Naqvi......................... 49 Saiyid Naqvi has served as a Director of the Company
since March 1998. Mr. Naqvi is the President and Chief
Executive Officer of PNC Mortgage (formerly Sears
Mortgage Corporation). He joined PNC Mortgage in 1993
with the acquisition of Sears Mortgage Corporation,
which he had joined in 1985 as senior vice president of
secondary marketing.
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY OR PRINCIPAL
NAME OF DIRECTOR AGE OCCUPATION DURING THE PAST FIVE YEARS
- ---------------- --- --------------------------------------
<S> <C> <C>
SERVING A TERM ENDING IN 2001:
George J. Ostendorf.................. 54 George J. Ostendorf has been a Director and Managing
Director of the Company since its inception in June
1997. Mr. Ostendorf has also been a Managing Director
and Director of HCP since its formation in 1989. Mr.
Ostendorf's duties at HCP include senior relationship
management of HCP's clients which range from small
depository institutions to large mortgage lenders. Prior
to joining HCP, Mr. Ostendorf was responsible for
origination and distribution of mortgage securities by
Chicago based sales forces that he managed for Citicorp
Investment Bank and later for Bankers Trust Company.
John Nicholas Rees................... 65 John Nicholas Rees has served as a Director of the
Company since the consummation of the Company's initial
public offering in September 1997. Since 1985, Mr. Rees
has been President of Pilot Management, a privately held
investor/consultant firm. From 1974 to 1985, Mr. Rees
was Vice Chairman of the Bank of New England Corporation
where he was responsible for its finance, strategic
planning, money market, government banking and data
processing operations.
Joseph Freeman....................... 66 Joseph Freeman has served as a Director of the Company
since October 1997. Since 1986, Mr. Freeman has been the
President of LRF Investments, Inc., a privately held
venture capital firm. Mr. Freeman is currently on the
Board of Directors of LRF Investments, Inc., Merrimack
Mortgage Co., Inc., The Newton Group, Inc. and Work
Management Solutions, Inc.
</TABLE>
EXECUTIVE OFFICERS
In addition to the directors named above, the Company has the following
executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Julia Curran......................... 37 Julia Curran has been a Senior Vice President of the
Company since its inception in June 1997. Ms. Curran is
also a Senior Vice President of HCP and has been
employed by HCP since 1990. Prior to joining HCP, Ms.
Curran held various mortgage servicing positions at
Bankers Trust Company and mortgage loan delivery and
servicing positions at City Federal Savings.
Ralph F. Laughlin.................... 45 Ralph F. Laughlin has been a Senior Vice President,
Chief Financial Officer, Treasurer and Assistant
Secretary of the Company since its inception in June
1997. Mr. Laughlin has also been Chief Financial Officer
of HCP since May 1996. Prior to 1996, Mr. Laughlin was
Vice President of Finance for Middex Development
Corporation, a New York based owner and operator of
office buildings, shopping centers and hotels, and the
holder of a controlling interest in Hodgson Houses,
Inc., a publicly traded modular home builder.
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
James C. Strickler, Jr............... 42 James C. Strickler, Jr. has been a Senior Vice
President of the Company since its inception in June
1997. Mr. Strickler is also a Senior Vice President of
HCP and has been employed by HCP since 1995. Prior to
joining HCP, Mr. Strickler held the position of trader
of whole loans, asset backed securities and non-agency
mortgage backed securities with Lehman Brothers Inc.
from 1992 to 1995 and with Chemical Bank from 1988 to
1992.
</TABLE>
INFORMATION CONCERNING THE BOARD OF DIRECTORS
During fiscal 1998, there were four in person meetings of the Board of
Directors of the Company and six meetings of the Board of Directors by
conference telephone. There also were actions taken by the Board of Directors by
Unanimous Written Consent in 1998. All of the Directors attended at least 75% of
the aggregate of (i) the total number of meetings of the Board of Directors
during which they served as Director and (ii) the total number of meetings held
by committees of the Board of Directors on which they served. The Board of
Directors does not have a Nominating Committee. The outside Directors of the
Company receive an annual director's fee equal to $15,000, payable on a
quarterly basis. Each of Mr. Burchett, Mr. Ostendorf, Ms. Mizerak and Ms.
Tavares received compensation as employees of the Company. See "Compensation
Committee Interlocks and Insider Participation - Certain Relationships and
Related Transactions - Employment Agreements" and "--Management Agreement." The
Company also pays each outside Director $500 plus reimbursement of travel
expenses in connection with their attending each in person meeting of the Board
of Directors of the Company. In addition Mr. Rees received a payment of $600
during the year as compensation for certain oversight review services he
performed for the Company.
The Board of Directors has a Compensation Committee whose members are Mr.
Clymer, Mr. Rees and Mr. Freeman. The Compensation Committee annually reviews
the Company's compensation policy for executive officers and makes
recommendations to the Board of Directors with respect to that policy, as well
as making compensation decisions for executive officers, and it administers the
Company's Bonus Incentive Compensation Plan and the Company's 1997 Stock Option
Plan. During the year ended December 31, 1998, there were no meetings of the
Compensation Committee.
The Company also has an Audit Committee whose present members are Mr.
Clymer, Mr. Rees and Mr. Freeman. The Audit Committee recommends to the Board of
Directors the selection of independent public accountants to serve as the
Company's auditors, and reviews the scope of their audit, their audit report and
any recommendations made by them. The Audit Committee also conducts reviews of
any related-party transactions or potential conflict of interest situations.
During the year ended December 31, 1998, there was one meeting of the Audit
Committee.
5
<PAGE> 8
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of March
31, 1999 by (1) each person known to the Company to beneficially own more than
five percent of the Company's Common Stock, (2) each Director of the Company,
(3) each executive officer of the Company and (4) all Directors and executive
officers of the Company as a group. Unless otherwise indicated in the footnotes
to the table, the beneficial owners named have, to the knowledge of the Company,
sole voting and investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
- ------------------------ ------------------ --------------------
<S> <C> <C>
Wallace R. Weitz & Company(1)......................... 2,622,000(3)(4) 34.12%
Ryback Management Corporation(2)...................... 469,700(3) 7.67%
John A. Burchett(5)................................... 441,277(6)(7) 7.17%
Joyce S. Mizerak(11).................................. 124,500(8) 2.03%
George J. Ostendorf(12)............................... 118,011 1.93%
Irma N. Tavares(11)................................... 113,500 1.85%
John Nicholas Rees(14)................................ 22,000(13) *
Robert E. Campbell(15)................................ 9,122(13) *
Saiyid Naqvi(16)...................................... 5,000(13) *
John A. Clymer(17).................................... 2,000(13) *
Joseph Freeman(18).................................... 2,000(13) *
Ralph F. Laughlin(11)................................. 800(19) *
Julia Curran(11)...................................... -- --
James C. Strickler(5)................................. -- --
All executive officers and directors as a group (12
persons)............................................ 838,210 13.58%
</TABLE>
- ---------------
* Less than one percent.
(1) Address is 1125 South 103rd Street, Suite 600 Omaha, Nebraska 68124.
(2) Address is 7711 Carondelet Avenue, Suite 700, St. Louis, Missouri 63105.
(3) According to a Schedule 13G filed with the Securities and Exchange
Commission on or before February 14, 1999.
(4) Includes 1,557,700 shares of Common Stock which Wallace R. Weitz & Company
has the right to acquire within sixty days pursuant to the exercise of
warrants.
(5) Address is 90 West Street, Suite 1508, New York, New York 10006.
(6) Includes 22,000 shares of Common Stock which Mr. Burchett has the right to
acquire within sixty days pursuant to the exercise of warrants.
(7) Includes 6,000 shares of Common Stock held by his children as to which he
disclaims beneficial ownership. Included in the 6,000 shares of Common
Stock are 3,000 shares of Common Stock which Mr. Burchett's children have
the right to acquire within sixty days pursuant to the exercise of
warrants.
(8) Includes 5,800 shares of Common Stock which Ms. Mizerak has the right to
acquire within sixty days pursuant to the exercise of warrants.
(9) Includes 2,800 shares of Common Stock which Mr. Ostendorf has the right to
acquire within sixty days pursuant to the exercise of warrants.
(10) Includes 800 shares of Common Stock which Ms. Tavares has the right to
acquire within sixty days pursuant to the exercise of warrants.
6
<PAGE> 9
(11) Address is 100 Metroplex Drive, Suite 301, Edison, New Jersey 08817.
(12) Address is 208 South LaSalle Street, Suite 1338, Chicago, Illinois 60604.
(13) Includes 2,000 shares of Common Stock which each of Mr. Rees, Mr. Campbell,
Mr. Naqvi, Mr. Clymer and Mr. Freeman has the right to acquire within sixty
days pursuant to the 1997 Executive and Non-Employee Director Stock Option
Plan.
(14) Address is 101 Granite Street, Rockport, Massachusetts 01966.
(15) Address is 100 Albany Street, Suite 200, New Brunswick, New Jersey 08901.
(16) Address is 75 North Fairway Drive, Vernon Hills, Illinois 60061.
(17) Address is 900 Second Avenue S., Suite 300, Minneapolis, Minnesota 55402
(18) Address is 60 Wells Avenue, Newton, Massachusetts 02459.
(19) Includes 400 shares of Common Stock which Mr. Laughlin has the right to
acquire within sixty days pursuant to the exercise of warrants.
EXECUTIVE COMPENSATION
John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares
(collectively, the "Principals") became employees of the Company as of January
1, 1998. The Company had no employees prior to 1998 and as such had no executive
compensation prior to 1998. In 1997, the Principals of the Company, which
include the Chief Executive Officer and the three most senior executive
officers, were employees and senior executive officers of Hanover Capital
Partners Ltd. ("HCP"), an unconsolidated subsidiary of the Company, and as such
received all of their compensation from HCP; a portion of which, in 1997, was
billed to the Company pursuant to the Management Agreement. See "Compensation
Committee Interlocks and Insider Participation - Certain
Relationships-Management Agreement".
The following table contains information concerning compensation earned in
the years ended December 31, 1998, 1997 and 1996 by the Company's and HCP's
Chief Executive Officer and its four other most senior executive officers (the
"Named Executive Officers") who received total salary and bonus in excess of
$100,000 during the fiscal years ended December 31, 1998, 1997 and 1996 from the
Company and HCP.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------- -------------------------------
OTHER SECURITIES LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(1) COMPENSATION UNDERLYING OPTIONS PAYOUTS
--------------------------- ---- --------- -------- ------------ ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
John A. Burchett(2).......... 1998 $301,069(3) $ 53,766(4) $15,605(5)
Chairman of the Board, 1997 287,500 545,715 22,633 $113,737 $4,537,510
Chief Executive Officer 1996 250,000 110,000 25,195
and President
Joyce S. Mizerak(2).......... 1998 225,802(6) 8,833(7)
Managing Director and a 1997 213,750 372,245 7,959 43,029 1,237,500
Director 1996 180,000 150,000 7,515
George J. Ostendorf(2)....... 1998 225,802(6) 13,601(8)
Managing Director and a 1997 225,000 141,271 16,728 43,029 1,237,500
Director 1996 225,000 35,000 16,972
Irma N. Tavares(2)........... 1998 225,802(6) 9,043(9)
Managing Director and a 1997 213,750 372,245 9,122 43,029 1,237,500
Director 1996 180,000 150,000 9,054
James C. Strickler........... 1998 132,600 15,000(10)
Senior Vice President 1997 130,000 50,000 12,500
1996 129,583 5,000
</TABLE>
7
<PAGE> 10
- ---------------
(1) Salary and bonus amounts are presented in the period earned; however, the
payment of such amounts may have occurred in other periods.
(2) Each of these persons entered into a five year Employment Agreement with
the Company on September 19, 1997. During 1997, this compensation was paid
by HCP. Beginning January 1, 1998, the compensation was paid by the
Company.
(3) Pursuant to his Employment Agreement, Mr. Burchett received an initial
base annual salary of $300,000. The base annual salary was increased to
$304,278 as a result of an annual cost of living adjustment in October
1998.
(4) Additional compensation paid to Mr. Burchett pursuant to a June 1997
Agreement.
(5) Includes $8,400 for an automobile allowance and $7,205 for life insurance
premiums.
(6) Pursuant to his/her Employment Agreement, Ms. Mizerak, Mr. Ostendorf and
Ms. Tavares each received an annual base salary of $225,000. The base
annual salary was increased to $228,208 as a result of an annual cost of
living adjustment in October 1998.
(7) Includes $7,200 for an automobile allowance and $1,633 for life insurance
premiums.
(8) Includes $7,200 for an automobile allowance, $4,711 for life insurance
premiums and $1,690 for club membership dues.
(9) Includes $7,200 for an automobile allowance and $1,843 for life insurance
premiums.
(10) A discretionary bonus of $10,000 was paid in 1998.
The Company established a Bonus Incentive Compensation Plan in 1997 for
eligible participants of the Company. The annual bonus pursuant to the Bonus
Incentive Compensation Plan, if any, will be paid one-half in cash and, subject
to certain ownership limitations, one-half in shares of common stock, annually,
following receipt of the Company's audit from its independent public accountants
for the related fiscal year. This Bonus Incentive Compensation Plan will award
bonuses annually to those eligible participants out of a total pool based upon
annual net income before bonus incentive compensation as follows:
<TABLE>
<CAPTION>
ACTUAL ROE(1)
IN EXCESS
OF BASE PLUS FIXED
BROE(2) BY: BONUS % MULTIPLIED BY MINIMUM BONUS
- ------------- ------- --------------- -------------------
<S> <C> <C> <C>
Zero or less............................... 0% Bonus Base(4) 0%
Zero to 6%................................. 12.00% Bonus Base(4) 0%
Greater than 6%............................ 15.00% Incremental Average Net Worth
Bonus Base(5) multiplied by .72%
</TABLE>
- ---------------
(1) "Actual ROE" means the Company's return on equity and is determined on an
annual basis by dividing (a) the Company's annual Net Income before bonus
incentive compensation, by (b) the Average Net Worth for the same fiscal
year. For such calculations "Net Income" of the Company means the net income
or net loss of the Company determined according to GAAP.
(2) "Base BROE" is the average weekly Ten-Year U.S. Treasury Rate, plus 4.0% for
each fiscal year.
(3) "Average Net Worth" is the annual average of the end of the month Net Worth
of the Company (as determined in accordance with GAAP); without regard to
earnings or losses generated in the current fiscal year.
(4) "Bonus Base" is equal to (a) the annual Net Income before bonus incentive
compensation minus (b) (i) the Average Net Worth multiplied by (ii) the Base
BROE.
8
<PAGE> 11
(5) "Incremental Bonus Base" is equal to (a) the annual Net Income before bonus
incentive compensation minus (b) (i) the Average Net Worth multiplied by
(ii) the Base BROE, minus (c) (i) the Average Net Worth multiplied by (ii)
6%.
Of the amount so determined, one-half will be deemed contributed to the
total pool in cash and the other half will be deemed contributed to the total
pool in the form of shares of common stock with the number of shares of common
stock to be calculated based on the average price per share of the common stock
during the twenty day period that ends on the date of such determination.
No incentive compensation bonuses were earned for the year ended December
31, 1998.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1998
No option awards were made to Mr. Burchett and the other four most highly
compensated executive officers in 1998.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1998
AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information concerning the value of
stock options held at December 31, 1998 by the Named Executive Officers of the
Company. None of the Named Executive Officers exercised any stock options during
the year ended December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John A. Burchett......... 0 $0 0 89,467 $0 $0
24,270 0 0
Joyce S. Mizerak......... 0 0 0 24,399 0 0
18,630 0 0
George J. Ostendorf...... 0 0 0 24,399 0 0
18,630 0 0
Irma N. Tavares.......... 0 0 0 24,399 0 0
18,630 0 0
James C. Strickler....... 0 0 0 12,500 0 0
</TABLE>
1997 STOCK OPTION PLAN
The Company has adopted the 1997 Executive and Non-Employee Director Stock
Option Plan (the "Stock Option Plan"), which provides for the grant of qualified
incentive stock options ("ISOs") which meet the requirements of Section 422 of
the Internal Revenue Code, stock options not so qualified ("NQSOs"), deferred
stock, restricted stock, performance shares, stock appreciation and limited
stock awards ("Awards") and dividend equivalent rights ("DERs"). The Stock
Option Plan is intended to provide a means of performance-based compensation in
order to attract and retain qualified personnel and to afford additional
incentive to others to increase their efforts in providing significant services
to the Company. The Stock Option Plan is administered by the Compensation
Committee. The outside Directors of the Company are eligible to receive only
NQSOs.
9
<PAGE> 12
Options granted under the Stock Option Plan become exercisable in
accordance with the terms of the grant made by the Compensation Committee.
Awards are subject to the terms and restrictions of the Awards made by the
Compensation Committee. Option and Award recipients must enter into a written
stock option agreement with the Company. The Compensation Committee has
discretionary authority to select participants from among eligible persons and
to determine at the time an option or Award is granted when and in what
increments shares covered by the option or Award may be purchased or will vest
and, in the case of options, whether it is intended to be an ISO or a NQSO
provided, however, that certain restrictions applicable to ISOs are mandatory,
including a requirement that ISOs not be issued for less than 100% of the then
fair market value of the common stock (110% in the case of a grantee who holds
more than 10% of the outstanding common stock) and a maximum term of ten years
(five years in the case of a grantee who holds more than 10% of the outstanding
common stock). Fair market value means as of any given date, with respect to any
option or Award granted, at the discretion of the Board of Directors or the
Compensation Committee, (i) the closing sale price of the common stock on such
date as reported in the Wall Street Journal or (ii) the average of the closing
price of the common stock on each day of which it was traded over a period of up
to twenty trading days immediately prior to such date, or (iii) if the common
stock is not publicly traded, the fair market value of the common stock as
otherwise determined by the Board of Directors or the Compensation Committee in
the good faith exercise of its discretion.
Officers, directors and employees of the Company or subsidiaries of the
Company and other persons expected to provide significant services to the
Company are eligible to participate in the Stock Option Plan. ISOs may be
granted to the officers and key employees of the Company and subsidiaries of the
Company. NQSOs and Awards may be granted to the directors, officers, key
employees, agents and consultants of the Company or any of its subsidiaries.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Stock Option Plan authorizes the grant of options to
purchase, and Awards of, an aggregate of up to 325,333 shares of the Company's
common stock. If an option granted under the Stock Option Plan expires or
terminates, or an Award is forfeited, the shares subject to any unexercised
portion of such option or Award will again become available for the issuance of
further options or Awards under the Stock Option Plan.
Unless previously terminated by the Board of Directors, the Stock Option
Plan will terminate ten years from the date of approval and no options or Awards
may be granted under the Stock Option Plan thereafter, but existing options or
Awards remain in effect until the options are exercised or the options or the
Awards are terminated by their terms. Each option must terminate no more than
ten years from the date it is granted (or five years in the case of ISOs granted
to an employee who is deemed to own in excess of 10% of the combined voting
power of the Company's outstanding equity stock). Options may be granted on
terms providing for exercise either in whole or in part at any time or times
during their respective terms, or only in specified percentages at stated time
periods or intervals during the term of the option.
The aggregate fair market value (determined as of the time of grant) of the
shares with respect to which ISOs are exercisable for the first time by an
employee during any calendar year may not exceed $100,000.
The exercise price of any option granted under the Stock Option Plan is
payable in full in cash, or its equivalent as determined by the Compensation
Committee. The Company may make loans available to option holders to permit them
to exercise options. Any such loan must be evidenced by a promissory note
executed by the option holder and secured by a pledge of common stock of the
Company with fair value at least equal to the principal of the promissory note
unless otherwise determined by the Compensation Committee.
The Board of Directors may, without affecting any outstanding options or
Awards, from time to time revise or amend the Stock Option Plan, and may suspend
or discontinue it at any time. However, no such revision or amendment may,
without stockholder approval, increase the number of shares subject to the Stock
10
<PAGE> 13
Option Plan, modify the class of participants eligible to receive options or
Awards granted under the Stock Option Plan or extend the maximum option term
under the Stock Option Plan.
All stock options granted by the Compensation Committee pursuant to the
Stock Option Plan are contingent and may vest, subject to other vesting
requirements imposed by the Compensation Committee, in full or in part on any
September 30 beginning with September 30, 1998 and ending with September 30,
2002 (each, an "Earn-Out Measuring Date"). No vesting occurred on the first
Earn-Out Measuring Date (September 30, 1998) as the Company did not meet or
exceed the vesting requirements. Subject to any other applicable vesting
restrictions, any outstanding stock options will vest in full as of any Earn-Out
Measuring Date through which the return on a unit offered in the Company's
initial public offering is at least equal to the initial public offering price
of the unit. In addition, subject to any other applicable vesting restrictions,
one-third of any outstanding stock options will vest as of any Earn-Out
Measuring Date through which the return on a unit is at least equal to a 20%
annualized return on the initial public offering price of the unit. The return
on a unit is determined by adding (i) the appreciation in the value of the unit
since the closing of the initial public offering and (ii) the amount of
distributions made by the Company on the share of common stock included in the
unit since the closing of the initial public offering. The appreciation in the
value of a unit as of any Earn-Out Measuring Date is the average difference,
during the 30 day period that ends on the Earn-Out Measuring Date, between the
market price of the shares of common stock included in the unit and the initial
public offering price of the unit multiplied by two to take into account the
value of the warrant included in the unit. In determining whether such stock
options have vested, appropriate adjustments will be made for stock splits,
recapitalizations, stock dividends and transactions having similar effects.
Pursuant to the Management Agreement, the Company intends to cancel options
to purchase 69,750 shares of common stock of the Company that were issued to
employees of HCP in 1997 and reissue such options, pursuant to the same terms
and conditions, directly to HCP. HCP will then grant its employees the right to
exercise these options. See "Compensation Committee Interlocks and Insider
Participation - Certain Relationships and Related Transactions - Management
Agreement."
A summary of the status of the Company's 1997 Stock Option Plan as of
December 31, 1998 and changes during the period from September 19, 1997 to
December 31, 1997 and for the year ended December 31, 1998, is presented below:
<TABLE>
<CAPTION>
# OF WEIGHTED
OPTIONS FOR AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
----------- -------------- --------------
<S> <C> <C> <C>
STOCK OPTION ACTIVITY - 1997
Granted - September 19, 1997.............................. 162,664 $15.00
Granted - September 28, 1997.............................. 160,660 15.75
Cancelled................................................. ( 3,000) 15.75
-------
Outstanding at December 31, 1997.......................... 320,324 $15.37
======= ======
STOCK OPTION ACTIVITY - 1998
Granted - January 14, 1998................................ 2,000 $15.94
Granted - March 9, 1998................................... 2,000 18.13
Cancelled................................................. (1,750) 15.75
-------
Outstanding at December 31, 1998.......................... 322,574 $15.39
======= ======
</TABLE>
No shares were exercisable at December 31, 1998 and 1997.
11
<PAGE> 14
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Company has developed and implemented executive compensation policies
and plans, including incentive and stock option plans, which seek to enhance the
profitability and value of the Company. These policies are administered by the
Company's Compensation Committee. The principal objective is to align closely
the financial interests of the Company's executives with those of its
stockholders. Therefore, the Company's compensation policies are structured to
link the compensation of the Company's Chief Executive Officer and other
executive officers with the financial performance of the Company.
The Company's executive compensation policy is to set base salary at the
minimum level considered sufficient to attract and retain qualified executive
officers. The Company provides performance-based variable compensation, thus
allowing the total compensation of executive officers to fluctuate depending
upon the Company's performance.
The Company has adopted the Stock Option Plan to provide employees with
options to acquire common stock of the Company. Under the Stock Option Plan,
incentive stock options and non-qualified stock options may be granted to key
employees, directors and consultants of the Company and its subsidiaries. To
date, all options granted under the Stock Option Plan have been granted at an
exercise price equal to the fair market value of the Company's common stock on
the date of grant. The Company awarded stock options under the Stock Option Plan
to executive officers during 1997. These stock options are intended to provide
an incentive to the Company's executive officers and other key employees to
increase the market value of the Common Stock of the Company, thus linking the
performance of the Company to executive compensation.
The Company has also adopted a Bonus Incentive Compensation Plan, which
provides annual bonuses for eligible participants of the Company. The bonuses
awarded under this plan are based upon the annual net income of the Company and
therefore also provides an incentive to the Company's executive officers and
other key employees to increase the market value of the Company. In view of the
Company's 1998 operating results, no bonuses for 1998 were awarded pursuant to
the Bonus Incentive Compensation Plan. A discretionary bonus pool of $125,000
was, however, approved by the Board of Directors to reward certain HCP employees
for their efforts during 1998. No Principals received any of the discretionary
bonus pool payments.
The compensation packages for Mr. Burchett (the Chief Executive Officer of
the Company), Ms. Mizerak, Mr. Ostendorf and Ms. Tavares were established in a
negotiated process at the time of the Company's initial public offering. The
purpose of these compensation packages was to retain the experience and talents
of these individuals. As with other executive compensation of the Company, these
arrangements consist of base salaries, stock options and annual bonuses based
upon the annual net income of the Company, all of which is intended to encourage
corporate performance. In addition, the base annual salaries of Mr. Burchett,
Ms. Mizerak, Mr. Ostendorf and Ms. Tavares are subject to increase at the
discretion of the non-employee members of the Company's Board of Directors or
the Compensation Committee. No such discretionary increases were awarded in
1998. A cost of living salary adjustment was put into effect in October 1998,
pursuant to the terms of the Principal's employment agreements.
COMPENSATION COMMITTEE
John A. Clymer
John Nicholas Rees
Joseph Freeman
12
<PAGE> 15
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
GENERAL
No interlocking relationship exists between the Company's Board of
Directors or officers responsible for compensation decisions and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement
Effective as of January 1, 1998, the Company entered into a Management
Agreement (the "Management Agreement") with HCP. Under this agreement, HCP,
subject to the direction and control of the Company's Board of Directors,
provides certain services for the Company, including, among other things: (i)
serving as the Company's consultant with respect to formulation of investment
criteria and preparation of policy guidelines by the Board of Directors; (ii)
assisting the Company in developing criteria for the purchase of mortgage assets
that are specifically tailored to the Company's investment objectives; (iii)
representing the Company in connection with the purchase and commitment to
purchase or sell mortgage assets; (iv) arranging for the issuance of mortgage
securities from a pool of mortgage loans; (v) furnishing reports and statistical
and economic research to the Company regarding the Company's activities and the
services performed for the Company by HCP; (vi) monitoring and providing to the
Board of Directors on an ongoing basis price information and other data; (vii)
investing or reinvesting any money of the Company in accordance with its
policies and procedures and the terms and conditions of the Management
Agreement; (viii) providing the executive and administrative personnel office
space and services required in rendering such services to the Company; and (ix)
administering the day-to-day operations of the Company. For these services, the
Company pays HCP for each month an amount equal to the sum of (a) the wages and
salaries of the personnel employed by HCP and/or its affiliates (other than
independent contractors and other third parties rendering due diligence services
in connection with the acquisition of any mortgage assets) apportioned to the
Company for such month, plus (b) twenty-five percent (25%) of (a). The Company
also is required to pay HCP for each month an amount equal to the sum of (c) the
expenses of HCP for any due diligence services provided by independent
contractors and other third parties in connection with the acquisition of any
mortgage assets during such month plus (d) three percent (3%) of (c). Any amount
that may become payable by HCP to the Company for any services provided by the
Company to HCP, including the services of the Principals, is offset against
amounts payable to HCP. During 1998 the Company recorded management and
administrative expenses of $733,000 and due diligence expenses of $687,000
relating to billings from HCP, pursuant to the Management Agreement.
Subject to other contractual limitations, the Management Agreement does not
prevent HCP from acting as an investment advisor or manager for any other
person, firm or corporation. The term of the Management Agreement continues
until December 31, 1999 and thereafter is automatically renewed for successive
one-year periods unless the Unaffiliated Directors (as defined therein) resolve
to terminate the Management Agreement.
The Formation Transactions
In connection with the Company's initial public offering, the Company
acquired a 97% ownership interest (representing 100% of the non-voting preferred
stock) in HCP and its wholly-owned subsidiaries, Hanover Capital Mortgage
Corporation ("HCMC") and Hanover Capital Securities, Inc. ("HCS"), in exchange
for an aggregate of 716,667 shares of the Company's common stock issued to the
Principals. The Principals may also be issued up
13
<PAGE> 16
to 216,667 additional shares of common stock as additional payment for their
contribution of the preferred stock of HCP to the Company (the "Earn-Out"). The
Earn-Out may vest in full or in part on any September 30 beginning with
September 30, 1998 and ending with September 30, 2002 (each, an "Earn-Out
Measuring Date"). No vesting occurred on the First Earn-Out Measuring Date
(September 30, 1998) as the Company did not meet or exceed the vesting
requirements. The Earn-Out will vest in full as of any Earn-Out Measuring Date
through which the return on a unit offered in the Company's initial public
offering is at least equal to the initial public offering price of the unit.
One-third of the Earn-Out will vest as of any Earn-Out Measuring Date through
which the return on a unit is at least equal to a 20% annualized return on the
initial public offering price of the unit. The return on a unit is determined by
adding (i) the appreciation in the value of the unit since the closing of the
initial public offering and (ii) the amount of distributions made by the Company
on the share of common stock included in the unit since the closing of the
initial public offering. The appreciation in the value of a unit as of any
Earn-Out Measuring Date is the average difference, during the 30 day period that
ends on the Earn-Out Measuring Date, between the market price of the shares of
common stock included in the unit and the initial public offering price of the
unit multiplied by two to take into account the value of the warrant included in
the unit. In determining whether the Earn-Out has vested, appropriate
adjustments will be made for stock splits, recapitalizations, stock dividends
and transactions having similar effects.
In addition, up to $1,750,000 in loans made by the Company to the
Principals to enable the Principals to pay taxes will be forgiven to the extent
that the Earn-Out vests. These loans are secured by 116,667 shares of the
Principal's common stock of the Company but are otherwise nonrecourse to the
Principals.
The shares of common stock acquired by the Principals (including any
additional shares to be issued upon the vesting of the Earn-Out) and the
forgiveness of any loans to the Principals upon the vesting of the Earn-Out
represent the consideration given to the Principals in exchange for their
contribution of the preferred stock of HCP to the Company.
Although the Company owns all of the preferred stock of HCP, the Company
generally has no right to control the affairs of HCP, HCMC and HCS (other than
to approve certain fundamental transactions such as mergers, consolidations,
sales of substantially all assets, and voluntary liquidations) because the
preferred stock of HCP is nonvoting. Instead, as the holders of all of the
common stock of HCP, the Principals control the operations and affairs of HCP,
HCMC and HCS. This ownership is required because, as a real estate investment
trust, the Company generally may not own more than ten percent (10%) of the
voting securities of any other issuer.
Employment Agreements
On September 19, 1997, the Company entered into employment agreements with
the CEO, John A. Burchett, and the Company's three most senior executive
officers (Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares). Each
employment agreement provides for an initial term of five years and will be
automatically extended for an additional year at the end of each year of the
employment agreement, unless either party provides prior written notice to the
contrary or the employee has been terminated pursuant to the terms thereof. The
employment agreements provide for an initial annual base salary of $300,000,
$225,000, $225,000, and $225,000 for Mr. Burchett, Ms. Mizerak, Mr. Ostendorf
and Ms. Tavares (each, a "Principal"), respectively, and annual cost of living
increases. Each employment agreement also provides for participation by the
executive officer in the Company's Bonus Incentive Compensation Plan and the
Company's Stock Option Plan. Each employment agreement also contains a not to
compete provision which prohibits the executive officer from competing with the
Company for a certain period of time following the Company's termination of the
executive officer pursuant to each employment agreement for "good cause" upon
(i) the conviction of the executive officer of (or the plea by the executive
officer of nolo contendere to) a felony; (ii) the good faith determination by
the Board of Directors that the executive officer has willfully and deliberately
failed to perform a material amount of his or her executive officer's duties
pursuant to the
14
<PAGE> 17
employment agreement (other than a failure to perform duties from the executive
officer's incapacity due to physical or mental illness), which failure to
perform such duties shall not have been cured within thirty (30) days after the
receipt by the executive officer of written notice thereof from the Board of
Directors specifying with reasonable particularity such alleged failure; (iii)
any absence from the Company's regular full-time employment in excess of three
consecutive days that is not due to a vacation, participation in a permitted
activity, bona fide illness, disability, death or other reason expressly
authorized by the Board of Directors in advance; or (iv) any act or acts of
personal dishonesty (including, without limitation, insider trading or
unauthorized trading in the Company's securities) by the executive officer which
may have a material adverse effect on the Company or any of its subsidiaries.
In addition, in the event the executive officer is terminated by the
Company without good cause or the executive officer resigns from the Company
within ninety days after being removed from, or not re-elected to the Board of
Directors, despite the executive officer's efforts to remain on the Board of
Directors, the executive officer will be entitled to receive his or her base
salary then in effect until the later of one year from the date of termination
or to the end of the term of the employment agreement. In the event that the
executive officer is terminated without good cause within ninety days after a
change of control (as defined in the employment agreement), then the executive
officer will be entitled to receive his or her base salary then in effect until
the later of two years from the date of termination or to the end of the term of
the employment agreement. The employment agreement also provides each executive
officer specified amounts of term life and disability insurance coverage, a
monthly automobile allowance and payment of club dues.
The HCP Shareholders' Agreement
HCP and the Principals entered into a shareholders' agreement (the "HCP
Shareholders' Agreement") that governs, among other things, (i) the rights of
the Principals to transfer their shares of common stock of HCP, and (ii) the
purchase of shares of common stock of HCP from the Principals by HCP, the
Company and the other Principals. Under the HCP Shareholders' Agreement, a
Principal may not transfer his or her shares of common stock of HCP, other than
to a family member, an affiliate or another HCP stockholder, without first
offering such common stock of HCP to HCP, the other holders of common stock of
HCP, and the holders of preferred stock of HCP (in that order) on the same terms
and conditions. In addition, HCP, the other holders of common stock of HCP, and
holders of preferred stock of HCP, will have the right to purchase the shares of
common stock of HCP of a Principal (or of a permitted transferee of a Principal)
if such Principal (a) ceases to be employed by the Company (including by death,
disability or voluntary or involuntary termination), (b) ceases to own any
equity interest in the Company, (c) becomes bankrupt, or (d) transfers any
shares of common stock of HCP in connection with a divorce or by operation of
law. The amount payable to a Principal who suffers any of the foregoing events
is based upon the valuation of HCP. To avoid the loss of the Company's status as
a real estate investment trust, the Company is permitted to assign its rights to
purchase common stock of HCP, and to exchange any common stock of HCP it
purchases for shares of nonvoting common stock of HCP.
Loans to the Principals
In connection with the Company's initial public offering, the Company
agreed to make up to $1,750,000 in loans available to the Principals to enable
them to pay their personal income taxes on the gains they recognized upon
contributing HCP preferred stock to the Company for shares of the Company's
common stock. Each loan has a term of five years and bears interest at the
lowest "applicable Federal rate" in effect for the month in which the loan was
made. No payment of principal on the loans is due before maturity unless the
borrowing Principal is terminated for "good cause" under his or her employment
agreement with the Company, in which case the loan will become immediately due
and payable. Interest, however, is payable on a quarterly basis in arrears. The
loans to the Principals are secured by 116,667 of their shares of the Company's
15
<PAGE> 18
common stock but are otherwise nonrecourse to them. A Principal will not be able
to sell the shares of common stock that are pledged to secure his or her loan.
Accordingly, if a Principal defaults in repaying his or her loan, the Company
will be able to look only to the shares of common stock the Principal pledged to
secure his or her loan and not to any personal assets of the Principal. Thus, a
decline in the value of the common stock could result in a Principal's failure
to repay his or her loan. As additional consideration to the Principals for
their contribution of the preferred stock of HCP to the Company, the outstanding
balance of the loans will be forgiven to the extent that the Earn-Out vests. The
terms of the loans were not determined through arm's-length negotiations and may
be more favorable to the Principals than would otherwise be available to them.
In March 1998, the Company agreed to lend up to an additional $1,500,000 in
unsecured loans to the Principals, in lieu of incurring the costs and expenses
the Company was required to pay associated with the registration of 100,000
shares of the Company's common stock owned by the Principals. Pursuant to such
agreement, the Company loaned the Principals an additional $1,203,880 in April
1998. The additional loans originally were due and payable on March 31, 1999 but
in March 1999 their term was extended to March 31, 2001. The loans bear interest
at the lowest applicable Federal rate in March 1998, which was 5.51%.
In November 1998, the Company agreed to lend an additional $226,693 in
unsecured loans to the Principals. The additional loans to Principals were used
to fund equity contributions by the Principals to HCP and Hanover Capital
Partners 2, Inc., affiliates of the Company. These loans are due and payable in
November 2002 and bear interest at 4.47% (the lowest applicable Federal rate in
November 1998). A portion of these loans ($44,223) was repaid in February 1999.
The summary of Principal loans - at December 31, 1998 is shown below:
<TABLE>
<CAPTION>
AMOUNT OF LOAN INTEREST SECURED BY MATURITY
PRINCIPALS OUTSTANDING RATE OR UNSECURED DATE
- ---------- -------------- -------- ------------ --------------
<S> <C> <C> <C> <C>
John A. Burchett.................... $ 270,000 6.02% Secured(a) September 2002
John A. Burchett.................... 692,500 5.70% Secured(a) September 2002
John A. Burchett.................... 696,280 5.51% Unsecured March 1999(b)
John A. Burchett.................... 45,928 4.47% Unsecured November 2002
John A. Burchett.................... 78,753 4.47% Unsecured November 2002
Joyce S. Mizerak.................... 108,000 6.02% Secured(a) September 2002
Joyce S. Mizerak.................... 154,500 5.70% Secured(a) September 2002
Joyce S. Mizerak.................... 170,500 5.51% Unsecured March 1999(b)
Joyce S. Mizerak.................... 12,526 4.47% Unsecured November 2002
Joyce S. Mizerak.................... 21,478 4.47% Unsecured November 2002
George J. Ostendorf................. 262,500 5.70% Secured(a) September 2002
George J. Ostendorf................. 130,000 5.51% Unsecured March 1999
George J. Ostendorf................. 12,526 4.47% Unsecured November 2002
George J. Ostendorf................. 21,478 4.47% Unsecured November 2002
Irma N. Tavares..................... 104,600 6.02% Secured(a) September 2002
Irma N. Tavares..................... 157,900 5.70% Secured(a) September 2002
Irma N. Tavares..................... 207,100 5.51% Unsecured March 1999(b)
Irma N. Tavares..................... 12,526 4.47% Unsecured November 2002
Irma N. Tavares..................... 21,478 4.47% Unsecured November 2002
----------
$3,180,573
==========
</TABLE>
- ---------------
(a) The loans to the Principals are secured (in total) by 116,667 of their
shares of the Company's common stock but are otherwise nonrecourse to the
Principals.
(b) The loans were amended to extend the maturity date to March 2001.
16
<PAGE> 19
PERFORMANCE GRAPH
The following graph presents a total return comparison of the Company's
common stock since the Company's initial public offering on September 16, 1997
(the date the units consisting of common stock and warrants commenced trading)
through December 31, 1998, to the S&P Composite-500 Stock Index and an index
average of the Company's peer group, composed of comparable publicly-traded
companies, in each case for the period commencing on September 16, 1997 through
December 31, 1998. Prior to March 20, 1998 only the units were traded on the
American Stock Exchange, subsequent to March 19, 1998 the common stock and
warrants also commenced trading separately. For purposes of the graph below a
value for the common stock was estimated at September 16, 1997 and December 31,
1997 using the Black-Sholes option-pricing model and other calculation methods.
The peer group includes Imperial Credit Mortgage Holdings, Inc., Capstead
Mortgage Corporation, DYNEX Capital, INMC Mortgage Holdings, Thornburg Mortgage
Asset Corporation and Redwood Trust, Inc. The total returns reflect stock price
appreciation and the value of dividends for the Company's common stock for each
of the comparative indices. The graph assumes $100 invested on September 16,
1997, in the Company's common stock, the S&P 500 Stock Index and the stock index
of the peer group. The data source for the peer group is Compustat, Bloomberg.
The total return performance shown on the graph is not necessarily indicative of
future total return performance of the Company's common stock.
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
HANOVER CAPITAL MORTGAGE
HOLDINGS INC. S&P 500 STOCK INDEX PEER GROUP INDEX
------------------------ ------------------- ----------------
<S> <C> <C> <C>
16-Sep-97 100.00 100.00 100.00
31-Dec-97 100.41 103.10 88.28
31-Dec-98 34.97 132.56 35.45
</TABLE>
17
<PAGE> 20
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of the Company has selected and appointed Deloitte &
Touche LLP to act as the Company's independent accountants for the year ended
December 31, 1999. In recognition of the important role of the independent
accountants, the Board of Directors has determined that its selection of such
accountants should be submitted to the stockholders for review and ratification
on an annual basis.
The affirmative vote of a majority of the shares voting on this proposal is
required for its adoption. In view of the difficulty and the expense involved in
changing independent accountants on short notice, if the proposal is not
approved, it is contemplated that the appointment for 1999 may be permitted to
stand, unless the Board of Directors finds other compelling reasons for making a
change. Disapproval of this proposal will be considered as advice to the Board
of Directors to select other independent accountants for the following year.
Representatives of Deloitte & Touche LLP are expected to be present at the
Annual Meeting and will have the opportunity to make a statement if they desire
to do so. They will also be available to respond to appropriate questions.
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons owning more than 10% of a
registered class of the Company's securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than 10% holders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company during the fiscal year which ended December 31,
1998, all Section 16(a) filing requirements applicable to its officers,
Directors and greater than 10% beneficial owners were satisfied by such persons
with the exception of the following:
Robert E. Campbell, a Director, filed a late Form 4 for his May 18, 1998
purchase of 1,000 shares of the Company's common stock.
STOCKHOLDERS' PROPOSALS
Stockholders' proposals intended to be presented at the Company's next
Annual Meeting of Stockholders to be held in 2000 must be received at the
Company's principal executive offices no later than December 23, 1999 in order
to be considered for inclusion in the proxy statement and form of proxy related
to that meeting. Any such proposal not intended for inclusion in such proxy
statement and form of proxy but intended to be presented at the 2000 Annual
Meeting must be submitted to the Secretary in writing at the Company's principal
executive offices not less than 60 days nor more than 90 days prior to May 21,
2000 pursuant to the Company's By-Laws.
OTHER MATTERS
Discretionary Authority to Vote Proxy
The Board of Directors knows of no other matter to be acted upon at the
meeting. However, if any other matter shall properly come before the meeting,
the proxyholders named in the proxy accompanying this Proxy Statement will have
discretionary authority to vote all proxies in accordance with their best
judgment.
18
<PAGE> 21
Annual Report; Annual Report on Form 10-K
The Annual Report of the Company for the year 1998 accompanies this Proxy
Statement. The Company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, which includes audited financial statements,
is included in the Company's Annual Report.
Stockholders who would like an additional copy of the Company's Annual
Report on Form 10-K may obtain it, free of charge, upon request to the Secretary
of the Company.
By order of the Board of Directors
Joyce S. Mizerak,
Managing Director, Director and
Secretary
April 23, 1999
19
<PAGE> 22
HCMCM-PS-99
<PAGE> 23
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
90 WEST STREET, SUITE 1508
NEW YORK, NEW YORK 10006
ANNUAL MEETING OF STOCKHOLDERS - MAY 21, 1999
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby appoints John A. Burchett
and Joyce S. Mizerak as Proxies, with full power of substitution to each, to
vote for and on behalf of the undersigned at the 1999 Annual Meeting of
Stockholders of HANOVER CAPITAL MORTGAGE HOLDINGS, INC. to be held at the New
York Marriott World Trade Center Hotel, 3 World Trade Center, New York, New York
on Friday, May 21, 1999 at 11:00 a.m., and at any adjournment or adjournments
thereof. The undersigned hereby directs the said proxies to vote in accordance
with their judgment on any matters which may properly come before the Annual
Meeting, all as indicated in the Notice of Annual Meeting, receipt of which is
hereby acknowledged, and to act on the following matters set forth in such
notice as specified by the undersigned.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED
"FOR" PROPOSALS 1 AND 2.
- --------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please sign exactly as your name(s) appear(s) on the books of the Company. Joint
owners should each sign personally. Trustees and other fiduciaries should
indicate the capacity in which they sign, and where more than one name appears,
a majority must sign. If a corporation, this signature should be that of an
authorized officer who should state his or her title.
- --------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ------------------------------------- ----------------------------------------
- ------------------------------------- ----------------------------------------
- ------------------------------------- ----------------------------------------
<PAGE> 24
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
- ---------------------------------------
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
- ---------------------------------------
CONTROL NUMBER:
RECORD DATE SHARES:
1. Election of Directors For All With- For All
Nominees hold Except
ROBERT E. CAMPBELL [ ] [ ] [ ]
JOYCE S. MIZERAK
IRMA N. TAVARES
NOTE: If you do not wish your shares voted "For" a particular nominee, mark the
"For All Except" box and strike a line through the name(s) of the nominee(s).
Your shares will be voted for the remaining nominee(s).
For Against Abstain
2. Ratification of the appointment of [ ] [ ] [ ]
Deloitte & Touche LLP as independent
auditors of the Company.
3. In their discretion, the proxies are authorized to vote upon any other
business that may properly come before the meeting or at any adjournment(s)
thereof.
Mark box at right if an address change or comment has been [ ]
noted on the reverse side of this card.
-------------------------
Please be sure to sign and date this Proxy. Date
- --------------------------------------------------------------------------------
- -------Stockholder sign here-------------------------Co-owner sign here---------
DETACH CARD DETACH CARD
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
Dear Stockholder,
Please take note of the important information enclosed with this Proxy. There
are a number of issues related to the management and operation of your Company
that require your immediate attention and approval. These are discussed in
detail in the enclosed proxy materials.
Your vote counts, and you are strongly encouraged to exercise your right to vote
your shares.
Please mark the boxes on the proxy card to indicate how your shares will be
voted, then sign the card, detach it and return your proxy vote in the enclosed
postage paid envelope.
Your vote must be received prior to the Annual Meeting of Stockholders on May
21, 1999.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Hanover Capital Mortgage Holdings, Inc.
