-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W0Er9/cOZmvHN1lEp6xUwgKrz8yyY9enyNBNlHDpLosPBKfh7S7x8VKmpk+1Gjro 5qHnK7Tg9plII55pFnYrlg== 0000950135-02-004204.txt : 20020916 0000950135-02-004204.hdr.sgml : 20020916 20020916164042 ACCESSION NUMBER: 0000950135-02-004204 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020701 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020916 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER CAPITAL MORTGAGE HOLDINGS INC CENTRAL INDEX KEY: 0001040719 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133950486 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13417 FILM NUMBER: 02765085 BUSINESS ADDRESS: STREET 1: 379 THORNALL STREET STREET 2: 2ND FLOOR CITY: EDISON STATE: NJ ZIP: 08837 BUSINESS PHONE: 732-548-0101 MAIL ADDRESS: STREET 1: 379 THORNALL STREET STREET 2: 2ND FLOOR CITY: EDISON STATE: NJ ZIP: 08837 8-K/A 1 b44243hke8vkza.txt HANOVER CAPITAL MORTGAGE HOLDINGS, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 1, 2002 HANOVER CAPITAL MORTGAGE HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) MARYLAND 001-13417 13-3950486 (STATE OR OTHER JURISDICTION OF (COMMISSION (IRS EMPLOYER INCORPORATION) FILE NUMBER) IDENTIFICATION NO.) 379 THORNALL STREET, EDISON, NEW JERSEY 08837 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (732) 548-0101 EXPLANATORY NOTE On July 16, 2002, we filed a Current Report on Form 8-K disclosing that on July 1, 2002 we acquired 100% of the outstanding common stock of each of HanoverTrade, Inc. ("HT"), Hanover Capital Partners Ltd. ("HCP") and Hanover Capital Partners 2, Inc. ("HCP-2"). We 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 our status as a real estate investment trust ("REIT"). Changes in the tax laws made it possible for us 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 we own 100% of the outstanding capital stock of each of HT, HCP and HCP-2, and for periods ending after June 30, 2002, our financial statements will be consolidated with the financial statements of HT, HCP and HCP-2. The report we filed on July 16, 2002 indicated our intention to file the required financial statements and pro forma financial information within 60 days thereafter in accordance with Subsection (a)(4) of Item 7 of Form 8-K. This Form 8-K/A is being filed for the sole purpose of providing the required financial statements and information which were omitted from the original Form 8-K filed on July 16, 2002. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial Statements of Businesses Acquired. The financial statements of HanoverTrade, Inc. are included as Exhibit 99.3 to this report and are incorporated herein by reference. The financial statements of Hanover Capital Partners Ltd. are included as Exhibit 99.4 to this report and are incorporated herein by reference. The financial statements of Hanover Capital Partners 2, Inc. are included as Exhibit 99.5 to this report and are incorporated herein by reference. The financial statements of HanoverTrade, Inc. for the years ended December 31, 2001 and 2000, and the period from May 28, 1999 (inception) to December 31, 1999 and Hanover Capital Partners Ltd. for each of the three years in the period ended December 31, 2001 are also included in Hanover Capital Mortgage Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001 and are incorporated herein by reference. (b) Pro Forma Financial Information. The pro forma financial information of Hanover Capital Mortgage Holdings, Inc., HanoverTrade, Inc., Hanover Capital Partners Ltd. and Hanover Capital Partners 2, Inc. is included as Exhibit 99.6 to this report and is incorporated herein by reference. (c) Exhibits
EXHIBIT DESCRIPTION ------- ----------- 23.1 Independent Auditors' Consent 99.3 Financial Statements of HanoverTrade, Inc. 99.4 Financial Statements of Hanover Capital Partners Ltd. 99.5 Financial Statements of Hanover Capital Partners 2, Inc. 99.6 Pro Forma Consolidated Financial Statements of Hanover Capital Mortgage Holdings, Inc., HanoverTrade, Inc., Hanover Capital Partners Ltd. and Hanover Capital Partners 2, Inc.
2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Hanover Capital Mortgage Holdings, Inc. Date: September 16, 2002 /s/ J. Holly Loux ------------------------------------- By: J. Holly Loux Title: Chief Financial Officer 3 EXHIBIT INDEX
EXHIBIT DESCRIPTION ------- ----------- 23.1 Independent Auditors' Consent 99.3 Financial Statements of HanoverTrade, Inc. 99.4 Financial Statements of Hanover Capital Partners Ltd. 99.5 Financial Statements of Hanover Capital Partners 2, Inc. 99.6 Pro Forma Consolidated Financial Statements of Hanover Capital Mortgage Holdings, Inc., HanoverTrade, Inc., Hanover Capital Partners Ltd. and Hanover Capital Partners 2, Inc.
4 EX-23.1 3 b44243hkexv23w1.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Current Report on Form 8-K/A under the Securities Exchange Act of 1934 of Hanover Capital Mortgage Holdings, Inc. dated September 16, 2002 and Registration Statement Nos. 333-84290 and 333-99483 of Hanover Capital Mortgage Holdings, Inc. on Form S-8 under the Securities Act of 1933 of our reports dated March 22, 2002, appearing in the Annual Report on Form 10-K of Hanover Capital Mortgage Holdings, Inc. and Subsidiaries for the year ended December 31, 2001 and incorporated herein by reference. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey September 16, 2002 EX-99.3 4 b44243hkexv99w3.txt FINANCIAL STATEMENTS OF HANOVERTRADE, INC. EXHIBIT 99.3 FINANCIAL STATEMENTS OF HANOVERTRADE, INC. TABLE OF CONTENTS TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001 2 Consolidated Statements of Operations (unaudited) for the Six Months Ended June 30, 2002 and 2001 3 Consolidated Statement of Stockholders' Equity (unaudited) for the Six Months Ended June 30, 2002 4 Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2002 and 2001 5 Notes to Consolidated Financial Statements (unaudited) 6
HANOVERTRADE, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ CURRENT ASSETS: (UNAUDITED) Cash and cash equivalents $ 273,847 $ 196,451 Accounts receivable 283,862 590,234 Prepaid expenses and other current assets 8,773 31,105 ------------ ------------ Total current assets 566,482 817,790 PROPERTY AND EQUIPMENT - Net 159,763 176,728 CAPITALIZED SOFTWARE - Net 1,707,263 2,170,323 GOODWILL - Net 1,514,736 1,044,266 DEFERRED TAX ASSET - Net -- -- OTHER ASSETS 68,971 68,971 ------------ ------------ TOTAL ASSETS $ 4,017,215 $ 4,278,078 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 564,540 $ 407,372 Accrued interest due to related party 23,972 103,738 Payable under asset purchase agreement 500,000 500,000 Due to related parties 397,457 544,639 Other current liabilities 3,518 5,110 ------------ ------------ Total current liabilities 1,489,487 1,560,859 NOTE PAYABLE TO RELATED PARTY 6,304,396 7,654,396 ------------ ------------ TOTAL LIABILITIES 7,793,883 9,215,255 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Series A preferred stock: $0.01 par value, 100,000 shares authorized, 97,000 shares outstanding at June 30, 2002 and December 31, 2001 970 970 Common stock: $0.01 par value, 105,000 shares authorized, 3,000 shares outstanding at June 30, 2002 and December 31, 2001 30 30 Additional paid-in capital 485,021 -- Retained earnings (deficit) (4,262,689) (4,938,177) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (3,776,668) (4,937,177) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,017,215 $ 4,278,078 ============ ============
See notes to consolidated financial statements 2 HANOVERTRADE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------------- 2002 2001 ----------- ------------ REVENUES: Loan brokering/trading $ 3,137,156 $ 1,594,666 Loan sale advisory services 1,008,124 -- Consulting 249,265 -- Other 24,744 170,434 ----------- ------------ Total revenues 4,419,289 1,765,100 ----------- ------------ EXPENSES: Personnel 1,859,395 1,868,646 Depreciation and amortization 594,151 544,361 Technology 483,368 219,049 General and administrative 273,024 139,327 Occupancy 213,444 135,002 Interest 147,786 198,310 Travel and entertainment 110,802 169,630 Professional 61,831 110,918 ----------- ------------ Total expenses 3,743,801 3,385,243 ----------- ------------ INCOME (LOSS) BEFORE INCOME TAX PROVISION 675,488 (1,620,143) INCOME TAX PROVISION -- -- ----------- ------------ NET INCOME (LOSS) $ 675,488 $(1,620,143) =========== ============ BASIC EARNINGS (LOSS) PER SHARE $ 225.16 $ (540.05) =========== ============
See notes to consolidated financial statements 3 HANOVERTRADE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
Series A Accumulated Preferred Stock Common Stock Additional Retained Other --------------- --------------- Paid-in Comprehensive Earnings Comprehensive Shares Amount Shares Amount Capital Income (Deficit) Gain Total ------ ------ ------ ------ ---------- ------------- ----------- ------------- ----------- BALANCE, DECEMBER 31, 2001 97,000 $ 970 3,000 $ 30 $ -- $(4,938,177) $ -- $(4,937,177) Capital contribution 485,021 485,021 Comprehensive income: Net income $ 675,488 675,488 675,488 ------------- Comprehensive income $ 675,488 ------ ------ ------ ------ ---------- ============= ----------- ---------- ----------- BALANCE, JUNE 30, 2002 97,000 $ 970 3,000 $ 30 $ 485,021 $(4,262,689) $ -- $(3,776,668) ====== ====== ====== ====== ========== =========== ========== ===========
See notes to consolidated financial statements 4 HANOVERTRADE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------------------- 2002 2001 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 675,488 $(1,620,143) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 594,151 544,361 Changes in assets - (increase) decrease: Accounts receivable 306,372 (190,153) Notes receivable -- (200,000) Prepaid expenses and other assets 22,332 (10,096) Changes in liabilities - increase (decrease): Accounts payable and accrued expenses 157,168 (662,184) Accrued interest due to related party (79,766) (2,953) Due to related parties (147,182) (46,482) Other current liabilities (1,592) 600 ----------- ----------- Net cash provided by (used in) operating activities 1,526,971 (2,187,050) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (31,126) (15,002) Capitalized software costs (83,000) (79,877) Acquisition -- (868,530) ----------- ----------- Net cash (used in) investing activities (114,126) (963,409) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayment of) proceeds from note payable to related party (1,350,000) 3,265,826 Capital contributions 14,551 -- ----------- ----------- Net cash (used in) provided by financing activities (1,335,449) 3,265,826 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 77,396 115,367 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 196,451 32,573 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 273,847 $ 147,940 =========== ===========
See notes to consolidated financial statements 5 HANOVERTRADE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION The interim consolidated financial statements of HanoverTrade, Inc. and Subsidiary (the "Company") should be read in conjunction with the Company's annual consolidated financial statements included in Hanover Capital Mortgage Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001. The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. There were no adjustments of a non-recurring nature recorded during the six months ended June 30, 2002. The interim results of operations presented are not necessarily indicative of the results for the full year. When necessary, reclassifications have been made to conform to current period presentation. The Company is principally engaged in operating a 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, the Company provides a full range of asset valuation, analysis, due diligence and marketing services for: performing, sub-performing and non-performing assets; whole loans and participations; Community Reinvestment Act loans; and mortgage servicing rights. A wholly-owned subsidiary of HanoverTrade, Inc., Pamex Securities, LLC is a registered broker/dealer with the Securities and Exchange Commission. In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. SFAS 145 amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 related to the rescission of FASB Statement No. 4 are effective for fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to FASB Statement No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of SFAS 145 are effective for financial statements issued on or after May 15, 2002. The adoption of SFAS 145 is not expected to have a material effect on the Company's consolidated financial statements. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material effect on the Company's consolidated financial statements. 6 2. ACQUISITION On January 19, 2001, the Company hired 18 employees of Pamex Capital Partners LLC ("Pamex") and purchased all of its assets. The Company entered into employment agreements with 6 of the 18 employees hired. The purchase price consisted of $850,000 in cash paid at closing, professional fees of $18,530 plus an earn-out of between $1,250,000 and $1,500,000, payable over three years in common stock of Hanover Capital Mortgage Holdings, Inc. ("HCHI"). This acquisition had been accounted for using the purchase method of accounting. At December 31, 2001, an initial earn-out of $500,000 had been accrued and was subsequently paid on February 19, 2002. At June 30, 2002, a second earn-out of $500,000 had been accrued and is payable in 2003. In addition, the Company is required under terms of the purchase agreement to adopt an employee stock option plan pursuant to which it will issue options to purchase 5% of the number of shares of common stock outstanding as of January 19, 2002. 3. PROPERTY AND EQUIPMENT
JUNE 30, DECEMBER 31, 2002 2001 --------- ----------- Office machinery and computer equipment $ 290,604 $ 259,950 Less accumulated depreciation (130,841) (83,222) --------- --------- Property and equipment - net $ 159,763 $ 176,728 ========= =========
Depreciation expense for the six months ended June 30, 2002 and 2001 was $48,091 and $39,071, respectively. 4. CAPITALIZED SOFTWARE
JUNE 30, DECEMBER 31, 2002 2001 ----------- ----------- Capitalized software costs $ 3,358,474 $ 3,275,474 Less accumulated amortization (1,651,211) (1,105,151) ----------- ----------- Capitalized software costs - net $ 1,707,263 $ 2,170,323 =========== ===========
Amortization expense for the six months ended June 30, 2002 and 2001 was $546,060 and $478,516, respectively. The estimated aggregate amortization expense, as of June 30, 2002, for the period July 1, 2002 through December 31, 2002 and for the years ending December 31, 2003, 2004 and 2005 is $546,060, $1,119,787, $96,750 and $27,666, respectively. 5. GOODWILL On January 1, 2001, the Company implemented Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 142 requires that upon adoption, amortization of goodwill will cease and instead, the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, to exclude from its scope goodwill and intangible assets that are not amortized. In accordance with SFAS 142, the Company has completed its transitional goodwill impairment test and its annual impairment test and determined that the fair value of its reporting unit exceeded the carrying value at both test dates. As a result, no impairment loss was recognized as of January 1, 2002 and June 30, 2002. The following table presents the consolidated results of operations adjusted as though the adoption of SFAS 142 occurred as of January 1, 2001:
SIX MONTHS ENDED JUNE 30, ---------------------------- 2002 2001 ----------- ----------- Reported net income (loss) $ 675,488 $(1,620,143) Goodwill amortization add-back -- 26,774 ----------- ----------- Adjusted net income (loss) $ 675,488 $(1,593,369) =========== ===========
Goodwill balances are as follows:
JUNE 30, DECEMBER 31, 2002 2001 ----------- ----------- Goodwill $ 1,579,371 $ 1,108,901 Less accumulated amortization (64,635) (64,635) ----------- ----------- Goodwill -- net $ 1,514,736 $ 1,044,266 =========== ===========
Amortization expense for six months ended June 30, 2001 was $26,774. On February 19, 2002, the Company received a capital contribution from HCHI of 63,577 shares of HCHI common stock with a then fair market value of $470,470. The capital contribution was utilized by the Company to fund the initial earn-out issued in connection with its purchase of all the assets of Pamex. The difference between the amount accrued at December 31, 2001 and the capital contribution at February 19, 2002, or $29,530, was reflected as an adjustment to goodwill. 7 6.CONCENTRATION RISK As of and for the six months ended June 30, 2002, one of the Company's customers accounted for approximately 78% of total revenues and 38% of accounts receivable. No other customer individually accounted for more than 10% of total revenues or accounts receivable. 7. RELATED PARTY TRANSACTIONS
JUNE 30, DECEMBER 31, 2002 2001 --------- ----------- Due to Hanover Capital Partners Ltd. $ 353,429 $ 466,287 Due to Hanover Capital Mortgage Holdings, Inc. 44,028 78,400 Other -- (48) --------- --------- Due to related parties $ 397,457 $ 544,639 ========= =========
For the six months ended June 30, 2002 and 2001, Hanover Capital Partners Ltd. ("HCP") and HCHI billed certain expenses to HanoverTrade, Inc. ("HT"). The expenses billed include personnel, occupancy, travel and entertainment, and general and administrative. These expenses were billed to reflect activity on behalf of HT. HT expects similar billings from HCP and HCHI in future periods. HCP billed a total of $1,741,700 and $1,488,800 of net expenses to HT for the six months ended June 30, 2002 and 2001, respectively. The billings included $1,381,000 and $1,001,600 of personnel, $280,700 and $372,200 of commissions, $58,200 and $90,500 of travel and entertainment, and $21,800 and $24,500 of general and administrative for the six months ended June 30, 2002 and 2001, respectively. HCHI billed a total of $264,016 and $218,890 of personnel expense to HT for the six months ended June 30, 2002 and 2001, respectively. At June 30, 2002 and December 31, 2001, HT had a principal balance on a note payable to HCHI in the amount of $6,304,396 and $7,654,396, respectively. The maximum loan amount under this note is $10 million. The note bears interest daily at the prime rate minus 1% and interest is calculated on the daily principal balance outstanding. At June 30, 2002 and December 31, 2001, the interest rate in effect was 3.75%. The entire unpaid principal balance on the note is due in full on March 31, 2003. 8. INCOME TAXES
JUNE 30, DECEMBER 31, 2002 2001 ----------- ----------- Deferred tax assets $ 1,670,686 $ 1,944,289 Valuation allowance (1,670,686) (1,944,289) ----------- ----------- Deferred tax asset - net $ -- $ -- =========== ===========
The items resulting in significant temporary differences that generate deferred tax assets relate primarily to the benefit of net operating loss carryforwards for the six months ended June 30, 2002 and the year ended December 31, 2001, and goodwill amortization for the year ended December 31, 2001. The Company has established a valuation allowance for the full amount of the deferred income tax benefit. 8 The income tax provision (benefit) differs from amounts computed at statutory rates, as follows:
SIX MONTHS ENDED JUNE 30, ------------------------ 2002 2001 --------- --------- Federal income tax provision (benefit) at statutory rate $ 229,667 $(550,849) State and local income tax provision (benefit) 39,935 (95,783) Meals and entertainment 3,593 6,133 Officers' life insurance 408 408 --------- --------- Total tax provision (benefit) 273,603 (640,091) Valuation allowance (273,603) 640,091 --------- --------- Income tax provision (benefit) $ -- $ -- ========= =========
At June 30, 2002, the Company had a Federal tax net operating loss carryforward of approximately $4,200,000 that begins to expire in 2014. 9. STOCKHOLDERS' EQUITY Prior to July 1, 2002, HCHI owned all of the outstanding preferred stock of the Company, giving it a 97% economic interest. The remaining 3% economic interest represented by all of the common stock of the Company was owned by the principals, John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares. The preferred stock has no dividend rate or preference over the common stock. Dividend distributions will be made in the same amount on a per share basis for the common stock as for the preferred stock. All voting power is held by the common stockholders except for certain situations involving merger, dissolution, sale of substantially all the assets of the Company, and amendments to the Certificate of Incorporation adversely affecting the preferred stockholder. In these situations, the preferred stockholder shall be entitled to vote. 10. COMMITMENTS AND CONTINGENCIES The Company has noncancelable operating lease agreements for office space. Future minimum rental payments for such leases are as follows: Six Months Ending December 31, 2002 $ 93,003 Year Ended December 31, 2003 170,112 Year Ended December 31, 2004 139,810 Year Ended December 31, 2005 45,932 -------- $448,857 ========
Rent expense for the six months ended June 30, 2002 and 2001 amounted to $51,606 and $52,627, respectively. 11. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, ------------------------- 2002 2001 -------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest to related party $227,552 $201,263 ACQUISITION: Fair value of assets acquired $ -- $259,629 Goodwill at acquisition -- 590,371 Direct costs of acquisition -- 18,530 -------- -------- Net cash paid for acquisition $ -- $868,530 ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Capital contribution received of 63,577 shares of Hanover Capital Mortgage Holdings, Inc. common stock utilized to fund the first earn-out in connection with the acquisition of Pamex $470,470 $ -- ======== ======== Second earn-out accrued in connection with the acquisition of Pamex resulting in an increase in goodwill and payable under asset purchase agreement $500,000 $ -- ======== ========
12. SUBSEQUENT EVENTS CHANGE IN COMMON STOCK OWNERSHIP Pursuant to a Stock Purchase Agreement effective July 1, 2002, HCHI acquired 100% of the outstanding common stock of the Company. Therefore, as of July 1, 2002, HCHI owns 100% of the outstanding capital stock of the Company and, for periods ending after June 30, 2002, the Company's financial statements will be consolidated with the financial statements of HCHI. DISPOSITION OF PAMEX SECURITIES On July 26, 2002, the Company terminated its March 12, 2002 letter of intent with a third party to sell its wholly-owned subsidiary, Pamex Securities, LLC. No determination has been made as to the Company's disposition of this subsidiary. OTHER On July 2, 2002, New Jersey Governor James E. McGreevey signed into law a $1.8 billion business tax package, known as the Business Tax Reform Act. The bill includes several changes overhauling the Corporate Business Tax ("CBT") intended to close loopholes, impose an Alternative Minimum Assessment, and assesses a processing fee on limited liability partnerships. The bill has numerous provisions, some of which effect businesses that currently do not pay CBT. The Business Tax Reform Act is effective immediately for taxable years beginning on or after January 1, 2002, except in limited circumstances. The Company is currently in the process of determining what effect, if any, the Business Tax Reform Act will have on its consolidated financial statements. ****** 9 EX-99.4 5 b44243hkexv99w4.txt FIN. STATEMENTS OF HANOVER CAPITAL PARTNERS LTD. EXHIBIT 99.4 FINANCIAL STATEMENTS OF HANOVER CAPITAL PARTNERS LTD. TABLE OF CONTENTS TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2 2001 Consolidated Statements of Income (unaudited) for the Six Months Ended 3 June 30, 2002 and 2001 Consolidated Statement of Stockholders' Equity (unaudited) for the Six Months 4 Ended June 30, 2002 Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended 5 June 30, 2002 and 2001 Notes to Consolidated Financial Statements (unaudited) 6
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, ASSETS 2002 2001 ----------- ------------ CURRENT ASSETS: (UNAUDITED) Cash and cash equivalents $ 940,299 $ 847,676 Investment in marketable securities 3,300 3,300 Accounts receivable 894,649 996,777 Receivables from related parties 353,672 473,637 Accrued revenue on contracts in progress 1,182,827 1,035,870 Prepaid expenses and other current assets 60,798 39,580 ----------- ------------ Total current assets 3,435,545 3,396,840 PROPERTY AND EQUIPMENT - Net 84,267 100,584 DEFERRED TAX ASSET - Net 203,666 294,041 OTHER ASSETS 10,040 10,040 ----------- ------------ TOTAL ASSETS $3,733,518 $3,801,505 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accrued appraisal and subcontractor costs $ 146,959 $ 16,139 Accounts payable and accrued expenses 471,861 456,242 Due to related parties 246,697 411,232 Income tax payable 617 617 ----------- ------------ Total current liabilities 866,134 884,230 NOTE PAYABLE TO RELATED PARTY 870,298 1,035,859 ----------- ------------ TOTAL LIABILITIES 1,736,432 1,920,089 ----------- ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock: $.01 par value, 100,000 shares authorized, 97,000 shares outstanding at June 30, 2002 and December 31, 2001 970 970 Common stock: Class A: $.01 par value, 5,000 shares authorized, 3,000 shares outstanding at June 30, 2002 and December 31, 2001 30 30 Additional paid-in capital 2,839,947 2,839,947 Retained earnings (deficit) (843,861) (959,531) ----------- ------------ TOTAL STOCKHOLDERS' EQUITY 1,997,086 1,881,416 ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,733,518 $3,801,505 =========== ============
See notes to consolidated financial statements 2 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------------- 2002 2001 ---------- ---------- REVENUES: Due diligence fees $2,085,862 $2,519,008 Assignment fees 833,438 367,319 Mortgage sales and servicing 2,468 5,140 Other income 101,268 8,507 ---------- ---------- Total revenues 3,023,036 2,899,974 ---------- ---------- EXPENSES: Personnel 1,242,016 1,329,230 Subcontractor 1,147,133 980,183 General and administrative 139,468 149,548 Travel and subsistence 79,990 109,283 Occupancy 79,756 114,186 Professional 73,998 126,608 Depreciation and amortization 31,119 29,372 Interest 23,511 27,361 ---------- ---------- Total expenses 2,816,991 2,865,771 ---------- ---------- NET INCOME BEFORE INCOME TAX PROVISION 206,045 34,203 INCOME TAX PROVISION 90,375 21,537 ---------- ---------- NET INCOME $ 115,670 $ 12,666 ========== ========== BASIC EARNINGS PER SHARE $ 38.56 $ 4.22 ========== ==========
See notes to consolidated financial statements 3 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
Common Stock Accumulated Preferred Stock New Class A Additional Retained Other --------------- -------------- Paid-in Comprehensive Earnings Comprehensive Shares Amount Shares Amount Capital Income (Deficit) Gain Total ------ ------ ------ ------ ---------- ------------- --------- ------------- ---------- BALANCE, DECEMBER 31, 2001 97,000 $ 970 3,000 $ 30 $2,839,947 $(959,531) $ -- $1,881,416 Comprehensive income: Net income $ 115,670 115,670 115,670 ----------- Comprehensive income $ 115,670 ------ ------ ------ ------ ---------- =========== --------- ------------- ---------- BALANCE, JUNE 30, 2002 97,000 $ 970 3,000 $ 30 $2,839,947 $(843,861) $ -- $1,997,086 ====== ====== ====== ====== ========== ========= ============= ==========
See notes to consolidated financial statements 4 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------- 2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 115,670 $ 12,666 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,119 25,276 Deferred tax provision 90,375 16,464 Changes in assets - (increase) decrease: Accounts receivable 102,128 1,056,792 Receivables from/payables to related parties (44,570) 406,059 Accrued revenue on contracts in progress (146,957) 487,048 Prepaid expenses and other current assets (21,218) (102,138) Other assets -- (50,368) Changes in liabilities - increase (decrease): Accrued appraisal and subcontractor costs 130,820 51,864 Accounts payable and accrued expenses 15,619 (1,192,194) Income tax payable -- 1,062 Deferred revenue -- (288) ------------ ------------ Net cash provided by operating activities 272,986 712,243 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (14,802) (48,532) ------------ ------------ Net cash (used in) investing activities (14,802) (48,532) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayment of) note payable to related party (165,561) (465,440) ------------ ------------ Net cash (used in) financing activities (165,561) (465,440) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 92,623 198,271 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 847,676 493,711 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 940,299 $ 691,982 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 17,703 $ 34,917 ============ ============ Interest $ 69,567 $ 36,010 ============ ============
See notes to consolidated financial statements 5 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION The interim consolidated financial statements of Hanover Capital Partners, Inc. ("HCP") and Subsidiaries (the "Company") should be read in conjunction with the Company's annual consolidated financial statements included in Hanover Capital Mortgage Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001. The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. There were no adjustments of a non-recurring nature recorded during the six months ended June 30, 2002. The interim results of operations presented are not necessarily indicative of the results for the full year. When necessary, reclassifications have been made to conform to current period presentation. The Company operates as a specialty finance company which is principally engaged in performing due diligence services, asset management services, mortgage loan assignment preparation services, and mortgage and investment banking services for third parties and for its affiliate, Hanover Capital Mortgage Holdings, Inc. ("HCHI"). A wholly-owned subsidiary of HCP, Hanover Capital Mortgage Corporation ("HCMC"), is a servicer of multifamily mortgage loans and until June 30, 1999 was an originator of multifamily mortgage loans. HCMC is approved by the U.S. Department of Housing and Urban Development (HUD) as a Title II Nonsupervised Mortgagee under the National Housing Act. Another wholly-owned subsidiary of HCP, Hanover Capital Securities, Inc. ("HCS") is a registered broker/dealer with the Securities and Exchange Commission. In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. SFAS 145 amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 related to the rescission of FASB Statement No. 4 are effective for fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to FASB Statement No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of SFAS 145 are effective for financial statements issued on or after May 15, 2002. The adoption of SFAS 145 is not expected to have a material effect on the Company's consolidated financial statements. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material effect on the Company's consolidated financial statements. 6 2. PROPERTY AND EQUIPMENT
JUNE 30, DECEMBER 31, 2002 2001 --------- ------------ Office machinery and computer equipment $ 382,232 $ 367,430 Furniture and fixtures 7,104 7,104 --------- ------------ 389,336 374,534 Less accumulated depreciation (305,069) (273,950) --------- ------------ Property and equipment - net $ 84,267 $ 100,584 ========= ============
Depreciation expense for the six months ended June 30, 2001 and 2001 was $31,119 and $25,276, respectively. 3. CONCENTRATION RISK For the six months ended June 30, 2002, the Company received revenues from certain customers which exceeded 10% of total revenues as follows:
SIX MONTHS ENDED JUNE 30, 2002 ---------------- Major Customer #1 30% Major Customer #2 13% Major Customer #3 13% Major Customer #4 10%
4. MORTGAGE SERVICING The Company, through its wholly-owned subsidiary, HCMC, services multifamily mortgage loans on behalf of others. Loan servicing consists of the collection of monthly mortgage payments on behalf of investors, reporting information to those investors on a monthly basis, and maintaining custodial escrow accounts for the payment of principal and interest to investors and property taxes and insurance premiums on behalf of borrowers. As of June 30, 2002 and December 31, 2001, HCMC was servicing 2 and 3 loans, respectively, with unpaid principal balances of $3,130,750 and $4,918,187 including loans subserviced for others of $2,008,610 and $3,774,586, respectively. Escrow balances maintained by HCMC were $87,413 and $152,226 at June 30, 2002 and December 31, 2001, respectively. The aforementioned servicing portfolio and related escrow accounts are not included in the accompanying Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001. 5. RELATED PARTY TRANSACTIONS
JUNE 30, DECEMBER 31, 2002 2001 ---------- ------------ Due from HanoverTrade, Inc. (1) $ 353,610 $ 465,987 Due from Hanover Capital Partners 2, Inc. 62 -- Due from Hanover Mortgage Capital Corporation -- 6,662 Due from HDMF-I LLC -- 988 ---------- ---------- Receivables from related parties $ 353,672 $ 473,637 ========== ==========
(1) Amounts due reflect certain costs that the Company paid on behalf of HanoverTrade, Inc. ("HT"). The expenses billed include personnel, commissions, travel and entertainment, and general and administrative. 7 Due to related parties of $246,697 and $411,232 at June 30, 2002 and December 31, 2001, respectively, are due to HCHI and primarily represent an allocation of payroll expenses and tax payments made by HCHI on behalf of HCP, partially offset by management fees charged by HCP to HCHI. The Company entered into a Management Agreement in 1998 to provide, among other services, due diligence, asset management and administrative services to HCHI in connection with acquiring single-family mortgage loan pools and managing and servicing HCHI's investment portfolio. The term of the Management Agreement continues until December 31, 2003 with automatic annual renewal. At June 30, 2002 and December 31, 2001, the Company had a principal balance outstanding on a note payable to HCHI in the amount of $870,298 and $1,035,859, respectively. The note bears interest at the prime rate minus 1% and interest is calculated on the daily principal balance outstanding. At June 30, 2002 and December 31, 2001, the interest rate in effect was 3.75%. Included in the 2002 and 2001 Consolidated Statements of Income is interest expense in the amount of $23,511 and $27,361, respectively, related to this note payable. The entire unpaid principal balance on the note is due in full on March 31, 2003. 6. INCOME TAXES The components of deferred income taxes as of June 30, 2002 and December 31, 2001 are as follows:
JUNE 30, DECEMBER 31, 2002 2001 ---------- ----------- Deferred tax assets - ------------------- Temporary differences $ 33,232 $ 64,585 Federal net operating loss carryforward 288,855 318,254 State/Local net operating loss carryforward 76,462 106,085 AMT Credit 16,830 16,830 --------- --------- Total deferred tax assets 415,379 505,754 Valuation allowance (211,713) (211,713) ---------- --------- Net deferred tax assets $ 203,666 $ 294,041 ========== =========
The items resulting in significant temporary differences for the six months ended June 30, 2002 and the year ended December 31, 2001 that generate deferred tax assets relate primarily to the recognition of revenue and accrued liabilities for financial reporting purposes. The components of the income tax provision for the six months ended June 30, 2002 and 2001 consist of the following:
SIX MONTHS ENDED JUNE 30, ------------------------- 2002 2001 --------- --------- Current - Federal, state and local $ - $ - Deferred - Federal, state and local 90,375 21,537 --------- --------- Total $ 90,375 $ 21,537 ========= =========
8 The income tax provision differs from amounts computed at statutory rates, as follows:
SIX MONTHS ENDED JUNE 30, ------------------------- 2002 2001 -------- -------- Federal income tax provision (benefit) at statutory rate $ 70,055 $ 10,261 State and local income tax provision 18,544 3,420 Meals and entertainment 890 906 Officer's life insurance 886 1,775 Tax settlement - 5,175 -------- -------- Total $ 90,375 $ 21,537 ======== ========
The Company has a Federal tax net operating loss carryforward of approximately $850,000 which begins to expire in the year 2012. 7. STOCKHOLDERS' EQUITY On September 19, 1997, the Company entered into an Agreement and Plan of Recapitalization ("Agreement") with its four stockholders (John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares) to recapitalize the Company. The Agreement provided for the tax-free exchange of the stockholders' 166,424 Class A "old" common stock shares for 3,000 shares of "new" Class A common stock shares, $0.01 par value (representing a 3% economic interest in the Company owned by the four stockholders until June 30, 2002) and 97,000 shares of Series A preferred stock, $0.01 par value (representing a 97% economic interest in the Company owned by HCHI until June 30, 2002). The preferred stock has no dividend rate or preference over the common stock. Dividend distributions will be made in the same amount on a per share basis of the common stock as for the preferred stock. Dividend distributions will be made to the common stockholders and the preferred stockholders in proportion to the number of outstanding shares. The preferred stockholder has the right to receive $10,750,005 upon liquidation of the Company before common stockholders receive any liquidating distributions. 8. COMMITMENTS AND CONTINGENCIES The Company has noncancelable operating lease agreements for office space. Future minimum rental payments for such leases are as follows:
Six Months Ending December 31, 2002 $ 91,500 Year Ended December 31, 2003 131,580 Year Ended December 31, 2004 131,580 Year Ended December 31, 2005 43,860 -------- $398,520 ========
Rent expense for the six months ended June 30, 2002 and 2001 amounted to $59,637 and $63,762, respectively. 9 9. SUBSEQUENT EVENTS CHANGE IN COMMON STOCK OWNERSHIP Pursuant to a Stock Purchase Agreement effective July 1, 2002, HCHI acquired 100% of the outstanding common stock of the Company. Therefore, as of July 1, 2002, HCHI owns 100% of the outstanding capital stock of the Company and, for periods ending after June 30, 2002, the Company's financial statements will be consolidated with the financial statements of HCHI. OTHER On July 2, 2002, New Jersey Governor James E. McGreevey signed into law a $1.8 billion business tax package, known as the Business Tax Reform Act. The bill includes several changes overhauling the Corporate Business Tax ("CBT") intended to close loopholes, impose an Alternative Minimum Assessment, and assesses a processing fee on limited liability partnerships. The bill has numerous provisions, some of which effect businesses that currently do not pay CBT. The Business Tax Reform Act is effective immediately for taxable years beginning on or after January 1, 2002, except in limited circumstances. The Company is currently in the process of determining what effect, if any, the Business Tax Reform Act will have on its consolidated financial statements. ****** 10 EX-99.5 6 b44243hkexv99w5.txt FIN. STATEMENTS OF HANOVER CAPITAL PARTNERS 2, INC EXHIBIT 99.5 FINANCIAL STATEMENTS OF HANOVER CAPITAL PARTNERS 2, INC. TABLE OF CONTENTS TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Balance Sheets (unaudited) as of June 30, 2002 and December 31, 2001 2 Consolidated Statements of Operations (unaudited) for the Six Months Ended June 30, 2002 and 2001 3 Consolidated Statement of Stockholders' Equity (unaudited) for the Six Months Ended June 30, 2002 4 Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2002 and 2001 5 Notes to Consolidated Financial Statements (unaudited) 6
HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS JUNE 30, DECEMBER 31, 2002 2001 ----------- ----------- Mortgage securities held for trading $ 3,158,746 $ 560,039 Cash and cash equivalents 457,309 2 Accrued interest receivable 72,212 16,858 Prepaid expenses and other assets 14,551 600 ----------- ----------- TOTAL ASSETS $ 3,702,818 $ 577,499 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 4,027 $ 23,281 Accrued interest due to related party 164,120 2,493 Mark to market of open futures positions 144,719 -- Note payable to related party 3,425,700 568,417 Due to related party 62 -- ----------- ----------- TOTAL LIABILITIES 3,738,628 594,191 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock: $0.01 par value, 9,900 shares authorized and outstanding at June 30, 2002 and December 31, 2001 99 99 Common stock: $0.01 par value, 100 shares authorized and outstanding at June 30, 2002 and December 31, 2001 1 1 Additional paid-in capital 8,135,590 8,135,590 Retained earnings (deficit) (8,171,500) (8,152,382) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (35,810) (16,692) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,702,818 $ 577,499 =========== ===========
See notes to consolidated financial statements 2 HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 2002 2001 --------- --------- REVENUES: Interest income $ 632,116 $ -- (Loss) on mark to market of mortgage assets (130,497) -- Realized and unrealized (loss) on derivative instruments (370,829) -- Other income 7,812 -- --------- --------- Total revenues 138,602 -- --------- --------- EXPENSES: Interest 163,209 -- General and administrative 7,226 -- --------- --------- Total expenses 170,435 -- --------- --------- (LOSS) BEFORE INCOME TAX (BENEFIT) (31,833) -- INCOME TAX (BENEFIT) (12,715) -- --------- --------- NET (LOSS) $ (19,118) $ -- ========= ========= BASIC (LOSS) PER SHARE $ (191.18) $ -- ========= =========
See notes to consolidated financial statements 3 HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
Accumulated Preferred Stock Common Stock Additional Retained Other --------------- ---------------- Paid-in Comprehensive Earnings Comprehensive Shares Amount Shares Amount Capital Income (Deficit) Gain Total ------ ------ ------ ------ ---------- ------------- ----------- ------------- -------- BALANCE, DECEMBER 31, 2001 9,900 $ 99 100 $ 1 $8,135,590 $(8,152,382) $ -- $(16,692) Comprehensive income: Net income $ (19,118) (19,118) (19,118) ------------- Comprehensive income $ (19,118) ----- ------ --- ------ ---------- ============= ----------- ------------- -------- BALANCE, JUNE 30, 2002 9,900 $ 99 100 $ 1 $8,135,590 $(8,171,500) $ -- $(35,810) ===== ====== === ====== ========== =========== ============= ========
See notes to consolidated financial statements 4 HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 2002 2001 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (19,118) $ -- Adjustments to reconcile net (loss) to net cash (used in) operating activities: Amortization of net premium and deferred costs 8,300 -- Loss on mark to market of mortgage assets 130,497 -- Loss on mark to market of open futures 144,719 -- Purchase of trading securities (7,883,930) -- Sale of trading securities 5,060,459 -- Changes in assets - (increase) decrease: Accrued interest receivable (55,354) -- Prepaid expenses and other assets (13,951) -- Changes in liabilities - increase (decrease): Accounts payable and accrued expenses (19,254) -- Accrued interest due to related party 161,627 -- Due to related party 62 -- ----------- ----------- Net cash (used in) operating activities (2,485,943) -- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Principal payments received on mortgage securities 85,967 -- ----------- ----------- Net cash provided by investing activities 85,967 -- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from note payable to related party 2,857,283 -- ----------- ----------- Net cash provided by financing activities 2,857,283 -- ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 457,307 -- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2 2 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 457,309 $ 2 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for interest $ 1,582 $ -- =========== ===========
See notes to consolidated financial statements 5 HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BUSINESS DESCRIPTION Hanover Capital Partners 2, Inc. ("HCP-2") was incorporated in Delaware on October 7, 1998. The Company was formed to acquire single-family residential mortgage loans from Hanover Capital Mortgage Holdings, Inc. ("HCHI") and to finance the purchase of these mortgage loans through a REMIC securitization. Hanover SPC-2, Inc., a wholly owned subsidiary of HCP-2, was incorporated in Delaware on October 9, 1998 for the sole purpose of selling certain investment grade and subordinated securities to HCHI, through its wholly-owned subsidiaries, Hanover QRS-1 98-B, Inc. and Hanover QRS-2 98-B, Inc. When we refer to the "Company", we mean HCP-2 together with its consolidated subsidiary. During 2000, the Company wrote off its mortgage-related assets and liabilities and temporarily ceased operations. In the first quarter of 2002, the Company commenced the trading of Agency derivative mortgage-backed securities ("MBS") and futures contracts. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of HCP-2 and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES; RISKS AND UNCERTAINTIES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's estimates and assumptions primarily arise from risks and uncertainties associated with interest rate volatility and credit exposure. Although management is not currently aware of any factors that would significantly change its estimates and assumptions in the near term, future changes in market trends and conditions may occur which could cause actual results to differ materially. MORTGAGE SECURITIES - Mortgage securities designated as trading are reported at fair value. Gains and losses resulting from changes in fair value are recorded as income or expense and included in earnings. Mortgage securities transactions are recorded on settlement date. Realized gains and losses on mortgage securities transactions are determined on a specific identification basis. DERIVATIVE INSTRUMENTS - HCP-2, in the normal course of its trading activities, can enter into transactions in derivative instruments to manage its exposure to market pricing changes of certain mortgage securities. HCP-2 recognizes changes in the fair value of such derivative instruments in earnings in the period of change. At June 30, 2002, HCP-2's derivative instruments consist of futures contracts with a loss of $(144,719). CASH AND CASH EQUIVALENTS - Cash and cash equivalents may include cash on hand, overnight investments deposited with banks and government securities with maturities of less than 30 days. BASIC EARNINGS PER SHARE - Basic earnings or loss per share is computed by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding during the period. Shares issued during the period and shares reacquired during the period are weighted for the period they were outstanding. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. SFAS 145 amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 related to the rescission of FASB Statement No. 4 are effective for fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to FASB Statement No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of SFAS 145 are effective for financial statements issued on or after May 15, 2002. The adoption of SFAS 145 is not expected to have a material effect on the Company's consolidated financial statements. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material effect on the Company's consolidated financial statements. 3. MORTGAGE SECURITIES HELD FOR TRADING
JUNE 30, 2002 DECEMBER 31, 2001 ---------------------------------------- ------------------------------------- FIXED-RATE INTEREST- FIXED-RATE INTEREST- AGENCY ONLY AGENCY ONLY MBS STRIPS TOTAL MBD STRIPS TOTAL ---------- ---------- ---------- ---------- -------- -------- Principal balance of mortgage securities $1,316,170 $ - $1,316,170 $ - $ - $ - Net premium (discount) and deferred costs 162,034 1,477,699 1,639,733 - 593,234 593,234 ---------- ---------- ---------- ---------- -------- -------- Total amortized cost of mortgage securities 1,478,204 1,477,699 2,955,903 - 593,234 593,234 Loan loss allowance - - - - - - Net unrealized gain (loss) (28,514) 231,357 202,843 - (33,195) (33,195) ---------- ---------- ---------- ---------- -------- -------- Carrying value of mortgage securities $1,449,690 $1,709,056 $3,158,746 $ - $560,039 $560,039 ========== ========== ========== ========== ======== ========
6 4. RELATED PARTY TRANSACTIONS At June 30, 2002 and December 31, 2001, HCP-2 had a principal balance on a note payable to HCHI in the amount of $3,425,700 and $568,417, respectively. The note bears interest daily at a market rate commensurate with the risks involved in HCP-2's trading activities. At June 30, 2002, the interest rate in effect was 10%. The entire unpaid principal balance on the note is due in full on March 31, 2003. 5. INCOME TAXES The income tax (benefit) differs from amounts computed at statutory rates, as follows:
SIX MONTHS ENDED JUNE 30, ------------------------- 2002 2001 --------- --------- Federal income tax provision (benefit) at statutory rate $(10,824) $ -- State and local income tax (benefit) (1,891) -- -------- -------- Income tax (benefit) $(12,715) $ -- ======== ========
At June 30, 2002, the Company had a capital loss carryforward of approximately $3,600,000 that expires in 2003. 7 6. STOCKHOLDERS' EQUITY Prior to July 1, 2002, HCHI owned all of the outstanding preferred stock of the Company, giving it a 99% economic interest. The remaining 1% economic interest represented by all of the common stock of the Company was owned by the principals, John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares. The preferred stock has no dividend rate or preference over the common stock. Dividend distributions will be made in the same amount on a per share basis for the common stock as for the preferred stock. All voting power is held by the common stockholders except for certain situations involving merger, dissolution, sale of substantially all the assets of the Company, and amendments to the Certificate of Incorporation adversely affecting the preferred stockholder. In these situations, the preferred stockholder shall be entitled to vote. 7. SUBSEQUENT EVENTS CHANGE IN COMMON STOCK OWNERSHIP Pursuant to a Stock Purchase Agreement effective July 1, 2002, HCHI acquired 100% of the outstanding common stock of the Company. Therefore, as of July 1, 2002, HCHI owns 100% of the outstanding capital stock of the Company and, for periods ending after June 30, 2002, the Company's financial statements will be consolidated with the financial statements of HCHI. OTHER On July 2, 2002, New Jersey Governor James E. McGreevey signed into law a $1.8 billion business tax package, known as the Business Tax Reform Act. The bill includes several changes overhauling the Corporate Business Tax ("CBT") intended to close loopholes, impose an Alternative Minimum Assessment, and assesses a processing fee on limited liability partnerships. The bill has numerous provisions, some of which effect businesses that currently do not pay CBT. The Business Tax Reform Act is effective immediately for taxable years beginning on or after January 1, 2002, except in limited circumstances. The Company is currently in the process of determining what effect, if any, the Business Tax Reform Act will have on its consolidated financial statements. ****** 8 EX-99.6 7 b44243hkexv99w6.txt PROFORMA CONSOLIDATED FINANCIAL STATEMENTS EXHIBIT 99.6 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES 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 and as of June 30, 2002 for balance sheet purposes. The unaudited pro forma consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the financial position or results of operations that would have actually been reported had the acquisition occurred on June 30, 2002 for balance sheet purposes and on January 1, 2001 for statement of income purposes, nor are these presentations necessarily indicative of the future financial position or 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.'s Annual Report on Form 10-K for the year ended December 31, 2001, Hanover Capital Mortgage Holdings, Inc. Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002, and the historical financial statements of the Newly Consolidated Subsidiaries included in this Form 8-K/A. TABLE OF CONTENTS TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
PAGE Pro Forma Consolidated Balance Sheet as of June 30, 2002 2 Notes to Pro Forma Consolidated Balance Sheet 3 Pro Forma Consolidated Statement of Income for the Six Months Ended June 30, 2002 4 Pro Forma Consolidated Statement of Income for the Year Ended December 31, 2001 5 Notes to Pro Forma Consolidated Statements of Income 6
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 2002 (UNAUDITED) (in thousands)
HANOVER CAPITAL MORTGAGE HOLDINGS, NEWLY INC. CONSOLIDATED ADJUSTMENTS/ PRO FORMA ORIGINAL SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ -------------- ------------ ASSETS Mortgage loans: Held for sale $ 758 $ - $ - $ 758 Collateral for CMOs 123,523 - - 123,523 Mortgage securities pledged as collateral for reverse repurchase agreements: Available for sale 4,265 - - 4,265 Held to maturity 689 - - 689 Trading 11,404 - - 11,404 Mortgage securities pledged as collateral for CMOs 9,800 - - 9,800 Mortgage securities, not pledged: Available for sale 579 - - 579 Trading 3,657 3,159 - 6,816 Cash and cash equivalents 8,514 1,671 - 10,185 Accrued interest receivable 1,202 72 - 1,274 Equity investments: Hanover Capital Partners Ltd. 1,920 - (1,920)(a,b) - HanoverTrade, Inc. (formerly HanoverTrade.com, Inc.) (3,663) - 3,663 (a,b) - Hanover Capital Partners 2, Inc. (19) - 19 (a,b) - HDMF-I LLC 3,970 - - 3,970 Notes receivable from related parties 13,880 - (11,074)(a,c) 2,806 Due from related parties 517 354 (836)(c) 35 Other assets 2,113 6,039 528 (a) 8,680 --------- --------- -------- --------- TOTAL ASSETS $ 183,109 $ 11,295 $ (9,620) $ 184,784 ========= ========= ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Reverse repurchase agreements $ 13,544 $ - $ - $ 13,544 CMO borrowing 123,173 - - 123,173 Notes payable to related party - 10,600 (10,600)(c) - Due to related parties - 836 (836)(c) - Accounts payable, accrued expenses and other liabilities 2,589 1,675 - 4,264 --------- --------- -------- --------- TOTAL LIABILITIES 139,306 13,111 (11,436) 140,981 --------- --------- -------- --------- STOCKHOLDERS' EQUITY: Preferred stock - 2 (2)(b) - Common stock 45 - - 45 Additional paid-in capital 67,963 11,461 (11,461)(b) 67,963 Retained earnings (deficit) (24,387) (13,279) 13,279 (b) (24,387) Accumulated other comprehensive income 182 - - 182 --------- --------- -------- --------- TOTAL STOCKHOLDERS' EQUITY 43,803 (1,816) 1,816 43,803 --------- --------- -------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 183,109 $ 11,295 $ (9,620) $ 184,784 ========= ========= ======== =========
See notes to pro forma consolidated balance sheet 2 HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED) (dollars in thousands) (a) Acquisition of 100% of the common stock of Hanover Capital Partners Ltd., HanoverTrade, Inc. and Hanover Capital Partners 2, Inc. in exchange for a reduction of the notes receivable from the common stockholders: Purchase price (reduction of notes receivable) $ 474 Less fair value of net assets (liabilities) acquired (54) ------- Goodwill $ 528 =======
(b) Elimination of the investment in newly consolidated subsidiaries against their equity: Negative investment balance reflected at 100% $ (1,816) ======== Preferred stock of subsidiaries $ 2 Additional paid-in capital of subsidiaries 11,461 Retained deficit of subsidiaries prior to acquisition (13,279) -------- Total equity of subsidiaries prior to acquisition $ (1,816) ========
(c) Elimination of intercompany receivables and payables between Hanover Capital Mortgage Holdings, Inc. and the newly consolidated subsidiaries: Notes receivable from subsidiaries $ 10,600 Due from subsidiaries 836 -------- $ 11,436 ======== Notes payable to HCHI $ 10,600 Due to HCHI 836 -------- $ 11,436 ========
3 HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF INCOME SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED) (in thousands, except per share data)
HANOVER CAPITAL MORTGAGE HOLDINGS, NEWLY INC. CONSOLIDATED ADJUSTMENTS PRO FORMA ORIGINAL SUBSIDIARIES ELIMINATIONS/ CONSOLIDATED ---------- ------------ ------------- ------------ REVENUES: Interest income $ 7,306 $ 632 $ (345)(a) $ 7,593 Interest expense 4,273 - - 4,273 ---------- --------- --------- ---------- Net interest income 3,033 632 (345) 3,320 Loan loss provision 121 - - 121 ---------- --------- --------- ---------- Net interest income after loan loss provision 2,912 632 (345) 3,199 Loan brokering/trading - 3,137 - 3,137 Due diligence fees - 2,086 - 2,086 Loan sale advisory services - 1,008 - 1,008 Assignment fees - 833 - 833 Gain on sale of mortgage assets 905 - - 905 Gain (loss) on mark to market of mortgage assets 575 (131) - 444 Other income (loss) (425) 15 (36)(b) (446) ---------- --------- --------- ---------- Total revenues 3,967 7,580 (381) 11,166 ---------- --------- --------- ---------- EXPENSES: Personnel 856 3,083 364 (b) 4,303 Subcontractor - 1,152 - 1,152 Depreciation and amortization - 625 - 625 Legal and professional 429 136 - 565 General, management and administrative 445 505 (400)(b) 550 Technology 1 489 - 490 Occupancy 48 187 - 235 Other 206 359 (332)(a) 233 Travel and entertainment 25 195 - 220 ---------- --------- --------- ---------- Total expenses 2,010 6,731 (368) 8,373 ---------- --------- --------- ---------- Operating income 1,957 849 (13) 2,793 Equity in income (loss) of unconsolidated subsidiaries 747 - (748)(c) (1) ---------- --------- --------- ---------- Income before income tax provision 2,704 849 (761) 2,792 Income tax provision - 77 - 77 ---------- --------- --------- ---------- NET INCOME $ 2,704 $ 772 $ (761) $ 2,715 ========== ========= ========= ========== BASIC EARNINGS PER SHARE: Average common shares outstanding 4,345,052 4,345,052 ========== ========== Basic earnings per share $ 0.62 $ 0.62 ========== ========== DILUTED EARNINGS PER SHARE: Diluted weighted average shares outstanding 4,409,312 4,409,312 ========== ========== Diluted earnings per share $ 0.61 $ 0.62 ========== ==========
See notes to pro forma consolidated statements of income 4 HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 2001 (UNAUDITED) (in thousands, except per share data)
HANOVER CAPITAL MORTGAGE HOLDINGS, NEWLY INC. CONSOLIDATED ADJUSTMENTS/ PRO FORMA ORIGINAL SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ REVENUES: Interest income $ 19,702 $ 42 $ (454)(a) $ 19,290 Interest expense 13,433 -- -- 13,433 --------- --------- --------- --------- Net interest income 6,269 42 (454) 5,857 Loan loss provision 709 -- -- 709 --------- --------- --------- --------- Net interest income after loan loss provision 5,560 42 (454) 5,148 Due diligence fees -- 5,803 (720)(b) 5,083 Loan brokering/trading -- 2,605 -- 2,605 Loan sale advisory services -- 993 -- 993 Assignment fees -- 756 -- 756 Gain on sale of mortgage assets 3,782 -- -- 3,782 Gain (loss) on mark to market of mortgage assets, net of associated hedge 751 (56) -- 695 Other income (loss) (28) 23 -- (5) --------- --------- --------- --------- Total revenues 10,065 10,166 (1,174) 19,057 --------- --------- --------- --------- EXPENSES: Personnel 664 6,554 (4)(b) 7,214 Subcontractor -- 2,373 -- 2,373 Legal and professional 1,247 457 -- 1,704 Depreciation and amortization -- 1,160 -- 1,160 General, management and administrative 952 726 (716)(b) 962 Occupancy 275 501 -- 776 Technology 4 690 -- 694 Other 509 479 (428)(a) 560 Travel and entertainment 45 499 -- 544 --------- --------- --------- --------- Total expenses 3,696 13,439 (1,148) 15,987 --------- --------- --------- --------- Operating income (loss) 6,369 (3,273) (26) 3,070 Equity in (loss) of unconsolidated subsidiaries (3,255) -- 3,220(c) (35) --------- --------- --------- --------- Income (loss) before income tax provision and cumulative effect of adoption of SFAS 133 3,114 (3,273) 3,194 3,035 Income tax provision -- 64 -- 64 --------- --------- --------- --------- Income (loss) before cumulative effect of adoption of SFAS 133 3,114 (3,337) 3,194 2,971 Cumulative effect of adoption of SFAS 133 46 -- -- 46 --------- --------- --------- --------- NET INCOME (LOSS) $ 3,160 $ (3,337) $ 3,194 $ 3,017 ========= ========= ========= ========= BASIC EARNINGS PER SHARE: Average common shares outstanding 4,256,874 4,256,874 --------- --------- Basic earnings per share: Before cumulative effect of adoption of SFAS 133 $ 0.73 $ 0.70 Cumulative effect of adoption of SFAS 133 0.01 0.01 --------- --------- After cumulative effect of adoption of SFAS 133 $ 0.74 $ 0.71 ========= ========= DILUTED EARNINGS PER SHARE: Diluted weighted average shares outstanding 4,310,632 4,310,632 --------- --------- Diluted earnings per share: Before cumulative effect of adoption of SFAS 133 $ 0.72 $ 0.69 Cumulative effect of adoption of SFAS 133 0.01 0.01 --------- --------- After cumulative effect of adoption of SFAS 133 $ 0.73 $ 0.70 ========= =========
See notes to pro forma consolidated statements of income 5 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 on intercompany notes and to reduce interest income on the portion of the notes receivable reduced in exchange for the purchase of the common stock of the newly consolidated subsidiaries summarized as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2002 2001 ------- ------------ Interest on note to Hanover Capital Partners Ltd. $ 24 $ 58 Interest on note to HanoverTrade, Inc. 146 368 Interest on note to Hanover Capital Partners 2, Inc. 162 2 ------- -------- 332 428 Interest on notes reduced on common stock purchase 13 26 ------- -------- $ 345 $ 454 ======= ========
(b) Hanover engaged Hanover Capital Partners Ltd. pursuant to a Management Agreement to render, among other things, due diligence, asset management and administrative services. To eliminate this intercompany management fee recorded as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2002 2001 ------- ------------ Management fee income recorded to: Due diligence fees $ - $ 720 Other revenues 36 - Reduction of personnel expense 370 - ------- -------- $ 406 $ 720 ======= ======== Management fee expensed to: General, management and administrative $ 400 $ 716 Personnel expense 6 4 ------- -------- $ 406 $ 720 ======= ========
(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 ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2002 2001 ------- ------------ Hanover Capital Partners Ltd. $ 112 $ 43 HanoverTrade, Inc. 655 (3,263) Hanover Capital Partners 2, Inc. (19) - ------- -------- $ 748 $ (3,220) ======= ========
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