<PAGE> 1
SCHEDULE 14(a) 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
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
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 2210
NEW YORK, NEW YORK 10006
NOTICE OF 2000 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD THURSDAY, MAY 18, 2000
TO OUR STOCKHOLDERS:
The 2000 Annual Meeting of the Stockholders of Hanover Capital Mortgage
Holdings, Inc. will be held on Thursday, May 18, 2000, at 11:00 a.m. at the
American Stock Exchange, 86 Trinity Place, New York, New York, for the following
purposes:
1. To elect three Directors, to serve for a term of three years.
2. To elect a Director to serve the remaining term of Robert E.
Campbell's term, who retired.
3. To consider and act upon a proposal to ratify, confirm and approve
the selection of Deloitte & Touche LLP as the Company's independent
certified public accountants for the fiscal year ending December 31, 2000.
4. 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, 2000 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,
Senior Managing Director, a Director
and Secretary
New York, New York
April 28, 2000
<PAGE> 3
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
PROXY STATEMENT
We are providing this Proxy Statement in connection with the solicitation
of proxies by the Board of Directors of Hanover Capital Mortgage Holdings, Inc.
(the "Company") for use at the 2000 Annual Meeting of Stockholders to be held on
Thursday, May 18, 2000, at the time and place set forth in the notice of the
meeting, and at any adjournments of the meeting. We are first sending this Proxy
Statement and form of proxy to stockholders on April 28, 2000.
If you properly execute and return this proxy, it will be voted in the
manner you direct. If you do not specify instructions with respect to any
particular matter to be acted upon, then the proxy will be voted in favor of the
matters in the proxy. 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 our Secretary 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.
We will bear the cost of the solicitation of proxies. It is expected that
the solicitation will be made primarily by mail, but the Company's regular
employees or representatives (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
Company's expense.
We are also providing our Annual Report on Form 10-K for the year ended
December 31, 1999 to each stockholder.
The Company's principal executive offices are located at 90 West Street,
Suite 2210, 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, 2000 are
entitled to notice of and to vote at the meeting. On that date, the Company had
outstanding and entitled to vote 5,748,924 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 director
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. Further, it is proposed
that any director nominee appointed to the Board of Directors to fill a vacancy
be elected to hold office for the balance of the term then remaining.
<PAGE> 4
The persons named in the accompanying proxy will vote, unless authority is
withheld, for the election of the director nominees named below, all of whom are
now members of the Board of Directors. All of the director nominees advised the
Company that they are available and willing to serve if elected. If any of the
director nominees become unavailable for election, which the Company does not
anticipate, then the persons named in the accompanying proxy will vote for
substitutes as the Board of Directors may recommend. None of the director
nominees are 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 BALANCE OF THE
TERM ENDING IN 2003:
John A. Burchett.................. 57 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 Hanover Capital Partners Ltd
("HCP"), a subsidiary of the Company 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.................... 51 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 Health Corporation,
Inc., Resource Companies, Inc. and St. Paul Foundation.
Mr. Clymer has also been a Director of WTC Industries,
Inc. since 1994.
Saiyid Naqvi...................... 50 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.
NOMINATED FOR THE BALANCE OF THE
TERM ENDING IN 2002:
James F. Stone.................... 60 James F. Stone has served as a Director of the Company
since March 2000. Mr. Stone is a retired general partner
of First American Capital. Among his professional
affiliations, Mr. Stone is a member of the Board of Magic
Seasoning Blends, Fiber Composites Corporation of North
Carolina, Oracle Lens Manufacturing Company, and the
South County Hospital in Rhode Island.
</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 2001:
George J. Ostendorf........... 55 George J. Ostendorf has been a Director of the Company
since its inception in June 1997. Mr. Ostendorf is also a
Senior Managing Director of the Company, and has been a
Director of HCP, a subsidiary of the Company, 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 the 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............ 66 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.
SERVING A TERM ENDING IN 2002:
Joyce S. Mizerak.............. 44 Joyce S. Mizerak has been a Director and Secretary of the
Company since its inception in June 1997. Ms. Mizerak is
also a Senior Managing Director of the Company, and a
Director and Senior Managing Director of HCP 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.
</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>
Irma N. Tavares............... 45 Irma N. Tavares has been a Director of the Company since
its inception in June 1997. Ms. Tavares is a Senior
Managing Director of the Company, and is also a Senior
Managing Director of HCP and has been a 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>
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>
Thomas P. Kaplan.................. 34 Thomas P. Kaplan has been Chief Financial Officer and
Managing Director of the Company since June 1999. Mr.
Kaplan is also Chief Financial Officer and Managing
Director of HCP. He is responsible for the Company's
strategic planning, corporate development, financing and
financial reporting functions. Prior to joining HCP, Mr.
Kaplan was the executive vice president in charge of the
capital markets division of Franchise Mortgage Acceptance
Company from 1997 to 1999, a senior vice president in the
asset-backed securities group at Greenwich Capital
Markets from 1995 to 1997, and a director in charge of
credit sensitive mortgage and asset-backed trading at
Credit Suisse First Boston, where he was employed from
1990 to 1995.
James C. Strickler, Jr............ 43 James C. Strickler, Jr. has been with the Company since
its inception in June 1997 and is a Managing Director of
the Company. Mr. Strickler is also a Managing Director 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.
John F. Lanahan................... 38 John F. Lanahan has been Assistant Secretary of the
Company since 1999. Mr. Lanahan is also Vice President
and In-House Counsel of HCP and has been employed by HCP
since 1999. Prior to joining HCP, Mr. Lanahan worked with
the law firm of Hack, Piro, O'Day, et al. from 1991 to
1998.
</TABLE>
4
<PAGE> 7
INFORMATION CONCERNING THE BOARD OF DIRECTORS
During fiscal 1999, the Board of Directors held four in-person meetings and
five meetings by telephone conference. The Board of Directors also took actions
by unanimous written consent. All of the Directors attended at least 75% of the
aggregate of
- the total number of Board of Directors' meetings during which they served
as Director; and
- the total number of meetings held by committees of the Board of Directors
on which they served.
The Company does not pay directors who are also officers of the Company
additional compensation for their services as directors. Accordingly, Mr.
Burchett, Mr. Ostendorf, Ms. Mizerak and Ms. Tavares did not receive any
additional compensation as directors of the Company. See "Compensation Committee
Interlocks and Insider Participation -- Certain Relationships and Related
Transactions -- Employment Agreements" and "-- Management Agreement".
In 1999, compensation for non-employee directors included the following:
- an annual director's fee equal to $15,000, payable on a quarterly basis;
- $500 for each meeting attended; and
- travel expenses in connection with attending each in-person meeting.
The Board of Directors does not have a nominating committee. However, there
is an Audit Committee and a Compensation Committee.
The members of the Company's Compensation Committee are:
<TABLE>
<CAPTION>
DIRECTOR NAME FUNCTIONS OF THE COMMITTEE MEETINGS IN 1999
- ------------- ------------------------------------------------------ ----------------
<S> <C> <C>
John A. Clymer - annually review the Company's compensation policy 1
John Nicholas Rees for executive officers;
Joseph Freeman
- make recommendations to the Board of Directors with
respect to the Company's compensation policy for
executive officers;
- make compensation decisions for executive officers;
and
- administer the Company's Bonus Incentive
Compensation Plan, the Company's 1997 Stock Option
Plan and the Company's 1999 Equity Incentive Plan.
</TABLE>
5
<PAGE> 8
AUDIT COMMITTEE REPORT
The members and duties of the Company's Audit Committee are:
<TABLE>
<CAPTION>
DIRECTOR NAME AUDIT COMMITTEE DUTIES AND FUNCTIONS MEETINGS IN 1999
- ------------- ------------------------------------------------------ ----------------
<S> <C> <C>
John A. Clymer - members are independent as defined in Section 121(A)
John Nicholas Rees of the AMEX's listing standard;
Joseph Freeman 1
- recommend to the Board of Directors the selection of
independent public accountants to serve as the
Company's auditors;
- review and discuss the Company's audited financial
statements with the executive officers;
- discuss with the independent auditors the matters
required to be discussed by SFAS 61;
- receive from the independent auditors written
disclosures and the letter required by the
Independence Standards Board Standard No. 1, and
discuss with the independent auditors the
independent accountant's independence; and
- recommend the audited financial statements be
included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999.
</TABLE>
AUDIT COMMITTEE
John A. Clymer
John Nicholas
Joseph Freeman
6
<PAGE> 9
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding the ownership of our
common stock as of April 11, 2000 by:
- each person we know to beneficially own more than 5% of our common stock;
- each director of the Company;
- each executive officer of the Company; and
- all directors and executive officers of the Company as a group.
Unless otherwise indicated in the table's footnotes, the beneficial owners
have, to the knowledge of the Company, sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
- ------------------------ ------------------ -------------------
<S> <C> <C>
Wallace R. Weitz & Company(1)........................... 1,975,100(2)(3) 29.12%
Apex Mortgage Capital, Inc.(4).......................... 552,000(5) 9.60%
John A. Burchett(6)..................................... 872,777(7) 14.10%
Joyce S. Mizerak(8)..................................... 128,290(9) 2.23%
George J. Ostendorf(10)................................. 118,186(11) 2.05%
Irma N. Tavares(12)..................................... 113,500(13) 1.97%
Thomas P. Kaplan(14).................................... 54,500(15) *
John Nicholas Rees(16).................................. 22,000(17) *
Robert E. Campbell(18).................................. 12,830 *
Saiyid Naqvi(19)........................................ 5,000(20) *
John A. Clymer(21)...................................... 2,000(22) *
Joseph Freeman(23)...................................... 7,000(24) *
James F. Stone.......................................... 5,000 *
James Strickler......................................... -- *
John F. Lanahan......................................... -- *
All executive officers and directors as a group (13
persons).............................................. 1,341,083 21.61%
</TABLE>
- ---------------
(1) Address is 1125 South 103rd Street, Suite 600 Omaha, Nebraska 68124.
(2) According to a Schedule 13D filed with the Securities and Exchange
Commission on April 11, 2000.
(3) Includes 1,033,400 shares of common stock which Wallace R. Weitz & Company
has the right to acquire within sixty days pursuant to the exercise of
warrants.
(4) Address is 865 South Figueroa Street, Suite 1800, Los Angeles, CA, 90017.
(5) According to a Schedule 13D filed with the Securities and Exchange
Commission on or before March 22, 2000.
(6) Address is 90 West Street, Suite 2210, New York, New York 10006.
(7) Includes 442,000 shares of common stock, which Mr. Burchett has the right
to acquire within sixty days pursuant to the exercise of warrants.
(8) Address is 100 Metroplex Drive, Suite 301, Edison, New Jersey 08817.
7
<PAGE> 10
(9) Includes 5,800 shares of common stock, which Ms. Mizerak has the right to
acquire within sixty days pursuant to the exercise of warrants.
(10) Address is 208 South LaSalle Street, Suite 1338, Chicago, Illinois 60604.
(11) Includes 2,800 shares of common stock, which Mr. Ostendorf has the right to
acquire within sixty days pursuant to the exercise of warrants.
(12) Address is 90 West Street, Suite 2210, New York, New York 10006.
(13) Includes 800 shares of common stock, which Ms. Tavares has the right to
acquire within sixty days pursuant to the exercise of warrants.
(14) Address is 90 West Street, Suite 2210, New York, New York 10006.
(15) Includes 2,000 shares of common stock which Mr. Kaplan has the right to
acquire within sixty days pursuant to the exercise of warrants.
(16) Address is 101 Granite Street, Rockport, Massachusetts 01966.
(17) Includes 2,000 shares of common stock which Mr. Rees has the right to
acquire within sixty days pursuant to the 1997 Executive and Non-Employee
Director Stock Option Plan.
(18) Address is 100 Albany Street, Suite 200, New Brunswick, New Jersey 08901.
(19) Address is 75 North Fairway Drive, Vernon Hills, Illinois 60061.
(20) Includes 2,000 shares of common stock which Mr. Naqvi has the right to
acquire within sixty days pursuant to the 1997 Executive and Non-Employee
Director Stock Option Plan.
(21) Address is 900 Second Avenue S., Suite 300, Minneapolis, Minnesota 55402
(22) Includes 2,000 shares of common stock which Mr. Clymer has the right to
acquire within sixty days pursuant to the 1997 Executive and Non-Employee
Director Stock Option Plan.
(23) Address is 60 Wells Avenue, Newton, Massachusetts 02459.
(24) Includes 2,000 shares of common stock which Mr. Freeman has the right to
acquire within sixty days pursuant to the 1997 Executive and Non-Employee
Director Stock Option Plan.
EXECUTIVE COMPENSATION
John A. Burchett, Irma N. Tavares, Joyce S. Mizerak and George J. Ostendorf
(collectively, the "Principals") became employees of the Company as of January
1, 1998. Because the Company had no employees prior to 1998, it had no executive
compensation prior to 1998. In 1997, the Principals, who include the Chief
Executive Officer and the three next most senior executive officers, were
employees and senior executive officers of Hanover Capital Partners Ltd., an
unconsolidated subsidiary of the Company, and received all of their compensation
from HCP. A portion of their compensation 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 about compensation earned by the
Company's and HCP's Chief Executive Officer and its most senior executive
officers (the "Named Executive Officers") in the years ended December 31, 1999,
1998 and 1997. Named Executive Officers are officers who have policy making
authority and received more than $100,000 in total salary and bonuses during
1999, 1998 and 1997.
8
<PAGE> 11
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ------------------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(1) COMPENSATION OPTIONS/SARS PAYOUTS
- --------------------------- ---- --------- -------- ------------ ------------ ---------
($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
John A. Burchett(2)........ 1999 306,277(3) 53,766(4) 22,322(5) 50,000
Chairman of the Board, 1998 301,069 53,766 15,605
Chief Executive Officer 1997 287,500 545,715 22,633 113,737 4,537,510
and President
Joyce S. Mizerak(2)........ 1999 229,708(6) 9,041(7) 35,000
Senior Managing Director 1998 225,802 8,833
and a Director 1997 213,750 372,245 7,959 43,029 1,237,500
George J. Ostendorf(2)..... 1999 229,708(6) 13,104(8) 35,000
Senior Managing Director 1998 225,802 13,601
and a Director 1997 225,000 141,271 16,728 43,029 1,237,500
Irma N. Tavares(2)......... 1999 229,708(6) 10,067(9) 35,000
Senior Managing Director 1998 225,802 9,043
and a Director 1997 213,750 372,245 9,122 43,029 1,237,500
Thomas P. Kaplan(2)........ 1999 115,057 35,000
Managing Director and 1998
Chief Financial Officer 1997
</TABLE>
- ---------------
(1) Salary and bonus amounts are presented in the period earned; however, the
payment of such amounts may have occurred in other periods.
(2) 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. The base
annual salary was increased to $312,275 as a result of an annual cost of
living adjustment in October 1999.
(4) Additional compensation paid to Mr. Burchett pursuant to a June 1997
Agreement.
(5) Includes $8,400 for an automobile allowance, and $13,922 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. The base annual salary was increased to $234,206
as a result of an annual cost of living adjustment in October 1999.
(7) Includes $7,200 for an automobile allowance and $1,841 for life insurance
premiums.
(8) Includes $7,200 for an automobile allowance, $3,884 for life insurance
premiums and $2,020 for club membership dues.
(9) Includes $7,200 for an automobile allowance and $2,867 for life insurance
premiums.
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
9
<PAGE> 12
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 then 6%........................... 15.00% Incremental Average Net Worth(3)
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.
(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 bonus amount 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. The calculation of the number of
shares is determined by the average price per share of our common stock during
the 20 day period that ends on the date of such determination.
No incentive compensation bonuses were earned for the year ended December
31, 1999.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1999
In 1999 the Compensation Committee approved the Equity Incentive Plan and
the following table shows the awards made to Mr. Burchett and the most highly
compensated executive officers in 1999. See "Aggregated Option Exercises In
Fiscal Year Ended December 31, 1999 And Fiscal Year End Option Values -- 1999
Equity Incentive Plan".
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE OR GRANT DATE
OPTIONS/SARS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION PRESENT
NAME GRANTED(#) IN FISCAL YEAR(%) ($/SH) DATE VALUE
---- ------------ -------------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
John A. Burchett............. 50,000 17.67 4.625 August 2009 $44,000
Chief Executive Officer
Joyce S. Mizerak............. 35,000 12.37 4.625 August 2009 $30,800
George J. Ostendorf.......... 35,000 12.37 4.625 August 2009 $30,800
Irma N. Tavares.............. 35,000 12.37 4.625 August 2009 $30,800
Thomas P. Kaplan............. 35,000 12.37 4.625 August 2009 $30,800
</TABLE>
10
<PAGE> 13
The present value of the options was calculated using the Black-Sholes
options pricing model as of August 1, 1999.
AGGREGATED OPTION EXERCISES AND OPTION VALUES
IN FISCAL YEAR ENDED DECEMBER 31, 1999
The following table sets forth information concerning the value of stock
options held at December 31, 1999 by the Named Executive Officers of the
Company. None of the Named Executive Officers exercised any stock options during
the year ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John A. Burchett....... 0 $0 0 50,000 $0 $0
89,467 0 0
24,270
Joyce S. Mizerak....... 0 0 0 35,000 0 0
24,399 0 0
18,630
George J. Ostendorf.... 0 0 0 35,000 0 0
24,399 0 0
18,630
Irma N. Tavares........ 0 0 0 35,000 0 0
24,399 0 0
18,630
Thomas P. Kaplan....... 0 0 0 35,000 0 0
</TABLE>
1997 STOCK OPTION PLAN
In 1997 the Company adopted the 1997 Executive and Non-Employee Director
Stock Option Plan (the "Stock Option Plan"). 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 Stock
Option Plan 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").
Options granted under the Stock Option Plan become exercisable in
accordance with the terms of the grant made by the Compensation Committee.
However, the outside Directors are eligible to receive only NQSOs. The
Compensation Committee determines the terms and restrictions applicable to the
Awards. Option and Award recipients must also enter into a written stock option
agreement with the Company. In administering the Stock Option Plan, the
Compensation Committee has discretionary authority to:
- select participants from among a class of eligible persons;
- determine the time an option or Award is granted;
11
<PAGE> 14
- determine when and in what increments shares covered by the option or
Award may be purchased or will vest; and
- in the case of options, determine whether it is intended to be an ISO or
a NQSO.
There are certain restrictions applicable to ISOs that are mandatory,
including a requirement that ISOs not be issued for less than 100% of the then
fair market value of our common stock (110% in the case of a grantee who holds
more than ten percent of the outstanding common stock). In addition, an ISO's
maximum term is ten years (five years in the case of a grantee who holds more
than ten percent of our outstanding common stock). The fair market value of an
ISO when granted is:
- the closing sale price on such date as reported in the Wall Street
Journal; or
- the average of the closing price on each day of which it was traded over
a period of up to 20 trading days immediately prior to such date; or
- if the common stock is not publicly traded, the fair market value as
otherwise determined by the Board of Directors or the Compensation
Committee in the good faith.
Eligible persons under the Stock Option Plan are officers, directors and
employees of the Company or its subsidiaries, and other persons expected to
provide significant services to the Company. ISOs may only be granted to the
officers and key employees of the Company and its subsidiaries. In contrast,
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. An option has a maximum term of ten years
(or five years in the case of ISOs granted to an employee who owns 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 restrictive 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
12
<PAGE> 15
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"). Vesting occurs when:
- 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; and
- 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 shares 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 stock options have vested, appropriate adjustments will be made for
stock splits, recapitalizations, stock dividends and transactions having similar
effects.
No vesting occurred on the first Earn-Out Measuring Date (September 30,
1998) and the second Earn-Out Measuring Date (September 30, 1999) because the
Company did not meet or exceed the vesting requirements.
1999 EQUITY INCENTIVE PLAN
The Company adopted the 1999 Equity Incentive Plan (the "Equity Incentive
Plan"), which provides for the grant of stock options which are not intended to
be "qualified incentive stock options" pursuant to Section 422 of the Internal
Revenue Code. The Equity Incentive Plan is intended to provide a means of
performance-based compensation in order to attract, retain and motivate
employees and consultants of the Company and to enable them to participate in
the growth of the Company by providing for or increasing the proprietary
interests of such persons in the Company. The Compensation Committee administers
the Equity Incentive Plan. The outside Directors are eligible to receive grants
of stock portions under the Equity Incentive Plan.
Options granted under the Equity Incentive 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 the
discretionary authority to:
- select participants from among eligible persons;
- determine at the time an option or Award is granted; and
- determine when and in what increment shares covered by the option or
Award may be purchased or will vest.
13
<PAGE> 16
Fair market value at the time any option or Award is granted is calculated
as:
- the closing sale price on such date as reported in the Wall Street
Journal; or
- the average of the closing price as reported in the Wall Street Journal
on each day of which it was traded over a period of 20 trading days that
ends on grant date; or
- if the common stock is not publicly traded, the fair market value of the
common stock as determined by the Compensation Committee in good faith.
Persons eligible to participate in the Equity Incentive Plan are officers,
directors and employees, agents and consultants of the Company or its
subsidiaries, and other persons who are in a position to make a significant
contribution to the Company's success.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Equity Incentive Plan authorizes the grant of options to
purchase, and Awards of, an aggregate of up to 550,710 shares of the Company's
common stock. If an option granted under the Equity Incentive 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 Equity Incentive Plan.
Unless terminated earlier by the Board of Directors, the Equity Incentive
Plan will terminate ten years from its approval date. When the Equity Incentive
Plan ends, no options or Awards may be granted under the Equity Incentive Plan,
but existing options or Awards remain in effect until they are exercised or
terminated. Each option must terminate no more than ten years from the date it
is granted. Options may be granted on terms providing for exercise either in
whole or in part at any time or times during their restrictive terms, or only in
specified percentages at stated time periods or intervals during the term of the
option.
The maximum number of common stock that any eligible participant may
receive under the Equity Incentive Plan for any year may not exceed 50,000.
The exercise price of any option granted under the Equity Incentive 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 loan to option holders 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 Compensation Committee may, without affecting any outstanding options
or Awards, from time to time revise or amend the Equity Incentive Plan, and may
suspend or discontinue it at any time. However, under the terms of the Equity
Incentive Plan, no revision or amendment may, without stockholder approval:
- increase the number of shares subject to the Equity Incentive Plan;
- modify the class of participants eligible to receive options;
- modify the class of participants eligible to receive Awards; or
- extend the maximum option term.
14
<PAGE> 17
A summary of the status of the Company's Stock Option Plan and Equity
Incentive Plan as of December 31, 1999 and changes during the period from
September 19, 1997 to December 31, 1999 and for the year ended December 31,
1999, is presented below:
<TABLE>
<CAPTION>
1997 STOCK 1999 EQUITY
OPTION PLAN INCENTIVE PLAN
# OF # OF WEIGHTED
OPTIONS FOR OPTIONS FOR AVERAGE
SHARES SHARES EXERCISE PRICE EXERCISE PRICE
----------- -------------- -------------- --------------
<S> <C> <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 Dec. 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 Dec. 31, 1998............ 322,574
=======
STOCK OPTION ACTIVITY - 1999
Granted - August 29, 1999............... 282,750 $4.625
Cancelled............................... (27,250) 15.75
Cancelled............................... (12,500) 4.625
Outstanding at Dec. 31, 1999............ 295,324 $15.35
======= ======
270,250 $4.625
======= ======
</TABLE>
No shares were exercisable at December 31, 1998 and 1999.
CHANGE IN CONTROL
The Company adopted policies to take effect in the event a single person,
entity, or a group of persons and/or entities acting in concert acquires control
of the Company through a merger or other combination, or if the employment of
any of the Principals is terminated without good cause or good reason (any of
the above events, a "Change in Control"). If there is a Change of Control the
Chief Executive Officer may:
- accelerate the exercisability, prior to the effective date of the Change
in Control, of all outstanding options under the Stock Option Plan and
the Equity Incentive Plan (and terminate the restrictions applicable to
any shares);
- accelerate the exercisability, prior to the effective date of the Change
in Control, of all outstanding ISOs (and terminate the restrictions
applicable to any shares);
- grant and deliver award bonuses under the Bonus Incentive Plan; and
- forgive any and all of the outstanding indebtedness of the Principals'
Loans.
On April 11, 2000 the Board of Directors approved a Stockholder Protection
Rights Agreement. The Stockholder Protection Rights Agreement became effective
on April 28, 2000 and provides that the holder of a Right, upon the exercise of
the Right, is entitled to purchase from the Company one one-hundredth of a share
of Participating Preferred Stock at an exercise price of $17.00 per share,
subject to adjustment. The
15
<PAGE> 18
description and terms of the Rights are set forth in the Stockholder Protection
Rights Agreement, which is incorporated by reference to the Company's form 8-K
filed April 28, 2000.
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 link the
compensation of the Company's Chief Executive Officer and other executive
officers to the Company's financial performance.
The Company's executive compensation policy sets base salary at the minimum
levels considered sufficient to attract and retain qualified executive officers.
The Company provides performance-based variable compensation, allowing the total
compensation of executive officers to fluctuate with the Company's performance.
The Company 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 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, which links to executive compensation the
performance of the Company.
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. As
a result, the Company's executive officers and other key employees receive an
incentive to increase the market value of the Company. In view of the Company's
1999 operating results, no bonuses for 1999 were awarded pursuant to the Bonus
Incentive Compensation Plan. A discretionary bonus pool of $145,000 was,
however, approved by HCP's management committee to reward certain HCP employees
for their efforts during 1999. No Principals received any of the discretionary
bonus pool payments.
Under the Equity Incentive Plan 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 Equity Incentive Plan have been granted
at an exercise price equal to the fair market value on the date of grant. The
Company awarded stock options under the Equity Incentive Plan to executive
officers during 1999. 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 compensation packages for Mr. Burchett, Ms. Mizerak, Mr. Ostendorf and
Ms. Tavares were negotiated 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
16
<PAGE> 19
at the discretion of the non-employee Directors or the Compensation Committee.
No such discretionary increases were awarded in 1999. 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
17
<PAGE> 20
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:
- serve as the Company's consultant with respect to the formulation of
investment criteria and preparation of policy guidelines by the Board of
Directors;
- assist the Company in developing criteria for the purchase of mortgage
assets that are specifically tailored to the Company's investment
objectives;
- represent the Company in connection with the purchase and commitment to
purchase or sell mortgage assets;
- arrange for the issuance of mortgage securities from a pool of mortgage
loans;
- furnish reports and statistical and economic research to the Company
regarding the Company's activities and the services performed for the
Company by HCP;
- on an ongoing basis, monitor and provide to the Board of Directors price
information and other data;
- invest or reinvest any of the Company's money in accordance with its
policies and procedures and the terms and conditions of the Management
Agreement;
- provide executive and administrative personnel office space and services
required in rendering services to the Company; and
- administer the day-to-day operations of the Company.
The Company each month pays HCP a fee for its services, and expenses for
any due diligence services provided by independent contractors and other third
parties in connection with the acquisition of mortgage assets.
The monthly fee paid to HCP equals 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 that month, plus
- (b) 25% of (a).
The monthly expenses paid to HCP equal the sum of:
- (c) the expenses of HCP; plus
- (d) three percent of (c).
18
<PAGE> 21
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. Effective July 1, 1999, the Management
Agreement was amended to define HCP's monthly expenses related to services
provided to the Company to mean: rent; telephone; utilities; office furniture;
equipment; machinery; and other office expenses of HCP required for the
Company's day-to-day operations, including bookkeeping, clerical and back-office
services provided by HCP. During 1999 the Company recorded management and
administrative expenses of $809,000 and due diligence expenses of $119,000
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, 2000, and is automatically renewed for successive one-year
periods unless the unaffiliated directors, as defined in the Management
Agreement, 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") from the
Principals, in exchange for an aggregate of 716,667 shares of the Company's
common stock. The Principals may also receive up 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"). 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. A unit is one share of common stock and one warrant.
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:
- the appreciation in the value of the unit since the closing of the
initial public offering; and
- the amount of distributions made by the Company on the shares of common
stock included in the unit since the closing of the initial public
offering.
Appreciation in a unit's value 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 our 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
19
<PAGE> 22
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
Mr. Burchett, Ms. Tavares, Ms. Mizerak, and Mr. Ostendorf. Each employment
agreement provides for an initial term of five years and will be automatically
extended for an additional year at the end of the employment agreement, unless
either party provides prior written notice to the contrary or the employee has
been terminated pursuant to the terms of the employment agreement. 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 contains a provision prohibiting competition with
the Company for a certain period of time following his or her termination for
"good cause". Good cause means:
- the conviction of (or the plea of nolo contendere to) a felony;
- the Board of Directors' good faith determination that the employee
willfully and deliberately failed to perform a material amount of his or
her duties (other than a failure to perform duties due to physical or
mental illness), and the employee's failure to perform his or her duties
was not cured within 30 days after written notice from the Board of
Directors specifying with reasonable particularity such alleged failure;
- 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
- any act or acts of personal dishonesty (including, without limitation,
insider trading or unauthorized trading in the Company's securities)
which may have a material adverse effect on the Company or any of its
subsidiaries.
In addition, the executive officer will be entitled to receive his or her
base salary in effect at the date of termination until the later of one year
from the termination date or the end of the employment term if the executive
officer is:
- terminated by the Company without good cause;
- resigns from the Company within 90 days after being removed from Board of
Directors; or
- is not re-elected to the Board of Directors, despite the executive
officer's efforts to remain on the Board of Directors.
In the event that the executive officer is terminated without good cause
within 90 days after a change of control of the Company, 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
20
<PAGE> 23
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,
- the rights of the Principals to transfer their shares of common stock of
HCP, and
- 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 those shares 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 have the right to purchase the shares of the common stock
of HCP of a Principal if the Principal:
- ceases to be employed by the Company (including by death, disability or
voluntary or involuntary termination);
- ceases to own any equity interest in the Company;
- becomes bankrupt; or
- 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 on 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 and Executive Officers
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
common stock but are otherwise nonrecourse to the Principals. 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 this
loan
21
<PAGE> 24
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 5.51% which was the lowest applicable Federal rate in March 1998.
In November 1998, the Company agreed to lend up to 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.
In connection with the hiring of Thomas P. Kaplan as the Company's Chief
Financial Officer and a Managing Director, the Company agreed to loan to Mr.
Kaplan an amount sufficient to purchase up to 50,000 shares of the Company's
common stock. The loan has a term of three years and bears interest at the
lowest "applicable Federal rate" in effect for the month in which the loan was
made. Mr. Kaplan's loan bears interest at 5.29% which was the lowest applicable
Federal rate in September 1999.
No payment of principal on the loans is due before maturity unless the
borrower 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. Although
Mr. Kaplan's loan is a nonrecourse loan, it is secured by 50,000 of his shares
of the Company's common stock. Mr. Kaplan will not be able to sell the shares of
common stock that are pledged to secure his loan. Accordingly, if Mr. Kaplan
defaults in repaying his loan, the Company will be able to look only to his
pledged shares of common stock and not to any of his personal assets. Thus, a
decline in the value of the common stock could result in Mr. Kaplan's failure to
repay his loan.
The summary of executive officer loans at December 31, 1999 is shown below:
<TABLE>
<CAPTION>
AMOUNT OF LOAN SECURED BY OR
PRINCIPALS OUTSTANDING INTEREST RATE UNSECURED MATURITY 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 2001(b)
John A. Burchett.................. 45,958 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 2001(b)
Joyce S. Mizerak.................. 12,526 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 2001(b)
George J. Ostendorf............... 12,526 4.47% Unsecured November 2002
George J. Ostendorf............... 12,203 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 2001(b)
Irma N. Tavares................... 12,526 4.47% Unsecured November 2002
Thomas P. Kaplan.................. 241,796 5.29% Secured(a) September 2002
</TABLE>
- ---------------
(a) The loans to the Principals are secured (in total) by 166,667 of their
shares of the Company's common stock but are otherwise non-recourse to the
Principals. The loan to Mr. Kaplan is secured by 50,000 shares of the
Company's common stock but is otherwise non-recourse to Mr. Kaplan.
(b) The loans were amended to extend the maturity date from March 1999 to March
2001.
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<PAGE> 25
PERFORMANCE GRAPH
The following graph presents a price 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, 1999, 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, 1999. 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 the
value of the units is used until March 20, 1997, and the value of the common
stock is used for subsequent periods. 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 returns reflect stock price appreciation for the Company's common stock and
for each of the comparative indices. The graph assumes $100 invested on
September 16, 1997, in the Company's common stock at the initial IPO, the S&P
500 Stock Index and the stock index of the peer group. The data source is
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-97 110.00 103.10 86.07
31-Dec-98 29.17 129.99 35.65
31-Dec-99 24.17 155.37 37.50
</TABLE>
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Audit Committee and the Board of Directors selected and appointed
Deloitte & Touche LLP to act as the Company's independent accountants for the
year ended December 31, 2000. In recognition of the important role of the
independent accountants, their selection is submitted to the stockholders for
their review and ratification on an annual basis.
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<PAGE> 26
An 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 2000 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. The
Board of Directors expects representatives of Deloitte & Touche LLP to be
present at the Annual Meeting, and they will have the opportunity to make a
statement if they so desire. The representatives of Deloitte & Touche LLP 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 ten percent 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 ten percent holders are required by regulations under
the Exchange Act of 1934 to furnish the Company with copies of all Section 16(a)
forms they file.
After reviewing the copies of these reports furnished to the Company during
the fiscal year which ended December 31, 1999, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were satisfied by these persons with the exception of the
following:
John A. Burchett, Chairman of the Board, Chief Executive Officer and
President, filed a late Form 5 relating to his beneficial ownership of the
Company's common stock.
STOCKHOLDERS' PROPOSALS
Any stockholder who intends to present a proposal at the next annual
meeting of stockholders to be held in 2001, must deliver the proposal at the
Company's principal executive offices no later than December 23, 2000 in order
for it to be considered for inclusion in the proxy statement and form of proxy
related to that meeting.
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.
Annual Report; Annual Report on Form 10-K
The Annual Report of the Company for the year 1999 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.
24
<PAGE> 27
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,
Senior Managing Director, a Director
and Secretary
April 28, 2000
25
<PAGE> 28
HCMCM-PS-2000
<PAGE> 29
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
CONTROL NUMBER:
RECORD DATE SHARES:
1. Election of Directors.
FOR ALL FOR ALL
(01) JOHN A. BURCHETT NOMINEES WITHHOLD EXCEPT
(02) JOHN A. CLYMER
(03) SAIYID T. NAQVI [ ] [ ] [ ]
(04) JAMES F. STONE
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).
2. Ratification of the appointment of Deloitte & Touche LLP as independent
auditors of the Company.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
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
90 WEST STREET, SUITE 2210
NEW YORK, NEW YORK 10006
ANNUAL MEETING OF STOCKHOLDERS -- MAY 18, 2000
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 2000 Annual Meeting of
Stockholders of HANOVER CAPITAL MORTGAGE HOLDINGS, INC. to be held at the
American Stock Exchange, 86 Trinity Place, New York, New York on Thursday, May
18, 2000 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, 2 AND 3.
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> 30
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
18, 2000.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Hanover Capital Mortgage Holdings, Inc.
