HANOVER TRADE.COM
Business Plan April 2000 ** Confidential **
HANOVER TRADE.COM
Business Plan April 2000 ** Confidential **
For additional information or to arrange a meeting with HTC, please contact:
Mr. Patrick R. Koster First Vice President Stifel, Nicolaus & Company, Incorporated (314)342-4054
This Business Plan has been submitted on a confidential basis solely for the benefit of selected, highly qualified investors and is not for use by any other persons. It may not be reproduced, stored, or copied in any form. Prospective investors and any other persons who receive this Business Plan agree that they will hold the contents of the Business Plan and all related documents (other than those publicly available) in the strictest confidence and that they will not utilize such information to the detriment of Hanover Trade.com. Distribution or reproduction of this Business Plan, in whole or in part is prohibited.
EXECUTIVE SUMMARY A. Overview HanoverTrade.com ("HTC") has developed a versatile Internet-based business model that will revolutionize the trading of whole loan residential mortgage pools. HTC's target market offers tremendous opportunity with estimated annual trading volume of over $1 trillion annually. HTC's business model incorporates new trading procedures and protocols that will save market participants over four to five times the HTC Exchange fee for execution. HTC's process will also provide other benefits including a dramatic increase in potential buyers. The versatility of HTC's unique Internet-based business model allows it to be adopted to accommodate the trading of other financial instruments without any significant additional development expenditure. Using HTC's pricing structure, HTC anticipates income of $75 million to $238 million by 2002, based on revenue of $84 million to $251 million. The financial plan anticipates realizing a profit in 2001. HTC has proven its business model through acceptance by its Founding Members Program, where participants representing approximately 25% of the market have worked with HTC to develop the process. HTC is seeking $15 million in venture funding to complete its five phased development effort. Trading is expected to commence in June 2000. HTC's business model incorporates the development of a "real-time" trading exchange of mortgage assets focused exclusively on business-to-business transactions. HTC will utilize the Internet to provide an online clearinghouse by electronically matching institutional buyers and sellers, thus forming an active market place from a network of financial companies. The HTC Exchange will require that trading institutions become member firms (similar to major equity and commodity exchanges). This membership structure will allow HTC to create and manage standardized processes for trading protocols, purchase agreements, and settlement procedures. HTC will integrate with third party vendors to provide information and data on-line to its members. The HTC Exchange will initially trade first-lien and second-lien residential mortgage pools. This focus will include mortgages of all sizes and credit grades, including "jumbo" mortgages. The HTC Exchange will include online settlement of whole loan trades, as well as other types of loans including domestic and international originations, secured and unsecured real estate loans, consumer loans (such as automobile, boat, manufactured housing and credit cards) and mortgage servicing rights. Initial trades are expected to range from $5 million to $500 million, averaging over $75 million per pool of residential mortgage loans.
EXECUTIVE SUMMARY B. Summary Of HTC Value Proposition
Many weaknesses exist within the traditional whole-loan mortgage trading marketplace. The HTC Exchange will dramatically improve the current trading process across the entire value chain. The HTC Exchange or "hub" is a business model that is quickly emerging on the Internet. This business model works well with a near-commodity product (a mortgage pool) that is easily defined and traded by sophisticated buyers and sellers. The HTC Exchange will increase market liquidity, reduce volatility risk, provide greater pricing efficiencies, and reduce transaction and operating costs. HTC's major advantages and points of distinction include the following: * Create Market Liquidity: The HTC model will be instrumental in creating greater market liquidity. Liquidity will be created by offering a centralized exchange that automates and standardizes the process by instantly matching available loan pools with the purchasing criteria of buyers. The process will also open up a large number of non-traditional buyers. * Lower Transaction Costs: The traditional process for trading whole loans is based on non-standardized, negotiated contracts that differ among participants. HTC will standardize trading protocols and legal documents from the outset, HTC pool due diligence certification and the introduction of electronic signatures will further reduce transaction costs. * Membership Structure: The HTC membership structure will facilitate the entire transaction from asset posting through cash exchange. This structure is distinguished from the billboard system in which people are merely made aware of asset opportunities and conclude the trade offline in the traditional manner. f Greater Efficiency: There are no constant spreads in the traditional marketplace. This contributes to numerous pricing structures negotiated for each transaction. Through the HTC Exchange, sellers will get the most competitive price available in the market at lower transaction costs and buyers will have the opportunity to review billions of dollars of mortgages for sale. * Improved Data Access: The HTC process will facilitate investor analysis. Data fields and reports will be presented consistently for every transaction. The HTC site will also provide statistical data of historical transactions to assist executives with strategic decisions.
EXECUTIVE SUMMARY C. Phased Approach
HTC plans a five phased approach to the implementation of the online "real time" trading Exchange. The Phases are depicted in the following illustration:
Projected Timeline:
2nd Qtr 2000
3nd Qtr 2000
4th Qtr 2000
1st Qtr 2001
2nd Qtr 2001
Phase 1 Initial Rollout
Phase 2 HTC Pool Certification Phase 3 Auto Close
Phase 4 eDone
Phases True Bid/Ask Environment
HTC Initial Investment Phase 1 - $3.5mm —*• Phase 2 - $2.Omm Total Investment Cost: $12 million Phase 3 - $2.5mm —* Phase 4 - $2.0mm —*" Phase 5 - $2.0mm
EXECUTIVE SUMMARY I). Potential Cost Savings Comparison Traditional ProOt • • , , -'*' " **< . ' ' , \ ' , ;
Provide real-time bid/ask environment in a central trading exchange Provide search capabilities to locate product
Maximize market efficiency , Maximize market liquidity I Consistent pricing structures Lower transaction cost
18
FINANCIAL PROJECTIONS & ANALYSIS A. HTC Revenue and Pricing
For the purposes of this presentation, fees generated from pure brokerage fees, membership fees and ancillary service fees are included in the revenue projections. The primary source of revenue for HTC will be fees earned from the large volume of trading mortgage loan pools on the Exchange. Secondary sources of income will be from third party service providers whose services are contracted through the website. The company will receive a percentage of the revenue earned by these third party providers. The site will also act as a single source for value added (support) services that may be required for the evaluation, bidding and closing of pool of loans. These services will include HTC due diligence certification services on loan pools available for sale, appraisal services, broker price opinions (BPO), automatic pricing services, credit scoring, and valuations. Other potential revenue sources would be database access fees, advertising revenue and, eventually, settlement processing fees.
B. Pricing Strategy
The HTC pricing structure has been developed through extensive market research and with input from the founding members. Annual Membership Fee Listing Fee: Transaction Fee: $2,000 $1,000 per pool listing fee after 1st $300 million of listings. The transaction fee will be based on cumulative trades executed during the anniversary year of membership. Basis Points 15 10 8 6
5 4
3.5 3
Cumulative Trades ($000) up to $24,999 25,000 to 49,999 50,000 to 99,999 100,000 to 149,000 150,000 to 199,999 200,000 to 249,000 250,000 to 299,999 more than 300,000
19
FINANCIAL PROJECTIONS & ANALYSIS
Example Trade:
1st Trade Fee owed in basis points 2nd Trade Cumulative Trade Value Total Fee of 6 basis points Less fee paid on prior YTD Balance owed after 2nd trade
$20.0 million 15 bps $100.0 million $120.0 million $72,000 $30.000 $42,000
20
TECHNICAL ARCHITECTURE A. Overview HTC will use the Internet to develop a "real-time" trading Exchange for consumer assets. The technical architecture required to support the business will be built to ensure a quality experience to the user for performance and speed. HTC has outsourced the technical development of the system by applying "best in class" approach to acquiring the appropriate software, hardware and third party services. HTC will use an open, scalable system that can support expected growth in customer activity over time. HTC has contracted a leading business-to-business, e-commerce solution provider to develop an online "real time" trading exchange. The Exchange is being developed with industry leading technology and an established global Internet Service Provider, providing a common, scalable infrastructure to reduce project risk and time to market. HTC intends to provide unique applications that add significant value to its customer base. These applications include automatic email alerts, online stratification and analytic tools, online financial calculators, interactive voice response ("IVR") systems, and integration with third party vendors and portals using the latest middleware technology. B. Security Security will be performed and monitored through the following systems and processes: Authentication: Data Encryption: Firewall: A secure method for assigning IDs and passwords will be established. Secure Sockets Layer ("SSL") will be employed to encrypt all data transmitted to and from the server. A firewall will be installed to monitor and restrict site access at the server/Internet Service Provider ("ISP") location.
Additional Security: Transactional audit logging procedures will be monitored on the site. Security event auditing and reporting will be made available through services provided by the ISP. Digital Signatures: The use of digital signatures will be implemented for future phases.
21
MANAGEMENT TEAM Hanover Capital Mortgage Holdings, Inc. ("HCM") is a publicly traded mortgage company whose principals have extensive experience in the mortgage industry through an average of twenty years' experience with companies such as Citicorp and Bankers Trust. The team also has the advantage of working together for many years. John A. Burchett, 57, has been the Chairman of the Board, President and Chief Executive Officer since its inception in June 1997. Mr. Burchett has also been the Chairman of the Board, President and Chief Executive Officer of each of HCP and Hanover Capital Mortgage Corporation, a subsidiary of HCP, since their formations in 1989 and 1992, respectively. Prior to the founding of HCP, Mr. Burchett held executive positions in the national mortgage finance operations of two global financial institutions: Citicorp Investment Bank from 1980 to 1987 and Bankers Trust Company from 1987 to 1989. Mr. Burchett's experience in operating a publicly held company will be invaluable throughout this process. Irma N. Tavares, 45, has been a Director and Managing Director of the Company since its inception in June 1997. Ms. Tavares has also been a Managing Director and Director of HCP since its formation in 1989. Prior to joining HCP, Ms. Tavares held trading positions at both Citicorp Investment Bank from 1983 to 1987 and Bankers Trust Company from 1987 to 1989. In these trading positions Ms. Tavares traded or directed the trading of billion of dollars of residential whole loans as well as mortgage backed securities. She was integral in the formation of Citimae which purchased and securitized over $6 billion in residential whole loans. Joyce S. Mizerak, 44, has been a Director, Managing Director and Secretary of the Company since its inception in June 1997. Ms. Mizerak has also been a Managing Director and Director of Hanover Capital Partners Ltd. ("HCP"), a subsidiary of the Company, since its formation in 1989. Prior to joining HCP, Ms. Mizerak had responsibilities at Bankers Trust Company from 1988 to 1989 for mortgage transaction contracts. Before joining Bankers Trust Company, Ms. Mizerak held a variety of positions at Citicorp Investment Bank from 1984 to 1988, including the trading of whole mortgage loans for Citicorp's Citimae residential mortgage conduit. George J. Ostendorf, 55, has been a Director and Managing Director of the Company since its inception in June 1997. Mr. Ostendorf has also been a Managing Director and Director of HCP since its formation in 1989. Mr. Ostendorf s duties at HCP include senior relationship management of HCP's clients which range from small depository institutions to large mortgage lenders. Prior to joining HCP, Mr. Ostendorf was responsible for origination and distribution of mortgage securities by Chicago based sales forces that he managed for Citicorp Investment Bank and later for Bankers Trust Company.
22
MANAGEMENT TEAM Thomas P. Kaplan, 34, has been a Managing Director and Chief Financial Officer of HCM since June, 1999. He is responsible for the company's planning, financing and financial reporting functions. Mr. Kaplan has extensive experience in the secondary mortgage whole loan market. He has held senior positions at Credit Suisse First Boston, Greenwich Capital Markets and Franchise Mortgage Acceptance Company, where he has been responsible for trading several billion dollars of mortgage loans and mortgage-backed securities. Mr. Kaplan brings direct experience to HTC as both an issuer of new loan production at FMAC and as a buyer of loans at CSFB and Greenwich. Organizational Chart The following organizational chart provides the key staffing positions to be filled in year 1. At the onset, Irma Tavares and George Ostendorf will fill the roles of President and Chief Marketing Officer, respectively. The aforementioned HCM Executive Management Team, not depicted below, will provide advisory roles to HTC.
Ostendorf Chief Marketing Officer
1
it Rep 1
Accoun Applications Manager ["Financial Analyst)
Staff 1 Staff 2 Staff3
[web Developer
23