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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
OR
| | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ______________
Commission file number: 001-13417
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 13-3950486
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
379 THORNALL STREET, EDISON, NEW JERSEY 08837
(Address of principal executive offices) (Zip Code)
(732) 548-0101
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No | |
The registrant had 4,451,030 shares of common stock outstanding as of
August 13, 2002.
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets as of
June 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income (unaudited)
for the Three and Six Months Ended June 30, 2002 and 2001 4
Consolidated Statement of Stockholders'
Equity (unaudited) for the Six Months Ended June 30, 2002 5
Consolidated Statements of Cash Flows (unaudited)
for the Six Months Ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except as noted)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
ASSETS (unaudited)
Mortgage loans:
Held for sale $ 758 $ 2,391
Collateral for CMOs 123,523 151,882
Mortgage securities pledged as collateral
for reverse repurchase agreements:
Available for sale 4,265 4,404
Held to maturity 689 768
Trading 11,404 33,182
Mortgage securities pledged as collateral for CMOs 9,800 9,840
Mortgage securities, not pledged:
Available for sale 579 1,162
Trading 3,657 1,827
Cash and cash equivalents 8,514 8,946
Accrued interest receivable 1,202 1,960
Equity investments:
Hanover Capital Partners Ltd. 1,920 1,808
HanoverTrade, Inc. (3,663) (4,789)
HDMF-I LLC 3,970 80
Hanover Capital Partners 2, Inc. (19) --
Notes receivable from related parties 13,880 12,538
Due from related parties 517 842
Other receivables 528 777
Prepaid expenses and other assets 1,585 1,889
--------- ---------
TOTAL ASSETS $ 183,109 $ 229,507
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Reverse repurchase agreements $ 13,544 $ 33,338
CMO borrowing 123,173 151,096
Accrued interest payable 551 1,094
Dividends payable -- 855
Accrued expenses and other liabilities 2,038 1,583
--------- ---------
TOTAL LIABILITIES 139,306 187,966
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01, 10 million shares authorized,
-0- issued and outstanding
Common stock, par value $.01, 90 million shares authorized,
4,451,030 and 4,275,676 shares issued and outstanding at
June 30, 2002 and December 31, 2001, respectively 45 43
Additional paid-in capital 67,963 67,082
Retained earnings (deficit) (24,387) (25,978)
Accumulated other comprehensive income (loss) 182 394
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 43,803 41,541
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 183,109 $ 229,507
========= =========
See notes to consolidated financial statements
3
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- ---------- --------- ----------
REVENUES:
Interest income $ 3,461 $ 5,327 $ 7,306 $ 10,805
Interest expense 2,080 3,653 4,273 7,801
------- ------- ------- --------
Net interest income 1,381 1,674 3,033 3,004
Loan loss provision 67 204 121 443
------- ------- ------- --------
Net interest income after loan loss provision 1,314 1,470 2,912 2,561
Gain on sale of mortgage assets 305 728 905 1,853
Gain on mark to market of mortgage assets,
net of associated hedge 300 144 575 18
Other gain (loss) (253) 10 (425) (70)
------- ------- ------- --------
Total revenue 1,666 2,352 3,967 4,362
------- ------- ------- --------
EXPENSES:
Personnel 360 170 856 337
Legal and professional 239 191 429 276
Management and administrative 175 192 361 396
Other 83 95 155 168
Financing/commitment fees 66 55 132 153
Occupancy 41 77 77 156
------- ------- ------- --------
Total expenses 964 780 2,010 1,486
------- ------- ------- --------
Operating income 702 1,572 1,957 2,876
Equity in income (loss) of unconsolidated subsidiaries:
Hanover Capital Partners Ltd. 86 10 112 12
HanoverTrade, Inc. 628 (886) 655 (1,565)
HDMF-I LLC 20 -- (1) --
Hanover Capital Partners 2, Inc. (44) -- (19) --
------- ------- ------- --------
Income before cumulative effect of adoption of SFAS 133 1,392 696 2,704 1,323
Cumulative effect of adoption of SFAS 133 -- -- -- 46
------- ------- ------- --------
NET INCOME $ 1,392 $ 696 $ 2,704 $ 1,369
======= ======= ======= ========
BASIC EARNINGS PER SHARE:
Before cumulative effect of adoption of SFAS 133 $ 0.32 $ 0.17 $ 0.62 $ 0.31
Cumulative effect of adoption of SFAS 133 -- -- -- 0.01
------- ------- ------- --------
After cumulative effect of adoption of SFAS 133 $ 0.32 $ 0.17 $ 0.62 $ 0.32
======= ======= ======= ========
DILUTED EARNINGS PER SHARE:
Before cumulative effect of adoption of SFAS 133 $ 0.31 $ 0.16 $ 0.61 $ 0.30
Cumulative effect of adoption of SFAS 133 -- -- -- 0.01
------- ------- ------- --------
After cumulative effect of adoption of SFAS 133 $ 0.31 $ 0.16 $ 0.61 $ 0.31
======= ======= ======= ========
See notes to consolidated financial statements
4
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002
(in thousands except share data)
(unaudited)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL RETAINED COMPREHENSIVE
-------------------------- PAID-IN COMPREHENSIVE EARNINGS INCOME
SHARES AMOUNT CAPITAL INCOME (DEFICIT) (LOSS) TOTAL
---------- -------- -------- ------------- --------- ------------- -------
Balance, December 31, 2001 4,275,676 $ 43 $ 67,082 $(25,978) $394 $41,541
Repurchase of common stock (15,666) -- (131) (131)
Capital contributed to related
party 63,577 1 469 470
Exercise of options 127,443 1 543 544
Comprehensive income:
Net income $ 2,704 2,704 2,704
Other comprehensive income:
Change in net unrealized
gain (loss) on securities
available for sale (376) (376) (376)
Change in net unrealized
gain (loss) on interest rate
caps designated as hedges 164 164 164
--------
Comprehensive income $ 2,492
========
Dividends declared (1,113) (1,113)
----------- ------- -------- -------- ------- -------
Balance, June 30, 2002 4,451,030 $ 45 $ 67,963 $(24,387) $ 182 $43,803
=========== ======= ======== ======== ======= =======
See notes to consolidated financial statements
5
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,704 $ 1,369
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Amortization of net premium and deferred costs 213 117
Loan loss provision 121 443
(Gain) on sale of mortgage assets (905) (1,853)
(Gain) on mark to market of mortgage assets (575) (167)
(Gain) on mark to market of mortgage assets for SFAS 133 -- (50)
Purchase of trading securities (38,685) (45,061)
Sale of trading securities 55,524 43,447
Equity in (income) loss of unconsolidated subsidiaries (747) 1,553
Decrease in accrued interest receivable 758 309
(Increase) in notes receivable from related parties (1,342) (2,801)
Decrease (increase) in due from related parties 325 (314)
Decrease in other receivables 249 660
Decrease in prepaid expenses and other assets 468 400
(Decrease) in accrued interest payable (543) (264)
Increase in accrued expenses and other liabilities 455 136
-------- --------
Net cash provided by (used in) operating activities 18,020 (2,076)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage securities (592) (4,433)
Principal payments received on mortgage securities 3,201 1,772
Principal payments received on collateral for CMOs 28,181 27,768
Principal payments received on mortgage loans held for sale 201 5
Proceeds from sale of mortgage assets 2,763 8,984
Sales of mortgage securities to affiliates 946 --
Capital contribution to HDMF-I LLC (3,891) --
-------- --------
Net cash provided by investing activities 30,809 34,096
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment of) reverse repurchase agreements (19,794) (1,478)
Net (repayment of) CMOs (27,912) (27,568)
Payment of dividends (1,968) (1,695)
Repurchase of common stock (131) (1,335)
Exercise of stock options 544 77
-------- --------
Net cash (used in) financing activities (49,261) (31,999)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (432) 21
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,946 9,958
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,514 $ 9,979
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 4,816 $ 8,065
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
Capital contribution of 63,577 shares of common stock to HT $ 470 $ --
======== ========
See notes to consolidated financial statements
6
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The interim consolidated financial statements of Hanover Capital Mortgage
Holdings, Inc. ("Hanover") and subsidiaries (with its subsidiaries, the
"Company") include the accounts of Hanover and its equity-owned subsidiaries.
These interim consolidated financial statements should be read in conjunction
with Hanover's Annual Report on Form 10-K for the year ended December 31, 2001.
The interim consolidated financial statements reflect all normal and recurring
adjustments which are, in the opinion of management, considered necessary for a
fair presentation of the financial condition and results of operations for the
periods presented. There were no adjustments of a non-recurring nature recorded
during the three and six months ended June 30, 2002. The interim results of
operations presented are not necessarily indicative of the results for the full
year. When necessary, reclassifications have been made to conform to current
period presentation.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS 145"). SFAS 145 rescinds FASB Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS 145 also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. SFAS 145 amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. SFAS 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of SFAS 145 related to the rescission of FASB Statement No. 4 are
effective for fiscal years beginning after May 15, 2002. The provisions of SFAS
145 related to FASB Statement No. 13 are effective for transactions occurring
after May 15, 2002. All other provisions of SFAS 145 are effective for financial
statements issued on or after May 15, 2002. The adoption of SFAS 145 is not
expected to have a material effect on the Company's consolidated financial
statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). SFAS 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues Task
Force Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS 146 is not
expected to have a material effect on the Company's consolidated financial
statements.
2. MORTGAGE LOANS
MORTGAGE LOANS HELD FOR SALE
(dollars in thousands)
JUNE 30, 2002 DECEMBER 31, 2001
--------------------------------- -----------------------------------
FIXED ADJUSTABLE FIXED ADJUSTABLE
RATE RATE TOTAL RATE RATE TOTAL
----- ---------- ------- ----- ---------- -------
Principal amount of mortgage loans $ 266 $ 899 $ 1,165 $ 560 $ 2,627 $ 3,187
Net premium (discount) and deferred costs (112) (295) (407) (159) (637) (796)
Loan loss allowance -- -- -- -- -- --
----- ----- ------- ----- ------- -------
Carrying value of mortgage loans $ 154 $ 604 $ 758 $ 401 $ 1,990 $ 2,391
===== ===== ======= ===== ======= =======
7
MORTGAGE LOANS SECURITIZED IN COLLATERALIZED MORTGAGE OBLIGATIONS
(dollars in thousands)
JUNE 30, 2002 DECEMBER 31, 2001
----------------------------------------- ------------------------------------------
FIXED ADJUSTABLE FIXED ADJUSTABLE
RATE RATE TOTAL RATE RATE TOTAL
-------- ---------- --------- --------- ---------- ---------
Principal amount of mortgage loans $ 86,834 $ 36,468 $ 123,302 $ 105,849 $ 45,535 $ 151,384
Net premium (discount) and deferred costs 1,204 (174) 1,030 1,442 (167) 1,275
Loan loss allowance (580) (229) (809) (553) (224) (777)
-------- -------- --------- --------- -------- ---------
Carrying value of mortgage loans $ 87,458 $ 36,065 $ 123,523 $ 106,738 $ 45,144 $ 151,882
======== ======== ========= ========= ======== =========
3. MORTGAGE SECURITIES
FIXED-RATE AGENCY MORTGAGE-BACKED SECURITIES
(dollars in thousands)
JUNE 30, 2002 DECEMBER 31, 2001
----------------------------------------- ---------------------------------------
AVAILABLE HELD TO AVAILABLE HELD TO
FOR SALE MATURITY TRADING TOTAL FOR SALE MATURITY TRADING TOTAL
--------- -------- ------- ------- --------- -------- ------- -------
Principal balance of mortgage securities $1,195 $ -- $ 4,360 $ 5,555 $1,378 $ -- $25,251 $26,629
Net premium (discount) and deferred costs 60 -- 494 554 70 -- 2,258 2,328
------ ------- ------- ------- ------ ------- ------- -------
Total amortized cost of mortgage securities 1,255 -- 4,854 6,109 1,448 -- 27,509 28,957
Net unrealized gain (loss) 19 -- (91) (72) 62 -- 45 107
------ ------- ------- ------- ------ ------- ------- -------
Carrying value of mortgage securities $1,274 $ -- $ 4,763 $ 6,037 $1,510 $ -- $27,554 $29,064
====== ======= ======= ======= ====== ======= ======= =======
FIXED-RATE SUBORDINATE MORTGAGE-BACKED SECURITIES
(dollars in thousands)
JUNE 30, 2002 DECEMBER 31, 2001
---------------------------------------------------- ---------------------------------------------------
AVAILABLE COLLATERAL AVAILABLE COLLATERAL
FOR HELD TO FOR FOR HELD TO FOR
SALE MATURITY TRADING CMOS TOTAL SALE MATURITY TRADING CMOS TOTAL
--------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Principal balance of
mortgage securities $ 5,740 $ -- $ 13,469 $ 12,808 $ 32,017 $ 6,561 $ -- $ 10,125 $ 12,926 $ 29,612
Net premium (discount)
and deferred costs (2,747) -- (4,098) (2,625) (9,470) (3,440) -- (3,449) (2,742) (9,631)
------- ------- -------- -------- -------- ------- ------- -------- -------- --------
Total amortized cost of
mortgage securities 2,993 -- 9,371 10,183 22,547 3,121 -- 6,676 10,184 19,981
Loan loss allowance (74) -- -- (383) (457) (221) -- -- (344) (565)
Net unrealized gain 377 -- 927 -- 1,304 623 -- 779 -- 1,402
------- ------- -------- -------- -------- ------- ------- -------- -------- --------
Carrying value of
mortgage securities $ 3,296 $ -- $ 10,298 $ 9,800 $ 23,394 $ 3,523 $ -- $ 7,455 $ 9,840 $ 20,818
======= ======= ======== ======== ======== ======= ======= ======== ======== ========
DERIVATIVE MORTGAGE-BACKED SECURITIES
(dollars in thousands)
JUNE 30, 2002 DECEMBER 31, 2001
-------------------------------------------- ----------------------------------------------
INTEREST- PRINCIPAL- INTEREST- PRINCIPAL-
ONLY STRIPS ONLY STRIPS ONLY STRIPS ONLY STRIPS
AVAILABLE HELD TO AVAILABLE HELD TO
FOR SALE MATURITY TRADING TOTAL FOR SALE MATURITY TRADING TOTAL
----------- ----------- ---------- ------- ----------- ----------- ---------- -------
Principal balance of mortgage
securities $ -- $ 834 $ -- $ 834 $ -- $ 929 $ -- $ 929
Net premium (discount) and
deferred costs 468 (145) -- 323 639 (161) -- 478
----- ----- ---------- ------- ----- ----- ---------- -------
Total amortized cost of mortgage
securities 468 689 -- 1,157 639 768 -- 1,407
Loan loss allowance -- -- -- -- -- -- -- --
Net unrealized gain (loss) (194) -- -- (194) (106) -- -- (106)
----- ----- ---------- ------- ----- ----- ---------- -------
Carrying value of mortgage securities $ 274 $ 689 $ -- $ 963 $ 533 $ 768 $ -- $ 1,301
===== ===== ========== ======= ===== ===== ========== =======
8
4. LOAN LOSS ALLOWANCE
The following table summarizes the activity in the loan loss allowance (dollars
in thousands):
SIX MONTHS ENDED
JUNE 30,
---------------------
2002 2001
------- -------
Balance, beginning of period $ 1,342 $ 1,724
Loan loss provision 121 443
Sales (157) (607)
Charge-offs (40) (108)
Recoveries -- --
------- -------
Balance, end of period $ 1,266 $ 1,452
======= =======
5. EQUITY INVESTMENTS
As of June 30, 2002, Hanover owned 100% of the non-voting preferred stock of
Hanover Capital Partners Ltd. ("HCP"), a due diligence consulting firm;
HanoverTrade, Inc. (formerly HanoverTrade.com, Inc.) ("HT"), an
internet-based loan trading firm; and Hanover Capital Partners 2, Inc.
("HCP-2"), a previously inactive subsidiary through which Hanover commenced
trading activity during the first quarter of 2002. These ownership interests
entitled Hanover to receive 97% of the earnings or losses of HCP and HT and 99%
of the earnings or losses of HCP-2. In addition, Hanover has a 31.45946%
interest in HDMF-I LLC ("HDMF-I"), a limited liability company formed to
purchase, service, manage and ultimately re-sell or otherwise liquidate packages
of primarily sub- and non-performing one-to-four family residential whole loans.
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2002 2001 2002 2001
------ ------ ------ -----
REVENUES:
Due diligence fees $1,170 $1,161 $2,086 $2,519
Assignment fees 444 201 833 367
Other income 64 7 104 13
------ ------ ------ ------
Total revenues 1,678 1,369 3,023 2,899
------ ------ ------ ------
EXPENSES:
Personnel 1,296 1,081 2,389 2,309
Other 127 147 234 350
General and administrative 65 90 139 150
Depreciation and amortization 17 14 31 29
Interest 13 17 24 27
------ ------ ------ ------
Total expenses 1,518 1,349 2,817 2,865
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 160 20 206 34
INCOME TAX PROVISION 71 10 90 22
------ ------ ------ ------
NET INCOME $ 89 $ 10 $ 116 $ 12
====== ====== ====== ======
9
HANOVERTRADE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
------ ------- ------ -------
REVENUES:
Loan brokering and other income $2,537 $ 827 $4,419 $ 1,765
------ ------- ------ -------
Total revenues 2,537 827 4,419 1,765
------ ------- ------ -------
EXPENSES:
Personnel 945 955 1,859 1,869
Depreciation and amortization 298 274 594 544
Technology 234 103 483 219
General and administrative 128 84 273 138
Occupancy 119 79 214 135
Interest 75 104 148 198
Travel and entertainment 55 78 111 170
Professional 35 63 62 111
------ ------- ------ -------
Total expenses 1,889 1,740 3,744 3,384
------ ------- ------ -------
INCOME (LOSS) BEFORE INCOME TAXES 648 (913) 675 (1,619)
INCOME TAX PROVISION (BENEFIT) -- 1 -- 1
------ ------- ------ -------
NET INCOME (LOSS) $ 648 $ (914) $ 675 $(1,620)
====== ======= ====== =======
HT's total assets at June 30, 2002 were $4,017,000, which includes $1,707,000 of
capitalized software costs and $1,515,000 of goodwill. HT's total liabilities at
June 30, 2002 were $7,794,000, which includes a note payable to Hanover of
$6,304,000 and intercompany payables of $397,000.
6. NOTES RECEIVABLE AND AFFILIATED PARTY TRANSACTIONS
During the second quarter of 2002, Hanover advanced funds to HCP-2 pursuant to
an unsecured loan agreement. The HCP and HT loans bear interest at 1.00% below
the prime rate and mature on March 31, 2003. The loan to HCP-2, which also
matures on March 31, 2003, bears interest at a fixed rate of 10%. In addition,
Hanover has outstanding loans to John A. Burchett, Thomas P. Kaplan, Joyce S.
Mizerak, George J. Ostendorf and Irma N. Tavares ("Principals"). The loans to
the Principals bear interest at the lowest applicable Federal interest rate
during the month the loans were made.
NOTES RECEIVABLE
(dollars in thousands)
MARCH 31, JUNE 30,
2002 2002
BALANCE ADVANCES REPAYMENTS BALANCE
--------- -------- ---------- --------
Principals $ 3,279 $ -- $ -- $ 3,279
HCP 1,351 -- (481) 870
HT 7,804 -- (1,499) 6,305
HCP-2 3,100 2,669 (2,343) 3,426
------- ------- -------- -------
$15,534 $ 2,669 $ (4,323) $13,880
======= ======= ======== =======
10
During the three months ended June 30, 2002 and 2001, Hanover recorded the
following interest income generated from loans to related parties (dollars in
thousands).
THREE MONTHS ENDED
JUNE 30,
------------------
2002 2001
---- ----
Principals $ 46 $ 46
HCP 13 17
HT 73 110
HCP-2 95 --
---- ----
$227 $173
==== ====
Hanover engaged HCP pursuant to a Management Agreement to render, among other
things, due diligence, asset management and administrative services. The term of
the Management Agreement continues until December 31, 2002 with subsequent
renewal. The Consolidated Statements of Income for the three months ended June
30, 2002 and 2001 include management and administrative expenses of $138,000 and
$163,000, respectively, relating to billings from HCP.
7. REVERSE REPURCHASE AGREEMENTS
Information pertaining to individual reverse repurchase agreement lenders at
June 30, 2002 is summarized as follows (dollars in thousands):
MARCH 31, NET JUNE 30,
MAXIMUM 2002 (PAYDOWN) 2002 UNDERLYING
LENDER BORROWING BALANCE ADVANCE BALANCE COLLATERAL TYPE OF COLLATERAL
-------------------- --------- -------- --------- -------- ---------- -----------------------
Lender A (committed) $10,000 $1,858 $ (91) 1,767 $10,150 Retained CMO Securities
Lender A 3,592 165 3,757 6,659 Mortgage Securities
Lender B 9,975 (4,322) 5,653 6,037 Mortgage Securities
Lender C 1,463 (1,093) 370 567 Mortgage Securities
Lender D 485 24 509 792 Mortgage Securities
Lender E 66 1,422 1,488 2,303 Mortgage Securities
-------- ------- -------- ---------
Total $17,439 $(3,895) $13,544 $26,508
======== ======= ======== =========
With the exception of the first facility listed, all of the reverse repurchase
borrowings are pursuant to uncommitted financing arrangements which are
typically renewed monthly. The first facility listed matures on March 27, 2003.
8. DERIVATIVE INSTRUMENTS
INTEREST RATE CAPS (CASH FLOW HEDGE & FREESTANDING DERIVATIVES)
From time to time, the Company buys interest rate caps when it finances
fixed-rate assets with floating-rate reverse repurchase agreements and
collateralized mortgage obligations ("CMOs"). At June 30, 2002, the Company has
designated one of its interest rate caps as a "cash flow hedge" and two as
"freestanding derivatives". The objective in entering into these instruments is
to protect the net interest margin, which represents the difference between the
interest earned on assets and the interest paid on debt. Payments received on
the interest rate caps are expected to partially offset increases in interest
expense that could result from increases in interest rates. For cash flow
hedges, the Company purchases caps that are indexed to the same floating
interest rate as the hedged borrowing. Currently, all of the interest rate caps
are indexed to LIBOR, and those liabilities for which a specific interest rate
cap has been designated a cash flow hedge are also indexed to LIBOR. The Company
considers its two interest rate caps designated as freestanding derivatives
additional protection against the net interest margin although they have not
been specifically designated hedging instruments for accounting purposes. The
Company did not recognize any gains or losses for the three months ended June
30, 2002 as a result of hedge ineffectiveness for the interest rate
11
cap designated as a cash flow hedge. The Company recognized $13,000 of losses
for the three months ended June 30, 2002 in the accompanying Consolidated
Statement of Income for changes in the fair value of interest rate caps
designated as freestanding derivatives. All of these interest rate caps relate
to the payment of variable interest on existing financial instruments. At June
30, 2002, the fair value of the Company's interest rate caps was $7,000.
FORWARD SALES OF AGENCY SECURITIES (FREESTANDING DERIVATIVES)
For the three and six months ended June 30, 2002, the Company entered into
forward sales of government agency guaranteed securities, known as "Agency"
securities, to manage the exposure to changes in the value of securities
classified as "trading securities." The Company considers these forward sales to
be freestanding derivatives. The objective is to offset gains or losses on the
trading securities with comparable losses or gains on the forward sales.
Generally, changes in the value of the trading securities are caused by changes
in interest rates, changes in the market for mortgage-backed securities ("MBS"),
and changes in the credit quality of the asset. Changes in interest rates and
changes in the market for MBS will also affect the value of the forward sales of
Agency securities. (The Company does not attempt to hedge changes in the credit
quality of individual assets.) The Company calculates the expected impact that
changes in interest rates and the market will have on the price of both the
trading securities and the forward sales. Using this information, the Company
determines the amount of forward sales that it needs so that the expected gains
or losses on trading securities will be offset by comparable losses or gains on
the forward sales. The Company marks to market the gain or loss on all of the
trading securities and all of the freestanding derivatives in each reporting
period. The mark to market on the trading securities is reported as a component
of gain (loss) on mark to market of mortgage assets in the accompanying
Consolidated Statement of Income. The mark to market on the freestanding
derivatives is reported as a component of other gain (loss) in the accompanying
Consolidated Statement of Income. The Company realized net losses on these
hedges of $240,000 for the three months ended June 30, 2002. At June 30, 2002,
the fair value of the Company's forward sale of Agency MBS was $(58,000).
9. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
In August 2000, the Board of Directors of Hanover authorized a share repurchase
program pursuant to which Hanover is authorized to repurchase up to 1,000,000
shares of its outstanding common stock, from time to time, in open market
transactions up to a maximum of $3,000,000. In addition, on August 7, 2001, the
Board of Directors of Hanover authorized the repurchase of 60,000 shares of its
outstanding common stock. As of June 30, 2002, Hanover had remaining authority
to purchase up to 501,025 shares for not more than $137,000 under the 2000 share
repurchase program and 3,000 shares under the 2001 share repurchase
authorization.
On February 20, 2002, the Board of Directors of Hanover authorized the
repurchase of up to 18,166 shares outstanding as a result of exercise of stock
option grants prior to the registration of the shares covered by the 1999 Stock
Option Plan. As of June 30, 2002, 15,666 shares have been repurchased for
approximately $131,000.
12
Calculations for earnings per share are shown below (dollars in thousands,
except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
EARNINGS PER SHARE BASIC:
Income before cumulative effect of adoption of SFAS 133 $ 1,392 $ 696 $ 2,704 $ 1,323
Cumulative effect of adoption of SFAS 133 -- -- -- 46
---------- ---------- ---------- ----------
Net income (numerator) $ 1,392 $ 696 $ 2,704 $ 1,369
========== ========== ========== ==========
Average common shares outstanding (denominator) 4,387,285 4,191,735 4,345,052 4,256,977
========== ========== ========== ==========
Per share:
Before cumulative effect of adoption of SFAS 133 $ 0.32 $ 0.17 $ 0.62 $ 0.31
Cumulative effect of adoption of SFAS 133 -- -- -- 0.01
---------- ---------- ---------- ----------
After cumulative effect of adoption of SFAS 133 $ 0.32 $ 0.17 $ 0.62 $ 0.32
========== ========== ========== ==========
EARNINGS PER SHARE DILUTED:
Income before cumulative effect of adoption of SFAS 133 $ 1,392 $ 696 $ 2,704 $ 1,323
Cumulative effect of adoption of SFAS 133 -- -- -- 46
---------- ---------- ---------- ----------
Net income (numerator) $ 1,392 $ 696 $ 2,704 $ 1,369
========== ========== ========== ==========
Average common shares outstanding 4,387,285 4,191,735 4,345,052 4,256,977
---------- ---------- ---------- ----------
Add: Incremental shares from assumed conversion of warrants -- 132,952 -- 121,643
Incremental shares from assumed conversion of
stock options 73,676 53,171 64,260 39,456
---------- ---------- ---------- ----------
Dilutive potential common shares 73,676 186,123 64,260 161,099
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding (denominator) 4,460,961 4,377,858 4,409,312 4,418,076
========== ========== ========== ==========
Per share:
Before cumulative effect of adoption of SFAS 133 $ 0.31 $ 0.16 $ 0.61 $ 0.30
Cumulative effect of adoption of SFAS 133 -- -- -- 0.01
---------- ---------- ---------- ----------
After cumulative effect of adoption of SFAS 133 $ 0.31 $ 0.16 $ 0.61 $ 0.31
========== ========== ========== ==========
10. SUBSEQUENT EVENTS
ACQUISITION OF ASSETS AND OTHER EVENTS
On July 16, 2002, Hanover filed a Form 8-K announcing that it acquired 100% of
the outstanding common stock of each of HT, HCP and HCP-2 and revised the
employment agreements and certain other compensation arrangements for certain
executive officers. The following is a summary description of the acquisition
and revisions in employment and compensation arrangements; please refer to the
Form 8-K and exhibits thereto for more information.
Pursuant to a Stock Purchase Agreement effective July 1, 2002 and approved by a
special committee of disinterested members of the Board of Directors, Hanover
acquired 100% of the outstanding common stock of each of HT, HCP and HCP-2.
Hanover had previously owned 100% of the non-voting preferred stock, but none of
the voting common stock, of each of HT, HCP and HCP-2. This ownership structure
was established in order to satisfy tax laws governing Hanover's status as a
real estate investment trust ("REIT") at the time of formation. Changes in the
tax laws made it possible for Hanover to acquire voting control of HT, HCP and
HCP-2 and operate under new rules permitting REITs to wholly own subsidiaries
such as HT, HCP and HCP-2. Therefore, as of July 1, 2002, Hanover owns 100% of
the outstanding capital stock of each of HT, HCP and HCP-2, and for periods
ending after June 30, 2002, Hanover's financial statements will be consolidated
with the financial statements of HT, HCP and HCP-2.
13
Hanover acquired the common shares of HT, HCP and HCP-2 from four of its
directors who are also executive officers.
DIRECTOR AND EXECUTIVE HANOVER CAPITAL MORTGAGE HANOVER CAPITAL HANOVER CAPITAL
OFFICER HOLDINGS, INC. HANOVERTRADE, INC. PARTNERS LTD. PARTNERS 2, INC.
- ----------------------- -------------------------- ---------------------- ------------------ -------------------------
John A. Burchett Chairman, Chief Executive Chairman and Chief Chairman and Chief Chairman and President
Officer and President Executive Officer Executive Officer
Senior Managing Director Director and Executive Director and Director, Senior Managing
Joyce S. Mizerak and Secretary Vice President President Director and Secretary
Director and Executive Director and Senior Director and Senior
George J. Ostendorf Senior Managing Director Vice President Managing Director Managing Director
Director and Senior Director and Senior
Irma N. Tavares Senior Managing Director Director and President Managing Director Managing Director
An independent appraiser determined that the value of the common shares of HT
and HCP was $474,000 in the aggregate. The parties agreed that the common shares
of HCP-2 would be transferred to Hanover as part of this transaction for no
additional consideration. Each of the four selling executives agreed that the
purchase price would be used to partially repay certain indebtedness owing to
Hanover from them. Each of these four executives also received a bonus in an
amount sufficient to cover the tax liability they incurred in connection with
this transaction. Although Hanover has no immediate plans for additional changes
in the ownership structure of HT and HCP, management believes that it is in the
best interest of the Company and its stockholders to continue to explore
possible third-party investments in, or purchase of, one or both of these
entities.
Effective July 1, 2002, Hanover revised the employment agreements and certain
compensation arrangements applicable to Mr. Burchett, Ms. Mizerak, Mr. Ostendorf
and Ms. Tavares.
AMENDED AND RESTATED EMPLOYMENT AGREEMENTS - Hanover entered into an Amended and
Restated Employment Agreement with each of Mr. Burchett, Ms. Mizerak, Mr.
Ostendorf and Ms. Tavares. These employment agreements are substantially
identical to the previous employment agreement with each of these officers,
except that (i) the base salary was set at the officer's current salary as of
July 1, 2002; and (ii) each agreement has a five-year term, automatically
renewing for successive one-year terms thereafter until Hanover or the officer
terminates the agreement.
EARN-OUT SHARES AND LOAN FORGIVENESS - In connection with Hanover's initial
public offering in 1997, Hanover entered into a Contribution Agreement with Mr.
Burchett, Ms. Mizerak, Mr. Ostendorf and Ms. Tavares which provided that they
were entitled to receive an aggregate of up to 216,667 shares of Hanover's
common stock ("Earn-Out Shares"), and to have certain indebtedness to Hanover
forgiven, if Hanover met performance targets based on its initial offering price
over certain performance periods, the last of which would have ended on
September 30, 2002. None of the targets were met within the first four periods,
so no Earn-Out Shares have been issued and none of the loans have been forgiven.
In accordance with Hanover's policy of tying executive compensation to its
corporate performance, Hanover has entered into Amendment No. 1 to the
Contribution Agreement. As a result, the Earn-Out Shares could be issued, and
the loans could be forgiven, in performance periods between 2002 and 2007 if
Hanover meets new performance targets based on its current market price rather
than its initial offering price.
REPLACEMENT STOCK OPTION GRANTS - In connection with Hanover's initial public
offering in 1997, Hanover granted Mr. Burchett, Ms. Mizerak, Mr. Ostendorf and
Ms. Tavares stock options under its 1997 Executive and Non-Employee Director
Stock Option Plan, exercisable for an aggregate of 80,160 shares of its common
stock. When initially granted, the options had an exercise price of $15.75 per
share and were subject to vest annually over 5 years based on Hanover's
achievement of certain performance targets keyed to its initial offering price.
None of the targets have been met to date, so none of the original options have
vested. To maintain a tie between executive compensation and Hanover's corporate
performance, Hanover has cancelled the original options and issued these
officers new stock options with the same exercise price but with annual vesting
periods between 2002 and 2007 and new vesting targets based on its current stock
price rather than its initial offering price.
14
OTHER
On July 2, 2002, New Jersey Governor James E. McGreevey signed into law a $1.8
billion business tax package, known as the Business Tax Reform Act. The bill
includes several changes overhauling the Corporate Business Tax ("CBT") intended
to close loopholes, impose an Alternative Minimum Assessment, and assesses a
processing fee on limited liability partnerships. The bill has numerous
provisions, some of which effect businesses that currently do not pay CBT. The
Business Tax Reform Act is effective immediately for taxable years beginning on
or after January 1, 2002, except in limited circumstances. The Company is
currently in the process of determining what effect, if any, the Business Tax
Reform Act will have on its consolidated financial statements.
On August 8, 2002, a $0.25 cash dividend was declared by the Board of Directors
for the quarter ended June 30, 2002 to be paid on September 5, 2002 to
stockholders of record as of August 22, 2002.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
The following section, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," should be read in conjunction with the
financial statements, related notes, and other detailed information included
elsewhere in this Quarterly Report on Form 10-Q. This report contains certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements represent our current expectations,
intent or beliefs concerning future events, including, without limitation,
statements containing the words "believes," "anticipates," "expects" and words
of similar import; and also including, without limitation, the following:
statements regarding our continuing ability to target, price and acquire
mortgage loans; our ability to manage and hedge the risks associated with our
investments; assumptions regarding interest rates; assumptions regarding
prepayment and default rates on the mortgage loans securing our mortgage-backed
securities; our decision to invest in higher-risk subordinated tranches; the
liquidity of our portfolios and our ability to invest currently liquid assets;
future restructuring plans with respect to our subsidiaries; the expected future
performance of Hanover Capital Partners and HanoverTrade and their need for
additional capital; continuing availability of the master reverse repurchase
agreement financing; the sufficiency of our working capital, cash flows and
financing to support our future operating and capital requirements; results of
operations and overall financial performance; the expected dividend distribution
rate; and the expected tax treatment of our operations. Such forward-looking
statements relate to future events and our future financial performance and
involve known and unknown risks, uncertainties and other important factors which
could cause actual results, performance or achievements to differ materially
from the future results, performance or achievements expressed or implied by
such forward-looking statements.
In light of the risks and uncertainties inherent in all such projected
operational matters, the inclusion of forward-looking statements in this report
should not be regarded as a representation by us or any other person that our
objectives or plans will be achieved or that any of our operating expectations
will be realized. Our revenues and results of operations are difficult to
forecast and could differ materially from those projected in the forward-looking
statements contained in this report as a result of certain risks and
uncertainties including, but not limited to, our ability to integrate and manage
acquired assets and personnel; changes in interest rates and the yield curve;
management of growth; changes in prepayment rates or default rates on our
mortgage assets; the availability and terms of additional financing; entry into
new markets; changes in business conditions and the general economy; our
dependence on effective information-systems technology; the possible decline in
our ability to locate and acquire mortgage loans; changes in the real estate
market both locally and nationally; the effectiveness of our hedging and other
efforts to mitigate the risks of our investments; the effect of default,
bankruptcy and severe weather or natural disasters on the ability of borrowers
to repay mortgages included in our asset pools; enforceability and
collectibility of non-standard single-family mortgage loans; our ability to
retain key employees; our ability to maintain our qualification for exemption
from registration as an investment company; our ability to obtain and maintain
all licenses necessary to our business; competition from other financial
institutions, including other mortgage REITs; and the possible changes in tax
and other laws applicable to REITs or our inability to maintain compliance with
such rules and to continue to qualify as a REIT. These factors should not be
considered exhaustive; we undertake no obligation to release publicly the
results of any future revisions we may make to forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Investors should also carefully consider the critical accounting policies
identified in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies," in Hanover's Annual
Report on Form 10-K for the year ended December 31, 2001. Certain critical
accounting policies are complex and involve significant judgment by our
management, including the use of estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. As a result,
changes in these estimates and assumptions could significantly affect our
financial position or our results of operations. We believe our critical
accounting policies for mortgage securities, loan loss allowance, equity
investments and income taxes involve a high degree of judgment and complexity in
the preparation of our consolidated financial statements.
OVERVIEW
Hanover is a real estate investment trust ("REIT"), formed to operate as a
specialty finance company. The principal business strategy of Hanover is to
invest in mortgage-backed securities ("MBS") and, to a lesser extent, mortgage
loans and to earn net interest income on these investments. At June 30, 2002,
Hanover had two principal unconsolidated subsidiaries, Hanover Capital Partners
Ltd. ("HCP") and HanoverTrade, Inc. ("HT"). The principal business strategy
of HCP is to generate consulting and other fee income by performing loan file
and operational due diligence reviews for third parties, performing advisory
services for third parties, and preparing and/or processing documentation
(primarily assignments of mortgage loans) for third parties on a contract basis.
The principal business activity of HT is to generate fee income by operating an
on-line worldwide web-based exchange for trading loan pools (primarily mortgage
loan pools) and by performing loan sale advisory services for third parties. In
addition, Hanover has a 31.45946% interest in HDMF-I LLC ("HDMF-I"), a limited
liability company formed to purchase, service, manage and ultimately re-sell or
otherwise liquidate packages of primarily sub- and non-performing one-to-four
family residential whole loans.
In conducting our business, we retain credit risk primarily through (i) the
purchase of subordinate MBS, (ii) the retention of subordinate securities from
our own securitization transactions, (iii) the direct investment in mortgage
loans on our own behalf and (iv) investment in HDMF-I. Through these investing
activities, we generally bear the credit losses on the related pools of mortgage
loans up to their carrying value. As of June 30, 2002, we retain the aggregate
credit risk on $4.7 billion of mortgage loans relating to (dollars in
thousands):
Principal Balance Carrying Value Financing
----------------- -------------- ---------
Subordinate MBS $ 20,043 $14,557 $11,791
Collateral for CMOs 136,110 10,150 1,753
Mortgage Loans 1,165 758 --
-------- ------- -------
Total $157,318 $25,465 $13,544
======== ======= =======
The above carrying value of collateral for collateralized mortgage obligations
("CMOs") is our net invested equity in retained mortgage-backed bonds.
In addition, HDMF-I retains the aggregate credit risk on $12,697,000 of mortgage
loans of which our portion is $3,970,000 of invested capital at risk.
16
RESULTS OF OPERATIONS
We recorded net income of $1,392,000 or $0.32 per share based on 4,387,285
weighted average shares of common stock outstanding for the three months ended
June 30, 2002 compared to net income of $696,000 or $0.17 per share based on
4,191,735 weighted average common shares outstanding for the three months ended
June 30, 2001. We recorded net income of $2,704,000 or $0.62 per share based on
4,345,052 weighted average shares of common stock outstanding for the six months
ended June 30, 2002 compared to net income of $1,369,000 or $0.32 per share
based on 4,256,977 weighted average common shares outstanding for the six months
ended June 30, 2001. Total revenue for the three months ended June 30, 2002 was
$1,666,000 compared with $2,352,000 for the comparable quarter last year. Total
revenue for the six months ended June 30, 2002 was $3,967,000 compared with
$4,362,000 for the comparable period last year.
Net interest income decreased to $1,381,000, or $0.31 per share, for the three
months ended June 30, 2002 from $1,674,000, or $0.40 per share, for the same
period in 2001. The decrease in net interest income of $293,000 was primarily
due to decreased net interest income of $292,000 on the subordinate
mortgage-backed securities portfolio. The decreased net interest income on the
subordinate MBS portfolio was primarily due to a decrease in the average balance
of the subordinate MBS portfolio from $14,234,000 for the three months ended
June 30, 2001 to $9,777,000 for the three months ended June 30, 2002. The net
effective interest rate on the average subordinate MBS portfolio decreased to
10.21% in the second quarter of 2002 from 15.23% in the second quarter of 2001
due to a shift to higher rated tranches within the portfolio. The decrease in
the average balance of the subordinate MBS was largely due to sales of
subordinate MBS not replaced with like-kind investments. The capital not
reinvested was primarily redeployed to fund the trading activities of Hanover
Capital Partners 2, Inc. ("HCP-2").
Net interest income increased to $3,033,000, or $0.70 per share, for the six
months ended June 30, 2002 from $3,004,000, or $0.71 per share, for the same
period in 2001. The increase in net interest income of $29,000 was primarily due
to (i) increased net interest income of $639,000 on our 1999-B securitization
due to favorable market interest rates, (ii) increased net interest income of
$180,000 on the mortgage loan portfolio primarily due to the recognition of
previously unearned discount on mortgage loans that paid in full during the
first half of 2002, offset by (iii) decreased net interest income of $505,000 on
the subordinate MBS portfolio due to a decrease in the average balance from
$13,829,000 for the six months ended June 30, 2001 to $9,698,000 for the six
months ended June 30, 2002 and (iv) decreased net interest income of $145,000 on
overnight investments due to lower interest rates and lower invested cash
balances.
NET INTEREST INCOME
(dollars in thousands)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------- --------------------------------------------------
2002 2001 2002 2001
----------------------- ----------------------- ---------------------- ----------------------
NET LOAN NET LOAN NET LOAN NET LOAN
INTEREST LOSS INTEREST LOSS INTEREST LOSS INTEREST LOSS
INCOME PROVISION INCOME PROVISION INCOME PROVISION INCOME PROVISION
---------- ----------- --------- ---------- -------- ---------- ------- ---------
Mortgage loans $ 73 $ -- $ 8 $ -- $ 190 $ -- $ 10 $ --
CMO collateral 659 (42) 550 (64) 1,400 (89) 774 (134)
Agency MBS 29 -- 99 -- 232 -- 230 --
Private placement MBS 366 (25) 778 (140) 740 (32) 1,478 (309)
Other 254 -- 239 -- 471 -- 512 --
------ ---- ------ ----- ------ ----- ------ -----
Total net interest income $1,381 $(67) $1,674 $(204) $3,033 $(121) $3,004 $(443)
====== ==== ====== ===== ====== ===== ====== =====
Our provision for loan losses decreased to $67,000 for the three months ended
June 30, 2002 from $204,000 for the same period last year and $121,000 for the
six months ended June 30, 2002 from $443,000 for the same period last year. The
decreases for the three and six months ended June 30, 2002 compared to similar
periods last year were primarily as a result of sales of first-loss subordinate
MBS and a reduction in the average balance of collateral for collateralized
mortgage obligations.
17
The results for the three and six months ended June 30, 2002 included a gain on
sale of mortgage assets of $305,000 and $905,000, respectively, compared to
$728,000 and $1,853,000, respectively, for the same periods last year. During
the three and six months ended June 30, 2002, we sold approximately $2,232,000
and $6,862,000 principal balance of subordinate MBS, respectively, as compared
to sales of $8,265,000 and $23,112,000, principal balance of subordinate MBS
during the three and six months ended June 30, 2001, respectively.
Operating expenses for the three months ended June 30, 2002 were $964,000,
compared to $780,000 for the same period last year, an increase of $184,000.
Operating expenses for the six months ended June 30, 2002 were $2,010,000,
compared to $1,486,000 for the same period last year, an increase of $524,000.
The biggest component of the increase was an increase in personnel expenses.
Personnel expenses for the three and six months ended June 30, 2002 increased to
$360,000 and $856,000, respectively, compared to $170,000 and $337,000,
respectively, for the same periods last year. The increase in personnel expenses
was primarily due to a bonus accrual established for a pool of employees during
the three and six months ended June 30, 2002. Such bonus accrual was established
pursuant to existing contractual agreements. No such bonus accrual was
established in 2001.
Hanover's equity in income of HCP, its unconsolidated consulting and due
diligence subsidiary, increased to $86,000 for the three months ended June 30,
2002 from $10,000 for the same period last year. Hanover's equity in income of
HCP increased to $112,000 for the six months ended June 30, 2002 from $12,000
for the same period last year. Total revenues at HCP for the three months ended
June 30, 2002 increased $309,000 or 23% to $1,678,000 in 2002 from $1,369,000
for the same period in 2001. Total revenues at HCP for the six months ended June
30 increased $124,000 or 4% to $3,023,000 in 2002 from $2,899,000 in 2001. Due
diligence fees increased $9,000 or 1% to $1,170,000 for the three months ended
June 30, 2002 from $1,161,000 for the same period in 2001 while assignment fees
increased $243,000 or 121% to $444,000 for the three months ended June 30, 2002
from $201,000 for the same period in 2001. Due diligence fees decreased $433,000
or 17% to $2,086,000 for the six months ended June 30, 2002 from $2,519,000 for
the same period in 2001 while assignment fees increased $466,000 or 127% to
$833,000 for the six months ended June 30, 2002 from $367,000 for the same
period in 2001. Expenses for the three months ended June 30, 2002 increased to
$1,518,000 from $1,349,000 for the same period in 2001 and, for the six months
ended June 30, 2002, decreased to $2,817,000 from $2,865,000 for the same period
in 2001. The increase in assignment fees of $466,000 for the six months ended
June 30, 2002 as compared to the same period last year, was primarily due to two
large assignment contracts accounting for approximately 44% of HCP's assignment
fees for the six months ended June 30, 2002. HCP continues to generate
assignment fees from these contracts. However, there can be no assurances made
that HCP will be able to generate assignment fees comparable to those recorded
for the six months ended June 30, 2002. The decrease in due diligence fees of
$433,000 for the six months ended June 30, 2002 as compared to the same period
last year, was primarily due to a change in the business mix which resulted in a
lower number of due diligence contracts requiring the use of outside personnel.
However, this decreased need for outside personnel contributed to the overall
decrease in expenses for the six months ended June 30, 2002 as compared to the
same period last year. In addition, the change in business mix resulted in an
increase in the number of due diligence contracts performed in-house. Overall,
such change in business mix resulted in decreased due diligence revenues offset
by lower expenses resulting in higher profit margins.
Hanover recognized equity in income of HT, its worldwide web-based exchange for
loan pool trading and loan sale advisory services, of $628,000 for the three
months ended June 30, 2002 compared to a loss of $886,000 for the same period
last year. Hanover recognized equity in income of HT of $655,000 for the six
months ended June 30, 2002 compared to a loss of $1,565,000 for the same period
last year. Total revenues at HT increased $1,710,000 or 207% to $2,537,000 for
the three months ended June 30, 2002 from $827,000 for the same period in 2001.
Total revenues at HT increased $2,654,000 or 150% to $4,419,000 for the six
months ended June 30, 2002 from $1,765,000 for the same period in 2001.
Approximately 78% of HT's revenue for the second quarter of 2002 was derived
from a contract with the FDIC. HT has completed its role under this contract,
and no further revenues will be generated from it. No assurances can be made
that HT will be able to sustain its second quarter financial performance.
Expenses for the three and six months ended June 30, 2002 increased to
$1,889,000 and $3,744,000, respectively, from $1,740,000 and $3,384,000,
respectively, for the same period in 2001. The $149,000 and $360,000 increases
for the three and six months ended June 30 were primarily due to an increase in
technology expense for web hosting and web graphics of $131,000 and $264,000,
respectively, and an increase in general and administrative expense of $44,000
and $135,000, respectively.
In the first quarter of 2002, we commenced trading activity in HCP-2.
Hanover recognized equity in losses of $44,000 and $19,000 for the three and six
months ended June 30, 2002, respectively. HCP-2 is engaged in the trading of
Agency derivative MBS and futures contracts.
In November 2001, we made our initial investment in HDMF-I of $115,000 to fund
our proportionate share of professional, organizational and other fees. In the
first quarter of 2002, we invested an additional $3,891,000 in HDMF-I to fund
our proportionate share of a loan pool with a purchase price of $12,230,000. For
the three and six months ended June 30, 2002, we recognized equity in income of
$20,000 and equity in loss of $1,000, respectively. At June 30, 2002, we had a
total capital contribution commitment of $5,820,000.
18
TAXABLE INCOME
Our taxable loss for the quarter ended June 30, 2002 is estimated at
$447,000. Taxable loss differs from GAAP net income due to various recurring and
one-time book/tax differences. The following table details the major book/tax
differences in arriving at the estimated taxable loss (dollars in thousands):
GAAP net income $ 1,392
GAAP gain on sale (305)
Tax gain on sale 318
Utilization of capital loss carryforward (318)
Equity in (income) of unconsolidated subsidiaries (690)
Gain on mark to market of mortgage securities, net of
associated hedge (46)
Loan loss provision, net of realized losses 35
Tax amortization of net premiums on mortgages, CMO
collateral and mortgage securities and interest accrual
in excess of GAAP amortization and interest accrual (99)
Deduction for tax for exercise of non-qualified stock options (691)
Other (43)
-------
Estimated taxable (loss) $ (447)
=======
As a REIT, we are required to pay dividends amounting to 85% of each year's
taxable income by the end of each calendar year and to have declared dividends
amounting to 90% of our taxable income for each year by the time we file our
Federal tax return. Therefore, a REIT generally passes through substantially all
of its earnings to shareholders without paying Federal income tax at the
corporate level. Dividend payments for 2002 may represent a partial return of
capital dividend to shareholders.
If we fail to qualify as a REIT in any taxable year and certain relief
provisions of the Code do not apply, we will be subject to Federal income tax as
a regular, domestic corporation, and our stockholders will be subject to tax in
the same manner as stockholders of a regular corporation. Distributions to our
stockholders in any year in which we fail to qualify as a REIT would not be
deductible by us in computing our taxable income. As a result, we could be
subject to income tax liability, thereby significantly reducing or eliminating
the amount of cash available for distribution to our stockholders. Further, we
could also be disqualified from re-electing REIT status for the four taxable
years following the year during which we became disqualified.
LIQUIDITY
We expect to meet our future short-term and long-term liquidity requirements
generally from our existing working capital, cash flow provided by operations,
reverse repurchase agreements ("repos") and other sources of financing,
including CMOs and real estate mortgage investment conduits ("REMICs"). We
consider our ability to generate cash to be adequate to meet operating
requirements both short-term and long-term.
We have exposure to market-driven liquidity events due to the short-term reverse
repurchase financing we have in place against our MBS. If a significant decline
in the market value of our MBS portfolio should occur, our available liquidity
from existing sources and ability to access additional sources of credit may be
reduced. As a result of such a reduction in liquidity, we may be forced to sell
certain investments to maintain liquidity. If required, these sales could be
made at prices lower than the carrying value of such assets, which could result
in losses.
19
We had one committed reverse repurchase line of credit in place at June 30, 2002
and five uncommitted lines of credit. At June 30, 2002, we had available
capacity to borrow $10 million under the committed line. Management may seek to
add additional committed and uncommitted lines of credit in the future; there
can be no assurance that such financing will be available on favorable terms.
Net cash provided by operating activities for the six months ended June 30, 2002
was $18,020,000 compared to net income of $2,704,000 for the same period in
2002. Sales of trading securities provided $55,524,000, partially offset by the
purchase of trading securities of $38,685,000.
Net cash provided by investing activities amounted to $30,809,000 during the six
months ended June 30, 2002. The majority of cash proceeds from investing
activities was generated from (i) principal payments received on collateral for
CMOs of $28,181,000, (ii) principal payments received on mortgage securities of
$3,201,000 and (iii) proceeds from sale of mortgage assets of $2,763,000. These
proceeds were partially offset by additions to investments of $3,891,000.
Cash flows from financing activities used $49,261,000 during the six months
ended June 30, 2002. We made repayments on reverse repurchase agreements of
$19,794,000 and on CMO borrowings of $27,912,000. Hanover also paid dividends of
$1,968,000 and purchased an additional 15,666 shares of its common stock for
$131,000 during the period. These payments were partially offset by proceeds
from the exercise of stock options resulting in the issuance of 127,433 shares
of common stock for $544,000.
CAPITAL RESOURCES
We regularly invest our capital in MBS through Hanover, our primary investment
vehicle. We have also invested a limited amount of our capital in HT. From the
inception of HT in May 1999 until June 30, 2002, we advanced $6,305,000 in the
form of loans, and $44,000 in the form of intercompany advances, to HT. On July
1, 2002, we acquired 100% of the outstanding common stock of each of HT, HCP and
HCP-2; for periods ending after June 30, 2002, our financial statements will be
consolidated with the financial statements of those entities. Although we have
no immediate plans for a change in the ownership of HT, we continue to pursue
third-party investments to address HT's future capitalized software budget and
operating needs. If outside financing is not located, we will continue to be
responsible for HT's capital and operating requirements, although we do not
expect those needs to be substantial in 2002.
20
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the second quarter of 2002, we used certain derivative financial
instruments as hedges of anticipated transactions relating to our mortgage
securities.
We, from time to time, enter into interest rate hedge mechanisms (forward sales
of Agency mortgage securities) to manage our exposure to market pricing changes
in connection with the purchase, holding, securitization and sale of our
fixed-rate mortgage loan portfolio and certain mortgage securities. We generally
close out the hedge position to coincide with the related sale or securitization
transaction. As such hedges are considered freestanding derivatives for
accounting purposes, we recognize changes in the fair value of such hedges in
earnings in the period of change.
At June 30, 2002, we had forward commitments to sell $5.2 million (par value) of
Agency mortgage securities that had not yet settled. These forward commitments
were entered into to partially hedge the expected sale of approximately $13.5
million principal balance of subordinate MBS classified as trading.
The primary risk associated with selling short Agency securities relates to
changes in interest rates. Generally, as market interest rates increase, the
market value of the hedged asset (fixed-rate mortgage loans) will decrease. The
net effect of increasing interest rates will generally be a favorable or gain
settlement on the forward sale of the Agency security; this gain should offset a
corresponding decline in the value of the hedged assets. Conversely, if interest
rates decrease, the market value of the hedged asset will generally increase.
The net effect of decreasing interest rates will generally be an unfavorable or
loss settlement on the forward sale of the Agency security; this loss should be
offset by a corresponding gain in value of the hedged assets. To mitigate
interest rate risk, an effective matching of Agency securities with the hedged
assets needs to be monitored closely. Senior management monitors the changes in
weighted average duration and coupons of the hedged assets and will
appropriately adjust the amount, duration and coupon of future forward sales of
Agency securities.
We also enter into interest rate hedge mechanisms (interest rate caps) to manage
our interest rate exposure on certain reverse repurchase financing and floating
rate CMOs. For interest rate caps designated as cash flow hedges for accounting
purposes, the effective portion of the gain or loss due to changes in fair value
is reported in other comprehensive income, and the ineffective portion is
reported in earnings in the period of change. For interest rate caps designated
as freestanding derivatives for accounting purposes, changes in fair value are
recognized in earnings in the period of change.
At June 30, 2002, we had the following interest rate caps in effect (dollars in
thousands):
NOTIONAL
AMOUNT INDEX STRIKE % MATURITY DATE ACCOUNTING DESIGNATION
-------- ------------- -------- ------------- -----------------------
$11,000 3 Month LIBOR 7.695% October 2003 Freestanding Derivative
20,000 1 Month LIBOR 7.75% August 2004 Freestanding Derivative
30,000 1 Month LIBOR 7.25% August 2002 Cash Flow Hedge
--------
$61,000
========
The primary risk associated with interest rate caps relates to interest rate
increases. The interest rate caps provide a cost of funds hedge against interest
rates that exceed the strike rate, subject to the limitation of the notional
amount of financing.
21
INTEREST RATE SENSITIVITY
Interest Rate Mismatch Risk - Reverse Repurchase Financing
At June 30, 2002, we owned $758,000 of mortgage loans held for sale. In general,
we expect that future loan purchases will be conducted by our equity investee
HDMF-I, and we do not currently plan to purchase additional loans for our own
account. If we resume our strategy of purchasing mortgage loans for our own
account, we would finance these assets during the initial period (the time
period during which management analyzes the loans in detail and corrects
deficiencies where possible before securitizing the loans) with reverse
repurchase financing or with equity alone in certain instances. In this
scenario, we would be exposed to the mismatch between the cost of funds on our
reverse repurchase financing and the yield on the mortgage loans. Our reverse
repurchase financing at June 30, 2002 was indexed to LIBOR plus a spread of 90
to 175 basis points. This financing generally is rolled and matures every 30 to
90 days. Accordingly, any increases in LIBOR will tend to reduce net interest
income and any decreases in LIBOR will tend to increase net interest income.
We also have floating-rate reverse repurchase financing for certain fixed-rate
MBS. At June 30, 2002, we had a total of $11,777,000 of floating-rate reverse
repurchase financing compared to $30,394,000 of fixed-rate MBS investments. We
have attempted to hedge this exposure by using the interest rate caps described
above.
Price Risk
The market value of mortgage loans and mortgage securities will fluctuate with
changes in interest rates. In the case of mortgage loans held for sale and
mortgage securities available for sale or held for trading, we will be required
to record changes in the market value of such assets. In the case of mortgage
loans held for sale and mortgage securities held for trading, we generally
attempt to hedge these changes through the short sale of mortgage securities,
described above. At June 30, 2002, we did not have any significant mortgage
loans held for sale. The mortgage securities held for trading were hedged with
the short sale of mortgage securities described above.
Prepayment Risk
Interest income on the mortgage loan and mortgage securities portfolio is also
negatively affected by prepayments on mortgage loan pools or MBS purchased at a
premium and positively impacted by prepayments on mortgage loan pools or MBS
purchased at a discount. We assign an anticipated prepayment speed to each
mortgage pool and MBS at the time of purchase and record the appropriate
amortization of the premium or discount over the estimated life of the mortgage
loan pool or MBS. To the extent the actual prepayment speeds vary significantly
from the anticipated prepayment speeds for an extended period of time, we will
adjust the anticipated prepayment speeds and amortization of the premium or
discount accordingly. This will negatively (in the case of accelerated
amortization of premiums or decelerated amortization of discounts) or positively
(in the case of decelerated amortization of premiums or accelerated amortization
of discounts) impact net interest income.
Securitized Mortgage Loan Assets
With respect to the matched funding of assets and liabilities, the CMO
collateral relating to the 1998-A, 1999-A, 1999-B and 2000-A securitizations
reflect $87,458,000 of fixed-rate mortgage loans and $36,065,000 of
adjustable-rate mortgage loans and $9,800,000 of mortgage securities at June 30,
2002. The primary financing for this asset category is the CMO debt of
$123,173,000 and, to a much lesser extent, reverse repurchase agreements of
$1,767,000. The reverse repurchase financing, which is indexed to LIBOR, is
subject to interest rate volatility as the reverse repurchase agreement matures
and is extended. The financing provided by the CMOs for the 1998-A, 1999-A and
2000-A securitizations lock in long-term fixed financing and thereby eliminates
most interest rate risk. The financing for the 1999-B securitization is indexed
to LIBOR. Accordingly, we have hedged this interest rate risk through the
purchase of interest rate caps.
22
We purchased amortizing interest rate caps with notional balances of $110
million in August 1999 to hedge the 1999-B securitization. The remaining
notional balance of these caps is $50 million at June 30, 2002.
Mortgage Securities
At June 30, 2002, we owned certain fixed-rate Agency and private placement
mortgage securities and certain interest-only and principal-only private
placement mortgage securities with an aggregate carrying value of $20,594,000.
The coupon interest rates on the fixed-rate mortgage securities would not be
affected by changes in interest rates. The interest-only notes remit monthly
interest generated from the underlying mortgages after deducting all service
fees and the coupon interest rate on the applicable notes. The interest rate on
each of the interest-only notes is based on a notional amount (the principal
balance of those mortgage loans with an interest rate in excess of the related
note coupon interest rate). The notional amounts decline each month to reflect
the related normal principal amortization, curtailments and prepayments for the
related underlying mortgage loans. Accordingly, net interest income on the
mortgage securities portfolio would be negatively affected by prepayments on
mortgage loans underlying the mortgage securities and would further be
negatively affected to the extent that higher rated coupon mortgage loans paid
off more rapidly than lower rated coupon mortgage loans.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are involved in litigation incidental to the conduct
of our business. We are not currently a party to any lawsuit or proceeding
which, in the opinion of management, is likely to have a material adverse
effect on our business, financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
Amendment to Amended Articles of Incorporation
At our annual meeting of stockholders on May 17, 2002, our stockholders
approved an amendment to our Amended Articles of Incorporation, which
modified our common stock ownership limitations. The common stock
ownership limitation applicable to John A. Burchett, our President, Chief
Executive Officer and Chairman, was increased from 11.99% to 20%. All
other stockholders are subject to a common stock ownership limitation of
7.5%, reduced from 9.5%.
Repurchase of Common Stock
On February 20, 2002, our Board of Directors authorized the repurchase of
up to 18,166 common shares outstanding as a result of exercise of stock
option grants prior to the registration of the shares covered by our 1999
Equity Incentive Plan. As of June 30, 2002, 15,666 shares have been
repurchased for approximately $131,000.
Option Plans
We have from time to time granted stock options to purchase shares of our
common stock pursuant to our 1999 Equity Incentive Plan (the "1999 Plan").
Option grants under the 1999 Plan were exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended. The following
table summarizes certain information regarding option grants:
Aggregate
Number
of Shares of
Common
Stock Weighted
Underlying Average
Options at the Exercise
Time Period Class of Grantees Time of Grant Price Plan
----------- ----------------- ------------- ----- ----
2001 Directors 4,000 7.750 1999 Plan
Item 3. Defaults Upon Senior Securities
Not applicable.
24
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders on May 17, 2002. 4,324,587
shares of our common stock were outstanding and entitled to vote at the
annual meeting, and 4,244,097 shares were represented at the annual
meeting in person or by proxy. The following matters were voted upon at
the annual meeting:
(a) The following members were re-elected to the Board of Directors:
Terms Expiring in 2005 Votes For Votes Against Abstentions
---------------------- --------- ------------- -----------
James F. Stone 4,207,394 0 36,703
Joyce S. Mizerak 4,206,798 0 37,299
Irma N. Tavares 4,206,798 0 37,299
There were no broker non-votes.
(b) An amendment to our Amended Articles of Incorporation to increase
the ownership limit of John A. Burchett, our Chief Executive Officer
and Chairman, from 11.99% to 20% while concurrently reducing any
other person's beneficial ownership limit from 9.5% to 7.5%, was
approved by the stockholders with the following vote:
Broker
Votes For Votes Against Abstentions Non-Votes
---------- ------------- ----------- ---------
3,006,361 216,019 54,355 967,362
Item 5. Other Information
Not applicable.
25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index, which appears immediately
following the signature page below, are included or incorporated by
reference herein.
(b) Reports on Form 8-K
A current report on Form 8-K was filed on July 16, 2002 announcing
that we acquired 100% of the outstanding common stock of HT, HCP and
HCP-2 and revised the employment agreements and certain other
compensation agreements for certain executive officers.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By: /s/ John A. Burchett
Dated: August 14, 2002 --------------------------------------
John A. Burchett
President and Chief Executive Officer
Chairman of the Board of Directors
By: /s/ J. Holly Loux
Dated: August 14, 2002 --------------------------------------
J. Holly Loux
Chief Financial Officer
27
EXHIBIT INDEX
Exhibit Description
2.1(8) Stock Purchase Agreement dated as of July 1, 2002 by and between
Registrant, John A. Burchett, Joyce S. Mizerak, George J.
Ostendorf and Irma N. Tavares
3.1* Amended Articles of Incorporation of Registrant, as amended
3.2(1) Bylaws of Registrant
4.1(1) Specimen Common Stock Certificate of Registrant
10.3(1) Registration Rights Agreement
10.5(1) Agreement and Plan of Recapitalization
10.6(1) Bonus Incentive Compensation Plan
10.7(1) 1997 Executive and Non-Employee Director Stock Option Plan
10.7.1(3) 1999 Equity Incentive Plan
10.8(7) Amended and Restated Employment Agreement effective as of July 1,
2002, by and between Registrant and John A. Burchett
10.8.1(7) Stock Option Agreement effective as of July 1, 2002 between
Registrant and John A. Burchett
10.9(7) Amended and Restated Employment Agreement effective as of July 1,
2002, by and between Registrant and Irma N. Tavares
10.9.1(7) Stock Option Agreement effective as of July 1, 2002 between
Registrant and Irma N. Tavares
10.10(7) Amended and Restated Employment Agreement effective as of July 1,
2002, by and between Registrant and Joyce S. Mizerak
10.10.1(7) Stock Option Agreement effective as of July 1, 2002 between
Registrant and Joyce S. Mizerak
10.11(7) Amended and Restated Employment Agreement effective as of July 1,
2002, by and between Registrant and George J. Ostendorf
10.11.1(7) Stock Option Agreement effective as of July 1, 2002 between
Registrant and George J. Ostendorf
10.11.2(6) Employment Agreement by and between Registrant and Thomas P.
Kaplan
10.13(1) Office Lease Agreement, dated as of March 1, 1994, by and between
Metroplex Associates and Hanover Capital Mortgage Corp., as
amended by the First Modification and Extension of Lease
Amendment, dated as of February 28, 1997
10.14(3) Office Lease Agreement, dated as of February 1, 1999, between
LaSalle-Adams, L.L.C. and Hanover Capital Partners Ltd.
10.25(1) Contribution Agreement by and among Registrant, John A. Burchett,
Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares
10.25.1(7) Amendment No. 1 to Contribution Agreement entered into as of July
1, 2002 by and between Registrant, John A. Burchett, Joyce S.
Mizerak, George J. Ostendorf and Irma N. Tavares
10.26(1) Participation Agreement by and among Registrant, John A.
Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N.
Tavares
10.27(1) Loan Agreement
10.29(2) Management Agreement, dated as of January 1, 1998, by and between
Registrant and Hanover Capital Partners Ltd.
10.30(3) Amendment Number One to Management Agreement, dated as of
September 30, 1999
10.31(4) Amended and Restated Master Loan and Security Agreement by and
between Greenwich Capital Financial Products, Inc., Registrant
and Hanover Capital Partners Ltd. Dated March 27, 2000
10.33(5) Stockholder Protection Rights Agreement
10.33.1(7) Amendment to Stockholder Protection Rights Agreement effective as
of September 26, 2001, by and among Registrant, State Street Bank
and Trust Company and EquiServe Trust Company, N.A.
10.33.2(7) Second Amendment to Stockholder Protection Rights Agreement dated
as of June 10, 2002 by and between Registrant and EquiServe Trust
Company, N.A.
10.34(6) Asset Purchase Agreement, dated as of January 19, 2001 by and
among HanoverTrade.com, Inc., Registrant, Pamex Capital Partners,
L.L.C. and the members of Pamex Capital Partners, L.L.C.
99.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith.
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11, Registration No. 333-29261, as amended, which became effective
under the Securities Act of 1933, as amended, on September 15, 1997.
(2) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1997, as filed with the Securities and Exchange
Commission on March 31, 1998.
(3) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1999, as filed with the Securities and Exchange
Commission on March 30, 2000.
(4) Incorporated herein by reference to Registrant's Form 10-Q for the quarter
ended March 31, 2000, as filed with the Securities and Exchange Commission
on May 15, 2000.
(5) Incorporated herein by reference to Registrant's report on Form 8-K filed
with the Securities and Exchange Commission on April 24, 2000.
(6) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 2000, as filed with the Securities and Exchange
Commission on April 2, 2001.
(7) Incorporated herein by reference to Registrant's Form 8-K filed with the
Securities and Exchange Commission on July 16, 2002.