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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 September 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The registrant had 4,509,197 shares of common stock outstanding as of
November 14, 2002.
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets as of
September 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income (unaudited) for the
Three and Nine Months Ended September 30, 2002 and 2001 4
Consolidated Statement of Stockholders' Equity (unaudited)
for the Nine Months Ended September 30, 2002 5
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 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 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
Certifications 33
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except as noted)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(unaudited)
ASSETS
Mortgage loans:
Held for sale $ 504 $ 2,391
Collateral for CMOs 113,473 151,882
Mortgage securities pledged as collateral
for reverse repurchase agreements:
Available for sale 1,657 4,404
Held to maturity 641 768
Trading 9,119 33,182
Mortgage securities pledged as collateral for CMOs 9,825 9,840
Mortgage securities, not pledged:
Available for sale 801 1,162
Trading 6,061 1,827
Cash and cash equivalents 9,839 8,946
Accounts receivable 2,676 777
Accrued interest receivable 1,118 1,960
Equity investments:
Hanover Capital Partners Ltd. -- 1,808
HanoverTrade, Inc. -- (4,789)
HDMF-I LLC 4,551 80
Notes receivable from related parties 2,805 12,538
Other assets 7,364 2,731
--------- ---------
TOTAL ASSETS $ 170,434 $ 229,507
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Reverse repurchase agreements $ 8,592 $ 33,338
CMO borrowing 113,314 151,096
Dividends payable -- 855
Accounts payable, accrued expenses and other liabilities 4,306 2,677
--------- ---------
TOTAL LIABILITIES 126,212 187,966
--------- ---------
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, 4,509,197 and
4,275,676 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively 45 43
Additional paid-in capital 68,232 67,082
Retained earnings (deficit) (24,004) (25,978)
Accumulated other comprehensive income (loss) (51) 394
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 44,222 41,541
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 170,434 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES:
Interest income $ 3,311 $ 4,695 $ 10,617 $ 15,500
Interest expense 1,772 3,088 6,045 10,889
-------- -------- -------- --------
Net interest income 1,539 1,607 4,572 4,611
Loan loss provision 107 145 228 588
-------- -------- -------- --------
Net interest income after loan loss provision 1,432 1,462 4,344 4,023
Gain on sale of mortgage assets 480 671 1,385 2,524
Gain on mark to market of mortgage assets,
net of associated hedge 1,237 483 1,812 501
Loan brokering/trading 1,618 -- 1,618 --
Due diligence fees 1,306 -- 1,306 --
Assignment fees 710 -- 710 --
Other income (loss) (717) 2 (1,142) (68)
-------- -------- -------- --------
Total revenue 6,066 2,618 10,033 6,980
-------- -------- -------- --------
EXPENSES:
Personnel 2,434 166 3,290 503
Subcontractor 803 -- 803 --
General and administrative 348 356 793 860
Legal and professional 337 451 766 727
Depreciation and amortization 311 9 311 23
Other 158 51 257 162
Occupancy 138 48 186 137
Financing/commitment fees 30 54 162 207
Technology 139 1 140 3
-------- -------- -------- --------
Total expenses 4,698 1,136 6,708 2,622
-------- -------- -------- --------
Operating income 1,368 1,482 3,325 4,358
Equity in income (loss) of unconsolidated subsidiaries:
Hanover Capital Partners Ltd. -- 3 112 15
HanoverTrade, Inc. -- (760) 655 (2,325)
HDMF-I LLC 130 -- 129 --
Hanover Capital Partners 2, Inc. -- -- (19) --
-------- -------- -------- --------
Income before income tax provision (benefit) and
cumulative effect of adoption of SFAS 133 1,498 725 4,202 2,048
Income tax provision (benefit) (8) -- (8) --
-------- -------- -------- --------
Income before cumulative effect of adoption of SFAS 133 1,506 725 4,210 2,048
Cumulative effect of adoption of SFAS 133 -- -- -- 46
-------- -------- -------- --------
NET INCOME $ 1,506 $ 725 $ 4,210 $ 2,094
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Before cumulative effect of adoption of SFAS 133 $ 0.34 $ 0.17 $ 0.96 $ 0.48
Cumulative effect of adoption of SFAS 133 -- -- -- 0.01
-------- -------- -------- --------
After cumulative effect of adoption of SFAS 133 $ 0.34 $ 0.17 $ 0.96 $ 0.49
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Before cumulative effect of adoption of SFAS 133 $ 0.33 $ 0.17 $ 0.95 $ 0.48
Cumulative effect of adoption of SFAS 133 -- -- -- 0.01
-------- -------- -------- --------
After cumulative effect of adoption of SFAS 133 $ 0.33 $ 0.17 $ 0.95 $ 0.49
======== ======== ======== ========
See notes to consolidated financial statements
4
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 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) -- (132) (132)
Capital contributed to
related party 63,577 -- 470 470
Exercise of options 185,610 2 812 814
Comprehensive income:
Net income $ 4,210 4,210 4,210
Other comprehensive
income:
Change in net unrealized
gain (loss) on
securities available
for sale (609) (609) (609)
Change in net unrealize
gain (loss) on interest
rate caps designated
as hedges 164 164 164
---------
Comprehensive income $ 3,765
=========
Dividends declared (2,236) (2,236)
--------- ------ -------- -------- -------- ---------
Balance, September 30, 2002 4,509,197 $ 45 $ 68,232 $(24,004) $ (51) $ 44,222
========= ====== ======== ======== ======== =========
See notes to consolidated financial statements
5
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,210 $ 2,094
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 311 --
Amortization of net premium and deferred costs 148 220
Loan loss provision 228 588
(Gain) on sale of mortgage assets (1,385) (2,095)
(Gain) on mark to market of mortgage assets (1,812) (1,239)
(Gain) on mark to market of mortgage assets for SFAS 133 -- (50)
(Gain) on disposition of REO (51) --
Purchase of trading securities (40,636) (95,360)
Sale of trading securities 61,184 90,642
Distributions from unconsolidated subsidiaries in excess of
equity (income) loss 195 2,311
(Increase) decrease in accounts receivable (720) 219
Decrease in accrued interest receivable 914 559
(Increase) in notes receivable from related parties (1,342) (3,598)
Decrease in other assets 511 459
Increase in accounts payable, accrued expenses and other liabilities (368) 276
-------- --------
Net cash provided by (used in) operating activities 21,387 (4,974)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage securities (1,312) (4,433)
Principal payments received on mortgage securities 3,667 3,474
Principal payments received on collateral for CMOs 38,180 46,063
Principal payments received on mortgage loans held for sale 205 8
Proceeds from sale of mortgage assets 6,270 12,051
Proceeds from disposition of REO 240 --
Sales of mortgage securities to affiliates 946 --
Increase in cash due to acquisition of subsidiaries' residual interests 1,671 --
Capital contribution to HDMF-I LLC (5,415) --
-------- --------
Net cash provided by investing activities 44,452 57,163
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment of) reverse repurchase agreements (24,746) (5,352)
Net (repayment of) CMOs (37,791) (45,707)
Payment of dividends (3,091) (2,556)
Repurchase of common stock (132) (1,734)
Exercise of stock options 814 154
-------- --------
Net cash (used in) financing activities (64,946) (55,195)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 893 (3,006)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,946 9,958
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,839 $ 6,952
======== ========
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 wholly-owned and 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. Other than the July 1, 2002
acquisition of 100% of the outstanding common stock of each of HanoverTrade,
Inc., Hanover Capital Partners Ltd. and Hanover Capital Partners 2, Inc., there
were no adjustments of a non-recurring nature recorded during the three and nine
months ended September 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.
Pursuant to a Stock Purchase Agreement effective July 1, 2002 and approved by a
special committee of disinterested members of its Board of Directors, Hanover
acquired 100% of the outstanding common stock of each of HanoverTrade, Inc.
(formerly HanoverTrade.com, Inc.) ("HT"), an internet-based loan trading firm;
Hanover Capital Partners Ltd. ("HCP"), a due diligence consulting 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. 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.
Hanover acquired the common shares of HT, HCP and HCP-2 from four of its
directors who are also executive officers.
DIRECTOR AND HANOVER CAPITAL HANOVER CAPITAL HANOVER CAPITAL
EXECUTIVE OFFICER MORTGAGE HOLDINGS, INC. HANOVERTRADE, INC. PARTNERS LTD. PARTNERS 2, INC.
- ---------------------- ------------------------- -------------------- ------------------- -------------------------
John A. Burchett Chairman, Chief Chairman and Chief Chairman and Chairman and President
Executive Officer and Executive Officer Chief Executive
President Officer
Joyce S. Mizerak Senior Managing Director and Director and Director, Senior
Director and Secretary Executive Vice President Managing Director and
President Secretary
George J. Ostendorf Senior Managing Director Director and Director and Director and Senior
Executive Vice Senior Managing Managing Director
President Director
Irma N. Tavares Senior Managing Director Director and Director and Director and Senior
President Senior Managing Managing Director
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
7
the Company and its stockholders to continue to explore possible third-party
investments in, or purchase of, one or both of these entities.
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 did not
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)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------------------- ---------------------------------
FIXED ADJUSTABLE FIXED ADJUSTABLE
RATE RATE TOTAL RATE RATE TOTAL
------- ---------- ------- ------- ---------- -------
Principal amount of mortgage loans $ 49 $ 645 $ 694 $ 560 $ 2,627 $ 3,187
Net premium (discount) and deferred costs (3) (187) (190) (159) (637) (796)
Loan loss allowance -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Carrying value of mortgage loans $ 46 $ 458 $ 504 $ 401 $ 1,990 $ 2,391
======= ======= ======= ======= ======= =======
MORTGAGE LOANS SECURITIZED IN COLLATERALIZED MORTGAGE OBLIGATIONS
(dollars in thousands)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------------------- ----------------------------------
FIXED ADJUSTABLE FIXED ADJUSTABLE
RATE RATE TOTAL RATE RATE TOTAL
-------- ---------- -------- -------- ---------- --------
Principal amount of mortgage loans $ 79,281 $ 34,070 $113,351 $105,849 $ 45,535 $151,384
Net premium (discount) and deferred costs 1,106 (165) 941 1,442 (167) 1,275
Loan loss allowance (581) (238) (819) (553) (224) (777)
-------- -------- -------- -------- -------- --------
Carrying value of mortgage loans $ 79,806 $ 33,667 $113,473 $106,738 $ 45,144 $151,882
======== ======== ======== ======== ======== ========
Hanover's securitizations were issued with various call provisions, generally
allowing for the termination of the securitization at the earlier of a certain
date or when the outstanding collateral balance is less than a certain
percentage of the original collateral balance. As of September 30, 2002, Group 2
of Hanover's 1998-A securitization is callable. We are currently evaluating the
economic feasibility of calling 1998-A.
8
3. MORTGAGE SECURITIES
FIXED-RATE AGENCY MORTGAGE-BACKED SECURITIES
(dollars in thousands)
DECEMBER 31, 2001
-------------------------------------------
AVAILABLE HELD TO
FOR SALE MATURITY TRADING TOTAL
--------- -------- ------- -------
Principal balance of mortgage securities $ 1,378 $ -- $25,251 $26,629
Net premium (discount) and deferred costs 70 -- 2,258 2,328
------- ------ ------- -------
Total amortized cost of mortgage securities 1,448 -- 27,509 28,957
Net unrealized gain (loss) 62 -- 45 107
------- ------ ------- -------
Carrying value of mortgage securities $ 1,510 $ -- $27,554 $29,064
======= ====== ======= =======
At September 30, 2002, there were no fixed-rate Agency mortgage-backed
securities.
FIXED-RATE SUBORDINATE MORTGAGE-BACKED SECURITIES
(dollars in thousands)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------------------------------------- ---------------------------------------------------
AVAILABLE HELD COLLATERAL AVAILABLE HELD COLLATERAL
FOR TO FOR FOR TO FOR
SALE MATURITY TRADING CMOS TOTAL SALE MATURITY TRADING CMOS TOTAL
--------- -------- -------- ---------- -------- --------- -------- -------- ---------- -------
Principal balance of
mortgage securities $ 5,942 $ -- $ 12,086 $12,699 $ 30,727 $ 6,561 $ -- $ 6,433 $ 12,926 $25,920
Net premium (discount)
and deferred costs (3,847) -- (3,782) (2,523) (10,152) (3,440) -- (2,452) (2,742) (8,634)
-------- ----- -------- ------- -------- -------- ----- -------- -------- -------
Total amortized cost
of mortgage securities 2,095 -- 8,304 10,176 20,575 3,121 -- 3,981 10,184 17,286
Loan loss allowance (110) -- -- (351) (461) (221) -- -- (344) (565)
Gross unrealized
gain/(loss) 216 -- 1,104 -- 1,320 623 -- 792 -- 1,415
-------- ----- -------- ------- -------- -------- ----- -------- -------- -------
Carrying cost of
mortgage
securities $ 2,201 $ -- $ 9,408 $ 9,825 $ 21,434 $ 3,523 $ -- $ 4,773 $ 9,840 $18,136
======== ===== ======== ======= ======== ======== ===== ======== ======== =======
ADJUSTABLE-RATE SUBORDINATE MORTGAGE-BACKED SECURITIES
(dollars in thousands)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------------------------------------- ---------------------------------------------------
AVAILABLE HELD COLLATERAL AVAILABLE HELD COLLATERAL
FOR TO FOR FOR TO FOR
SALE MATURITY TRADING CMOS TOTAL SALE MATURITY TRADING CMOS TOTAL
--------- -------- -------- ---------- -------- --------- -------- -------- ---------- -------
Principal balance of
mortgage securities $ 300 $ -- $ 4,088 $ -- $ 4,388 $ -- $ -- $ 3,692 $ -- $ 3,692
Net premium (discount)
and deferred costs (196) -- (1,038) -- (1,234) -- -- (997) -- (997)
-------- ----- -------- ------- -------- -------- ----- -------- -------- -------
Total amortized cost
of mortgage securities 104 -- 3,050 -- 3,154 -- -- 2,695 -- 2,695
Loan loss allowance (6) -- -- -- (6) -- -- -- -- --
Gross unrealized
gain/(loss) (14) -- 625 -- 611 -- -- (13) -- (13)
-------- ----- -------- ------- -------- -------- ----- -------- -------- -------
Carrying cost of
mortgage
securities $ 84 $ -- $ 3,675 $ -- $ 3,759 $ -- $ -- $ 2,682 $ -- $ 2,682
======== ===== ======== ======= ======== ======== ===== ======== ======== =======
DERIVATIVE MORTGAGE-BACKED SECURITIES
(dollars in thousands)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
---------------------------------------------- ----------------------------------------------
INTEREST- PRINCIPAL- INTEREST- INTEREST- PRINCIPAL- INTEREST-
ONLY STRIPS ONLY STRIPS ONLY ONLY STRIPS ONLY STRIPS ONLY
AVAILABLE HELD TO STRIPS AVAILABLE HELD TO STRIPS
FOR SALE MATURITY TRADING TOTAL FOR SALE MATURITY TRADING TOTAL
---------- ---------- --------- ------- ---------- ---------- --------- -------
Principal balance of mortgage
securities $ -- $ 778 $ -- $ 778 $ -- $ 929 $ -- $ 929
Net premium (discount) and
deferred costs 417 (137) 1,478 1,758 639 (161) -- 478
------- ------- ------- ------- ------- ------- ------- -------
Total amortized cost of mortgage
securities 417 641 1,478 2,536 639 768 -- 1,407
Loan loss allowance -- -- -- -- -- -- -- --
Net unrealized gain (loss) (244) -- 619 375 (106) -- -- (106)
------- ------- ------- ------- ------- ------- ------- -------
Carrying value of mortgage
securities $ 173 $ 641 $ 2,097 $ 2,911 $ 533 $ 768 $ -- $ 1,301
======= ======= ======= ======= ======= ======= ======= =======
4. LOAN LOSS ALLOWANCE
The following table summarizes the activity in the loan loss allowance (dollars
in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2002 2001
------- -------
Balance, beginning of period $ 1,342 $ 1,724
Loan loss provision 228 443
Sales (157) (607)
Charge-offs (127) (108)
Recoveries -- --
------- -------
Balance, end of period $ 1,286 $ 1,452
======= =======
9
5. WHOLLY-OWNED SUBSIDIARIES
As of and for the six months ended June 30, 2002, Hanover owned 100% of the
non-voting preferred stock of HCP, HT and HCP-2. 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. As discussed in Note 1, effective July 1,
2002, Hanover acquired 100% of the common stock of HCP, HT and HCP-2; therefore,
for the periods ending after June 30, 2002, the financial statements of HCP, HT
and HCP-2 will be consolidated with the financial statements of Hanover.
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
REVENUES:
Due diligence fees $ 1,306 $ 1,719 $ 3,392 $ 4,238
Assignment fees 710 219 1,543 587
Other income 37 6 141 19
------- ------- ------- -------
Total revenue 2,053 1,944 5,076 4,844
------- ------- ------- -------
EXPENSES:
Subcontractor 794 775 1,941 1,756
Personnel 675 872 1,917 2,201
General and administrative 105 53 230 182
Occupancy 60 63 137 172
Travel and entertainment 46 85 130 202
Legal and professional 54 42 128 169
Other 32 46 100 120
------- ------- ------- -------
Total expenses 1,766 1,936 4,583 4,802
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 287 8 493 42
INCOME TAX PROVISION 115 5 206 27
------- ------- ------- --------
NET INCOME $ 172 $ 3 $ 287 $ 15
======= ======= ======= ========
10
HANOVERTRADE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
REVENUES:
Loan brokering/trading $ 1,618 $ 309 $ 4,755 $ 1,904
Loan sale advisory services and other income 257 550 1,539 720
------- ------ ------- -------
Total revenue 1,875 859 6,294 2,624
------- ------ ------- -------
EXPENSES:
Personnel 1,315 913 3,157 2,773
Depreciation and amortization 299 274 893 820
Technology 135 128 616 347
General and administrative 205 86 576 216
Interest 60 92 208 291
Occupancy 54 66 164 202
Travel and entertainment 46 43 157 212
Professional 62 43 148 169
------- ------ ------- -------
Total expenses 2,176 1,645 5,919 5,030
------- ------ ------- -------
INCOME (LOSS) BEFORE INCOME TAXES (301) (786) 375 (2,406)
INCOME TAX PROVISION (BENEFIT) 6 - 6 -
------- ------ ------- -------
NET INCOME (LOSS) $ (307) $ (786) $ 369 $(2,406)
======= ====== ======= =======
HT's total assets at September 30, 2002 were $4,227,000, which includes
$1,897,000 of capitalized software costs and $1,515,000 of goodwill. HT's total
liabilities at September 30, 2002 were $8,311,000, which includes a note payable
to Hanover of $6,305,000 and intercompany payables of $293,000.
HANOVER CAPITAL PARTNERS 2, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
REVENUES:
Interest income $ 210 $ - $ 842 $ -
Gain on mark to market of mortgage assets 395 - 265 -
Other income (loss) (858) - (1,221) -
------- ------ ------- -------
Total revenue (loss) (253) - (114) -
------- ------ ------- -------
EXPENSES:
Interest 68 - 231 -
General and administrative 1 - 8 -
------- ------ ------- -------
Total expenses 69 - 239 -
------- ------ ------- -------
INCOME (LOSS) BEFORE INCOME TAXES (322) - (353) -
INCOME TAX PROVISION (BENEFIT) (129) - (141) -
------- ------ ------- -------
NET INCOME (LOSS) $ (193) $ - $ (212) $ -
======= ====== ======= =======
11
6. NOTES RECEIVABLE AND AFFILIATED PARTY TRANSACTIONS
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. As discussed in Note 1, the purchase price
of $474,000 paid to certain of the Principals was used to partially repay
outstanding loans.
NOTES RECEIVABLE
(dollars in thousands)
IMPACT OF
JUNE 30, ACQUISITION OF SEPTEMBER 30
2002 SUBSIDIARIES/ 2002
BALANCE ADVANCES REPAYMENTS ELIMINATIONS BALANCE
------- -------- ---------- -------------- ------------
Principals $ 3,279 $ - $ - $ (474) $ 2,805
HCP 870 - - (870) -
HT 6,305 - - (6,305) -
HCP-2 3,426 1,532 (2,424) (2,534) -
------- -------- ---------- --------- --------
$13,880 $ 1,532 $ (2,424) $ (10,183) $ 2,805
======= ======= ========= ========= ========
During the three months ended September 30, 2002 and 2001, Hanover recorded the
following interest income generated from loans to related parties (dollars in
thousands).
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2002 2001
------- -------
Principals $ 40 $ 46
HCP 8 18
HT 60 86
HCP-2 68 -
Eliminations (136) -
----- ------
$ 40 $ 150
===== ======
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 management and administrative expenses for the three months ended
September 30, 2002 and 2001 were $164,000 and $178,000, respectively, relating
to billings from HCP. The expense for the three months ended September 30, 2002
was eliminated in consolidation in the accompanying Consolidated Statement of
Income.
7. REVERSE REPURCHASE AGREEMENTS
Information pertaining to individual reverse repurchase agreement lenders at
September 30, 2002 is summarized as follows (dollars in thousands):
JUNE 30, NET SEPTEMBER 30,
MAXIMUM 2002 (PAYDOWN) 2002 UNDERLYING
LENDER BORROWING BALANCE ADVANCE BALANCE COLLATERAL TYPE OF COLLATERAL
- -------------------- --------- --------- --------- ------------ ----------- -------------------
Lender A (committed) $ 10,000 $ 1,767 $ (13) $ 1,754 $ 9,984 Retained CMO Securities
Lender A 3,757 (199) 3,558 6,457 Mortgage Securities
Lender B 5,653 (5,653) - - Mortgage Securities
Lender C 370 (370) - - Mortgage Securities
Lender D 509 (509) - - Mortgage Securities
Lender E 1,488 862 2,350 3,731 Mortgage Securities
Lender F - 930 930 1,230 Mortgage Securities
-------- ------- --------- -------
Total $ 13,544 $(4,952) $ 8,592 $21,402
======== ======= ========= =======
12
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 (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 September 30, 2002, the Company
had two interest rate caps designated 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. Currently, both interest rate caps are indexed
to LIBOR. The Company considers its 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 recognized $4,000 of losses for the three
months ended September 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 September 30, 2002,
the fair value of the Company's interest rate caps was $3,000.
FORWARD SALES OF AGENCY SECURITIES AND FUTURES CONTRACTS (FREESTANDING
DERIVATIVES)
For the three and nine months ended September 30, 2002, the Company entered into
forward sales of government agency guaranteed securities, known as "Agency"
securities, and futures contracts to manage the exposure to changes in the value
of securities classified as "trading securities." The Company considers these
forward sales and futures contracts 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 or futures contracts. 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.
Changes in interest rates also affect the value of the futures contracts. (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 the trading securities, the
forward sales and the futures contracts. Using this information, the Company
determines the amount of forward sales or futures contracts 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 or futures contracts. 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 income (loss) in the accompanying Consolidated Statement of Income. The
Company realized net losses on forward sales of $201,000 and on futures
contracts of $858,000 for the three months ended September 30, 2002. At
September 30, 2002, the fair value of the Company's one forward sale of Agency
MBS was ($47,000) and the open trade equity of the Company's futures contracts
was ($169,000).
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 September 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.
13
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 September 30, 2002, 15,666 shares have been repurchased for
approximately $132,000.
Calculations for earnings per share are shown below (dollars in thousands,
except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2002 2001 2002 2001
--------- ---------- ---------- ----------
EARNINGS PER SHARE BASIC:
Income before cumulative effect of adoption of SFAS 133 $ 1,506 $ 725 $ 4,210 $ 2,048
Cumulative effect of adoption of SFAS 133 - - - 46
--------- --------- --------- ---------
Net income (numerator) $ 1,506 $ 725 $ 4,210 $ 2,094
========= ========= ========= =========
Average common shares outstanding (denominator) 4,474,452 4,252,471 4,388,659 4,255,459
========= ========= ========= =========
Per share:
Before cumulative effect of adoption of SFAS 133 $ 0.34 $ 0.17 $ 0.96 $ 0.48
Cumulative effect of adoption of SFAS 133 - - - 0.01
--------- --------- --------- ---------
After cumulative effect of adoption of SFAS 133 $ 0.34 $ 0.17 $ 0.96 $ 0.49
========= ========= ========= =========
EARNINGS PER SHARE DILUTED:
Income before cumulative effect of adoption of SFAS 133 $ 1,506 $ 725 $ 4,210 $ 2,048
Cumulative effect of adoption of SFAS 133 - - - 46
--------- --------- --------- ---------
Net income (numerator) $ 1,506 $ 725 $ 4,210 $ 2,094
========= ========= ========= =========
Average common shares outstanding 4,474,452 4,252,471 4,388,659 4,255,459
Add: Incremental shares from assumed conversion of
stock options 75,553 70,346 63,883 47,992
--------- --------- --------- ---------
Diluted weighted average shares outstanding (denominator) 4,550,005 4,322,817 4,452,542 4,303,451
========= ========= ========= =========
Per share:
Before cumulative effect of adoption of SFAS 133 $ 0.33 $ 0.17 $ 0.95 $ 0.48
Cumulative effect of adoption of SFAS 133 - - - 0.01
--------- --------- --------- ---------
After cumulative effect of adoption of SFAS 133 $ 0.33 $ 0.17 $ 0.95 $ 0.49
========= ========= ========= =========
14
10. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS
(in thousands except for share data)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2002 2001
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 28 $ 14
========= ==========
Interest $ 6,634 $ 11,321
========= ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
Transfer of mortgage loans to real estate owned $ 251 $ -
========= ==========
Acquisition of preferred stock of subsidiaries from related parties in
exchange for reduction of notes receivable from related parties $ 474 $ -
========= ==========
Capital contribution of 63,577 shares of common stock to HT $ 470 $ -
========= ==========
Cashless exercise of 1 warrant in exchange for 136,734 shares of
common stock $ - $ 1
========= ==========
INCREASE IN CASH DUE TO ACQUISITION OF SUBSIDIARIES'
RESIDUAL INTERESTS
Total negative equity of subsidiaries prior to acquisition $ (1,816) $ -
Less net liabilities of subsidiaries prior to acquisition,
excluding cash (3,487) -
--------- ----------
Net increase in cash due to acquisition of subsidiaries' residual
interests $ 1,671 $ -
========= ==========
11. SUBSEQUENT EVENTS
On November 11, 2002, the Board of Directors declared a $0.25 cash dividend for
the quarter ended September 30, 2002 to be paid on December 9, 2002 to
stockholders of record as of November 25, 2002.
12. PRO FORMA DISCLOSURE
The following unaudited pro forma consolidated financial statements have been
prepared to give effect to Hanover Capital Mortgage Holdings, Inc.'s acquisition
on July 1, 2002 of 100% of the outstanding common stock of each of HanoverTrade,
Inc., Hanover Capital Partners Ltd. and Hanover Capital Partners 2, Inc.
(collectively, the "Newly Consolidated Subsidiaries"), as previously reported on
Form 8-K filed on July 16, 2002. This acquisition had been accounted for using
the purchase method of accounting. These pro forma financial statements were
prepared as if the acquisition had been completed as of January 1, 2001 for
statement of income purposes.
The unaudited pro forma consolidated financial statements are presented for
illustrative purposes only and are not necessarily indicative of the results of
operations that would have actually been reported had the acquisition occurred
on January 1, 2001, nor are these presentations necessarily indicative of the
future results of operations.
These unaudited pro forma consolidated financial statements are based upon the
historical consolidated financial statements of Hanover Capital Mortgage
Holdings, Inc. and the Newly Consolidated Subsidiaries included in Hanover
Capital Mortgage Holdings, Inc. Quarterly Reports on Form 10-Q.
15
Information presented for the three months ended September 30, 2001 and the nine
months ended September 30, 2002 and 2001 is presented on a consolidated pro
forma basis. Information presented for the three months ended September 30, 2002
is presented on an actual basis, which takes into account the consolidation of
Hanover, HT, HCP and HCP-2.
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
(Pro Forma) (Pro Forma) (Pro Forma)
REVENUES:
Interest income $ 3,311 $ 4,584 $10,897 $15,143
Interest expense 1,772 3,088 6,045 10,889
------- ------- ------- -------
Net interest income 1,539 1,496 4,852 4,254
Loan loss provision 107 145 228 588
------- ------- ------- -------
Net interest income after loan loss provision 1,432 1,351 4,624 3,666
Gain on sale of mortgage assets 480 671 1,385 2,524
Gain on mark to market of mortgage assets,
net of associated hedge 1,237 483 1,682 501
Loan brokering/trading 1,618 309 4,755 1,904
Due diligence fees 1,306 1,538 3,385 3,719
Assignment fees 710 219 1,543 587
Other income (loss) (717) 558 (155) 671
------- ------- ------- -------
Total revenue 6,066 5,129 17,219 13,572
------- ------- ------- -------
EXPENSES:
Personnel 2,434 1,948 6,722 5,474
Subcontractor 803 775 1,954 1,756
Depreciation and amortization 311 297 936 886
Legal and professional 337 529 902 1,043
General and administrative 348 317 885 742
Technology 139 139 630 372
Occupancy 138 177 373 511
Other 89 112 322 367
Travel and entertainment 99 138 319 447
------- ------- ------- -------
Total expenses 4,698 4,432 13,043 11,598
------- ------- ------- -------
Operating income 1,368 697 4,176 1,974
Equity in income of unconsolidated subsidiaries:
Hanover Capital Partners Ltd. - - - -
HanoverTrade, Inc. - - - -
HDMF-I LLC 130 - 129 -
Hanover Capital Partners 2, Inc. - - - -
------- ------- ------- -------
Income before income tax provision (benefit) and
cumulative effect of adoption of SFAS 133 1,498 697 4,305 1,974
Income tax provision (benefit) (8) 5 71 27
------- ------- ------- -------
Income before cumulative effect of adoption of SFAS 133 1,506 692 4,234 1,947
Cumulative effect of adoption of SFAS 133 - - - 46
------- ------- ------- -------
NET INCOME $ 1,506 $ 692 $ 4,234 $ 1,993
======= ======= ======= =======
BASIC EARNINGS PER SHARE:
Before cumulative effect of adoption of SFAS 133 $ 0.34 $ 0.16 $ 0.96 $ 0.46
Cumulative effect of adoption of SFAS 133 - - - 0.01
------- ------- ------- -------
After cumulative effect of adoption of SFAS 133 $ 0.34 $ 0.16 $ 0.96 $ 0.47
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
Before cumulative effect of adoption of SFAS
133 $ 0.33 $ 0.16 $ 0.95 $ 0.45
Cumulative effect of adoption of SFAS 133 - - - 0.01
------- ------- ------- -------
After cumulative effect of adoption of SFAS 133 $ 0.33 $ 0.16 $ 0.95 $ 0.46
======= ======= ======= =======
See notes to pro forma consolidated statements of income
16
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(in thousands, except per share data)
SIX MONTHS
ENDED
HANOVER JUNE 30, 2002
CAPITAL -------------
MORTGAGE NEWLY
HOLDINGS, INC. CONSOLIDATED ADJUSTMENTS/ PRO FORMA
AS REPORTED SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
REVENUES:
Interest income $ 10,617 $ 632 $ (352)(a,d) $ 10,897
Interest expense 6,045 - - 6,045
----------- ---------- --------- -----------
Net interest income 4,572 632 (352) 4,852
Loan loss provision 228 - - 228
----------- ---------- --------- -----------
Net interest income after loan loss
provision 4,344 632 (352) 4,624
Gain on sale of mortgage assets 1,385 - - 1,385
Gain (loss) on mark to market of mortgage assets 1,812 (130) - 1,682
Loan brokering/trading 1,618 3,137 - 4,755
Due diligence fees 1,306 2,086 (7)(b) 3,385
Assignment fees 710 833 - 1,543
Other income (loss) (1,142) 1,023 (36)(b) (155)
----------- ---------- --------- -----------
Total revenue 10,033 7,581 (395) 17,219
----------- ---------- --------- -----------
EXPENSES:
Personnel 3,290 3,084 348 (b,d) 6,722
Subcontractor 803 1,151 - 1,954
Depreciation and amortization 311 625 - 936
Legal and professional 766 136 - 902
General and administrative 793 503 (411)(b) 885
Technology 140 490 - 630
Occupancy 186 187 - 373
Other 295 359 (332)(a) 322
Travel and entertainment 124 195 - 319
----------- ---------- --------- -----------
Total expenses 6,708 6,730 (395) 13,043
----------- ---------- --------- -----------
Operating income 3,325 851 - 4,176
Equity in income of unconsolidated subsidiaries 877 - (748)(c) 129
----------- ---------- --------- -----------
Income before income tax provision (benefit) 4,202 851 (748) 4,305
Income tax provision (benefit) (8) 79 - 71
----------- ---------- --------- -----------
NET INCOME $ 4,210 $ 772 $ (748) $ 4,234
=========== ========== ========= ===========
BASIC EARNINGS PER SHARE:
Average common shares outstanding 4,388,659 4,388,659
=========== ===========
Basic earnings per share $ 0.96 $ 0.96
=========== ===========
DILUTED EARNINGS PER SHARE:
Diluted weighted average shares outstanding 4,452,542 4,452,542
=========== ===========
Diluted earnings per share $ 0.95 $ 0.95
=========== ===========
See notes to pro forma consolidated statements of income
17
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
(in thousands, except per share data)
HANOVER
CAPITAL
MORTGAGE NEWLY
HOLDINGS, INC. CONSOLIDATED ADJUSTMENTS/ PRO FORMA
AS REPORTED SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
REVENUES:
Interest income $ 4,695 $ - $ (111)(a,d) $ 4,584
Interest expense 3,088 - - 3,088
----------- ---------- --------- -----------
Net interest income 1,607 - (111) 1,496
Loan loss provision 145 - - 145
----------- ---------- --------- -----------
Net interest income after loan loss
provision 1,462 - (111) 1,351
Gain on sale of mortgage assets 671 - - 671
Gain (loss) on mark to market of mortgage assets,
net of associated hedge 483 - - 483
Loan brokering/trading - 309 - 309
Due diligence fees - 1,719 (181)(b) 1,538
Assignment fees - 219 - 219
Other income (loss) 2 556 - 558
----------- ---------- --------- -----------
Total revenue 2,618 2,803 (292) 5,129
----------- ---------- --------- -----------
EXPENSES:
Personnel 166 1,785 (3)(b) 1,948
Subcontractor - 775 - 775
Depreciation and amortization 9 288 - 297
Legal and professional 451 78 - 529
General and administrative 356 139 (178)(b) 317
Technology 1 138 - 139
Occupancy 48 129 - 177
Other 95 121 (104)(a) 112
Travel and entertainment 10 128 - 138
----------- ---------- --------- -----------
Total expenses 1,136 3,581 (285) 4,432
----------- ---------- --------- -----------
Operating income (loss) 1,482 (778) (7) 697
Equity in (loss) of unconsolidated subsidiaries (757) - 757 (c) -
----------- ---------- --------- -----------
Income (loss) before income tax provision (benefit) 725 (778) 750 697
Income tax provision (benefit) - 5 - 5
----------- ---------- --------- -----------
NET INCOME (LOSS) $ 725 $ (783) $ 750 $ 692
=========== ========== ========= ===========
BASIC EARNINGS PER SHARE:
Average common shares outstanding 4,252,471 4,252,471
=========== ===========
Basic earnings per share $ 0.17 $ 0.16
=========== ===========
DILUTED EARNINGS PER SHARE:
Diluted weighted average shares outstanding 4,322,817 4,322,817
=========== ===========
Diluted earnings per share $ 0.17 $ 0.16
=========== ===========
See notes to pro forma consolidated statements of income
18
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
(in thousands, except per share data)
HANOVER
CAPITAL
MORTGAGE NEWLY
HOLDINGS, INC. CONSOLIDATED ADJUSTMENTS/ PRO FORMA
ORIGINAL SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------- ----------------
REVENUES:
Interest income $ 15,500 $ - $ (357)(a,d) $ 15,143
Interest expense 10,889 - - 10,889
-------------- ------------- ------------- ----------------
Net interest income 4,611 - (357) 4,254
Loan loss provision 588 - - 588
-------------- ------------- ------------- ----------------
Net interest income after loan loss provision 4,023 - (357) 3,666
Gain on sale of mortgage assets 2,524 - - 2,524
Gain on mark to market of mortgage assets, net of
associated hedge 501 - - 501
Loan brokering/trading - 1,904 - 1,904
Due diligence fees - 4,238 (519) (b) 3,719
Assignment fees - 587 - 587
Other income (loss) (68) 739 - 671
-------------- ------------- ------------- ----------------
Total revenue 6,980 7,468 (876) 13,572
-------------- ------------- ------------- ----------------
EXPENSES:
Personnel 503 4,974 (3) (b) 5,474
Subcontractor - 1,756 - 1,756
Depreciation and amortization 23 863 - 886
Legal and professional 727 316 - 1,043
General and administrative 860 398 (516) (b) 742
Technology 3 369 - 372
Occupancy 137 374 - 511
Other 336 368 (337) (a) 367
Travel and entertainment 33 414 - 447
-------------- ------------- ------------- ----------------
Total expenses 2,622 9,832 (856) 11,598
-------------- ------------- ------------- ----------------
Operating income (loss) 4,358 (2,364) (20) 1,974
Equity in (loss) of unconsolidated subsidiaries (2,310) - 2,310 (d) -
-------------- ------------- ------------- ----------------
Income (loss) before income tax provision and cumulative
effect of adoption of SFAS 133 2,048 (2,364) 2,290 1,974
Income tax provision - 27 - 27
-------------- ------------- ------------- ----------------
Income (loss) before cumulative effect of adoption of SFAS 133 2,048 (2,391) 2,290 1,947
Cumulative effect of adoption of SFAS 133 46 - - 46
-------------- ------------- ------------- ----------------
NET INCOME (LOSS) $ 2,094 $ (2,391) $ 2,290 $ 1,993
============== ============= ============= ================
BASIC EARNINGS PER SHARE:
Average common shares outstanding 4,255,459 4,255,459
================ ================
Basic earnings per share:
Before cumulative effect of adoption of SFAS 133 $ 0.48 $ 0.46
Cumulative effect of adoption of SFAS 133 0.01 0.01
---------------- ----------------
After cumulative effect of adoption of SFAS 133 $ 0.49 $ 0.47
================ ================
DILUTED EARNINGS PER SHARE:
Diluted weighted average shares outstanding 4,303,451 4,303,451
================ ================
Diluted earnings per share:
Before cumulative effect of adoption of SFAS 133 $ 0.48 $ 0.45
Cumulative effect of adoption of SFAS 133 0.01 0.01
---------------- ----------------
After cumulative effect of adoption of SFAS 133 $ 0.49 $ 0.46
================ ================
See notes to pro forma consolidated statements of income
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
(a) To eliminate intercompany interest income and expense summarized as
follows:
SIX MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2001
---------------- --------------- ------------------
Interest on note to Hanover Capital Partners Ltd. $ 24 $ 18 $ 46
Interest on note to HanoverTrade, Inc. 146 86 291
Interest on note to Hanover Capital Partners 2, Inc. 162 - -
---------------- ----------------- ----------------
$ 332 $ 104 $ 337
================ ================= ================
(b) Hanover engaged Hanover Capital Partners Ltd. pursuant to a Management
Agreement to render, among other things, due diligence, asset management
and administrative services. In addition, Hanover Capital Partners Ltd.
performed management and administrative services for HanoverTrade, Inc. To
eliminate these intercompany management fees recorded as follows:
SIX MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2001
---------------- -------------- ------------------
Management fee income recorded to:
Due diligence fees $ 7 $ 181 $ 519
Other revenues 36 - -
Reduction of personnel expense 372 - -
---------------- ------------------ ---------------
$ 415 $ 181 $ 519
================ ================== ===============
Management fee expensed to:
General, management and administrative $ 411 $ 178 516
Personnel expense 4 3 3
---------------- ------------------ ---------------
$ 415 $ 181 $ 519
================ ================== ===============
(c) With the consolidation of the results of Hanover Capital Partners Ltd.,
HanoverTrade, Inc. and Hanover Capital Partners 2, Inc., the equity in
income (loss) of these subsidiaries summarized below would be reversed:
SIX MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2001
---------------- ---------------- -----------------
Hanover Capital Partners Ltd. $ 112 $ 3 $ 15
HanoverTrade, Inc. 655 (760) (2,325)
Hanover Capital Partners 2, Inc. (19) - -
---------------- ----------------- ---------------
$ 748 $ (757) $ (2,310)
================ ================= ================
(d) To exclude the interest income on the portion of the notes receivable
reduced in exchange for the purchase of the common stock of the newly
consolidated subsidiaries; interest for the nine months ended September 30,
2002 was forgiven and the offset is to personnel expense while for the
three and nine months ended September 30, 2002, the offset is to the
balance sheet.
NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2001
---------------- ---------------- -----------------
Interest income $ 20 $ 7 $ 20
================= ================ ==================
Personnel expense $ (20) $ - $ -
================= ================ ==================
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 and their effect on our
hedging strategies; assumptions regarding prepayment and default rates on the
mortgage loans securing our mortgage-backed securities and their effect on our
hedging strategies; our decision to invest in higher-risk subordinated
traunches; 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,
their need for additional capital; and the desirability of pursuing third-party
investments therein; 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; our expectations regarding the effects of accounting rules and changes
thereto; our strategy of discontinuing purchases of mortgage loans held for
sale; 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 our 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,
21
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
We are a real estate investment trust, or REIT, formed to operate as a specialty
finance company. At September 30, 2002, we had two principal consolidated
subsidiaries, Hanover Capital Partners Ltd., which we refer to as HCP, and
HanoverTrade, Inc., which we refer to as HT. When we use the terms "we", "us"
or "the Company," we are referring to our company and subsidiaries taken as a
whole. In order to provide more meaningful disclosure, we occasionally wish to
report information regarding only our REIT entity without reference to any of
its subsidiaries. In those instances, we refer to the REIT entity as "Hanover."
The principal business strategy of Hanover is to invest in mortgage-backed
securities, or "MBS" and, to a lesser extent, mortgage loans, and to earn net
interest income on these investments. The principal business strategy of HCP is
to generate consulting and other fee income by performing loan sale advisory
services, loan file due diligence reviews, staffing solutions and mortgage
assignment and collateral rectification services. The principal business
activity of HT is to generate fee income by operating an on-line worldwide
web-based exchange for trading mortgage loans, mortgage servicing rights and
related assets, and providing a state-of-the art Internet trading facility
supported by experienced valuation, operations and trading professionals. In
addition to trading assets, HanoverTrade provides a full range of asset
valuation, analysis and marketing services for: performing, sub-performing and
non-performing assets; whole loans and participations; CRA loans; and mortgage
servicing rights. In addition, Hanover has a 31.45946% interest in HDMF-I LLC,
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 September 30, 2002, we retain the
aggregate credit risk on $5.2 billion of mortgage loans relating to:
Principal Carrying
Balance Value Financing
---------- ---------- ----------
Subordinate MBS $ 23,194 $ 18,279 $ 7,081
Collateral for CMOs 126,050 9,984 1,511
Mortgage Loans 694 504 -
---------- ---------- -----------
Total $ 149,938 $ 28,767 $ 8,592
========== ========== ===========
The above carrying value of collateral for collateralized mortgage obligations,
or "CMOs", is our net invested equity in retained mortgage-backed bonds.
In addition, HDMF-I retains the aggregate credit risk on $11,176,000 of mortgage
loans of which our portion is $4,551,000 of invested capital at risk.
On July 1, 2002, Hanover acquired 100% of the outstanding capital stock of each
of HT, HCP and Hanover Capital Partners 2, Inc., which we call "HCP-2." Hanover
had previously owned 100% of the non-voting preferred stock, but none of the
voting common stock, of each of these entities. Prior to July 1, 2002, the
financial results for these three entities appeared in our financial statements
as a single line-item under "equity in income or loss of unconsolidated
subsidiaries." Due to the stock purchase, for periods ending after June 30,
2002 Hanover's financial statements will be consolidated with the financial
statements of those entities. This means that the financial results
attributable to these three entities, whether positive or negative, will appear
throughout our financial statements as applicable, rather than in a single
line-item. The discussion below sometimes includes information regarding both
"previously reported" financial results, which do not give effect to the stock
purchase for any periods prior to July 1, 2002, and "pro forma" financial
results, which present information as if the acquisition of HT, HCP and HCP-2
had been completed as of January 1, 2001 for statement of income purposes.
Please be advised that pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations that would have actually been reported had the
acquisition occurred on January 1, 2001, nor are these presentations necessarily
indicative of the future financial position or results of operations.
22
RESULTS OF OPERATIONS
We recorded net income of $1,506,000 or $0.34 per share based on 4,474,452
weighted average shares of common stock outstanding for the three months ended
September 30, 2002 compared to net income of $725,000 or $0.17 per share based
on 4,252,471 weighted average common shares outstanding for the three months
ended September 30, 2001. We recorded net income of $4,210,000 or $0.96 per
share based on 4,388,659 weighted average shares of common stock outstanding for
the nine months ended September 30, 2002 compared to net income of $2,094,000 or
$0.49 per share based on 4,255,459 weighted average common shares outstanding
for the nine months ended September 30, 2001. Total revenue for the three months
ended September 30, 2002 was $6,066,000 compared with $2,618,000 as previously
reported, or $5,129,000 on a pro forma basis, for the comparable quarter last
year. Total revenue for the nine months ended September 30, 2002 was
$10,033,000, compared with $6,980,000 previously reported for the same period in
2001. On a pro forma basis, total revenue for the 2002 period was $17,219,000,
while total revenue for the 2001 period was $13,572,000.
Net interest income decreased to $1,539,000, or $0.34 per share, for the three
months ended September 30, 2002 from $1,607,000, or $0.38 per share, as
previously reported for the same period in 2001. The decrease in net interest
income of $68,000 was primarily due to (i) decreased net interest income of
$205,000 on the Agency MBS portfolio, (ii) decreased net interest income of
$122,000 on notes receivable offset by (iii) increased net interest income of
$45,000 on the subordinate MBS portfolio and (iv) net interest income of
$210,000 from an interest-only security designated as a trading security. The
decrease in net interest income on the Agency MBS portfolio of $205,000 was
primarily due to a decrease in the average balance of the Agency MBS portfolio
from $24,245,000 for the three months ended September 30, 2001 to $1,006,000 for
the three months ended September 30, 2002. This decrease is the result of
management's decision to terminate its Agency MBS activity in the third quarter
of 2002. The decrease in net interest income on notes receivable of $122,000 is
due to the elimination of related party revenue in 2002, in consolidation for
financial reporting, as a result of the Company's acquisition of HCP, HT and
HCP-2 on July 1, 2002. The increase in net interest income on the subordinate
MBS portfolio was primarily due to an increase in the average balance of the
subordinate MBS portfolio from $9,722,000 for the three months ended September
30, 2001 to $14,665,000 for the three months ended September 30, 2002. For the
three months ended September 30, 2001, there were no interest-only securities
designated as trading securities.
Net interest income increased to $1,539,000 for the three months ended September
30, 2002 from $1,496,000 on a pro forma basis for the same period in 2001. The
increase of $43,000 includes the decrease of $68,000 in interest income for the
three months ended September 30, 2002 as discussed above, excluding $111,000 of
the $122,000 decrease due to related party revenue being eliminated in net
interest income for the September 30, 2002 and 2001 periods.
Net interest income decreased to $4,572,000, or $1.04 per share, for the nine
months ended September 30, 2002 from $4,611,000, or $1.08 per share, as
previously reported for the same period in 2001. The decrease in net interest
income of $39,000 was primarily due to (i) decreased net interest income of
$203,000 on the Agency MBS portfolio due to a decrease in the average balance of
the portfolio from $15,118,000 for the nine months ended September 30, 2001 to
$9,715,000 for the nine months ended September 30, 2002, (ii) decreased net
interest income of $143,000 on overnight investments due to lower market rates
and lower invested cash balances, (iii) decreased net interest income on the
subordinate MBS portfolio of $459,000 due to a decrease in the average balance
of the portfolio from $13,300,000 for the nine months ended September 30, 2001
to $11,354,000 for the nine months ended September 30, 2002. The net effective
interest rate on the average subordinate MBS portfolio decreased to 12.22% for
the nine months ended September 30, 2002 from 17.35% for the same period in 2001
due to a shift to higher rated traunches within the portfolio. These decreases
were offset by (iv) increased net interest income of $179,000 on the mortgage
loan portfolio due to the recognition of previously unearned discount on
mortgage loans that paid in full and (v) increased net interest income of
$687,000 on our 1999-B securitization due to favorable market interest rates.
23
On a pro forma basis, net interest income increased to $4,852,000 for the nine
months ended September 30, 2002 from $4,254,000 for the comparable prior year
period. The $598,000 increase is due to nine months worth of net interest income
recorded on a pro forma basis in 2002 attributable to trading activity that was
conducted through HCP-2 and reduced Agency MBS activity conducted by the
Company.
NET INTEREST INCOME
(dollars in thousands)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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 $ 3 $ - $ 4 $ - $ 193 $ - $ 14 $ -
CMO collateral 696 (38) 613 (59) 2,096 (128) 1,387 (193)
Agency MBS 36 - 228 - 268 - 458 -
Private placement MBS 735 (69) 575 (86) 1,475 (100) 2,052 (395)
Other 69 - 187 - 540 - 700 -
--------- ------------ ------- ----------- --------- ----------- ---------- -----------
Total net interest income $ 1,539 $ (107) $1,607 $ (145) $ 4,572 $ (228) $ 4,611 $ (588)
========== =========== ========= =========== ========= =========== ========== ===========
Our provision for loan losses decreased to $107,000 for the three months ended
September 30, 2002 from $145,000 for the same period last year and to $228,000
for the nine months ended September 30, 2002 from $588,000 for the same period
last year. The decreases for the three and nine months ended September 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. No adjustments were required on a pro
forma basis because provision for loan losses relates solely to Hanover during
these periods.
The results for the three and nine months ended September 30, 2002 included a
gain on sale of mortgage assets of $480,000 and $1,385,000, respectively,
compared to $671,000 and $2,524,000, respectively, for the same periods last
year. During the three and nine months ended September 30, 2002, we sold
approximately $1,925,000 and $8,786,000 principal balance of subordinate MBS,
respectively, as compared to sales of $5,286,000 and $28,398,000, principal
balance of subordinate MBS during the three and nine months ended September 30,
2001, respectively. No adjustments were required on a pro forma basis because
gain on sale of mortgage assets relates solely to Hanover during these periods.
Revenues from loan brokering/trading increased to $1,618,000 for the three and
nine months ended September 30, 2002, from $0 for the same periods in 2001.
Revenues from due diligence increased to $1,306,000 for the three and nine
months ended September 30, 2002 from $0 for the same periods in 2001. Revenues
from assignment fees increased to $710,000 for the three and nine months ended
September 30, 2002 from $0 for the same periods in 2001. In each case, this is
because in periods prior to the consolidation of Hanover, HCP, HT and HCP-2 we
did not separately record revenues attributable to HT, HCP or HCP-2, and all of
the revenues listed in this paragraph are derived from the activities of HT and
HCP.
Revenues from loan brokering/trading increased to $1,618,000 for the three
months ended September 30, 2002, from $309,000 for the three months ended
September 30, 2001 on a pro forma basis. This is primarily due to fees generated
by whole loan sales represented by 7 transactions for 3 clients. Revenues from
due diligence decreased to $1,306,000 for the three months ended September 30,
2002 from $1,538,000 on a pro forma basis for the same period in 2001, primarily
due to a decrease in the size of contracts for the 2002 period as compared to
the 2001 period. Revenues from assignment fees increased to $710,000 for the
three months ended September 30, 2002 from $558,000 on a pro forma basis for the
same period in 2001, primarily as a result of 2 large assignment contracts in
the current period, as compared to no contracts of comparable size in the 2001
period.
On a pro forma basis, revenues from loan brokering/trading increased to
$4,755,000 for the nine months ended September 30, 2002, from $1,904,000 for the
nine months ended September 30, 2001. This is primarily attributable to revenue
derived from a contract with the FDIC during 2002 and revenue generated by third
quarter 2002 whole-loan sales. We cannot assure you that comparable contracts
will be available in the future. Revenues from due diligence decreased to
$3,385,000 for the nine months ended September 30, 2002 from $3,719,000 for the
same period in 2001, primarily due to a change in our mix of business which
resulted in fewer due diligence contracts. Revenues from assignment fees
increased to $1,543,000 for the nine months ended September 30, 2002 from
$587,000 for the same period in 2001, primarily because of 2 large assignment
contracts.
These contracts account for 79% of the total assignment fees
recognized to date. However, there can be no assurances made that we
will be able to generate assignment fees comparable to those recorded for the
nine months ended September 30, 2002.
Operating expenses for the three months ended September 30, 2002 were $4,698,000
compared to $1,136,000 as previously reported for the same period in 2001. Pro
forma operating expenses for the three months ended September 30, 2001 were
$4,432,000. Operating expenses for the nine months ended September 30, 2002 were
$6,708,000 compared to $2,622,000 as previously reported for the same period in
2001. Pro forma operating expenses were $13,043,000 for the nine months ended
September 30, 2002 compared to $11,598,000 for the same period last year on a
pro forma basis. The biggest component of the increase, on a pro forma basis,
was an increase in personnel expenses. Personnel expenses for the three and nine
months ended September 30, 2002, on a pro forma basis, increased to $2,434,000
and $6,722,000, respectively, compared to, on a pro forma basis, $1,948,000 and
$5,474,000, respectively, for the same periods last year. The increase in
personnel expenses was primarily due to (i) a bonus accrual established for a
pool of employees during the three and nine months ended September 30, 2002 that
was established pursuant to existing contractual agreements; no such bonus
accrual was established in 2001 and (ii) an increase in commission expense,
relating to the increase in loan brokering/trading income, of $513,000 and
$420,000 for the three and nine months ended September 30, 2002, respectively.
The increase in personnel expense was partially offset by a decrease in legal
and professional fees to $337,000 for the three months ended September 30, 2002
and $902,000 on a pro forma basis for the nine months ended September 30, 2002,
from $529,000 and $1,043,000 on a pro forma basis for the same period last year.
Legal and professional fees decreased for the three and nine months ended
September 30, 2002 primarily due to non-recurring charges in 2001.
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 of
HDMF-I. 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. In the third quarter of 2002, we invested an additional $1,524,000
in HDMF-I to fund the purchase price of an additional loan pool and received
$1,072,000 in distributions from HDMF-I. For the three and nine months ended
September 30, 2002, we recognized equity in income of $130,000 and $129,000,
respectively. At September 30, 2002, we had a total capital contribution
commitment of $5,820,000.
TAXABLE INCOME
Our taxable income for the quarter ended September 30, 2002 is estimated at
$307,000. Taxable income 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 income (dollars in
thousands):
GAAP net income $ 1,506
GAAP gain on sale (480)
Tax gain on sale 571
Utilization of capital loss carryforward (571)
Loss in subsidiaries not included in taxable income 328
Gain on mark to market of mortgage securities, net of
associated hedge (688)
Loan loss provision, net of realized losses 20
Tax amortization of net premiums on mortgages, CMO
collateral and mortgage securities and interest accrual
in excess of GAAP amortization and interest accrual (181)
Deduction for tax for exercise of non-qualified stock options (198)
--------
Estimated taxable income $ 307
========
As a REIT, we are required to pay dividends amounting to 85% of each year's
taxable ordinary income and 95% of the portion of each year's capital gain net
income that is not taxed at the REIT level by the end of each calendar year and
to have declared dividends amounting to 90% of our real estate investment trust
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 and other sources of financing, including CMOs and
real estate mortgage investment conduits. 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.
We had one committed reverse repurchase line of credit in place at September 30,
2002 and three uncommitted lines of credit. At September 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 nine months ended September
30, 2002 was $21,387,000 compared to net income of $4,210,000 for the same
period in 2002. Sales of trading securities provided $61,184,000, partially
offset by the purchase of trading securities of $40,636,000.
Net cash provided by investing activities amounted to $44,452,000 during the
nine months ended September 30, 2002. The majority of cash proceeds from
investing activities was generated from (i) principal payments received on
collateral for CMOs of $38,180,000, (ii) proceeds from sale of mortgage assets
of $6,270,000 and (iii) principal payments received on mortgage securities of
$3,667,000. These proceeds were partially offset by additions to investments of
$5,415,000.
Cash flows from financing activities used $64,946,000 during the nine months
ended September 30, 2002. We made repayments on reverse repurchase agreements of
$24,746,000 and on CMO borrowings of $37,791,000. Hanover also paid dividends of
$3,091,000 and purchased an additional 15,666 shares of its common stock for
$132,000 during the period. These payments were partially offset by proceeds
from the exercise of stock options resulting in the issuance of 185,610 shares
of common stock for $814,000.
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 September 30, 2002, we advanced $6,305,000 in
the form of loans, and $104,000 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the third 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 and futures contracts) 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 September 30, 2002, we had forward commitments to sell $4.5 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 $16.2 million principal balance of subordinate MBS classified as
trading. At September 30, 2002, the fair value of the Company's one forward sale
of Agency MBS was ($47,000).
At September 30, 2002, we had futures contracts with open trade equity of
($169,000). These futures contracts were entered into to partially hedge the
expected sale of approximately $23.9 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 freestanding derivatives for
accounting purposes, changes in fair value are recognized in earnings in the
period of change.
At September 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
--------
$ 31,000
========
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. At September 30, 2002, the fair value of the Company's
interest rate caps was $3,000.
28
INTEREST RATE SENSITIVITY
Interest Rate Mismatch Risk - Reverse Repurchase Financing
At September 30, 2002, we owned $504,000 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 September 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 September 30, 2002, we had a total of $6,187,000 of floating-rate
reverse repurchase financing compared to $22,416,000 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 September 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 $79,806,000 of fixed-rate mortgage loans and $33,667,000 of
adjustable-rate mortgage loans and $9,825,000 of mortgage securities at
September 30, 2002. The primary financing for this asset category is the CMO
debt of $113,314,000 and, to a much lesser extent, reverse repurchase agreements
of $1,754,000. 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. We purchased amortizing interest rate caps with
notional balances of $110
29
million in August 1999 to hedge the 1999-B securitization. The remaining
notional balance of these caps is $20 million at September 30, 2002.
Mortgage Securities
At September 30, 2002, we owned certain fixed-rate private placement mortgage
securities and certain interest-only and principal-only private placement
mortgage securities with an aggregate carrying value of $18,279,000. 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Within the 90 days prior to the date we are filing this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to our
Company required to be included in our SEC reports. However, we cannot assure
you that our controls and procedures can prevent or detect all errors and all
fraud. In addition, since any system of controls is based in part upon
assumptions regarding future events, we cannot assure you that the design of our
controls will be successful in achieving its stated goals under all potential
future conditions.
(b) There have been no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date of the evaluation referred to in subsection (a) above.
30
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
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index, which appears
immediately following the signature and certification pages
below, are included or incorporated by reference herein.
(b) Reports on Form 8-K
We filed a current report on Form 8-K on July 16, 2002 announcing
that we had acquired 100% of the outstanding common stock of
HanoverTrade, Inc., Hanover Capital Partners Ltd. and Hanover
Capital Partners 2, Inc. and revised the employment agreements
and certain other compensation arrangements for certain executive
officers.
We filed a current report on Form 8-K/A on September 16, 2002 for
the sole purpose of providing the required financial statements
and information which were omitted (as permitted by Form 8-K)
from the original Form 8-K filed on July 16, 2002.
We filed a current report on Form 8-K on September 17, 2002
announcing that certain of our executive officers and directors
established trading plans in accordance with Rule 10b5-1 under
the Securities Exchange Act of 1934, as amended.
31
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: November 14, 2002 ------------------------------
John A. Burchett
President and Chief Executive Officer
Chairman of the Board of Directors
By: /s/ J. Holly Loux
Dated: November 14, 2002 ------------------------------
J. Holly Loux
Chief Financial Officer
32
CERTIFICATIONS
I, John A. Burchett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hanover Capital
Mortgage Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ John A. Burchett
-----------------------
John A. Burchett
President and Chief
Executive Officer
33
CERTIFICATIONS (CONTINUED)
I, J. Holly Loux, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hanover Capital
Mortgage Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ J. Holly Loux
-----------------------
J. Holly Loux
Chief Financial Officer
34
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
2.1(7) 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(8) 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
EXHIBIT DESCRIPTION
------- -----------
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 Exchanges 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.
(8) Incorporated herein by reference to Registrant's Form 10-Q for the quarter
ended June 30, 2002 as filed with the Securities and Exchange Commission on
August 14, 2002.
2