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SEC Filings

424B1
DITECH HOLDING CORP filed this Form 424B1 on 09/16/1997
Entire Document
 


<PAGE>   1
 
                                                Filed Pursuant to File 424(b)(1)
                                                 Registration File No. 333-29261

PROSPECTUS
 
                                5,000,000 Units
                    Hanover Capital Mortgage Holdings, Inc.
 
Each Unit to Consist of One Share of Common Stock and One Stock Purchase Warrant
 
     All of the Units offered hereby are being sold by Hanover Capital Mortgage
Holdings, Inc. Each Unit consists of one share of Common Stock, par value $.01
per share (the "Common Stock"), and one Stock Purchase Warrant (the "Warrants").
The Warrants included in the Units are not detachable from the Common Stock
until six months after the closing of this offering. See "Description of
Securities."
 
     Each Warrant entitles the holder to purchase one share of Common Stock (a
"Warrant Share"), subject to certain anti-dilution adjustments. The Warrants
will become exercisable six months after the initial closing of this offering
and will remain exercisable until 5:00 p.m. New York Time on the third
anniversary of the date of this Prospectus, at an exercise price equal to the
initial public offering price. See "Underwriting". For purposes of this
Prospectus, the Units, the Common Stock, the Warrants and the Warrant Shares are
referred to collectively as the "Securities" unless the context indicates
otherwise.
 
     Prior to the closing of this offering, there has been no public market for
the Securities. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. The Company has
been approved for quotation for the Units on the American Stock Exchange under
the symbol "HCM.U." The Company has also been approved for quotation for the
Common Stock and Warrants on the American Stock Exchange effective on the date
the Warrants are detachable from the Common Stock under the symbols "HCM" and
"HCM.WS," respectively.
                            ------------------------
 
     SEE "RISK FACTORS" COMMENCING ON PAGE 14 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS. THESE RISKS INCLUDE:
 

<TABLE>
<S>                                                          <C>
- - Total dependence upon Principals and other key             - Significant increases in short-term interest rates,
  personnel.                                                 which would adversely affect the Company's borrowing
- - The possibility that the Company, in light of its            costs and could negatively impact the Company's net
  recent formation and lack of relevant experience, may        income.
  lack the ability to effectively manage its operations      - Difficulty of acquiring Mortgage Assets (as defined
  and planned growth.                                        herein) at favorable spreads relative to borrowing costs
- - Material benefits to affiliates of the Company,              in an environment of increasing competition.
  including certain officers and directors, in connection    - Consequences of failing to maintain REIT status which
  with the Formation Transactions (as defined herein).       would result in the Company being subject to tax as a
- - Inability of the Company to control the operations of        regular corporation.
  the Company's taxable subsidiaries (which are              - Failure of a public market to develop or be sustained
  controlled by the Principals), which could result in       for the Units, Common Stock or Warrants.
  decisions by such subsidiaries that do not reflect the
  Company's best interests.
- - Adverse general economic conditions, which generally
  cause decreasing demand for consumer credit and
  declining real estate values, either of which would
  negatively impact the Company's net income.
</TABLE>

 
                            ------------------------
 
  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
                             IS A CRIMINAL OFFENSE.
 

<TABLE>
<CAPTION>
===========================================================================================================
                                                  PRICE TO           UNDERWRITING          PROCEEDS TO
                                                   PUBLIC             DISCOUNT(1)          COMPANY(2)
- -----------------------------------------------------------------------------------------------------------
<S>                                         <C>                  <C>                  <C>
Per Unit....................................        $15.00               $1.05               $13.95
- -----------------------------------------------------------------------------------------------------------
Total(3)....................................      $75,000,000         $5,250,000           $69,750,000
===========================================================================================================
</TABLE>

 
(1) Excludes value of Warrants to be issued to Stifel, Nicolaus & Company,
    Incorporated and Montgomery Securities to purchase 150,000 shares of Common
    Stock (172,500 shares of Common Stock if the Underwriters' over-allotment
    option is exercised) at an exercise price equal to the initial public
    offering price. The Company and certain of its affiliates have agreed to
    indemnify the Underwriters against certain liabilities, including
    liabilities under the Securities Act of 1933, as amended. See
    "Underwriting."
(2) Before deducting expenses of this offering payable by the Company, estimated
    to be $900,000.
(3) The Company has granted the Underwriters an option exercisable within 30
    days after the date of this Prospectus to purchase up to 750,000 additional
    Units on the same terms and conditions set forth above to cover
    over-allotments, if any. If all such additional Units are purchased, the
    total Price to Public, Underwriting Discount and Proceeds to Company will be
    $86,250,000, $6,037,500 and $80,212,500, respectively. See "Underwriting."
                            ------------------------
 
     The Securities are offered by the Underwriters subject to receipt and
acceptance by them, prior sale and the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of certificates for the Securities will be made
through the Depository Trust Company, on or about September 19, 1997.
 
STIFEL, NICOLAUS & COMPANY                                 MONTGOMERY SECURITIES
          INCORPORATED
 
September 15, 1997

<PAGE>   2
 
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                            PAGE
                                            -----
<S>                                         <C>
PROSPECTUS SUMMARY........................      4
  The Company.............................      4
         General..........................      4
         Management.......................      4
         The Company's Operations.........      5
         Competitive Advantages...........      6
         Purpose of the Offering..........      6
         Structure and Formation
           Transactions...................      6
  Structure of Company....................      7
  Benefits to Insiders....................     11
  Principals' Conflicts of Interest.......     12
  Dividend Policy and Distributions.......     12
  Summary Risk Factors....................     12
  The Offering............................     13
RISK FACTORS..............................     14
    Dependence Upon Principals and Other
      Key Personnel.......................     14
    Recent Formation and Lack of Relevant
      Experience..........................     14
    Benefits to the Principals............     14
    Negative Effect on Financial Condition
      Due to Board of Director's Ability
      to Change Policies of the Company...     15
    Absence of Independent Valuation for
      Allocation of Equity Interest in
      HCHI................................     15
    Principals' Conflicts of Interest.....     15
    Recent Negative Trends in Revenue and
      Income..............................     16
    Immediate and Substantial Dilution....     16
    Mortgage Assets with Poor
      Documentation and Poor Payment
      Histories...........................     16
    Defaults on Mortgage Assets...........     17
         Defaults on Commercial
           Mortgages......................     17
         Effect of Adverse Economic
           Conditions on Multifamily
           Properties.....................     17
         Decreases in Value of Retail,
           Office and Industrial
           Properties.....................     17
         Environmental Liabilities
           Associated with Contaminated
           Properties.....................     18
    Risks Related to Operations...........     18
         Negative Effects of Fluctuating
           Interest Rates.................     18
         Reduction of Income Due to
           Prepayment.....................     20
         Defaults by Borrowers under
           Mortgage Assets................     20
         Losses Related to Investing in
           Subordinated Classes of
           Mortgage-Backed Securities.....     21
         Losses Related to Borrowings and
           Substantial Leverage...........     21
         Insufficient Demand for Mortgage
           Loans and the Company's Loan
           Products.......................     22
         Lack of Geographic
           Diversification................     23
         Ability to Acquire Mortgage
           Assets at Favorable Spreads
           Relative to Borrowing Costs;
           Competition and Supply.........     23
  Failure to Maintain REIT Status; Company
    Subject to Tax as a Regular
    Corporation...........................     23
  Potential Characterization of
    Distribution as UBTI; Taxation of
    Tax-Exempt Investors..................     24
  Taxable Mortgage Pool Risk; Increased
    Taxation..............................     24
  Market Considerations...................     25
 
<CAPTION>
                                            PAGE
                                            -----
<S>                                         <C>
  Investment Company Act Risk.............     25
  Legislative and Regulatory Risk.........     26
  Shares Eligible for Future Sale.........     26
  Preferred Stock; Restrictions on
    Ownership of Common Stock;
    Anti-takeover Measures................     27
THE COMPANY...............................     28
USE OF PROCEEDS...........................     28
DIVIDEND POLICY AND DISTRIBUTIONS.........     28
DIVIDEND REINVESTMENT PLAN................     29
DILUTION..................................     30
CAPITALIZATION............................     31
PRO FORMA FINANCIAL DATA..................     32
SELECTED FINANCIAL DATA...................     34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
  FINANCIAL CONDITION AND RESULTS OF
  OPERATIONS..............................     35
    Results of Operations.................     35
    Six Months Ended June 30, 1997
      Compared to Six Months Ended June
      30, 1996............................     35
    Year Ended December 31, 1996 Compared
      to Year Ended December 31, 1995.....     37
    Year Ended December 31, 1995 Compared
      to Year Ended December 31, 1994.....     38
    Inflation.............................     40
    Liquidity and Capital Resources.......     40
BUSINESS..................................     42
    General...............................     42
         Background.......................     42
         Business Strategy................     42
    Investment Portfolio..................     43
         General..........................     43
         Single-Family Mortgage
           Operations.....................     43
         Commercial Mortgage Loans and
           Multifamily Mortgage Loans.....     48
    Accumulation Period Acquisitions......     50
    Due Diligence Operations..............     50
    Financing.............................     51
         General..........................     51
         Reverse Repurchase Agreements....     51
    Securitization and Sale Process.......     52
         General..........................     52
         Credit Enhancement...............     53
         Other Mortgage-Backed
           Securities.....................     54
         Capital Allocation Guidelines
           (CAG)..........................     54
         Implementation of the CAG -- Mark
           to Market Accounting...........     55
    Risk Management.......................     55
         Credit Risk Management...........     55
         Interest Rate Risk Management....     56
         Prepayment Risk Management.......     57
    Hedging...............................     57
         Investment Portfolio.............     57
         Costs and Limitations............     58
    Relationships Among Affiliates........     58
    PMSR/OMSR.............................     59
    Regulation............................     59
    Competition...........................     59
    Employees.............................     59
    Service Marks.........................     60
    Facilities............................     60
    Future Revisions in Policies and
      Strategies..........................     60
    Legal Proceedings.....................     60
HCHI ORGANIZATIONAL CHART.................     62
MANAGEMENT................................     63
</TABLE>

 
                                        2

<PAGE>   3
 

<TABLE>
<CAPTION>
                                            PAGE
                                            -----
<S>                                         <C>
    Directors and Executive Officers......     63
    Terms of Directors and Officers.......     65
    Committees of the Board...............     66
    Compensation of Directors.............     66
    Compensation Committee Interlocks.....     66
    Executive Compensation................     67
    Bonus Incentive Compensation Plan.....     67
    Employment Agreements.................     68
    401(k) Plan...........................     69
    1997 Stock Option Plan................     69
STRUCTURE AND FORMATION TRANSACTIONS......     71
    The Structure of the Company..........     71
    HCHI..................................     71
    HCP, HCMC and HCS.....................     71
    The Formation of HCHI.................     72
         Structure of HCP and Subsidiaries
           Prior to the Consummation of
           the Formation Transactions.....     72
         Formation Transactions...........     73
         Consequences of the Formation
           Transactions...................     73
         Determination and Valuation of
           Ownership Interests............     74
         Benefits to the Principals.......     75
CERTAIN TRANSACTIONS......................     77
    The HCP Shareholders' Agreement.......     77
    The Formation Transactions............     77
    Employment Agreements.................     77
    Principals' Ownership.................     77
    Loans to the Principals...............     77
PRINCIPAL STOCKHOLDERS....................     78
DESCRIPTION OF SECURITIES.................     78
    Common Stock..........................     78
    Preferred Stock.......................     79
    Warrants..............................     79
    Repurchase of Shares and Restrictions
      on Transfer.........................     80
    Transfer Agent........................     82
SHARES ELIGIBLE FOR FUTURE SALE...........     82
    General...............................     82
    Registration Rights...................     83
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
  THE COMPANY'S CHARTER AND BYLAWS........     83
                                            PAGE
                                            -----
    Removal of Directors..................     83
    Business Combinations.................     83
    Control Share Acquisitions............     83
    Amendment to the Charter..............     84
    Dissolution of the Company............     84
    Advance Notice of Director Nominations
      and New Business....................     84
    Anti-takeover Effect of Certain
      Provisions of Maryland Law and the
      Charter and Bylaws..................     85
    Limitation of Liability and
      Indemnification.....................     85
FEDERAL INCOME TAX CONSIDERATIONS.........     86
    General...............................     86
    Opinion of Counsel....................     86
    Requirements for Qualification as a
      REIT................................     87
    Record Keeping Requirements...........     91
    Termination or Revocation of REIT
      Status..............................     91
    Taxation of HCHI......................     91
    Taxation of Taxable Affiliates........     92
    Taxation of Taxable U.S.
      Stockholders........................     92
    Withholding...........................     94
    Taxation of Tax-Exempt Stockholders...     94
    Certain United States Federal Income
      Tax Considerations Applicable to
      Foreign Holders.....................     94
    Information Reporting and Backup
      Withholding.........................     95
    Special Considerations................     95
    New Tax Legislation...................     96
    Other Tax Consequences................     96
ERISA INVESTORS...........................     97
UNDERWRITING..............................     98
LEGAL MATTERS.............................    100
EXPERTS...................................    100
ADDITIONAL INFORMATION....................    100
GLOSSARY..................................    101
TABLE OF CONTENTS TO FINANCIAL
  STATEMENTS..............................    F-1
</TABLE>

 
                            ------------------------
 
     CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE UNITS.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES IN THE OPEN MARKET,
OVERALLOTMENTS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
 
                                        3

<PAGE>   4
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Certain capitalized terms
not otherwise defined herein have the meanings assigned to them in the Glossary,
which begins on page 101. Unless otherwise indicated, the information in this
Prospectus assumes that the Underwriters' over-allotment option is not
exercised. The "Company" means either (i) Hanover Capital Mortgage Holdings,
Inc., a Maryland corporation ("HCHI"), or (ii) HCHI, Hanover Capital Partners
Ltd., a New York corporation ("HCP"), Hanover Capital Mortgage Corporation, a
Missouri corporation ("HCMC"), and Hanover Capital Securities, Inc., a New York
corporation ("HCS"), collectively, as the context may require.
 
                                  THE COMPANY
 
GENERAL
 
     The Company is a specialty finance company, the activities of which will
include (i) acquiring primarily Single-Family Mortgage Loans that are at least
twelve months old ("seasoned" Single-Family Mortgage Loans) or that were
intended to be of certain credit quality but that do not meet the originally
intended market parameters due to errors or credit deterioration ("fall-out"
Single-Family Mortgage Loans and, together with seasoned Single-Family Mortgage
Loans, "subprime" Single-Family Mortgage Loans), (ii) originating, holding,
selling and servicing Multifamily Mortgage Loans and Commercial Mortgage Loans,
(iii) securitizing Mortgage Loans and retaining interests therein, (iv)
purchasing Mortgage Assets in the secondary mortgage market, (v) managing the
resulting combined portfolio in a tax-advantaged REIT structure, and (vi)
offering due diligence services to buyers, sellers and holders of Mortgage
Loans. The Company's principal business objective is to generate increasing
earnings and dividends for distribution to stockholders. The Company will
acquire Single-Family Mortgage Loans through a network of sales representatives
targeting financial institutions throughout the United States. The Company will
originate Multifamily Mortgage Loans and Commercial Mortgage Loans through HCMC.
The Company will elect to be taxed as a real estate investment trust under the
Internal Revenue Code of 1986, as amended, beginning with its tax year ending
December 31, 1997. The Company will generally not be subject to Federal income
tax to the extent it distributes its earnings to its stockholders and maintains
its qualification as a REIT. Taxable affiliates of the Company, however,
including HCP, HCMC and HCS, will be subject to Federal income tax. See "Federal
Income Tax Considerations -- Requirements for Qualification as a REIT,"
"-- Taxation of HCHI" and "-- Taxation of Taxable Affiliates." The Company will
be self-advised and self-managed.
 
     The Company has determined to elect REIT status primarily for the tax
advantages. Management believes that the REIT structure is the most desirable
structure for owning Mortgage Assets because it generally eliminates
corporate-level Federal income taxation. In addition, as the Company will not be
a traditional lender which accepts deposits, it will be subject to substantially
less regulatory oversight and incur lower compliance expenses than banks,
thrifts and many other originators of Mortgage Assets. The Principals believe
that the Company will generate attractive earnings and dividends per share for
stockholders through the combination of (i) purchasing subprime Single-Family
Mortgage Loans which generally have higher yields than newly originated,
conforming Single-Family Mortgage Loans, (ii) its focus on originating
Multifamily Mortgage Loans and Commercial Mortgage Loans, which generally have
higher yields than conforming Single-Family Mortgage Loans, and (iii) using
long-term financing that allows the Company to realize net interest income over
time as REIT-qualified income, as opposed to fully taxable gain-on-sale income.
In general, "subprime" Single-Family Mortgage Loans are Single-Family Mortgage
Loans that are either twelve months or older (also referred to as "seasoned"
Single-Family Mortgage Loans) or were intended to be of a certain credit quality
but do not meet the originally intended market parameters due to documentation
errors or credit deterioration (also referred to as "fall-out" Single-Family
Mortgage Loans). "Conforming" Single-Family Mortgage Loans are newly originated
Single-Family Mortgage Loans of top quality and of a size acceptable to the
Agencies. See "Business -- Single-Family Mortgage Operations -- Single-Family
Market Trends." See also "Risk Factors -- Defaults on Mortgage Assets."
 
MANAGEMENT
 
     The business of the Company will be managed by John A. Burchett, Joyce S.
Mizerak, Irma N. Tavares and George J. Ostendorf. Prior to founding HCP in
February 1989, these four individuals (each, a "Principal" and collectively, the
"Principals") were employed in the mortgage trading operations of Bankers Trust
Company. Prior to that time, the Principals were employed by Citicorp Investment
Bank, where they supervised trades of Mortgage
 
                                        4

<PAGE>   5
 
Assets and were responsible for the management and hedging of portfolios of
Mortgage Assets. At Citicorp Investment Bank, Mr. Burchett co-managed the
mortgage finance department, which included responsibilities for the trading of
mortgage assets, and led the development of its residential conduit, Citimae. At
Citicorp Investment Bank, Ms. Tavares was responsible initially for mortgage
operations and eventually for trading of whole loan packages and adjustable rate
mortgage securities. While employed at Citicorp Investment Bank, Ms. Mizerak
originally was responsible for contract finance and securitization and later for
whole loan trading. Mr. Ostendorf was responsible for marketing, sales and
customer relations for the Chicago mortgage finance office. Ms. Tavares, Ms.
Mizerak and Mr. Ostendorf had similar responsibilities at Bankers Trust Company.
See "Management -- Directors and Executive Officers."
 
THE COMPANY'S OPERATIONS
 
     General.  HCHI was incorporated in the state of Maryland on June 10, 1997
and will not conduct any activities prior to the closing of the Offering. Since
its incorporation in 1989, HCP has managed short-term trading (generally
involving holding periods of eighteen months or less) of Single-Family Mortgage
Loans for Alpine Associates, A Limited Partnership, and for BT Realty Resources,
Inc., a subsidiary of Bankers Trust New York Corp. In managing trading
activities, HCP has typically targeted pools containing subprime Single-Family
Mortgage Loans with deficiencies that could be corrected to permit resales on
favorable terms. See "Business -- Investment Portfolio -- Prior Activities of
HCP." In addition, HCP provides Mortgage Loan due diligence services. After the
closing of the Offering, HCP will cease to manage trading activities for Alpine
Associates and BT Realty Resources but will continue to provide due diligence
services. HCMC, which was incorporated in 1992, originates, sells and services
Multifamily Mortgage Loans and will also originate, sell and service Commercial
Mortgage Loans after the closing of the Offering. HCS, which was incorporated in
1989, is a broker/dealer.
 
     Investment Portfolio.  The primary business of the Company will be
investing in first lien Single-Family Mortgage Loans, Multifamily Mortgage Loans
and Commercial Mortgage Loans and Mortgage Securities secured by or representing
an interest in Mortgage Loans (the "Investment Portfolio"). HCHI will not own
any Mortgage Loans before the closing of the Offering. Upon the closing of the
Offering, HCHI will acquire the Investment Portfolio using the net proceeds of
the Offering and the net proceeds of borrowings and securitizations. Consistent
with HCP's focus in managing Single-Family Mortgage Loan trading activities for
Alpine Associates and BT Realty Resources, Inc., HCHI's focus in acquiring
Single-Famly Mortgage Loans for the Investment Portfolio will be on pools that
contain subprime Single-Family Mortgage Loans. HCHI, however, will also invest
in Multifamily Mortgage Loans and Commercial Mortgage Loans. In addition,
Mortgage Loans and Mortgage Securities in the Investment Portfolio generally
will be held on a long-term basis, so that returns will be earned over the lives
of Mortgage Loans and Mortgage Securities rather than from their sales. Although
HCMC has originated and sold Multifamily Mortgage Loans, neither HCP nor any of
the Principals has experience in managing investments in Multifamily Mortgage
Loans or Commercial Loans or in managing long-term investments in any Mortgage
Loans or Mortgage Securities. See "Risk Factors -- Limited Experience of
Principals."
 
     HCMC has originated Multifamily Mortgage Loans since its inception in 1992.
The Principals believe HCMC was one of the first commercial mortgage banking
operations to originate Multifamily Mortgage Loans for sale to conduits and,
from direct borrower originations and its network of third party brokers, can
provide Multifamily Mortgage Loans and Commercial Mortgage Loans of sufficient
credit quality to meet the requirements for securitization and sales to third
party investors and into the Investment Portfolio. Subsequent to the closing of
the Offering, the Company will primarily originate, through HCMC, Multifamily
Mortgage Loans and Commercial Mortgage Loans, including Mortgage Loans secured
by income-producing commercial properties such as office, retail, warehouse and
mini-storage facilities, through HCMC and subsequently either sell the Mortgage
Loans to investors or hold them in the Investment Portfolio. It is not
anticipated that the Company will originate Single-Family Mortgage Loans. The
Principals believe that the Company will have certain competitive advantages
over other entities in the commercial mortgage market due to the speed,
consistency and flexibility it will seek to achieve by being a vertically
integrated company (i.e., acting as originator, servicer and owner of Commercial
Mortgage Loans).
 
                                        5

<PAGE>   6
 
     The Company intends to acquire and securitize Single-Family Mortgage Loans
and Commercial Mortgage Loans so as to earn higher returns than could generally
be earned from purchasing Mortgage Securities in the marketplace. However, there
can be no assurance that the Company will be able to earn such higher returns.
In addition, although HCP has rendered advisory services in connection with
securitization transactions, neither it nor HCMC has securitized any significant
amount of Mortgage Loans.
 
     Accumulation Period Acquisitions.  The Company intends initially to
allocate a majority of the net proceeds raised in the Offering to build a
portfolio of Mortgage Assets, primarily comprised of adjustable rate mortgage
pass-through securities of high investment quality (i.e., Agency, "AAA" or
"AA"-rated), to provide income during the initial period required to acquire
Mortgage Loans. The Company will acquire these Mortgage Assets in the secondary
mortgage market as soon as it identifies attractive opportunities to do so. The
Principals intend that the Company will earn an acceptable level of return on
the initial Investment Portfolio until the net proceeds from the Offering can be
fully invested in higher yielding Mortgage Assets. However, there can be no
assurance that the Company will be able to earn such a level of return or any
return at all. A similar portfolio acquisition strategy will be employed
whenever the Company must invest the net proceeds of a new issuance of debt or
equity securities.
 
     Due Diligence Operations.  The Company will continue to conduct the Due
Diligence Operations, which have been historically performed for commercial
banks, government agencies, private mortgage banks, credit unions and insurance
companies. The Due Diligence Operations consist of the underwriting of credit,
the analysis of loan documentation and collateral, and the analysis of the
accuracy of the servicing accounting for Mortgage Loans. Such due diligence
analysis is performed on a loan by loan basis. Audits of the accuracy of the
interest charged on adjustable rate Mortgage Loans are frequently a part of the
due diligence services provided to customers. The Company will perform due
diligence on the Mortgage Loans it acquires and for third parties. The
Principals of the Company believe that the Due Diligence Operations will provide
a source of revenue and a competitive advantage to the Company through the
underwriting and pricing expertise gained through this business. However, there
is no assurance that the Due Diligence Operations will in fact provide such
revenue or competitive advantage.
 
COMPETITIVE ADVANTAGES
 
     The Principals anticipate that the Company will be able to compete
effectively and generate relatively attractive rates of return for holders of
the Common Stock due to the Company's (i) tax-advantaged REIT structure, (ii)
position as both originator of Commercial Mortgage Assets and Multi-Family
Mortgage Assets and investor in Mortgage Assets, (iii) freedom from certain
regulatory-related burdens affecting certain competitors, (iv) ability to
securitize its Mortgage Assets, (v) cost-efficient operations relative to
certain competitors, and (vi) underwriting and pricing knowledge gained through
its Due Diligence Operations.
 
     The Company's strategy is to build and hold the Investment Portfolio to
generate a net interest margin over time and allow the Company to take full
advantage of its REIT structure. Generally, the Company does not intend to use
gain on sale treatment in accounting for its income for financial accounting or
tax reporting purposes. Rather, the Company intends to finance its Mortgage
Assets through structured debt vehicles where the emphasis is on earning net
interest income and not gains from sales of Mortgage Assets.
 
PURPOSE OF THE OFFERING
 
     HCP has managed purchases and sales of Single-Family Mortgage Loans for
several years and has developed its commercial, multifamily and single-family
mortgage acquisition infrastructure to the point that each may provide an
attractive flow of Mortgage Assets for investment. The Principals believe that
the REIT structure is the most efficient structure for owning Mortgage Assets
and will permit the Company to grow as a vertically integrated mortgage holder
while maintaining access to capital.
 
STRUCTURE AND FORMATION TRANSACTIONS
 
     The Structure.  The following diagram depicts the structure of the Company
immediately after the closing of the Offering. The structure is designed
primarily to (i) permit the Company to acquire the
 
                                        6

<PAGE>   7
 
ownership of a majority of the stock in HCP while preserving HCHI's
qualification as a REIT, and (ii) permit certain activities of HCP to be wound
down before and after the closing of the Offering. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT;" "Structure and
Formation Transactions -- The Structure of the Company;" and "-- The Formation
of HCHI and HCLP -- Benefits to the Principals."
 
                              STRUCTURE OF COMPANY
                              ORGANIZATIONAL CHART
- ---------------
(1) The Principals will initially own 716,677 shares of Common Stock,
    representing 12.54% of the outstanding shares of Common Stock. The
    Principals may thereafter be issued up to 216,667 additional shares of
    Common Stock, increasing their percentage ownership of the outstanding
    shares of Common Stock to up to 15.73%, if the Earn-Out vests. See
    "Structure and Formation Transactions -- HCHI -- The Formation of HCHI." In
    addition, the Principals may acquire additional shares of Common Stock upon
    the exercise of stock options granted to them under the Company's 1997
    Executive and Non-Employee Director Stock Option Plan or pursuant to the
    Company's Bonus Incentive Compensation Plan. See "Management -- Bonus
    Incentive Compensation Plan -- 1997 Stock Option Plan."
 
(2) HCHI will own 100% of the HCP Preferred representing the right to receive
    97% of dividend distributions from HCP, and the Principals will own 100% of
    the common stock of HCP representing the right to receive 3% of dividend
    distributions from HCP.
 
     HCHI will issue the Units, each of which will consist of one share of
Common Stock and one Warrant to purchase one share of Common Stock of HCHI. HCHI
will acquire the Investment Portfolio using the net proceeds of the Offering and
the net proceeds of borrowings and securitizations. The Principals will
contribute the HCP Preferred to HCHI in exchange for 716,667 shares of Common
Stock and will serve as directors and officers of HCHI. See "Management --
Directors and Executive Officers." It is anticipated that HCHI's assets will
consist primarily of the Investment Portfolio and the HCP Preferred.
 
     Initially, the Principals will own 716,677 shares of Common Stock of HCHI,
or 12.54% of the outstanding shares of Common Stock. If the Earn-Out vests, HCHI
will issue up to 216,667 additional shares of Common Stock to the Principals as
an additional payment for their contribution of the HCP Preferred to HCHI. The
Earn-Out may vest in full or in part on any September 30 beginning with
September 30, 1998 and ending with September 30, 2002 (each, an "Earn-Out
Measuring Date"). The Earn-Out will vest in full as of any Earn-Out Measuring
Date through which the return on a Unit is at least equal to the initial public
offering
 
                                        7

<PAGE>   8
 
price of the Unit. One-third of the Earn-Out will vest as of any Earn-Out
Measuring Date through which the return on a Unit is at least equal to a 20%
annualized return on the initial public offering price of the Unit. The return
on a Unit is determined by adding (i) the appreciation in the value of the Unit
since the closing of the Offering, and (ii) the amount of distributions made by
the Company on the share of Common Stock included in the Unit since the closing
of the Offering. The appreciation in the value of a Unit as of any Earn-Out
Measuring Date is the average difference, during the 30 day period that ends on
the Earn-Out Measuring Date, between the market price of the share of Common
Stock included in the Unit and the initial public offering price of the Unit
multiplied by two to take into account the value of the Warrant included in the
Unit. See "Structure and Formation Transactions -- HCHI." The Principals may
acquire additional shares of Common Stock upon the exercise of stock options
granted to them under the Company's 1997 Executive and Non-Employee Director
Stock Option Plan or pursuant to the Company's Bonus Incentive Compensation
Plan. See "Management -- 1997 Stock Option Plan;" and "Management -- Bonus
Incentive Compensation Plan."
 
     It is anticipated that HCHI will earn substantially all of its revenue from
the net cash flow from the Investment Portfolio and the operations of HCP, HCMC
and HCS. The amounts that HCHI may in turn distribute to its stockholders will
be reduced by the operating expenses of HCHI, including any Federal income tax
that HCHI must pay if it fails to qualify as a REIT. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT" and "-- Taxation of
HCHI."
 
     Except as described below, HCP, HCMC and HCS will continue to own their
pre-Offering assets and conduct their pre-Offering activities as taxable,
non-controlled subsidiaries of HCHI. HCP will conduct the Due Diligence
Operations and will support HCHI's acquisition and investment activities by
providing due diligence services. HCMC will originate, sell and service
Multifamily Mortgage Loans and Commercial Mortgage Loans and will serve as a
source of Multifamily Mortgage Loans and Commercial Mortgage Loans for HCHI. HCS
will facilitate the Company's trading activities by acting as a broker/dealer.
See "Risk Factors -- Principals' Conflicts of Interest."
 
     HCHI will own all of the HCP Preferred, but will generally have no right to
participate in the operations of HCP, HCMC and HCS (other than to approve
certain fundamental transactions such as mergers, consolidations, sales of all
or substantially all assets, and any voluntary liquidation) because the HCP
Preferred is nonvoting. Instead, as the holders of all of the HCP Common, the
Principals will generally control the operations of HCP, HCMC and HCS. See
"Structure and Formation Transactions." This ownership structure is required
because as a REIT, HCHI generally may not own more than 10% of the voting
securities of any other issuer. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT -- Nature of Assets."
Accordingly, the purchasers of Units in the Offering will not own an interest in
any entity that controls HCP, HCMC or HCS.
 
     As the directors of HCP, the Principals intend to cause HCP to distribute
its net cash from operations as dividends on a quarterly basis to the extent
consistent with HCHI's REIT qualification. For purposes of receiving dividends,
there is no difference between a share of the HCP Preferred and a share of the
HCP Common, so that the HCP Preferred will have no dividend rate or preference
over the HCP Common. Instead, dividend distributions by HCP will be made in the
same amount per share of HCP Preferred and HCP Common. Accordingly, each
dividend distribution by HCP will be made to HCHI and the Principals in
proportion to the numbers of shares held by them (so that, initially, each
dividend distribution will be made 97% to HCHI and 3% to the Principals). As the
holder of the HCP Preferred, however, based on a price of the Common Stock in
the Offering of $15.00 per share, HCHI will have the right to receive
$10,750,005 (up to $15,750,010 if the Earn-Out vests, including the forgiveness
of loans from HCHI of up to $1,750,000, but without regard to any salaries or
other compensation for services, any additional shares of Common Stock that may
be issued as compensation for services and any releases of personal guarantees)
in HCP's liquidation before any other shareholders receive anything. Thus, the
Principals will control the operations of HCP, HCMC and HCS, but will have the
right to receive only 3% of the dividend distributions made by HCP. See "Risk
Factors -- Principals' Conflicts of Interest." Shares of HCP Common held by a
Principal may be repurchased if, among other things, the Principal ceases to be
employed by the Company or
 
                                        8

<PAGE>   9
 
to own an interest in HCHI. See "Structure and Formation
Transactions -- HCHI -- The Formation of HCHI -- Benefits to the Principals" and
"Certain Transactions -- The HCP Shareholders' Agreement."
 
     The Principals will receive 716,667 shares of Common Stock (representing
12.54% of the outstanding shares of Common Stock) in exchange for the HCP
Preferred (which represents 97% of the book value of HCP at June 30, 1997, or
$688,854). HCHI will record the carrying value of its investment in HCP at cost
(which has been determined to be the net book value of the HCP Preferred) and
account for the investment under the equity method. See "Pro Forma Financial
Data." Upon the full vesting of the Earn-Out, up to 216,667 additional shares of
Common Stock may be issued to the Principals, giving the Principals up to 15.73%
of the outstanding Common Stock (taking into account the issuance of such
additional shares of Common Stock). HCHI will receive no additional
consideration in exchange for the 216,667 additional shares of Common Stock. See
"Pro Forma Financial Data." In addition, up to $1,750,000 in loans made by HCHI
to the Principals to enable the Principals to pay taxes will be forgiven to the
extent that the Earn-Out vests. See "Structure and Formation Transactions -- The
Formation of HCHI." See "Structure and Formation Transactions -- HCHI" and "Risk
Factors -- Benefits to the Principals."
 
     Historically, HCP has owned interests in other entities in addition to HCMC
and HCS. Some of these entities are inactive, have no value and will be
dissolved and terminated before the closing of the Offering (or as soon
thereafter as reasonably possible). Four of these entities may still own assets
at the time of the closing of the Offering. Two of the entities (Alpine/Hanover
LLC and ABH-I LLC) were formed with institutional investors (Alpine Associates,
in the case of Alpine/Hanover LLC; Alpine/Hanover LLC and BT Realty Resources,
Inc., in the case of ABH-I LLC) to engage in Mortgage Loan trading activities,
with HCP acting as asset manager entitled to receive up to 50% of any profits
depending upon performance. See "Business -- Investment
Portfolio -- Single-Family Mortgage Operations -- Prior Activities of HCP." The
third entity (Alpine/Hanover II, L.L.C.) was formed with Alpine Associates, to
trade non-mortgage receivables, with HCP acting as asset manager entitled to
receive up to 50% of any profits depending upon performance. The fourth entity
(AGR Financial, L.L.C.) was formed with an unaffiliated individual (who has
acted as the managing member) to invest and trade in receivables of temporary
employment agencies, with HCP as a passive investor owning 25% of the
outstanding interest therein.
 
     HCP will transfer its interests in Alpine/Hanover II, L.L.C. and AGR
Financial, L.L.C. to an entity owned by the Principals before the closing of the
Offering. Although HCP will retain its interests in Alpine/Hanover LLC and ABH-I
LLC, it will distribute to the Principals before the closing of the Offering its
rights to any receivables from those entities arising between June 30, 1997 and
the closing of the Offering. HCP has also separately managed assets for BT
Realty Resources, Inc. pursuant to a management contract entitling it to receive
up to 50% of any profits depending upon performance. HCP will wind down its
activities under that management contract but, as of the time of the closing of
the Offering, may not have completed the disposition of all of the managed
assets. HCP will distribute to the Principals before the closing of the Offering
its rights to any receivables arising between June 30, 1997 and the closing of
the Offering under its management contract with BT Realty Resources, Inc. The
amount of receivables arising between June 30, 1997 and the closing of the
Offering from Alpine/Hanover LLC, ABH-I LLC and BT Realty Resources, Inc. are
expected to approximate $1,000,000.
 
     The Formation Transactions.  Prior to the transactions that will effect the
structure of the Company described above (collectively, the "Formation
Transactions"), HCP will be owned by the Principals and will have (i) four
wholly owned corporate subsidiaries, two of which (HCMC and HCS) are active,
(ii) interests of 49% and 75%, respectively, in two inactive corporations, and
(iii) interests of various percentages in four active limited liability
companies and one inactive limited liability company.
 
     The following will constitute the Formation Transactions (all but the last
three of which will occur prior to or concurrently with the closing of the
Offering):
 
          - HCHI has been formed as a Maryland corporation.
 
          - HCP will begin to liquidate (or dispose of its interests in) its
            inactive corporate subsidiaries and affiliates.
 
                                        9

<PAGE>   10
 
          - HCP will amend its charter to authorize the HCP Preferred and the
            HCP Common.
 
          - The Principals will exchange, in a tax-free recapitalization, their
            shares of stock in HCP for all of the HCP Preferred and all of the
            HCP Common.
 
          - To the extent consistent with its contractual and fiduciary
            obligations, HCP will begin to wind down (or dispose of its
            interests in) the limited liability companies of which it is a
            member. If HCP is not able to divest itself of all of its interests
            in two of those limited liability companies (Alpine/Hanover LLC and
            ABH-I LLC) and as asset manager to BT Realty Resources, Inc. prior
            to the closing of the Offering, HCP will distribute to the
            Principals prior to the closing of the Offering its rights to any
            receivables arising between June 30, 1997 and the closing of the
            Offering from these investment entities. The receivables are
            expected to approximate $1,000,000. See "Structure and Formation
            Transactions -- The Formation of HCHI -- Benefits to the
            Principals."
 
          - HCHI will sell 5,000,000 Units in the Offering.
 
          - The Principals will contribute the HCP Preferred to HCHI in exchange
            for 716,667 shares of Common Stock.
 
          - HCP will complete the termination of (or the disposition of its
            interests in) Alpine/Hanover LLC, ABH-I LLC and any other entities
            (other than HCMC and HCS)in which it owns interests and that were
            not terminated before the closing of the Offering.
 
          - HCHI will lend up to $1,750,000 to the Principals to enable the
            Principals to pay tax on the gains they must recognize upon
            contributing the HCP Preferred to HCHI for shares of Common Stock.
            The loans will be secured by 116,667 shares of the Principals'
            Common Stock but will otherwise be nonrecourse to the Principals (so
            that, upon a default by a Principal, HCHI could not reach other
            assets of the Principals, for repayment). The loans will bear
            interest at the lowest "applicable federal rate." See "Certain
            Transactions -- Loans to the Principals."
 
          - If the Earn-Out vests, as an additional payment to the Principals
            for their contribution of the HCP Preferred to HCHI, HCHI will (i)
            issue to the Principals up to 216,667 additional shares of Common
            Stock, increasing the Principals' percentage ownership of the
            outstanding shares of Common Stock to up to 15.73%, and (ii) forgive
            the $1,750,000 in loans made to the Principals to enable them to pay
            taxes to the extent that the Earn-Out vests.
 
     For additional information regarding the Formation Transactions, see
"Structure and Formation Transactions." Immediately after the closing of the
Offering, (i) the Company will be comprised of HCHI, HCP, HCMC and HCS, (ii) the
purchasers of Units in the Offering will own 87.46% of the outstanding Common
Stock (and all of the Warrants, except for the Representatives' Warrants), (iii)
the Principals will own 12.54% of the outstanding Common Stock, (iv) HCHI will
own all of the HCP Preferred, (v) the Principals will own all of the HCP Common,
and (iv) HCMC and HCS will be wholly owned subsidiaries of HCP. The percentage
of the Common Stock owned by the Principals may increase to up to 15.73%,
subject to dilution by other issuances of Common Stock, if the Earn-Out vests.
See "Structure and Formation Transactions -- The Formation of HCHI." The shares
of Common Stock acquired by the Principals (including any additional shares to
be issued upon the vesting of the Earn-Out) and the forgiveness of any loans to
the Principals upon the vesting of the Earn-Out represent the consideration
given to the Principals in exchange for their contribution of the HCP Preferred
to HCHI. The Principals' percentage ownership interest in the Company may be
further increased as a result of their participation in the 1997 Stock Option
Plan and the Bonus Incentive Compensation Plan. See "Management -- 1997 Stock
Option Plan;" and "-- Bonus Incentive Compensation Plan."
 
     In connection with the contribution by the Principals of the HCP Preferred
to HCHI, no third-party appraisals or fairness opinions have been or will be
obtained. There can be no assurance that the value of the Common Stock received
by the Principals and the amount of any forgiven loans will be equivalent to the
fair market value of the HCP Preferred contributed by them to HCHI. See "Risk
Factors -- Benefits to the
 
                                       10

<PAGE>   11
 
Principals" and "-- Absence of Independent Valuation for Allocation of Equity
Interests in HCHI;" "Structure and Formation Transactions -- The Formation of
HCHI -- Determination and Valuation of Ownership Interests."
 
                              BENEFITS TO INSIDERS
 
     The Principals will realize certain material benefits in connection with
the consummation of the Formation Transactions and the closing of the Offering,
including the following:
 
          - If HCP is not able to divest itself of all of its interests in
            Alpine/Hanover LLC and ABH-I LLC and as sole asset manager to BT
            Realty Resources, Inc. prior to the closing of the Offering, HCP
            will distribute to the Principals prior to the closing of the
            Offering its rights to any receivables arising between June 30, 1997
            and the closing of the Offering from these investment entities. The
            receivables are expected to approximate $1,000,000. See "Structure
            and Formation Transactions -- The Formation of HCHI -- Benefits to
            the Principals."
 
          - The Principals will receive in exchange for the HCP Preferred (i)
            12.54% of the initially outstanding Common Stock of HCHI (with a
            total value of $10,750,005 based on a price of the Common Stock in
            the Offering of $15.00 per share) and (ii) if the Earn-Out partially
            or fully vests, additional shares of Common Stock of HCHI increasing
            their percentage of Common Stock to up to 15.73%, subject to
            dilution by other issuances of Common Stock, and the forgiveness of
            up to $1,750,000 in loans made by HCHI to the Principals to enable
            the Principals to pay taxes. At June 30, 1997, the book value of the
            HCP Preferred to be contributed to HCHI by the Principals was
            $688,854. The value of the benefits to be received by the Principals
            in exchange for the HCP Preferred may equal $15,750,010 if the
            Earn-Out fully vests (including the forgiveness of loans from HCHI
            of up to $1,750,000, but without regard to any receivables
            distributed to the Principals by HCP, salaries or other compensation
            for services, any additional shares of Common Stock that may be
            issued as compensation for services and any releases of personal
            guarantees) based upon a public offering price of the Units of
            $15.00 per share and no value for the Warrants.
 
          - Subject to lender approval, John A. Burchett will be released from
            his personal guarantee of indebtedness of HCP which equaled
            $2,115,000 as of June 30, 1997. See "Risk Factors -- Benefits to the
            Principals" and "Structure and Formation Transactions -- The
            Formation of HCHI -- Benefits to the Principals."
 
          - HCHI will lend up to $1,750,000 to the Principals to enable the
            Principals to pay tax on the gains they must recognize upon
            contributing the HCP Preferred to HCHI for shares of Common Stock.
            The loans will be secured by 116,667 shares of the Principals'
            Common Stock but will otherwise be nonrecourse to the Principals (so
            that, upon a default by a Principal, HCHI could not reach other
            assets of the Principal for repayment). In addition, the loans to
            the Principals will be forgiven to the extent that the Earn-Out
            vests. See "Certain Transactions -- Loans to the Principals."
 
        - The Principals will serve as directors and officers of HCHI for which
          they will collectively receive annual base salaries of $975,000 and
          will be eligible to participate in the 1997 Stock Option Plan. The
          Principals will also be eligible to participate in the Bonus Incentive
          Compensation Plan. See "Management -- Executive Compensation;"
          "-- 1997 Stock Option Plan;" and "-- Bonus Incentive Compensation
          Plan."
 
     Additional information regarding these and certain other benefits to be
received by the Principals in connection with the consummation of the Formation
Transactions and the closing of the Offering is set forth under "Structure and
Formation Transactions." See also "Risk Factors -- Benefits to the Principals"
and "Principals' Conflicts of Interest;" and "Certain Transactions."
 
                                       11

<PAGE>   12
 
                       PRINCIPALS' CONFLICTS OF INTEREST
 
     The Principals' interests might conflict with those of the purchasers of
Units in the Offering in certain respects, particularly as follows:
 
        - The terms of the agreements by which the Principals will acquire their
          shares of Common Stock and their loans to pay taxes have not been
          determined through arm's-length negotiation. The Principals'
          obligations to enforce those agreements as directors and officers of
          HCHI may conflict with their interests as stockholders, directors and
          officers of HCHI.
 
        - The Principals will continue to own the HCP Common. As the owners of
          the HCP Common, the Principals will be entitled to receive only 3% of
          the dividend distributions made by HCP but will control the operations
          of HCP, HCMC and HCS. HCP Common held by a Principal may be
          repurchased if, among other things, the Principal ceases to be
          employed by the Company or to own an interest in HCHI.
 
                       DIVIDEND POLICY AND DISTRIBUTIONS
 
     The Company intends to distribute 95% or more of its net taxable income
(which does not necessarily equal net income as calculated in accordance with
GAAP) to its stockholders on a quarterly basis each year so as to comply with
the REIT provisions of the Code. Any taxable income remaining after the
distribution of the regular quarterly dividends will be distributed annually in
a special dividend on or prior to the date of the first regular quarterly
dividend payment date of the following taxable year. The dividend policy is
subject to revision in the discretion of the Board of Directors of the Company.
All distributions will be made based upon such factors as the Board of Directors
of the Company deems relevant. The Board of Directors of the Company has not
established a minimum distribution level. See "Federal Income Tax
Considerations."
 
                              SUMMARY RISK FACTORS
 
     An investment in the Units involves various risks, and prospective
investors should consider carefully the matters discussed under "Risk Factors"
prior to an investment in the Units. Among such risks are the following:
 
          - The Company's success will depend heavily upon the efforts of the
            Principals, each of whom would be difficult to replace.
 
          - HCHI is a newly formed entity. The earnings of HCHI will depend
            primarily upon the Principals' ability to acquire and manage the
            Investment Portfolio. Although HCP has managed the short-term
            trading of Single-Family Mortgage Loans and HCMC has originated
            Multifamily Mortgage Loans, none of the Principals has experience in
            managing investments in Multifamily Mortgage Loans and Commercial
            Mortgage Loans or in managing long-term investments in any Mortgage
            Loans or Mortgage Securities. In addition, none of the officers and
            directors of HCHI has experience in managing a public company or a
            REIT. Certain prior performance information regarding HCP's past
            activities in managing the short-term trading of Single-Family
            Mortgage Loans is set forth in "Business -- Single-Family Mortgage
            Operations -- Prior Performance Table." Nothing set forth in the
            prior performance information should be construed as indicative in
            any way of the expected performance of the Company.
 
          - The Principals will realize material benefits in connection with the
            Formation Transactions.
 
          - The investment and financing policies of the Company and its
            policies with respect to certain other activities, including growth,
            debt capitalization, distributions, REIT status and operating
            policies, will be determined by the Board of Directors.
 
          - There can be no assurance that the initial public offering price of
            the Units reflects the fair market value of the interest in the
            Company represented by the Units.
 
          - The Company will not control the operations of the Company's taxable
            subsidiaries (which are controlled by the Principals), which could
            result in decisions by such subsidiaries that do not reflect the
            Company's best interests.
 
                                       12

<PAGE>   13
 
          - The Principals may have conflicts of interest with respect to their
            obligations as officers and directors of the Company, in connection
            with the operations of the Company and the enforcement of the terms
            of the agreements pursuant to which such individuals will acquire
            their Common Stock in HCHI and loans from HCHI.
 
          - Adverse general economic conditions, which generally cause
            decreasing demand for consumer credit and declining real estate
            values, could negatively impact the Company's net income, if any.
 
          - Significant increases in short-term interest rates could adversely
            affect the Company's borrowing costs and could negatively impact the
            Company's net income.
 
          - The Company may experience difficulty in acquiring Mortgage Assets
            at favorable spreads relative to borrowing costs in an environment
            of increasing competition.
 
          - If the Company fails to maintain its qualification as a REIT, the
            Company will be subject to Federal income tax as a regular
            corporation.
 
          - The failure of a public market to develop or be sustained for the
            Units, the Common Stock or the Warrants may occur.
 
                                  THE OFFERING
 

<TABLE>
<S>                                          <C>                                     <C>
Units Offered by the Company(1)(2).................................................   5,000,000
Units to be outstanding after the closing of the Offering(2).......................   5,000,000
Common Stock to be outstanding after the closing of the Offering(2)(3)(4)..........   5,716,677
Common Stock Purchase Warrants to be outstanding after the closing of the
  Offering(2)(5)...................................................................   5,150,000
Common Stock Options to be outstanding after the closing of the Offering...........     325,333
</TABLE>

 
Use of Proceeds.....................     To provide funding for the Investment
                                         Portfolio and Due Diligence Operations
                                         and for general corporate purposes.
 

<TABLE>
<S>                                                                                <C>
American Stock Exchange Symbol
  For the Units..................................................................    HCM.U
  For the Common Stock(6)........................................................      HCM
  For the Warrants(6)............................................................   HCM.WS
</TABLE>

 
- ---------------
(1) Each Unit consists of one share of Common Stock and one Warrant.
 
(2) Assumes that the Underwriters' over-allotment option to purchase up to an
    additional 750,000 Units to cover over-allotments is not exercised. See
    "Underwriting."
 
(3) Includes 10 shares currently issued and outstanding and 716,667 shares of
    Common Stock to be issued to the Principals in connection with the Offering.
 
(4) Does not include (i) shares of Common Stock that may be issued on the
    exercise of the Warrants included in the Units, (ii) 325,333 shares of
    Common Stock reserved for issuance to the Principals and other employees of
    the Company pursuant to the Company's 1997 Stock Option Plan, (iii) 150,000
    shares (172,500 if the Underwriters' over-allotment option is exercised) of
    Common Stock reserved for issuance upon the exercise of the Representatives'
    Warrants, (iv) 216,667 shares of Common Stock that may be issued to the
    Principals representing the Earn-Out and (v) additional shares of Common
    Stock that may be issued pursuant to the Company's Bonus Incentive
    Compensation Plan. See "Underwriting," "Structure and Formation
    Transactions" and "Management."
 
(5) Exercisable at the initial public offering price. Includes the
    Representatives' Warrants. The Warrants included with the Units are
    detachable six months after the closing of the Offering.
 
(6) The Common Stock and Warrants will not be separately listed and traded until
    the Warrants are detachable from the Common Stock.
 
                                       13

<PAGE>   14
 
                                  RISK FACTORS
 
     In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its business before purchasing any of the Units offered hereby.
 
     This Prospectus contains forward-looking statements within the meaning of
the Federal securities laws. Discussions containing such forward-looking
statements may be found in the material set forth under "Prospectus Summary,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business" as well as within the Prospectus
generally. Actual results could differ materially from those described in the
forward-looking statements as a result of the risks and uncertainties set forth
below and within the Prospectus generally.
 
DEPENDENCE UPON PRINCIPALS AND OTHER KEY PERSONNEL
 
     The Company's operations will depend heavily upon the efforts of John A.
Burchett, Joyce S. Mizerak, Irma N. Tavares and George J. Ostendorf, each of
whom would be difficult to replace. Mr. Burchett, Ms. Mizerak, Ms. Tavares and
Mr. Ostendorf will sign employment and non-competition agreements with the
Company. See "Management -- Employment Agreements." There can be no assurance,
however, that any of these individuals will remain in the Company's employ. The
loss of any one of these individuals could have a material adverse effect upon
the Company's business and results of operations. See "Management -- Directors
and Executive Officers."
 
RECENT FORMATION AND LACK OF RELEVANT EXPERIENCE
 
     HCHI is a newly formed entity the earnings of which will depend primarily
upon the Principals' ability to acquire and manage the Investment Portfolio.
Although HCP has managed the short-term trading of Single-Family Mortgage Loans
and HCMC has originated Multifamily Mortgage Loans, none of the Principals has
experience in managing investments in Multifamily Mortgage Loans and Commercial
Mortgage Loans or in managing long-term investments in any Mortgage Loans or
Mortgage Securities. In addition, none of the officers and directors of HCHI has
experience in managing a public company or a REIT. See "Business -- Investment
Portfolio -- Single-Family Mortgage Operations -- Prior Activities of HCP;"
"Management -- Directors and Executive Officers." The Company has not purchased
or committed to purchase any Mortgage Assets and will not hold any Mortgage
Assets before the closing of the Offering. Although HCP has previously rendered
advisory services in connection with securitization transactions, neither it nor
HCMC has securitized any significant amount of Mortgage Loans. There can be no
assurance that the Company will be able to successfully operate its business as
described in this Prospectus. If the Company does not originate and acquire a
sufficient number of Mortgage Loans, or securitize its Mortgage Loans as
planned, the Company's business and results of operations will be materially
adversely affected.
 
     Historical financial information presented in this Prospectus and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" should be regarded solely as background information and may not be
indicative of future results, which may vary substantially and adversely from
historical results.
 
BENEFITS TO THE PRINCIPALS
 
     The Principals will realize material benefits in connection with the
consummation of the Formation Transactions. If, prior to the closing of the
Offering, HCP is not able to divest itself of all of its interests in
Alpine/Hanover LLC and ABH-I LLC, and divest itself as asset manager to BT
Realty Resources, Inc., HCP will distribute to the Principals its rights to any
receivables arising between June 30, 1997 and the closing of the Offering from
these investment entities. Those receivables are expected to approximate
$1,000,000. In connection with the consummation of the Formation Transactions
and the closing of the Offering, (i) the Principals will receive, in exchange
for the HCP Preferred, 12.54% of the initially outstanding shares of Common
Stock of HCHI (with a total value of $10,750,005 based on an initial public
offering price of the Common Stock in the Offering of $15.00 per share) and (ii)
subject to lender approval, John A. Burchett will
 
                                       14

<PAGE>   15
 
be released from his personal guarantee of indebtedness of HCP, which equaled
$2,115,000 as of June 30, 1997. Because the contribution by the Principals of
the HCP Preferred to HCHI in exchange for shares of Common Stock will be a
taxable transaction for the Principals, HCHI will lend up to $1,750,000 to the
Principals to enable the Principals to pay tax on their gains. The loans will be
secured by 116,667 shares of the Principals' Common Stock but will otherwise be
nonrecourse to the Principals (so that, upon a default by a Principal, HCHI
could not reach other assets of the Principals for repayment). If the Earn-Out
vests after the closing of the Offering, as additional consideration to the
Principals for their contribution of the HCP Preferred to HCHI, the loans will
be forgiven and the Principals will be entitled to receive up to 216,667
additional shares of Common Stock. Based on a public offering price of $15.00
per Unit (with no value for the Warrants), the value of the benefits that the
Principals may receive in connection with the Formation Transactions may equal
up to $15,750,010 (including the forgiveness of loans from HCHI of up to
$1,750,000, but without regard to any receivables distributed to the Principals
by HCP, any salaries or other compensation for services, any additional shares
of Common Stock that may be issued as compensation for services and any releases
of personal guarantees). In addition, the Principals will serve as directors and
officers of the Company, for which they will collectively receive aggregate
annual base salaries of $975,000 and will be eligible to participate in the
Company's 1997 Stock Option Plan and the Company's Bonus Incentive Compensation
Plan. See "Risk Factors -- Principals' Conflicts of Interest;"
"Management -- Executive Compensation;" " -- Bonus Incentive Compensation Plan"
and " -- 1997 Stock Option Plan;" "Structure and Formation Transactions;" and
"Certain Transactions."
 
NEGATIVE EFFECT ON FINANCIAL CONDITION DUE TO BOARD OF DIRECTOR'S ABILITY TO
CHANGE POLICIES OF THE COMPANY
 
     The investment and financing policies of the Company and its policies with
respect to certain other activities, including growth, debt capitalization,
distributions, REIT status and operating policies, will be determined by the
Board of Directors. The Board of Directors has no present intention to amend or
revise these policies. However, the Board of Directors may do so at any time
without a vote of the Company's stockholders. A change in these policies could
adversely affect the Company's financial condition or results of operations.
 
ABSENCE OF INDEPENDENT VALUATION FOR ALLOCATION OF EQUITY INTERESTS IN HCHI
 
     The capitalization of HCHI and the amounts and terms of the loans of up to
$1,750,000 to be made to the Principals were not determined by arm's-length
negotiations. The Company did not obtain an independent valuation of the
businesses of the Company or a fairness opinion in connection with the
capitalization and valuation of HCHI. No third-party appraisals or fairness
opinions have been or will be obtained in connection with the contributions of
the HCP Preferred to HCHI. The value of the Units to be purchased by the public
were determined based upon discussions between the Principals and the
Representatives. See "Structure and Formation Transactions," "Underwriting" and
"Certain Transactions." Accordingly, there can be no assurance that the initial
public offering price of the Units in the Offering reflects the fair market
value thereof.
 
PRINCIPALS' CONFLICTS OF INTEREST
 
     The terms of the agreements pursuant to which the Principals will acquire
their Common Stock, and will be made loans to pay taxes on their acquisitions of
Common Stock, were not determined through arms-length negotiation. The
Principals may have a conflict of interest with respect to their obligations as
officers and directors of the Company to enforce the terms of such agreements.
See "Structure and Formation Transactions -- The Formation of
HCHI -- Determination and Valuation of Ownership Interests." Certain aspects of
the businesses of the Company will be carried on through HCP, HCMC and HCS
because income from the businesses might jeopardize HCHI's status as a REIT if
such operations were carried on directly by HCHI. After the consummation of the
Formation Transactions and the closing of the Offering, the Principals will own
all of the voting common stock of HCP, and HCHI will own all of the non-voting
HCP Preferred. As the holder of the HCP Preferred, HCHI will receive 97% of the
dividend distributions generated by the operations of HCP, HCMC and HCS (and,
based on a public offering price of $15.00 per Unit, will have a
 
                                       15

<PAGE>   16
 
liquidation preference that will initially equal $10,750,005 and that may
increase up to $15,750,010 if the Earn-Out vests). However, HCHI's investment in
HCP, through non-voting preferred stock, is subject to the risk that the
Principals might have interests which are inconsistent with the interests of
HCHI. See "Structure and Formation Transactions -- The Structure of the
Company."
 
     The Principals will be parties to a shareholders' agreement that will
provide for, among other things, (i) rights of first refusal in the event any
Principal proposes to sell his or her shares of HCP Common, and (ii) rights to
redeem or purchase the shares of HCP Common held by any Principal who dies,
becomes incompetent, suffers a bankruptcy, ceases to hold limited partner
interests or shares of Common Stock or is no longer employed by HCHI, HCP, HCMC
or HCS. There can be no assurance, however, that the HCP Common will be held at
all times by persons who also hold shares of Common Stock. In addition, there
can be no assurance that the post-Formation Transactions relationship between
HCHI, on the one hand, and HCP, HCMC and HCS, on the other hand, will continue
indefinitely. See "Certain Transactions -- The HCP Shareholders' Agreement;" and
"Structure and Formation Transactions -- The Structure of the Company."
 
     The Principals will serve as directors and officers of each of HCHI, HCP,
HCMC and HCS. In addition, certain other officers and employees of HCP, HCMC and
HCS will serve as officers and employees of HCHI. Upon the consummation of the
Formation Transactions and the closing of the Offering, each of the Principals
will enter into an employment agreement with the Company. See
"Management -- Employment Agreements." There can be no assurance that disputes
among the Principals, as shareholders, which may delay decisions of the
Principals as directors and officers, will not occur, or that if they occur they
will not adversely effect the operation of the Company.
 
RECENT NEGATIVE TRENDS IN REVENUE AND INCOME
 
     Total revenue and income in the first half of 1997 reflected a decrease
from total revenue and income in the first half of 1996, with the most
significant decreases attributable to loan brokerage/asset management fees and
due diligence contracts. Loan brokerage/asset management fees decreased due to a
single loan sale advisory contract with a large commercial bank that generated
significant revenues in the first half of 1996 but did not generate any revenues
in the first half of 1997. The decrease in revenues generated by due diligence
contracts was a result of the type of due diligence contracts and the scope of
work detailed in such contracts in the first half of 1997 as compared to the
first half of 1996. There can be no assurance that such negative trends will not
continue due to further decreases in loan brokerage/asset management fees and
due diligence contracts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Six Months Ended June 30, 1997 Compared
to Six Months Ended June 30, 1996."
 
IMMEDIATE AND SUBSTANTIAL DILUTION
 
     After giving effect to the Formation Transactions estimated underwriting
discounts and estimated offering expenses, assuming no value for or exercise of
the Warrants, purchasers of the Units in the Offering will experience immediate
dilution of approximately $2.84 per share of Common Stock. In the event that the
Principals receive 216,667 additional shares of Common Stock that may be issued
to them under the Earn-Out and the Principals further receive a distribution of
$1,750,000 from the forgiveness of the loans to the Principals under the
Earn-Out, purchasers of the Units in the Offering would experience a potential
further dilution of approximately $.73 per share of Common Stock, based upon an
initial public offering price of $15.00 per Unit and no value for or exercise of
the Warrants. See "Dilution."
 
MORTGAGE ASSETS WITH POOR DOCUMENTATION AND POOR PAYMENT HISTORIES
 
     The Company plans to invest in Single-Family Mortgage Loans that are at
least twelve months old ("seasoned Single-Family Mortgage Loans") or that were
intended to be of certain credit quality but that do not meet the originally
intended market parameters due to errors or credit deterioration ("fall-out
Single-Family Mortgage Loans" and, together with seasoned Single-Family Mortgage
Loans, "subprime Single-Family Mortgage Loans"). Single-Family Mortgage Loans
that are missing applicable documents, such as the original note, mortgage or
title policy, may be difficult to enforce. Single-Family Mortgage Loans that are
missing origination documents, such as the original appraisal, application or
disclosure documents, risk having
 
                                       16

<PAGE>   17
 
inadequate property valuations. Such Mortgage Loans also risk exposure to
consumer protection relief in the event of a loss of disclosure documents which
limit the ability of the Company to audit origination disclosure procedures. In
addition, Single-Family Mortgage Loans with poor payment histories are subject
to increased future delinquencies due to poor borrower payment habits or a
continuous cash flow problem.
 
DEFAULTS ON MORTGAGE ASSETS
 
  Defaults on Commercial Mortgages
 
     Commercial Mortgage Loans have certain distinct risk characteristics.
Commercial properties tend to be unique and more difficult to value than
single-family residential properties. Commercial Mortgage Loans also tend to
have shorter maturities than Single-Family Mortgage Loans and may have a
significant principal balance or "balloon" due on maturity. The Company expects
that a majority of its Commercial Mortgage Loans will have a balloon payment due
at maturity. Commercial Mortgage Loans with balloon payments involve a greater
risk to a lender than self-amortizing Commercial Mortgage Loans, because the
ability of a borrower to pay such amount will normally depend on its ability to
fully refinance the Commercial Mortgage Loan or sell the related property at a
price sufficient to permit the borrower to make the balloon payment. The Company
is not under any obligation to refinance any Commercial Mortgage Loans.
Commercial mortgage lending is generally viewed as exposing the lender to a
relatively greater risk of loss than single-family mortgage lending, in part
because it typically involves larger Mortgage Loans to single borrowers or
groups of related borrowers than Single-Family Mortgage Loans. Further, the
repayment of Commercial Mortgage Loans secured by income producing properties is
typically dependent upon the successful operation of the related properties. The
successful operation of a commercial property is dependent upon the performance
and viability of the property manager of the applicable project. There can be no
assurance regarding the performance of any operators or managers or persons who
may become operators or managers of the applicable commercial properties. See
"Business -- Investment Portfolio -- Commercial Mortgage Loans and Multifamily
Mortgage Loans."
 
     Commercial Mortgage Loans generally are nonrecourse to the borrower. In the
event of foreclosure on a Commercial Mortgage Loan, the value of the property
and other collateral securing the Commercial Mortgage Loan may be less than the
amounts due on the Commercial Mortgage Loan. There may also be costs and delays
involved in enforcing rights of a property owner against tenants in default
under the terms of leases with respect to commercial properties, who may seek
the protection of the bankruptcy laws which can result in termination of lease
contracts.
 
  Effect of Adverse Economic Conditions on Multifamily Properties
 
     Adverse economic conditions, either local, regional or national, may limit
the rent that can be charged by a multifamily borrower and may result in a
reduction in timely rent payments or a reduction in occupancy levels. Further,
the costs of operating a multifamily property may increase, including the costs
of utilities and the costs of required capital expenditures. Occupancy and rent
levels may also be affected by construction of additional housing units, local
military base closings and national and local politics, including current or
future rent stabilization and rent control laws and agreements. In addition, the
level of mortgage interest rates may encourage tenants to purchase single-family
housing. All of these conditions and events may increase the possibility that a
borrower may default on its obligations under its Multifamily Mortgage Loan. See
"Business -- Investment Portfolio -- Commercial Mortgage Loans and Multifamily
Mortgage Loans."
 
  Decreases in Value of Retail, Office and Industrial Properties
 
     Income from, and the market value of, retail, office or industrial
properties would be adversely affected if space in such properties could not be
leased, if tenants were unable to pay rent, if a significant tenant were to
become a debtor in a case under the United States Bankruptcy Code and its lease
were rejected, or if for any other reason rental payments could not be
collected.
 
     If sales of retail tenants were to decline, percentage rents may decline,
tenants could be unable to pay their base rent, or delays in enforcing the
lessor's rights could be experienced. Repayment of the related
 
                                       17

<PAGE>   18
 
Commercial Mortgage Loans may also be affected by the expiration of tenant
leases and the ability of the borrowers to renew leases or to release the space
on favorable terms. Even if vacated space is successfully released, the
associated costs, including tenant improvements and leasing commissions (to the
extent not reserved), could be substantial and could reduce cash flow from the
properties. Retail properties are, in general, affected by the health of the
retail industry, which is currently undergoing a consolidation and is
experiencing changes due to the growing market share of "off-price" and direct
mail retailing. A particular retail property may be adversely affected by the
bankruptcy, decline in drawing power, departure or cessation of operations of an
anchor tenant, a shift in consumer demand due to demographic changes (for
example, population decreases or changes in average age or income) and/or
changes in consumer preference.
 
     An office property may be adversely affected if there is an economic
decline in the businesses operated by the tenant of the property. The risk of
such an adverse effect is increased if rental revenue is dependent on a single
tenant or if there is a significant concentration of tenants in a particular
business or industry. Owners of office properties are generally required to
expend significant amounts of cash for general capital improvements, tenant
improvements and costs of re-leasing space, including commissions. Office
properties that are not equipped to accommodate the needs of modern businesses
may become functionally obsolete and, thus, non-competitive.
 
     Industrial and warehouse properties may be adversely affected by reduced
demand for industrial space occasioned by a general economic decline in a
particular industry (for example, a decline in defense spending), and a
particular industrial or warehouse property that suited the needs of its
original tenant may be difficult to re-lease to another tenant or may become
functionally obsolete relative to newer industrial properties.
 
  Environmental Liabilities Associated with Contaminated Properties
 
     Certain properties securing Mortgage Loans may be contaminated by hazardous
substances resulting in reduced property values. If the Company forecloses on a
defaulted Mortgage Loan on such property, the Company may be subject to
environmental liabilities regardless of whether the Company was responsible for
the contamination. The Company intends to exercise due diligence to discover
potential environmental liabilities before purchasing any property through
foreclosure. However, hazardous substances or waste, contaminants and pollutants
may be discovered on properties during the Company's ownership or after a sale
to a third party. If such substances are discovered on a property, the Company
may be subject to liability for clean-up. The Company may also be liable to
tenants and owners of neighboring properties. In addition, the Company may find
it difficult or impossible to sell the property during or following any such
clean-up. Further, under certain circumstances, such as if the Company were
found to have participated in the management or operation of a property, the
Company may be subject to environmental liabilities with respect to such
property absent a foreclosure on the property. See "Business -- Investment
Portfolio -- Commercial Mortgage Loans and Multifamily Mortgage Loans."
 
RISKS RELATED TO OPERATIONS
 
  Negative Effects of Fluctuating Interest Rates
 
     Impact on Profitability of Mortgage Loans.  The Company's earnings will be
affected by changes in interest rates. The Company will be subject to the risk
of rising mortgage interest rates (including changes in interest rates between
the time it commits to purchase Mortgage Loans at a fixed price and the time it
sells or securitizes those Mortgage Loans), which will adversely affect the
value of the Investment Portfolio. While hedging techniques will be used to
reduce these risks, there still may be changes in income due to changes in
interest rates. In addition, hedging involves transaction and other costs, and
such costs increase dramatically as the period covered by the hedging protection
increases and also increase in periods of rising and fluctuating interest rates.
See "Business -- Risk Management -- Interest Rate Risk Management" and
"-- Hedging -- Costs and Limitations."
 
     Impact on Overall Operations.  Higher interest rates may discourage
borrowers from refinancing Mortgage Loans, borrowing to purchase a single-family
residence or commercial property, or seeking a second
 
                                       18

<PAGE>   19
 
Mortgage Loan, thus decreasing the volume of Mortgage Loans originated by
third-parties. This could have an adverse effect on the Company's net interest
spread during the accumulation of Mortgage Loans held for sale and on the net
interest spread on Mortgage Loans held for long-term investment which are
financed through reverse repurchase agreements. If short-term interest rates
exceed long-term interest rates, there could also be a negative effect on the
Company's net interest spread. See "Business -- Risk Management -- Interest Rate
Risk Management."
 
     Financial Impact on Net Interest Income.  Some Mortgage Assets held by the
Company for long-term investment may have adjustable interest rates or
pass-through rates based on short-term interest rates. The Company's short-term
borrowings generally will bear interest at fixed rates and have maturities of
less than one year. However, certain of these borrowings will include variable
rates. Consequently, changes in short-term interest rates may affect the
Company's net interest income. ARMs owned by the Company or mortgage-backed
securities backed by ARMs will be subject to periodic interest rate adjustments
based on an index such as the CMT Index or LIBOR. Interest rates on the
Company's borrowings may also be based on short-term indices. If any of the
Company's Mortgage Assets are financed with borrowings that bear interest based
on an index different from that used for the related Mortgage Assets, so-called
"basis" interest rate risk will arise. In that event, if the index used for the
Mortgage Assets is a "lagging" index that reflects market interest rate changes
on a delayed basis, and the rate on the related borrowings reflects market rate
changes more rapidly, the Company's net interest income will be adversely
affected in periods of increasing market interest rates. If the Company utilizes
short-term debt financing to originate or acquire fixed rate mortgages or
mortgage-backed securities or issues adjustable rate mortgage-backed securities
backed by fixed rate mortgages, the Company may also be subject to interest rate
risks. See "Business -- Risk Management -- Interest Rate Risk Management."
 
     Impact of Periodic and Life Caps on Net Interest Margin.  Some Mortgage
Assets will also be subject to periodic rate adjustments that may be less
frequent than the adjustments in rates on the borrowings or financings utilized
by the Company. Accordingly, in a period of increasing interest rates, the
Company could experience a decrease in net interest income or a net loss because
the interest rates on the Company's borrowings could adjust faster than the
interest rates on the ARMs or mortgage-backed securities backed by ARMs held in
the Investment Portfolio. Moreover, ARMs are typically subject to periodic and
lifetime interest rate caps, which limit the amount the interest rate can change
during a given period. The Company's short-term borrowings will not be subject
to similar restrictions. Hence, in a period of increasing interest rates, the
Company could also experience a decrease in net interest income or a net loss in
the absence of effective hedging because the interest rates on borrowings could
increase without limitation, while the interest rates on the Company's ARMs and
mortgage-backed securities backed by ARMs would be limited by caps. Further,
some ARMs may be subject to periodic payment caps that result in some portion of
the interest accruing on the ARMs being deferred and added to the principal
outstanding. This could result in receipt by the Company of less cash on its
ARMs than is required to pay interest on the related borrowings, which will not
have such payment caps. The Company expects that the net effect of these factors
will be to lower the Company's net interest income or cause a net loss during
periods of rising interest rates. No assurance can be given as to the amount or
timing of changes in interest rates or their effect on the Company's Mortgage
Assets held for long-term investment or net interest income. If the Company
utilizes short-term debt financing to originate or acquire fixed rate mortgages
or mortgage-backed securities or issues adjustable rate mortgage-backed
securities backed by fixed rate mortgages, the Company may also be subject to
interest rate risks.
 
     Impact on Derivative Securities Held For Investment.  Rising interest rates
may have a negative effect, in particular, on the yield of any mortgage-backed
securities in the Investment Portfolio purchased at a premium in connection with
the Company's hedging activities. If the Company were required to dispose of any
such mortgage-backed securities during a period of rising interest rates, a loss
could be incurred. Lower long-term rates of interest may negatively affect the
yield on servicing fees receivable and on Mortgage Assets purchased at a premium
in connection with the Company's hedging activities. In certain low interest
rate environments, the Company may not fully recoup any initial investment in
such securities or investments.
 
                                       19

<PAGE>   20
 
     Impact on Origination Volume.  Higher interest rates may also negatively
impact the conduit operations by reducing originations of Multifamily Mortgage
Loans and Commercial Mortgage Loans, since high interest rates will limit the
ability of borrowers to incur new debt or to refinance existing mortgages.
 
  Reduction of Income Due to Prepayments on Mortgage Assets
 
     Mortgage prepayment rates vary from time to time and may cause changes in
the amount of the Company's net interest income. Prepayments on Mortgage Assets
generally increase when mortgage interest rates fall below the then-current
interest rates on such Mortgage Assets. Conversely, prepayments of the Mortgage
Assets generally decrease when mortgage interest rates exceed the then-current
interest rate on the Mortgage Assets. Prepayment experience also may be affected
by the geographic location of the property securing the Mortgage Loans, the
assumability of the Mortgage Loans, the ability of an ARM Mortgage loan to
convert to a fixed-rate Mortgage Loan, conditions in the housing and financial
markets, and general economic conditions. In addition, prepayments on ARMs are
affected by conditions in the fixed-rate mortgage market. If the interest rates
on ARMs increase at a rate greater than the interest rates on fixed-rate
Mortgage Loans, prepayments on ARMs will tend to increase. In periods of
fluctuating interest rates, interest rates on ARMs may exceed interest rates on
fixed-rate Mortgage Loans, which may tend to cause prepayments on ARMs to
increase at a greater rate than anticipated. In addition, any future limitations
on the rights of borrowers to deduct interest payments on Mortgage Loans for
Federal income tax purposes may result in a higher rate of prepayment of
Mortgage Loans. See "Business -- Risk Management -- Prepayment Risk Management."
 
     Prepayments of Mortgage Loans could affect the Company in several adverse
ways. The prepayment of any Mortgage Loan that had been purchased at a premium
by the Company would result in the immediate write-off of any remaining
capitalized premium amount and a consequent increase of the Company's
amortization of purchased mortgage servicing rights (to the extent it has
retained servicing) by such amount. See "Business -- PMSR/OMSR."
 
     Substantially all of the Commercial Mortgage Loans originated by the
Company will contain provisions restricting prepayment. The restrictions may
prohibit prepayments in whole or in part during a specified period of time
and/or require the payment of a prepayment charge or fee. Prepayment
restrictions may, but do not necessarily, deter prepayments. Prepayment charges
or fees may be less than the amount which would fully compensate for the
difference between the yield on the reinvestment of the prepayment proceeds and
the expected yield to maturity of the prepaid Commercial Mortgage Loan. There
can be no assurance that the borrower on a Commercial Mortgage Loan which is
being prepaid will have sufficient financial resources to pay all or any
required prepayment charges, particularly where the prepayment results from
acceleration of the Commercial Mortgage Loan following a payment default. No
assurance can be given that foreclosure proceeds will be sufficient to make any
prepayment charges required in connection with a defaulted Commercial Mortgage
Loan. No representation or warranty is made as to the effect of prepayment
charges on the rate of prepayment of the related Commercial Mortgage Loan.
 
     The laws of a number of states are unclear whether provisions requiring
payment of prepayment charges upon a voluntary or involuntary prepayment are
enforceable. In particular, no assurance can be given that prepayment charges
required in connection with an involuntary prepayment will be enforceable under
applicable law or, if enforceable, that foreclosure proceeds will be sufficient
to make the payment. Proceeds recovered in respect of any defaulted Commercial
Mortgage Loans will, in general, be applied to cover outstanding property
protection expenses, servicing expenses and unpaid principal and interest before
being applied to any prepayment charges.
 
  Defaults by Borrowers under Mortgage Assets
 
     The Company intends to make long-term investments in Mortgage Assets.
Accordingly, during the time it holds Mortgage Assets for investment, the
Company will be subject to the risks of borrower defaults and bankruptcies and
special hazard losses (such as those occurring from earthquakes or floods) that
are not covered by standard hazard insurance. If a default occurs on any
Mortgage Loan held by the Company, the
 
                                       20

<PAGE>   21
 
Company will bear the risk of loss of principal to the extent of any deficiency
between the value of the mortgaged property, plus any payments from an insurer
or guarantor, and the amount owing on the Mortgage Loan. In addition, Mortgage
Loans in default are not eligible collateral for borrowings, and will have to be
financed by the Company from other funds until ultimately liquidated.
 
     With respect to second Mortgage Loans, the Company's security interest in
the property is subordinated to the interest of the first mortgage holder. If
the value of the property securing the second Mortgage Loan is not sufficient to
repay the borrower's obligation to the first Mortgage Loan holder upon
foreclosure or if there is no additional value in such property after satisfying
the borrower's obligation to the first Mortgage Loan holder, the borrower's
obligation to the Company may not be satisfied. See "Business -- Risk
Management -- Credit Risk Management."
 
  Losses Related to Investing in Subordinated Classes of Mortgage-Backed
Securities
 
     The Company will bear the risk of loss on any mortgage-backed securities it
purchases in the secondary mortgage market or otherwise. The Company has not
previously insured mortgage-backed securities through monoline insurers.
However, if monoline insurers are contracted to insure against these types of
losses, the Company would be dependent in part upon the creditworthiness and
claims-paying ability of the insurer and the timeliness of reimbursement in the
event of a default on the underlying obligations. Further, the insurance
coverage for various types of losses is limited, and losses in excess of the
limitations would be borne by the Company.
 
     The yield derived from certain classes of mortgage-backed securities, which
may be created in connection with securitizations by the Company and
subsequently retained by the Company, is particularly sensitive to interest
rate, prepayment and credit risks. The Investment Portfolio will include
subordinated securities and investments in servicing fees receivables. See "Risk
Factors -- Risks Related to Operations;" "-- Negative Effects of Fluctuating
Interest Rates; "-- Reduction of Income Due to Prepayment." Because subordinated
securities, in general, bear all losses prior to the applicable senior
securities, the amount of credit risk associated with any investment in
subordinated securities would be significantly greater than the risk associated
with a comparable investment in the related senior securities and, on a
percentage basis, the risk would be greater than holding the underlying Mortgage
Loans directly. See "Business -- Investment Portfolio;" -- "Securitization and
Sale Process."
 
  Losses Related to Borrowings and Substantial Leverage by the Company
 
     General.  The Company intends to leverage the Investment Portfolio by
borrowing a substantial portion (up to approximately 92%, depending on the
nature of the underlying Mortgage Asset) of the market value of substantially
all of its investments in Mortgage Assets. The Company expects generally to
maintain a ratio of equity capital (book value of stockholders' equity) to book
value of total assets of approximately 15%, although the percentage may vary
from time to time depending upon market conditions and other factors. The
Company is not limited by its charter or bylaws as to the amount it may borrow,
whether secured or unsecured, and the ratio of equity capital could at times be
lower. A majority of the Company's borrowings are expected to be collateralized
borrowings, primarily in the form of reverse repurchase agreements, which are
based on the market value of the Company's Mortgage Assets pledged to secure the
specific borrowings. The cost of borrowing under a reverse repurchase agreement
corresponds to the referenced interest rate (e.g., the CMT Index or LIBOR) plus
or minus a margin. The margin over or under the referenced interest rate varies
depending upon the lender, the nature and liquidity of the underlying
collateral, the movement of interest rates, the availability of financing in the
market and other factors. If the returns on the Mortgage Assets purchased with
borrowed funds fail to cover the cost of the borrowings, the Company will
experience net interest losses and may experience net losses. See
"Business -- Investment Portfolio."
 
     Failure to Refinance Outstanding Borrowings.  The Company's ability to
achieve its investment objectives will depend not only on its ability to borrow
money in sufficient amounts and on favorable terms but also on its ability to
renew or replace its maturing short-term borrowings on a continuous basis. The
Company's business strategy relies on short-term borrowings to fund long-term
Mortgage Loans at certain
 
                                       21

<PAGE>   22
 
times. If the Company is not able to renew or replace maturing borrowings, it
could be required to sell, under adverse market conditions, all or a portion of
its Mortgage Assets, and could incur losses as a result. In such event the
Company may be required to terminate hedge positions, which could result in
further losses. These events could have a material adverse effect on the
Company, and could jeopardize the Company's qualification as a REIT by, among
other things, causing the value of the HCP Preferred to exceed 5% of the value
of the Company's total assets or causing the Company's income to include
excessive amounts of gains from sales of Qualified REIT Assets held for less
than four years. See "Risk Factors -- Consequences of Failure to Maintain REIT
Status; Company Subject to Tax as a Regular Corporation."
 
     Initiation of Margin Calls.  Certain of the Company's borrowings may be
cross-collateralized to secure multiple borrowings from a single lender. A
decline in the market value of the collateral could limit the Company's ability
to borrow or result in lenders initiating margin calls (i.e., requiring a pledge
of cash or additional assets to reestablish the ratio of the amount of the
borrowing to the value of the collateral). The Company could be required to sell
Mortgage Assets under adverse market conditions to maintain liquidity. If these
sales were made at prices lower than the carrying value of the Mortgage Assets,
the Company would experience losses. A default by the Company under its
collateralized borrowings could also result in a liquidation of the collateral,
including any cross-collateralized Mortgage Assets, and a resulting loss of the
difference between the value of the collateral and the amount borrowed.
 
     Liquidation of Collateral Upon Bankruptcy.  In the event of a bankruptcy of
the Company, certain reverse repurchase agreements may qualify for special
treatment under the Bankruptcy Code, the effect of which is, among other things,
to allow the creditors under such agreements to avoid the automatic stay
provisions of the Bankruptcy Code and to liquidate the collateral under the
agreements without delay. Conversely, in the event of a bankruptcy of a party
with whom the Company had a reverse repurchase agreement, the Company might
experience difficulty repurchasing the collateral under the agreement if it were
to be repudiated and the Company's claim against the bankrupt lender for the
resulting damages were to be treated as an unsecured claim. In this event,
payment of the Company's claim would be subject to significant delay and, if and
when paid, the amount paid might be substantially less than the damages actually
suffered by the Company. Although the Company intends to enter into reverse
repurchase agreements with several different parties and has developed
procedures to reduce its exposure to such risks, no assurance can be given that
the Company will be able to avoid such risks. See "Business -- Financing."
 
     Need for Additional Debt or Equity Financing.  The Company's liquidity is
also affected by its ability to access the debt and equity capital markets. To
the extent that the Company is unable regularly to access such markets, the
Company could be forced to sell Mortgage Assets at unfavorable prices or
discontinue various business activities in order to meet its liquidity needs.
Any such inability to access the capital markets could have a negative impact on
the Company's earnings. In addition, the REIT provisions of the Code require the
Company to distribute to its holders of Common Stock substantially all of its
net earnings, thereby restricting the Company's ability to retain earnings and
replenish the capital necessary or advisable for its business activities.
 
  Insufficient Demand for Mortgage Loans and the Company's Loan Products
 
     The availability of Mortgage Loans meeting the Company's criteria depends
on, among other things, the size of and level of activity in the residential,
multifamily and commercial real estate lending markets. The size and level of
activity in the residential real estate lending markets depends on various
factors, including the level of interest rates, regional and national economic
conditions, inflation and deflation in property values, as well as the general
regulatory and tax environment as it relates to mortgage lending. See
"-- Legislative and Regulatory Risk." To the extent the Company is unable to
obtain sufficient Mortgage Loans meeting its criteria, the Company's business
will be adversely affected.
 
     In general, lower interest rates generate greater demand for Mortgage
Loans, because more individuals can afford to purchase single-family and
commercial properties. However, if low interest rates are accompanied by a weak
economy and high unemployment, demand for Mortgage Loans may decline.
Conversely, higher interest rates often result in lower levels of real estate
finance and refinance activity, which may
 
                                       22

<PAGE>   23
 
decrease Mortgage Loan purchase volume levels, resulting in decreased economies
of scale and higher costs per unit, reduced fee income, smaller gains on the
sale of Mortgage Loans and lower net income during the accumulation phase.
 
     FNMA and FHLMC are not currently permitted to purchase Single-Family
Mortgage Loans with original principal balances above $214,600, with certain
exceptions. If this dollar limitation were increased without a commensurate
increase in home prices, the Company's ability to maintain or increase its
current acquisition levels could be adversely affected as the size of the
non-conforming Single-Family Mortgage Loan market may be reduced, and FNMA and
FHLMC may be in a position to purchase a greater percentage of the Single-Family
Mortgage Loans in the secondary market than they currently acquire.
 
  Lack of Geographic Diversification
 
     Although the Company intends to seek geographic diversification of the
properties underlying the Company's Mortgage Assets, it does not intend to set
specific diversification requirements (whether by state, zip code or other
geographic measure). Concentration in any one area will increase exposure of the
Company's Investment Portfolio to the economic and natural hazard risks
associated with that area. See "Business -- Risk Management -- Credit Risk
Management."
 
  Ability to Acquire Mortgage Assets at Favorable Spreads Relative to Borrowing
Costs; Competition and Supply
 
     The Company's net income depends on the Company's ability to acquire
Mortgage Assets at favorable spreads over the Company's borrowing costs. In
acquiring Mortgage Assets, the Company competes with other REITs, investment
banking firms, savings and loan associations, banks, mortgage bankers, insurance
companies, mutual funds, other lenders, GNMA, FNMA, FHLMC, and other entities
purchasing Mortgage Assets, many of which have greater financial resources than
the Company and more experience in securitizations. In addition, there are
several mortgage REITs similar to the Company, and others may be organized in
the future. The effect of the existence of additional REITs may be to increase
competition for the available supply of Mortgage Assets suitable for purchase by
the Company. There can be no assurance that the Company will be able to acquire
sufficient Mortgage Assets from mortgage suppliers at spreads above the
Company's cost of funds. The Company will also face competition for financing,
and the effect of the existence of additional mortgage REITs may be to reduce
the Company's access to sufficient funds to carry out its business strategy
and/or to increase the costs of funds to the Company. Continued consolidation in
the financial services industry may also reduce the number of current sellers of
Mortgage Assets to the Investment Portfolio, thus reducing the Company's
potential customer base, resulting in the Company's purchasing a larger
percentage of Mortgage Loans from a smaller number of sellers. Such changes
could negatively impact the Investment Portfolio. See "Business -- Competition."
 
     The Company will face competition in its Due Diligence Operations from
financial institutions, including, but not limited to, banks and investment
banks. Many of the institutions with which the Company will compete in this area
have significantly greater financial resources than the Company. Increased
competition in the Due Diligence Operations could adversely affect the Company's
profitability. See "Business -- Competition."
 
FAILURE TO MAINTAIN REIT STATUS; COMPANY SUBJECT TO TAX AS A REGULAR CORPORATION
 
     The Company intends to qualify as a REIT for Federal income tax purposes.
To qualify as a REIT, the Company must satisfy a series of complicated tests
related to, among other things, the nature of its assets and income, the
ownership of its Common Stock, and the amount and timing of distributions to its
stockholders. The REIT election will cover only HCHI and not any of the
Company's taxable subsidiaries, including HCP, HCMC and HCS, which will be
subject to Federal income tax. See "Federal Income Tax Considerations --
Requirements for Qualification as a REIT;" -- "Taxation of Taxable Affiliates."
 
     The continued qualification of the Company as a REIT could be jeopardized
by, among other things, (i) the hedging of interest rate and prepayment risks
with instruments that are not Qualified REIT Assets or
 
                                       23

<PAGE>   24
 
Qualified Hedges, (ii) the payment by HCP of excessive amounts of dividends, and
(iii) the failure of the Company to distribute sufficient amounts of its income
to its stockholders. In addition, it is anticipated that the Mortgage Assets
will be highly leveraged. Borrowings could result in the termination of the
Company's qualification as a REIT if (a) substantial amounts of Mortgage Assets
must be sold to make required payments, or (b) required payments on borrowings
leave the Company with insufficient amounts to distribute to its stockholders.
An inability of the Company to fund acquisitions of Mortgage Assets with
borrowings, on the other hand, could result in the termination of the Company's
qualification as a REIT if the value of the HCP Preferred exceeds 5% of the
value of the Company's total assets. See "Business -- Hedging" and "Federal
Income Tax Considerations -- Requirements for Qualification as a REIT."
 
     If the Company fails to qualify as a REIT in any taxable year and certain
relief provisions of the Code do not apply, the Company will be subject to
Federal income tax as a regular, domestic corporation, and its stockholders will
be subject to tax in the same manner as stockholders of a regular corporation.
Distributions to its stockholders in any year in which the Company fails to
qualify as a REIT would not be deductible by the Company in computing its
taxable income. As a result, the Company could be subject to income tax
liability, thereby significantly reducing or eliminating the amount of cash
available for distribution to its stockholders. Further, the Company could also
be disqualified from re-electing REIT status for the four taxable years
following the year during which it became disqualified. See "Federal Income Tax
Considerations -- Termination of Revocation of REIT Status."
 
     The Principals have no experience in managing a REIT. No assurance can be
given that future legislation, regulations, administrative interpretations or
court decisions will not significantly change the tax laws with respect to REIT
qualification or the Federal income tax consequences of such qualification. See
"Federal Income Tax Considerations -- Requirements for Qualification as a REIT."
 
POTENTIAL CHARACTERIZATION OF DISTRIBUTIONS AS UBTI; TAXATION OF TAX-EXEMPT
INVESTORS
 
     In the event that (i) the Company is subject to the rules relating to
taxable mortgage pools (discussed below) or if a pension trust owns more than
10% of the Common Stock and (a) at least one pension trust owns more than 25% of
the Common Stock, or (b) one or more pension trusts, each owning more than 10%
of the Common Stock, own in the aggregate more than 50% of the Common Stock,
(ii) a tax-exempt stockholder has incurred indebtedness to purchase or hold
Common Stock or is not exempt from Federal income taxation under certain special
sections of the Code, or (iii) any residual REMIC interests generate "excess
inclusion income," distributions to and, in the case of a stockholder described
in (ii), gains realized on the sale of Common Stock by, such tax-exempt
stockholder may be subject to Federal income tax as unrelated business taxable
income as defined in section 512 of the Code ("UBTI"). See "Federal Income Tax
Considerations -- Taxation of Tax-Exempt Stockholders."
 
TAXABLE MORTGAGE POOL RISK; INCREASED TAXATION
 
     The Company intends to enter into reverse repurchase agreements and CMO and
other secured lending transactions pursuant to which it may borrow funds with
differing maturity dates which are cross-collateralized by specific Mortgage
Loans. Some financing activities may create taxable mortgage pools. A REIT that
incurs debt obligations with two or more maturities, which are supported by
Mortgage Loans or mortgage-backed securities, may be classified as a "taxable
mortgage pool" under the Code if payments required to be made on the debt
obligations bear a specified relationship to the payments received on such
Mortgage Loans. If all or a portion of the Company were treated as a taxable
mortgage pool, the Company's status as a REIT would not be impaired, but a
portion of the Company's taxable income may, under proposed regulations, be
characterized as "excess inclusion" income and allocated to the stockholders.
Any excess inclusion income (i) could not be offset by the net operating losses
of a stockholder, (ii) would be subject to tax as UBTI to a tax-exempt
stockholder, (iii) would be subject to the application of Federal income tax
withholding at the maximum rate (without reduction for any otherwise applicable
income tax treaty) with respect to amounts allocable to foreign stockholders,
and (iv) would be taxable (at the highest corporate tax rate) to a REIT, rather
than its stockholders, to the extent allocable to shares of stock held by
disqualified organizations (generally, tax-exempt entities not subject to tax on
unrelated business income, including
 
                                       24

<PAGE>   25
 
governmental organizations). See "Federal Income Tax Considerations -- Taxation
of Taxable U.S. Stockholders; -- Taxation of Tax-Exempt
Stockholders; -- Taxation of Non-U.S. Stockholders; -- Special Considerations."
 
MARKET CONSIDERATIONS
 
     Fluctuation in Market Price.  Prior to the closing of the Offering, there
has not been a public market for the Securities. Accordingly, there can be no
assurance that a liquid trading market for the Securities offered hereby will
develop or, if developed, that the market will be sustained. In the absence of a
public trading market, an investor may be unable to liquidate his investment in
the Company. The initial public offering price was determined by the Company and
the Underwriter. See "Underwriting." There can be no assurance that the price of
the Units in the public market after the closing of the Offering will not be
lower than the initial public offering price. While there can be no assurance
that a market for the Company's Securities will develop, the Company has been
approved by the American Stock Exchange to list the Units, the Common Stock and
the Warrants.
 
     If a public market for the Securities exists, it is likely that the market
price of the Securities will be influenced by any variation between the net
yield on the Company's Mortgage Assets and prevailing market interest rates.
Earnings will not necessarily be greater in high interest rate environments than
in low interest rate environments. Moreover, in periods of high interest rates,
the net income of the Company, and, therefore, the dividend yield on the Common
Stock, may be less attractive compared with alternative investments, which could
negatively impact the price of the Securities. If the anticipated or actual net
yield on the Company's Mortgage Assets declines or if prevailing market interest
rates rise, thereby decreasing the positive spread between the net yield on such
investments and the cost of the Company's borrowings, the market price of the
Common Stock may be adversely affected.
 
     Effects of Future Offerings.  The Company in the future may increase its
capital resources through private or public offerings of its Common Stock,
securities convertible into its Common Stock, preferred stock or debt
securities. All debt securities and preferred stock will be senior to the Common
Stock in the event of a liquidation of the Company. The actual or perceived
effect of such offerings, the timing of which cannot be predicted, may be the
dilution of the book value or earnings per share of the Common Stock
outstanding, which may result in the reduction of the market price of the Common
Stock.
 
INVESTMENT COMPANY ACT RISK
 
     The Company at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act.
Accordingly, the Company does not expect to be subject to the restrictive
provisions of the Investment Company Act. The Investment Company Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate ("Qualifying
Interests")." Under the current interpretation of the staff of the Commission,
in order to qualify for this exemption, the Company must maintain at least 55%
of its assets directly in mortgage loans, qualifying pass-through certificates
and certain other Qualifying Interests in real estate. Unless certain mortgage
securities represent all of the securities issued with respect to an underlying
pool of mortgages, the mortgage securities may be treated as securities separate
from the underlying Mortgage Loans and, thus, may not qualify as Qualifying
Interests for purposes of the 55% requirement. Therefore, the Company's ability
to invest in certain mortgage securities may be limited by considerations of the
provisions of the Investment Company Act. In addition, in order to meet the 55%
requirement under the Investment Company Act, the Company intends to consider
privately issued certificates issued with respect to an underlying pool as to
which the Company holds all issued certificates as Qualifying Interests. If the
Commission, or its staff, adopts a contrary interpretation with respect to such
securities, the Company could be required to restructure its activities to the
extent its holding of such privately issued certificates did not comply with the
new interpretation. Such a restructuring could require the sale of a substantial
amount of privately issued certificates at an inopportune time. Further, in
order to insure that the Company at all times continues to qualify for exemption
from the Investment Company Act, the Company may be required at times to adopt
less efficient methods of financing certain of its Mortgage Loans and
investments in mortgage-backed
 
                                       25

<PAGE>   26
 
securities than would otherwise be the case and may be precluded from acquiring
certain types of Mortgage Assets whose yield may be higher than the yield on
Mortgage Assets that are consistent with the exemption. The net effect of these
factors will be to reduce at times the Company's net interest income, although
the Company does not expect the effect to be material. If the Company fails to
qualify for exemption from registration as an investment company, its ability to
use leverage would be substantially reduced, and it would be unable to conduct
its business as described in this Prospectus. Any failure to qualify for the
exemption could have a material adverse effect on the Company.
 
LEGISLATIVE AND REGULATORY RISK
 
     Members of Congress and government officials from time to time have
suggested the elimination of the mortgage interest deduction for Federal income
tax purposes, either entirely or in part, based on borrower income, type of
Mortgage Loan or principal amount. The reduction or elimination of these tax
benefits could have a material adverse effect on the demand for the Company's
Mortgage Loans.
 
     The Company's business is subject to regulation, supervision and licensing
by Federal, state and local governmental authorities. It will also be subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. Regulated matters include,
without limitation, collection and foreclosure procedures, qualification and
licensing requirements for mortgage banking and otherwise doing business in
various jurisdictions and other trade practices. In addition, the Company's
activities will be subject to the rules and regulations of the Department of
Housing and Urban Development. Failure to comply with these rules and
regulations can lead to loss of approved status, termination or suspension of
servicing contracts without compensation to the servicer, demands for
indemnification or Mortgage Loan repurchases, certain rights of rescission for
Mortgage Loans, class action lawsuits and administrative enforcement actions.
There can be no assurance that the Company will maintain compliance with these
requirements in the future without additional expense, or that more restrictive
local, state or Federal laws, rules and regulations will not be adopted or that
existing laws and regulations will not be interpreted in a more restrictive
manner, which would make compliance more difficult for the Company.
 
     The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the regulations to which the Company is subject may lead to
regulatory investigations or enforcement actions and private causes of action,
such as class action lawsuits, with respect to the Company's compliance with the
applicable laws and regulations. As a mortgage lender, the Company will be
subject to regulatory enforcement actions and private causes of action from time
to time with respect to its compliance with applicable laws and regulations. See
"Business -- Regulation."
 
SHARES ELIGIBLE FOR FUTURE SALE
 
     Sales of substantial amounts of the Common Stock in the public market or
the prospect of such sales could materially and adversely affect the market
price of the Common Stock. The 5,000,000 shares of Common Stock offered hereby
will be immediately eligible for sale in the public market without restriction
beginning on the date that the Warrants become detachable. The 716,667 shares of
Common Stock that will be issued to the Principals, and the 216,667 shares of
Common Stock that may be issued to the Principals if the Earn-Out vests, will be
restricted and will not be salable pursuant to Rule 144 or otherwise sooner than
the date which is one year from the date of issue of such shares (except
pursuant to registration rights). The Company and the Principals have agreed
with the Underwriters that, for a period of one year following the closing of
the Offering, and except for up to 100,000 shares of Common Stock that may be
sold after six months, the Principals will not sell, contract to sell or
otherwise dispose of shares of Common Stock or rights to acquire such shares
(other than pursuant to employee plans) without the prior written consent of the
Representatives. See "Shares Eligible for Future Sale" and "Underwriting."
Additionally, (i) stock options for 325,333 shares of Common Stock may be
granted to the Principals and other employees of the Company at a per share
exercise price equal to the initial public offering price pursuant to the
Company's 1997 Stock
 
                                       26

<PAGE>   27
 
Option Plan, (ii) 5,000,000 shares of Common Stock may be issued upon the
exercise of the Warrants, and (iii) up to 172,500 shares of Common Stock may be
issued upon exercise of the Representatives' Warrants. See "Underwriting." The
Principals have registration rights which will permit them to sell, free of the
Rule 144 volume limitation, up to 100,000 shares of Common Stock in the
aggregate at any time more than six months after the closing of the Offering and
the remainder of their shares of Common Stock at any time after the one year
lock-up period expires. See "Shares Eligible for Future Sale -- Registration
Rights."
 
PREFERRED STOCK; RESTRICTIONS ON OWNERSHIP OF COMMON STOCK; ANTI-TAKEOVER
MEASURES
 
     The charter authorizes the Board of Directors to issue shares of Preferred
Stock designated in one or more classes or series. The Preferred Stock may be
issued from time to time with such designations, rights and preferences as shall
be determined by the Board of Directors. Preferred Stock would be available for
possible future financing of, or acquisitions by, the Company and for general
corporate purposes without any legal requirement that further stockholder
authorization for issuance be obtained. The issuance of Preferred Stock could
have the effect of making an attempt to gain control of the Company more
difficult by means of a merger, tender offer, proxy contest or otherwise. The
Preferred Stock, if issued, may have a preference on dividend payments which
could affect the ability of the Company to make dividend distributions to the
holders of Common Stock. As of the date of this Prospectus, no shares of
Preferred Stock have been issued and the Company does not intend to issue any
Preferred Stock prior to the closing of the Offering. Certain provisions of the
Company's charter may also have the effect of delaying, deferring or preventing
a change in control of the Company. See "Certain Provisions of Maryland Law and
of the Company's Charter and Bylaws;" and "Description of Securities."
 
     To meet the requirements for qualification as a REIT at all times, the
Company's charter prohibits any person other than John A. Burchett from
acquiring or holding, directly or constructively, shares of Common Stock in
excess of 9.5% of the value of the aggregate of the outstanding shares of Common
Stock (the "Ownership Limit"). Mr. Burchett's ownership percentage may not
exceed 11.99%. For this purpose, the term "ownership" is defined in accordance
with the REIT provisions of the Code, the constructive ownership provisions of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code, and
the term "person" is defined to include a "group" so as to have the same meaning
as for purposes of Section 13(d)(3) of the Exchange Act apply. Accordingly,
shares of Common Stock owned or deemed to be owned by a person who individually
owns less than 9.5% (or 11.99% in the case of Mr. Burchett) of the outstanding
shares of Common Stock may nevertheless be in violation of the ownership
limitations set forth in the Company's charter. The Company's charter further
prohibits (1) any person from beneficially or constructively owning shares of
Common Stock that would result in the Company being "closely held" under Section
856(h) of the Code or otherwise cause the Company to fail to qualify as a REIT,
and (2) any person from transferring shares of Common Stock if such transfer
would result in shares of Common Stock being owned by fewer than 100 persons.
 
                                       27

<PAGE>   28
 
                                  THE COMPANY
 
     The Company was incorporated in the state of Maryland on June 10, 1997. The
Company generally will not be subject to Federal income tax to the extent that
certain REIT qualification requirements are met. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT." HCP (and its
subsidiaries) will not be consolidated with the Company for accounting purposes
because the Company will not own any of HCP's voting common stock and the
Company will not control HCP. All taxable income of HCP, HCMC and HCS is subject
to Federal and state income taxes, where applicable. See "Federal Income Tax
Considerations -- Taxation of Taxable Affiliates."
 
     The principal executive office of the Company is located at 90 West Street,
Suite 1508, New York, New York 10006, telephone (212) 732-5086.
 
                                USE OF PROCEEDS
 
     The net proceeds of the Offering are estimated to be approximately
$68,850,000 (or $79,312,500 if the Underwriters' over-allotment option is
exercised in full). The Company expects to use up to $1,750,000 of the net
proceeds of the Offering to make loans to the Principals to enable the
Principals to pay tax on their gains from the Formation Transactions. See
"Structure and Formation Transactions." It is expected that approximately 94%
and 5% of the remaining net proceeds of the Offering will be used to provide
funding for the Investment Portfolio and the Due Diligence Operations,
respectively. The balance of such remaining net proceeds will be used for
working capital and general corporate purposes. Pending these uses, the net
proceeds may be invested in short-term CDs and money-market accounts temporarily
to the extent consistent with the REIT provisions of the Code.
 
     The Company anticipates that it will fully invest the net proceeds of the
Offering in Mortgage Assets as soon as reasonably possible after the closing of
the Offering. The Company has not specifically identified any Mortgage Assets in
which to invest the net proceeds of the Offering.
 
                       DIVIDEND POLICY AND DISTRIBUTIONS
 
     The Company intends to distribute 95% or more of its taxable income (which
may not necessarily equal net income as calculated in accordance with GAAP) to
its stockholders on a quarterly basis each year so as to comply with the REIT
provisions of the Code. Any taxable income remaining after distribution of the
regular quarterly dividends will be distributed annually in a special dividend
on or prior to the date of the first regular quarterly dividend payment date of
the following taxable year. The dividend policy is subject to revision at the
discretion of the Board of Directors. All distributions in excess of those
required for the Company to maintain REIT status will be made by the Company in
the discretion of the Board of Directors and will depend on the taxable earnings
of the Company, the financial condition of the Company and such other factors as
the Board of Directors deems relevant. The Board of Directors has not
established a minimum distribution level. See "The Company -- Directors and
Executive Officers;" and "Federal Income Tax Considerations -- Requirements for
Qualifications as a REIT -- Distributions."
 
     The Company intends to operate in a manner that permits it to elect, and it
intends to elect, to be a REIT for Federal income tax purposes. The Company
expects to generate income for distribution to the stockholders primarily from
the net interest income derived from its investments classified as Qualified
REIT Assets and from dividends generated by the Due Diligence Operations and the
conduit operations. As a result of its REIT status, the Company will be
permitted to deduct dividend distributions to its stockholders in calculating
its taxable income, thereby effectively eliminating the "double taxation" that
generally results when a corporation earns income and distributes that income to
stockholders in the form of dividends. The Principals intend to cause HCP to
distribute its net cash from operations as dividends on a quarterly basis to the
extent consistent with HCHI's REIT qualification. For purposes of receiving
dividend distributions, there is no difference between a share of the HCP
Preferred and a share of the HCP Common, so that the HCP Preferred will have no
dividend rate or preference over the HCP Common. Since HCP, HCMC and HCS will
not be covered by
 
                                       28

<PAGE>   29
 
the REIT election, dividend distributions made by HCP, HCMC and HCS will not be
deductible by them for Federal income tax purposes.
 
     Distributions to stockholders will generally be taxable as ordinary income,
although a portion of such distributions may be designated by the Company as
capital gain or may constitute a tax-free return of capital. The Company will
annually furnish to each of its stockholders a statement setting forth
distributions paid during the preceding year and their characterization as
ordinary income, capital gains or return of capital. For a discussion of the
Federal income tax treatment of distributions by the Company, see "Federal
Income Tax Considerations -- Taxation of Taxable U.S. Stockholders;"
"-- Taxation of Tax-Exempt Stockholders;" and "-- Certain United States Federal
Income Tax Considerations Applicable to Foreign Holders."
 
     If (i) the Company is subject to the rules relating to taxable mortgage
pools or the Company is a "pension-held REIT" within the meaning of Section
856(h)(3)(D) of the Code, (ii) a tax-exempt stockholder has incurred
indebtedness to purchase or hold its Common Stock or is not exempt from Federal
income taxation under certain special sections of the Code, or (iii) the
residual REMIC interests acquired by the Company generate "excess inclusion
income," distributions to and, in the case of a stockholder described in (ii),
gains realized on the sale of Common Stock by, such tax-exempt stockholder may
be subject to federal income tax as unrelated business taxable income as defined
in section 512 of the Code ("UBTI"). See "Federal Income Tax
Considerations -- Special Considerations."
 
                           DIVIDEND REINVESTMENT PLAN
 
     The Company intends to adopt a Dividend Reinvestment Plan ("DRP") for
stockholders who wish to reinvest their dividend distributions in additional
shares of Common Stock. All stockholders will be eligible to participate in the
DRP. The DRP will be administered by a plan administrator who will keep records,
send statements of accounts to each stockholder who participates in the DRP,
provide safe-keeping for the shares and perform other duties related to the DRP.
The DRP will provide for dividend reinvestments and optional cash purchases.
Discounts will be made available to the extent determined by the Board of
Directors and to the extent consistent with the Company's qualification as a
REIT.
 
                                       29

<PAGE>   30
 
                                    DILUTION
 
     The net tangible book value of the Company as of July 31, 1997 was $150, or
$15.00 per share of Common Stock. Net tangible book value per share represents
the total tangible assets of the Company, reduced by the amount of its total
liabilities, and divided by the number of shares of Common Stock outstanding as
of that date.
 
     After giving effect to the Formation Transactions estimated underwriting
discounts and estimated offering expenses, assuming no value for or exercise of
the Warrants, the pro forma net tangible book value of the Company would
increase by $688,854 (the net book value of the HCP Preferred being
contributed). The Formation Transactions represent an immediate dilution of
$2.84 per share of Common Stock. See "Structure and Formation Transactions."
 
     The net tangible book value per share of Common Stock could potentially be
further diluted by $.73 per share of Common Stock upon the issuance by the
Company of 216,667 additional shares of Common Stock that may be issued to the
Principals and the distribution to the Principals in the amount of $1,750,000
from the forgiveness of loans to the Principals if the Earn-Out vests based upon
a public offering price of $15.00 per Unit and no value for or exercise of the
Warrants. See "Structure and Formation Transactions -- HCHI."
 

<TABLE>
<CAPTION>
                                                                                  OFFERING
                                                                               ---------------
<S>                                                                            <C>      <C>
Initial public offering price per Unit.......................................  $15.00
Dilution per share of Common Stock attributable to estimated underwriting
  discounts and estimated offering expenses payable by the Company...........   (1.23)
Dilution per share of Common Stock attributable to the Formation
  Transactions(1)............................................................   (1.61)
Potential additional dilution per share of Common Stock attributable to the
  Formation Transactions(2)..................................................    (.73)
                                                                               ------
     Fully diluted value per Unit............................................           $11.43
                                                                                        ======
</TABLE>

 
- ---------------
(1) Includes the issuance by the Company of 716,667 shares of Common Stock to
    the Principals. See "Structure and Formation Transactions."
 
(2) Assumes the issuance by the Company of 216,667 shares of Common Stock that
    may be issued to the Principals and the distribution to the Principals in
    the amount of $1,750,000 from the forgiveness of the loans to the Principals
    if the Earn-Out vests. See "Structure and Formation Transactions -- The
    Formation of HCHI."
 
     The following table summarizes on a pro forma basis as of June 30, 1997 the
differences between (i) the total consideration received for, and the average
price per share of, the Common Stock acquired by the Principals (for the book
value of the HCP Preferred) and (ii) the total consideration received for, and
the average price per share of, the Common Stock acquired by the new investors
in the offering, assuming no value for or exercise of the Warrants:
 

<TABLE>
<CAPTION>
                                                  TOTAL CONSIDERATION              AVERAGE PRICE
                      SHARES OF THE COMPANY             RECEIVED             -------------------------
                      ---------------------     ------------------------     PER SHARE OF COMMON STOCK
    OFFERING           NUMBER       PERCENT     AMOUNT(2)(3)     PERCENT          OF THE COMPANY
    ----------------  ---------     -------     ------------     -------     -------------------------
    <S>               <C>           <C>         <C>              <C>         <C>
    Principals......    716,667       12.54%    $   688,854          .91%             $  0.96
                        216,667(1)  3.19   %              0         0   %               $0.00
                      ---------     ------       ----------      ---- --
                        933,334       15.73%        688,854          .91%
    New Investors...  5,000,000       84.27%     75,000,000        99.09%             $ 15.00
                      ---------     ------       ----------      ---- --
            Total...  5,933,334      100.00%    $75,688,854       100.00%
                      =========     ======       ==========      ======
</TABLE>

 
- ---------------
(1) Assumes the issuance by the Company of 216,667 shares of Common Stock that
    may be issued to the Principals if the Earn-Out vests. See "Structure and
    Formation Transactions -- The Formation of HCHI."
 
(2) No effect is shown for the distribution to the Principals in the amount of
    $1,750,000 resulting from the forgiveness of loans to the Principals if the
    Earn-Out vests.
 
(3) For Principals, the value of the contribution is the net book value of the
    HCP Preferred ($688,854) being contributed; for new investors, their cash
    contribution ($75,000,000) is used.
 
                                       30

<PAGE>   31
 
                                 CAPITALIZATION
 
     The capitalization of the Company (i) as of June 30, 1997, (ii) as adjusted
to reflect the sale of the Units offered hereby at an initial public offering
price equal to $15.00 per Unit and the issuance of 716,667 shares of Common
Stock to the Principals, (iii) as adjusted to reflect certain shares of Common
Stock that may be issued to the Principals and other employees of the Company
and (iv) as adjusted to reflect the potential forgiveness of the loans to the
Principals ($1,750,000) on a distribution to the Principals resulting in a
reduction in additional paid-in capital, is as follows:
 

<TABLE>
<CAPTION>
                                                       ACTUAL     AS ADJUSTED(1)     AS ADJUSTED(1)(2)
                                                       ------     --------------     -----------------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                    <C>        <C>                <C>
Stockholders' equity:
  Preferred Stock, $.01 par value, 10,000,000 shares
     authorized; no shares issued and outstanding....   $-0-         $-0-                -$0-
                                                        ----         --------             -------
  Common Stock, $.01 par value 90,000,000 shares
     authorized; 10 shares issued and outstanding
     actual, 5,716,677 and 5,933,344 shares as
     adjusted, respectively..........................   -0-                57                  59
                                                        ----         --------             -------
  Additional paid-in capital.........................   -0-            69,482              67,730
                                                        ----         --------             -------
  Total capitalization...............................   $-0-         $ 69,539             $67,789
                                                        ====         ========             =======
</TABLE>

 
- ---------------
(1) After deducting estimated underwriting discount and estimated offering
    expenses payable by the Company, assuming
    no exercise of the Underwriters' over-allotment option to purchase up to an
    additional 750,000 Units and assuming no exercise of the Warrants.
 
(2) Includes (i) 216,667 additional shares of Common Stock that may be issued to
    the Principals if the Earn-Out vests; no additional consideration will be
    received by the Company; and (ii) the distribution to the Principals in the
    amount of $1,750,000, resulting from the potential forgiveness of loans to
    the Principals if the Earn-Out vests. See "Structure and Formation
    Transactions -- The Formation of HCHI."
 
                                       31

<PAGE>   32
 
                    HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
                            PRO FORMA FINANCIAL DATA
 
     The following pro forma balance sheet has been prepared based on the
historical audited June 30, 1997 balance sheet of HCHI. The unaudited pro forma
balance sheet gives effect to the Formation Transactions which will occur upon
the effective date of this Offering. See "Structure and Formation Transactions."
No pro forma income statement has been prepared because HCHI has no operating
history. Upon completion of the Formation Transactions, HCHI intends to invest
substantially all of the net proceeds of the Offering in Qualified REIT Assets,
which Qualified REIT Assets will comprise the Investment Portfolio. The
Investment Portfolio is expected to generate in excess of 95% of HCHI's gross
revenues. The balance of HCHI's gross revenues is expected to be generated from
its equity investment in HCP, which in turn will be generated by offering due
diligence services to buyers, sellers and holders of Mortgage Loans and by
originating, selling and servicing Multifamily and Commercial Mortgage Loans.
The pro forma adjustments are based upon currently available information and
upon certain assumptions that management believes to be reasonable under the
circumstances. This pro forma information is for illustrative purposes only and
should not be viewed as a projection or forecast of HCHI's performance. The pro
forma balance sheet does not purport to represent HCHI's actual financial
position had such events occurred on the aforementioned dates. Such pro forma
information should be read in conjunction with HCHI's financial statements and
the notes relating hereto included elsewhere herein.
 
     HCHI is a recently-formed Maryland corporation which will elect to be taxed
as a REIT. HCP is a New York corporation, established in 1989. HCHI will account
for its investment in HCP on the equity method of accounting.
 
                                       32

<PAGE>   33
 
                    HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
 
                            PRO FORMA BALANCE SHEET
                                  (UNAUDITED)
 

<TABLE>
<CAPTION>
                                                           AT JUNE 30, 1997
                                      ----------------------------------------------------------
                                                         [1]             [2]             [3]
                                                      INCREASE        INCREASE        INCREASE
                                      HISTORICAL     (DECREASE)      (DECREASE)      (DECREASE)       PRO FORMA
                                      ----------     -----------     -----------     -----------     -----------
<S>                                   <C>            <C>             <C>             <C>             <C>
               ASSETS
Cash................................     $150        $68,850,000     $(1,750,000)             --     $67,100,150
Investment in Hanover Capital
  Partners Ltd. ....................       --            688,854              --              --         688,854
Loans to Principals.................       --                 --       1,750,000      (1,750,000)             --
                                         ----        -----------     -----------     -----------     -----------
TOTAL ASSETS........................     $150        $69,538,854     $   -0-         $(1,750,000)    $67,789,004
                                         ====        ===========     ===========     ===========     ===========
 
     TOTAL STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 --
  authorized, 10 million shares,
  issued and outstanding, -0- shares,
  historical and proforma...........       --                 --
Common stock, par value $.01 --
  authorized, 90 million shares,
  historical and proforma; issued
  and outstanding 10 and 5,933,344
  shares, historical, and proforma,
  respectively......................       --        $    57,167                           2,166     $    59,333
Additional paid-in capital..........     $150         69,481,687              --      (1,752,166)     67,729,671
                                         ----        -----------     -----------     -----------     -----------
TOTAL STOCKHOLDERS' EQUITY..........     $150        $69,538,854     $   -0-         $(1,750,000)    $67,789,004
                                         ====        ===========     ===========     ===========     ===========
</TABLE>

 
- ---------------
(1) Reflects the estimated net proceeds ($68,850,000) from the Offering assuming
    no exercise of the Underwriters' overallotment option at a public offering
    price of $15.00 per Unit.
 
    Reflects the contribution by the Principals of the net book value ($688,854)
    of the HCP Preferred in exchange for 716,667 shares of Common Stock of HCHI.
    HCHI's investment will be reflected at cost (which has been determined to be
    the net book value of the HCP Preferred). Even though HCHI will generally
    have no right to control the affairs of HCP because the HCP Preferred is
    nonvoting, Management believes that HCHI has the ability to exert
    significant influence over HCP and therefore the investment in HCP will be
    accounted for on the equity method. Some of the factors considered in
    determining the use of the equity method of accounting were (1) HCHI will
    have the ability to exercise significant influence over HCP through the
    Principals, who are the holders of the HCP Common, (2) HCP and its
    subsidiaries will perform their respective activities primarily for HCHI,
    (3) substantially all of the economic benefits in HCP and its subsidiaries
    will flow to HCHI, (4) HCHI and HCP and its subsidiaries will have common
    board of director members, officers and employees, (5) the views of HCHI's
    management influence the operations of HCP and its subsidiaries and (6) HCHI
    will be able to obtain financial information from HCP that is needed to
    apply the equity method of accounting to its investment in HCP.
 
(2) Reflects loans that may be made by HCHI to the Principals to enable the
    Principals to pay tax on the gains they must recognize upon contributing the
    HCP Preferred to HCHI for shares of Common Stock.
 
(3) Reflects the additional shares (216,667) of Common Stock to be issued to the
    Principals assuming the full vesting of the Earn-Out. HCHI will receive no
    additional consideration in exchange for the 216,667 additional shares of
    Common Stock. HCHI will therefore not reflect any additional investment in
    HCP and will continue to account for its investment in HCP on the equity
    method.
 
    Reflects the potential forgiveness of the $1,750,000 of loans to the
    Principals assuming full vesting of the Earn-Out. The forgiveness will be
    treated as a distribution to the Principals and will reduce additional
    paid-in capital by $1,750,000.
 
                                       33

<PAGE>   34
 
                            SELECTED FINANCIAL DATA
 
     The following selected financial data are derived from the audited
consolidated financial statements of HCP and subsidiaries at and for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992 and from the unaudited
financial information at and for the six months ended June 30, 1997 and 1996.
Such selected financial data should be read in conjunction with the audited
consolidated financial statements of HCP and subsidiaries at December 31, 1996
and 1995 and for the three years in the period ended December 31, 1996 whose
audit reports prepared by Deloitte & Touche LLP, independent auditors, appear
elsewhere herein and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" also included elsewhere herein. The
following selected financial data at and for the six months ended June 30, 1997
and 1996 have been derived from the unaudited consolidated financial statements
of HCP and subsidiaries; however, in the opinion of management such information
reflects all adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation of such financial information for those
periods. Results for the six months ended June 30, 1997 are not necessarily
indicative of results for the year ending December 31, 1997.
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 

<TABLE>
<CAPTION>
                                           SIX MONTHS ENDED
                                               JUNE 30                       YEAR ENDED DECEMBER 31
                                         --------------------   ------------------------------------------------
                                          1997        1996       1996      1995       1994      1993      1992
                                         -------   ----------   -------   -------   --------   -------   -------
                                             (UNAUDITED)
<S>                                      <C>       <C>          <C>       <C>       <C>        <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS
  DATA
Revenues
  Due diligence fees.................... $ 2,363   $    2,723   $ 8,324   $ 7,526   $ 10,194   $ 3,853   $ 5,215
  Loan brokerage/asset management fee...   1,074        1,470     2,469     1,771        659        --        --
  Mortgage sales and servicing..........     538          656       971     2,289      2,527     3,961       537
  Other income..........................     259          335       356       296        189        20        10
                                         -------   ----------   -------   -------   --------   -------   -------    
         Total revenues.................   4,234        5,184    12,120    11,882     13,569     7,834     5,762
                                         -------   ----------   -------   -------   --------   -------   -------
Expenses
  Personnel expense.....................   2,116        2,002     4,227     3,832      4,002     3,538     1,436
  Appraisal, inspection and other
    professional fees...................     526          580     3,128     2,594      5,244       272       286
  Subcontractor expense.................     853        1,206     2,920     2,739      2,171     1,851     2,320
  Travel and subsistence................     113          518       617       860        315       472       497
  Occupancy expense.....................     250          276       537       438        415       256       155
  General and administrative expense....     193          300       525     1,066      1,162     1,025       681
  Reversal of reserve for IRS
    assessment..........................     (22)          --      (278)       --         --        --        --
  Interest expense......................      67           56       134       160        102        64        61
  Depreciation and amortization.........      65           44       126       114         84        50        39
                                         -------   ----------   -------   -------   --------   -------   -------
         Total expenses.................   4,161        4,982    11,936    11,803     13,495     7,528     5,475
                                         -------   ----------   -------   -------   --------   -------   -------
Income before income taxes..............      73          202       184        79         74       306       287
Income tax expense......................      38           92        74        51        128       147       121
                                         -------   ----------   -------   -------   --------   -------   -------
Net income (loss)....................... $    35   $      110   $   110   $    28   $    (54)  $   159   $   166
                                         =======   ==========   =======   =======   ========   =======   =======
Net income (loss) per share of common
  stock................................. $211.92   $   660.48   $658.74   $169.80   $(323.99)  $954.47   $996.19
Dividends per share of common stock..... $    --   $       --   $    --   $    --   $     --   $    --   $211.01
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents............... $    93   $      505   $   162   $   912   $    300   $ 1,308   $   536
Accounts receivable.....................     988        1,424     3,684     1,533      2,396       954     1,423
Accrued revenue on contracts in
  progress..............................     357          112       550       165      1,177       248       339
Receivables from related parties........   1,426          350       629       230        252     1,192        88
                                         -------   ----------   -------   -------   --------   -------   -------
Total assets............................   3,450        3,178     5,758     3,529      4,701     4,061     2,717
Note payable to bank....................   2,115        1,185     1,045     1,375      1,500       950       930
Stockholders' equity....................     710          675       675       667        639       693       534
</TABLE>

 
                                       34

<PAGE>   35
 

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     As further discussed in the notes to the HCP and subsidiaries consolidated
financial statements, the financial statements of HCP and its subsidiaries ("HCP
Subsidiaries") were prepared based on historical operations of HCP, HCMC (a
wholly-owned subsidiary), HCS (a wholly-owned subsidiary), HJV (a 75% owned
subsidiary that became inactive in the fourth quarter of 1995) and certain other
inactive subsidiaries (Hanover Capital Advisors, Inc. ("HCA"), Hanover Capital
Mortgage Fund, Inc. ("HCMF") and Hanover Online Mortgage Edge, LLC ("HOME")).
HCHI is not acquiring any operating assets from any predecessor entities. HCHI
is, however, acquiring on the closing of the Offering all of the outstanding
shares of the HCP Preferred. See "Structure and Formation Transactions".
Historical financial information presented herein should be regarded solely as
background information. There can be no assurance that the results of the Due
Diligence Operations and conduit operations from HCP and HCMC, respectively, are
indicative of future results.
 
RESULTS OF OPERATIONS; HCP AND SUBSIDIARIES
 
     The following discussion relates only to HCP and its subsidiaries prior to
the contribution of the HCP Preferred to HCHI as described in "Formation and
Structure Transactions."
 
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
 
     The net income in the first half of 1997 was $35,000 as compared to net
income of $110,000 in the same period in 1996. Income before income taxes was
$73,000 in the first half of 1997 as compared to income before income taxes of
$202,000 in the first half of 1996.
 
     Total revenue in the first half of 1997 was $4,234,000, a decrease of 18.2%
from the total revenues of $5,184,000 in the first half of 1996. All revenue
categories during the first six months of 1997 reflected declines when compared
to the same period during 1996, with the most significant decrease in loan
brokerage/asset management fees (a decrease of 26.9%). Approximately 38% of the
total revenue decrease was attributable to the decrease in revenues generated by
due diligence contracts. Due diligence revenues are generated from contracts
entered into with commercial banks, private mortgagors, credit unions,
government agencies (the RTC and the FDIC) and other financial institutions. The
need for due diligence contract work is often influenced by the overall
acquisition, merger and other consolidation activity in the financial market.
HCP's sales representatives actively pursue due diligence contracts (as well as
the sale and purchase of Mortgage Loans for third parties). In addition, a
substantial portion of HCP's due diligence contracts are obtained as a result of
HCP's reputation and prior work as a due diligence contractor and HCP being
listed as an approved RTC/FDIC contractor. The type of due diligence contracts
and scope of work detailed in the contracts was generally less labor intensive
and required less travel and lodging in the first half of 1997 as compared to
the first half of 1996. Accordingly, despite the decrease in revenues, the first
half 1997 due diligence contracts were generally more profitable (on a per loan
basis) than due diligence contracts for the same period in 1996. Commercial due
diligence revenues (which account for 13.2% and 14.1% of all due diligence
revenues for the first half of 1997 and 1996, respectively) reflected a decrease
of $72,000. HCP's current contract to provide commercial due diligence for the
FDIC terminated in June 1997.
 
     Revenues from loan brokering/asset management fee operations were
$1,074,000 in the first half of 1997 as compared to $1,470,000 in the first half
of 1996, a decrease of $396,000 (41.6% of the total revenue decrease). Although
asset management fees increased substantially during this period (from $600,000
to $850,000), the increase in asset management fees in the first half of 1997
did not fully offset the revenues generated in the first half of 1996 by a
single loan sale advisory contract with a large commercial bank. This contract
generated $819,000 of revenues in the first half of 1996. No such revenues were
recognized in 1997. Asset management fees are recognized by HCP, to the extent
that HCP, as asset manager for ABH-I LLC and BT Realty Resources, Inc.,
generates returns in excess of an established base return on capital (generally
15.0%) for each entity. HCP's asset management fee is based on a portion of the
return on capital that HCP generates in excess of the base return on capital.
 
                                       35

<PAGE>   36
 
     Mortgage sales and servicing revenues, conducted through HCMC, decreased by
$118,000 or 18.0% from $656,000 in the first half of 1996 to $538,000 in the
first half of 1997. Revenues generated by multifamily mortgage servicing
decreased by $91,000 while mortgage sales (including revenues generated by
mortgage originations, applications and gains on sale) decreased by $27,000. The
decreased mortgage servicing revenues were a direct result of the decrease in
Multifamily Mortgage Loans serviced (servicing portfolio of $121.7 million as of
June 30, 1997 compared to $267.7 million as of June 30, 1996). Although the
volume of mortgage loans originated increased in 1997 to $37.3 million from
$36.0 million in 1996, the increase in mortgage loan volume was more than offset
by an overall decrease in the amount of origination/processing fees generated.
During the first half of 1997, fees were .87% of mortgage loans as compared to
1.18% during the same period in 1996. During the first half of 1996, HCMC added
three Multifamily Mortgage Loans to its servicing portfolio and recorded gains
on sale of $16,000. Only one loan was added to HCMC's Multifamily Mortgage Loan
servicing portfolio in 1997. The Company anticipates additional mortgage sales
and servicing revenues to be generated subsequent to the closing of the Offering
as a result of HCMC originating and servicing Multifamily Mortgage Loans and
Commercial Mortgage Loans for the Investment Portfolio.
 
     Total expenses in the first half of 1997 were $4,161,000 as compared to
$4,982,000 in the first half of 1996, a decrease of $821,000, or 16.5%.
Personnel expenses increased by $114,000 or 5.6% in the first six months of
1997, as compared to the same period in 1996. The majority of the increase in
personnel expenses related to normal merit pay increases from 1996 to 1997, an
increase in the Principals' base salaries (effective April 1, 1997) and
additional discretionary bonuses in 1997. There were minimal changes in total
staffing levels of HCP and HCMC (combined) from June 30, 1996 to June 30, 1997.
Expenses for appraisal, inspection and other professional fees were $526,000 in
the first half of 1997 as compared to $580,000 in the first half of 1996, a
decrease of $54,000 or 9.3%. This decrease resulted from the decrease of due
diligence contract work performed in the first half of 1997 as compared to the
first half of 1996 and the extent of professional fees required to close $37.3
million of Multifamily Mortgage Loans in the first half of 1997.
 
     The scope of due diligence contract work performed in the first half of
1996 was not only more complex in nature but required reviewing loan files in
many different locations. Accordingly, expenses relating to this contract work
were significantly higher in the first half of 1996 for subcontractor expense
and travel and subsistence expense ($1,206,000 and $518,000 in 1996 as compared
to $853,000 and $113,000 in 1997).
 
     The 9.7% decrease in occupancy expense resulted primarily from the decrease
in rent expense in the first half of 1997 as compared to the first half of 1996.
During 1996, HCP terminated a portion of its office lease in Illinois for space
that was not utilized and HCP (in June 1996) and HCMC (in February 1997) both
successfully renewed their office leases at lower aggregate rental amounts as
compared to their original respective leases. In 1996, HCP also reflected a one
time rental charge of $8,000 for certain office space rented in 1995.
 
     General and administrative expenses decreased from $300,000 during the
first half of 1996 to $193,000 during the first half of 1997, a $107,000
decrease. Approximately 40% of this decrease was related to the reduced data
processing/computer supply needs of due diligence contracts in 1997 as compared
to 1996. Other sizeable cost reductions in general office expense categories
(i.e., telephone, postage, advertising, etc.) were fully realized as a result of
cost containment procedures implemented during the second quarter of 1996.
 
     An additional reversal of reserve for IRS assessment of $22,000 was
reflected during the six months ended June 30, 1997 (an initial reversal of
reserve of $278,000 was recorded in the year ended December 31, 1996). In 1993,
HCP reflected a one-time charge of $400,000 relating to management's estimated
liability for the IRS payroll tax assessments for the years 1991-1993. HCP has
recently received a revised settlement offer from the IRS to pay the United
States Government $100,000 (as compared to $122,000 as was previously
contemplated at December 31, 1996).
 
     Interest expense was $67,000 in the first half of 1997 as compared to
$56,000 during the first half of 1996. The increase in interest expense was a
result of increased usage of the bank line of credit (average month end line of
credit balance for the first six months of 1997 and 1996 was $1,445,000 and
$1,185,000, respectively) and higher interest rates in effect in the first half
of 1997 as compared to the first half of 1996.
 
                                       36

<PAGE>   37
 
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
     Net income for the year ended December 31, 1996 increased to $110,000 as
compared to $28,000 for the year ended December 31, 1995, an increase of 292.9%.
Income before income taxes was $184,000 for the year ended December 31, 1996 as
compared to $79,000 for the year ended December 31, 1995.
 
     Total revenues increased 2.0% from $11,882,000 in the year ended December
31, 1995 to $12,120,000 in the year ended December 31, 1996. All revenue
categories reflected significant increases in the year ended December 31, 1996
as compared to the year ended December 31, 1995 with the exception of mortgage
sales and servicing.
 
     Due diligence revenues increased by $798,000, or 10.6%, from $7,526,000 in
the year ended December 31, 1995 to $8,324,000 in the year ended December 31,
1996. Competition for due diligence contract work increased during the year
ended December 31, 1996 and as a result HCP focused its marketing efforts on
obtaining larger, more profitable due diligence contracts.
 
     In the years ended December 31, 1996 and 1995, 55.0% and 76.9%,
respectively, of the revenues from loan brokering/asset management fees were
generated by asset management fees earned as a result of HCP acting as asset
manager for ABH-I LLC and BT Realty Resources, Inc. HCP earned total asset
management fees of $1,370,000 and $1,362,000 in the years ended December 31,
1996 and 1995, respectively. The asset management fees that HCP earned during
such periods were generated from average returns on capital before asset
management fees (for all mortgage pools of ABH-I LLC and BT Realty Resources,
Inc.) in excess of 15% per annum in the year ended December 31, 1996 and a
cumulative return of over 50% since inception.
 
     Revenues generated by mortgage sales and servicing were $971,000 in the
year ended December 31, 1996 as compared to $2,289,000 in the year ended
December 31, 1995, a decrease of $1,318,000. Mortgage originations were
negatively affected in the year ended December 31, 1996 by (i) increases in the
number of competitive origination operations, (ii) heavy reliance on one
investor that significantly reduced its Multifamily Mortgage Loan acquisitions
from $58 million in the year ended December 31, 1995 to $4 million in the year
ended December 31, 1996, (iii) rate and fee sensitivity on the part of
borrowers, and (iv) time delays in the loan closing process. Mortgage servicing
revenues and gains from mortgage servicing sales were also negatively impacted
in the year ended December 31, 1996 by a lower volume of Multifamily Mortgage
Loans originated. Normal attrition of the mortgage servicing portfolio (from
prepayments, sales and transfers of servicing rights) were not offset in the
year ended December 31, 1996 by the addition of new mortgage servicing
contracts. The mortgage servicing portfolio decreased from $288 million in
outstanding principal balance at December 31, 1995 to $129 million in
outstanding principal balance at December 31, 1996. Loan pay-offs and transfers
of subservicing rights decreased the mortgaging servicing portfolio by $10.3
million and $119.0 million, respectively, in 1996.
 
     Total expenses increased 1.1% from $11,803,000 in the year ended December
31, 1995 to $11,936,000 in the year ended December 31, 1996. Personnel expenses
were $4,227,000 in the year ended December 31, 1996 as compared to $3,832,000 in
the year ended December 31, 1995, an increase of $395,000. This increase
resulted from increases in staffing levels and bonuses in the year ended
December 31, 1996. At December 31, 1996, HCP and HCMC had 61 full-time
employees, as compared to 55 full-time employees at December 31, 1995.
 
     In 1996, HCP completed several significant commercial due diligence
contracts with government agencies (the FDIC and the RTC) that generated more
than 53.8% of total due diligence revenues during 1996. Expenses related to
these contracts required extensive appraisal and other professional work. The
due diligence contract work with government agencies (the FDIC and RTC) is the
principal reason that appraisal, inspection, and other professional fees
increased by 20.6%, from $2,594,000 in the year ended December 31, 1995 to
$3,128,000 in the year ended December 31, 1996.
 
     Subcontractor expense was $2,920,000 in the year ended December 31, 1996 as
compared to $2,739,000 in the year ended December 31, 1995, an increase of 6.6%.
The additional subcontractor labor was utilized by the commercial Due Diligence
Operations and by the loan brokering/asset management operations for a large
loan sale advisory engagement with a major commercial bank. Travel and
subsistence expenses were $617,000
 
                                       37

<PAGE>   38
 
in the year ended December 31, 1996 as compared to $860,000 in the year ended
December 31, 1995, a decrease of 28.3%. The majority of this decrease is
attributable to the due diligence contract work performed in connection with
Single-Family Mortgage Loans, which required less travel in the year ended
December 31, 1996 as compared to the year ended December 31, 1995 due to the
location of the job sites.
 
     General and administrative expense in the years ended December 31, 1996 and
1995 was $525,000 and $1,066,000, respectively. Included in general and
administrative expense are telephone, advertising, computer supplies, postage,
delivery, office supplies and other operating expenses. Management established
various cost containment goals in the year ended December 31, 1996 to ensure
that general and administrative expense remained at levels significantly below
levels in the year ended December 31, 1995. Management was able to effect cost
savings in general office expense in the year ended December 31, 1996 due to the
combination of (i) successful implementation of cost containment procedures,
(ii) a reduction of computer supplies relating to the largest due diligence job
in connection with Single-Family Mortgage Loans completed in the year ended
December 31, 1995, and (iii) overall office expense reductions from the
origination operations of HCMC resulting from the decrease in originations of
Multifamily Mortgage Loans in the year ended December 31, 1996 as compared to
the year ended December 31, 1995.
 
     The reversal of reserve for IRS assessment of $278,000 in the year ended
December 31, 1996 resulted from the reversal of a one-time charge of $400,000
that was provided for in 1993. This charge represented management's estimated
liability for the IRS payroll tax assessment relating to a 1991, 1992 and 1993
employee and subcontractor payroll tax audit. In the year ended December 31,
1996, a $278,000 credit to expense was shown as an adjustment of management's
estimate of this payroll tax liability. This adjustment is based on a settlement
offer of approximately $122,000 made by the IRS.
 
     Interest expense was $134,000 in the year ended December 31, 1996 as
compared to $160,000 in the year ended December 31, 1995, a decrease of $26,000
(or 16.3%). This decrease was directly related to the decreased use of the bank
line of credit during the year ended December 31, 1996. In December 1996, HCP
successfully renegotiated the terms of its line of credit agreement, thereby
increasing the line from $1.5 million at December 31, 1995 to $2.0 million at
December 31, 1996. The interest rate charged on the line of credit remained at
prime plus 1.5%. The line of credit was guaranteed by John Burchett individually
and each of the HCP Subsidiaries at December 31, 1996.
 
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
 
     Net income for the year ended December 31, 1995 was $28,000 as compared to
a net loss of $54,000 for the year ended December 31, 1994. Income before income
taxes was $79,000 for the year ended December 31, 1995 as compared to $74,000
for the year ended December 31, 1994.
 
     Total revenues in the year ended December 31, 1995 were $11,882,000 as
compared to $13,569,000 in the year ended December 31, 1994, a decrease of
12.4%. This decrease was primarily a result of a decline in revenues generated
by commercial Due Diligence Operations and, to a lesser extent, by a decline in
the revenues generated by mortgage sales and servicing operations.
 
     Revenues from the commercial Due Diligence Operations decreased by
$3,363,000, or 44.8%, in the year ended December 31, 1995 as compared to the
year ended December 31, 1994. In 1994 and 1995, the commercial Due Diligence
Operations were almost entirely dependent on the government sector for its
revenues. When the volume of government agency (RTC and FDIC) loan sale activity
decreased in 1995, a corresponding decrease in revenues was experienced in the
Due Diligence Operations.
 
     Loan brokering/asset management operation revenues in the year ended
December 31, 1995 were $1,771,000 as compared to $659,000 in the year ended
December 31, 1994, an increase of 168.7%. In the year ended December 31, 1995,
HCP earned asset management fees of $1,362,000 as compared to $304,000 in the
year ended December 31, 1994, an increase of 448%. Such increase was the result
of HCP's acting as asset manager for ABH-I LLC and BT Realty Resources, Inc.
 
     Mortgage sales and servicing revenues decreased from $2,527,000 in the year
ended December 31, 1994 to $2,289,000 in the year ended December 31, 1995 as a
result of a decline in the volume of Multifamily
 
                                       38

<PAGE>   39
 
Mortgage Loans originated. In the year ended December 31, 1994, HCMC originated
in excess of $175 million of Multifamily Mortgage Loans as compared to $104
million of Multifamily Mortgage Loans in the year ended December 31, 1995. Two
conduit investors that purchased Multifamily Mortgage Loans totaling $117
million from HCMC in the year ended December 31, 1994 did not purchase any
Multifamily Mortgage Loans from HCMC in the year ended December 31, 1995. The
loss of this business was not fully replaced in the year ended December 31,
1995. The loss of Multifamily Mortgage Loan origination volume was, however,
partially offset by an increase in the average size of Multifamily Mortgage
Loans originated from $3,070,000 in the year ended December 31, 1994 to
$3,250,000 in the year ended December 31, 1995. In early 1995, management
terminated HCMC's Single Family Mortgage Loan origination operations, which had
begun in 1992. This decision also contributed to the decrease in mortgage sales
and servicing revenues from the year ended December 31, 1994 to the year ended
December 31, 1995.
 
     HCMC accounts for loan origination fees in accordance with Statement of
Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases ("SFAS 91"). SFAS 91 requires loan fees to be deferred until the sale of
the loan. HCMC sells all originated Mortgage Loans to investors at the time of
origination and accordingly recognizes loan origination fees at that time. SFAS
91 further requires related direct loan origination costs to be offset by loan
origination fees.
 
     In October 1994, HCMC began its servicing operations for Multifamily
Mortgage Loans. Revenues from mortgage servicing increased from $194,000 in the
year ended December 31, 1994 to $533,000 in the year ended December 31, 1995. At
December 31, 1995, HCMC was servicing a portfolio of Multifamily Mortgage Loans
with a combined outstanding principal balance in excess of $288 million, as
compared to a principal balance of $250 million at December 31, 1994. All of the
mortgage servicing growth in 1995 resulted from retaining a portion of the
mortgage servicing rights on Multifamily Mortgage Loans originated by the
Multifamily Mortgage Loan originations operation.
 
     Revenues from mortgage servicing sales were $534,000 in the year ended
December 31, 1995, as compared to $524,000 in the year ended December 31, 1994,
an increase of 1.9%. HCMC adopted Statement of Financial Accounting Standards
No. 122, Accounting for Mortgage Servicing Rights, an amendment of FASB
Statement No. 65, effective January 1, 1995 ("SFAS 122"). Included in the
revenues from mortgage servicing sales in the year ended December 31, 1995 was
$73,000 of SFAS 122 gains from servicing rights. No similar SFAS 122 gain was
recorded in 1994.
 
     Total expenses in the year ended December 31, 1995 was $11,803,000 as
compared to $13,495,000 in the year ended December 31, 1994, a decrease of
12.5%.
 
     Personnel expense decreased from $4,002,000 in the year ended December 31,
1994 to $3,832,000 in the year ended December 31, 1995. The majority of this
decrease was attributable to the decrease in mortgage sales and servicing
revenues. The decline in mortgage origination operations from the year ended
December 31, 1994 to the year ended December 31, 1995 caused a commensurate
decrease in (i) commissions for HCMC originators, (ii) HCMC salaries and wages,
(iii) HCMC bonuses, and (iv) the related HCMC payroll taxes and employee
benefits.
 
     Appraisal, inspection and other professional fees reflected a significant
decrease of 50.5% from the year ended December 31, 1994 to the year ended
December 31, 1995 due to the decrease in commercial due diligence. Travel and
subsistence expense in the year ended December 31, 1995 was $860,000 as compared
to $315,000 in the year ended December 31, 1994, an increase of 173.0%. The
majority of this increase was a result of increased travel, lodging and meal
expenses of $519,000 incurred by due diligence contract work performed in
connection with Single-Family Mortgage Loans.
 
     The increased revenue volume for due diligence contract work performed in
connection with Single-Family Mortgage Loans and the scope of the assignments
completed in the year ended December 31, 1995 in the commercial Due Diligence
Operations required significantly more subcontract labor as compared to in the
year ended December 31, 1994. Accordingly, subcontract expense increased by
$568,000, or 26.2%, from $2,171,000 in the year ended December 31, 1994 to
$2,739,000 in the year ended December 31, 1995.
 
                                       39

<PAGE>   40
 
     General and administrative expense was $1,066,000 in the year ended
December 31, 1995, as compared to $1,162,000 in the year ended December 31,
1994, a decrease of $96,000, or 9.2%, resulting primarily from decreased
revenues generated by the commercial Due Diligence Operations and Multifamily
Mortgage Loan origination operations. General and administrative expense in the
year ended December 31, 1994 was also negatively impacted by the additional
costs involved with the closing of a Single Family Mortgage Loan origination
office located in Toms River, New Jersey.
 
     Interest expense increased $58,000, or 56.9%, in the year ended December
31, 1995 as compared to the year ended December 31, 1994 due to the increased
use of the bank line of credit. Interest on the line of credit was charged at
the rate of prime plus 1.5% in both periods.
 
     Income tax expense decreased by $77,000 from $128,000 in the year ended
December 31, 1994 to $51,000 in the year ended December 31, 1995, even though
income before income taxes increased by 6.8% (from $74,000 to $79,000). This
decrease in income tax expense related primarily to the change in tax filing for
HCP and subsidiaries from a cash method to an accrual method.
 
INFLATION
 
     The financial statements and notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased costs of the
Company's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company's operations are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Inflation affects the Company's
operations, however, primarily through its effect on interest rates, which
normally increase during periods of high inflation and decrease during periods
of low inflation. During periods of increasing interest rates, demand for
Mortgage Loans and a borrower's ability to qualify for mortgage financing in a
transaction may be adversely affected.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's principal liquidity requirements will derive from (i) the
need to make long-term investments in Mortgage Assets and (ii) the need to fund
originations of Mortgage Loans by the conduit operations. Prior to the Offering,
mortgage sales and servicing operations and Due Diligence Operations were funded
by operating cash flows, the bank line of credit, other borrowings and equity.
After the closing of the Offering, the Investment Portfolio and the Due
Diligence Operations may receive additional funding by committed or
non-committed reverse repurchase agreements and proceeds from the issuance of
Common Stock, Preferred Stock, CMOs and REMICs and the sale of mortgage-backed
securities.
 
     During the six months ended June 30, 1997 and the years ended December 31,
1996, 1995 and 1994, net cash provided by (used in) operating activities was
($1,074,000), ($283,000), $671,000, and ($1,837,000), respectively. Net cash for
the years ended December 31, 1996 and December 31, 1994 was primarily negatively
affected by increases in accounts receivable, receivables from related parties
(asset management fees) and accrued revenue on contracts in progress that
exceeded increases in liabilities, such as accrued appraisal and subcontractor
costs and accounts payable. Net cash for the six months ended June 30, 1997 was
primarily negatively affected by net decreases in all current liability accounts
(particularly accrued appraisal and subcontractor costs -- $2,712,000) that
exceeded decreases in current assets; except for receivables from related
parties which increased from $629,000 at December 31, 1996 to $1,425,000 at June
30, 1997. Accounts receivable are very liquid and are generally collected within
30 to 45 days after billing. Due diligence contracts in progress are also very
liquid in that amounts due are generally billed monthly and shown as accounts
receivable in the following month. Asset management fees receivable from trading
activities are generally much less liquid than other accounts receivable or
contracts in progress. Asset management fees are recognized as earned, based on
returns of capital from mortgage pools that HCP manages for ABH-I LLC and BT
Realty Resources, Inc. The asset management fees receivable are generally not
received by HCP, however, until at least 95% of each mortgage pool is disposed
of. The disposal of mortgage pools managed by
 
                                       40

<PAGE>   41
 
HCP can vary significantly (from a few days to over a year based upon the type
and size of loans in the pool). Net cash for the year ended December 31, 1995
was positively affected by the collection of accounts receivable, accrued
revenue on contracts in progress and asset management fees.
 
     Net cash provided by (used in) investing activities for the six months
ended June 30, 1997, and the years ended December 31, 1996, 1995 and 1994 was
($21,000), $(72,000), $118,000 and $379,000, respectively. The net cash was
favorably impacted in the years ended December 31, 1995 and 1994 from sales and
transfers of mortgage servicing rights. Sales and transfers of mortgage
servicing rights were generally initiated at the request of the master mortgage
loan servicer and not by HCMC. Net cash for the six months ended June 30, 1997
and the year ended December 31, 1996 was negatively impacted primarily by the
purchase of fixed assets.
 
     During the six months ended June 30, 1997, and the years ended December 31,
1996, 1995 and 1994, net cash provided by (used in) financing activities was
$1,027,000, ($396,000), ($176,000) and $450,000, respectively. The factors
affecting the repayment of the line of credit and proceeds from the line of
credit are dependent on cash flows generated from operating activities (dictated
mainly by the collection of receivables), and to a lesser extent, cash flows
from investing activities, subject to the limits of the bank line of credit. As
a result of such factors, borrowings on the bank line of credit can and do
fluctuate substantially during the year. During 1996 and during the first six
months of 1997, the Company also used $66,000 and $42,599, respectively, as a
partial payment on the redemption of Class A Common Stock.
 
     The Company has had preliminary discussions with third party lenders to
provide up to $500 million of committed or non-committed reverse repurchase
facilities to finance the Company's businesses and expects to finalize such
negotiations shortly after the closing of the Offering. However, there can be no
assurance that the Company will be able to obtain such facilities. The Company
expects to have the ability to borrow against the collateral as a percentage of
the original principal balance. The borrowing rates quoted vary from 50 basis
points to 600 basis points over comparable maturity LIBOR depending on the type
of collateral provided by the Company. The margins on the reverse repurchase
agreements are all based on the type of mortgage collateral used and generally
range from 85% to 97% of the fair market value of the collateral.
 
     The only significant long-term liability that existed at June 30, 1997 was
a $2,115,000 (note payable) borrowing pursuant to a $2,000,000 Line of Credit
Facility Agreement (the "Credit Agreement") with Fleet Bank. The maximum
borrowing capacity under the terms of the Credit Agreement is reduced every six
(6) months, beginning June 30, 1997, by $150,000. This borrowing, which bears
interest at the prime rate plus 1 1/2%, is payable in full at the expiration
date, December 31, 1999, is collateralized by all of the assets of HCP and is
guaranteed by John A. Burchett and all of the wholly-owned subsidiaries of HCP.
The Credit Agreement requires HCP to meet three covenants on an annual basis at
December 31: (i) a maximum debt to net worth ratio of 3.0, (ii) a minimum debt
service coverage ratio of 1.25 and (iii) HCP is limited to advancing no more
than $100,000 to its affiliates. In June 1997, HCP entered in a Modification
Agreement with Fleet Bank to temporarily increase the borrowing capacity on the
Credit Agreement from $2,000,000 to $2,300,000. The Credit Agreement reverts to
the original $1,850,000 borrowing capacity at September 1, 1997.
 
     The Company has no long-term material capital expenditures or other
significant liquidity needs other than the required reductions pursuant to the
Credit Agreement.
 
     The Company anticipates utilizing substantially all of the net proceeds of
the Offering to provide funding for the Investment Portfolio and Due Diligence
Operations, if necessary.
 
     Management believes that cash flow from operations and the aforementioned
potential financing arrangements will be sufficient to meet the current
liquidity needs of the businesses.
 
                                       41

<PAGE>   42
 
 
                                   BUSINESS
 
GENERAL
 
  Background
 
     The Company is a specialty finance company the activities of which will
include (i) acquiring primarily subprime Single-Family Mortgage Loans, (ii)
originating, holding, selling and servicing Multifamily Mortgage Loans and
Commercial Mortgage Loans, (iii) securitizing Mortgage Loans and retaining
interests therein, (iv) purchasing Mortgage Assets in the secondary mortgage
market, (v) managing the resulting combined portfolio in a tax-advantaged REIT
structure, and (vi) offering due diligence services to buyers, sellers and
holders of Mortgage Loans. The Company's principal business objective is to
generate increasing earnings and dividends for distribution to stockholders. The
Company will acquire Single-Family Mortgage Loans through a network of sales
representatives targeting financial institutions throughout the United States.
The Company will originate Multifamily Mortgage Loans and Commercial Mortgage
Loans through HCMC. The Company will elect to be taxed as a real estate
investment trust under the Code, beginning with its tax year ending December 31,
1997. The Company will generally not be subject to Federal income tax to the
extent that it distributes its earnings to its stockholders and maintains its
qualification as a REIT. Taxable affiliates of the Company, however, including
HCP, HCMC and HCS, will be subject to Federal income tax. See "Federal Income
Tax Considerations -- Requirements for Qualification as a REIT," "-- Taxation of
the Company" and "-- Taxation of Taxable Affiliates." The Company will be
self-advised and self-managed.
 
     The Company has determined to elect REIT status primarily for the tax
advantages. Management believes that the REIT structure is the most desirable
structure for owning Mortgage Assets because it eliminates corporate-level
Federal income taxation. In addition, as the Company will not be a traditional
lender which accepts deposits, it will be subject to substantially less
regulatory oversight and incur lower compliance expenses than banks, thrifts and
many other originators of Mortgage Assets. The Principals believe that the
Company will generate attractive earnings and dividends per share for
stockholders through the combination of (i) its focus on originating Multifamily
Mortgage Loans and Commercial Mortgage Loans, which generally have higher yields
than conforming Single-Family Mortgage Loans, (ii) purchasing subprime
Single-Family Mortgage Loans which generally have higher yields than newly
originated conforming Single-Family Mortgage Loans, and (iii) using long-term
financing that allows the Company to realize net interest income over time as
REIT-qualified income, as opposed to fully taxable gain-on-sale income. Although
HCP has previously rendered advisory services in connection with securitization
transactions, neither it nor HCMC has securitized any significant amount of
Mortgage Loans. See "Risk Factors -- Recent Formation and Limited Operating
History."
 
     Management of the Company estimates that during the first year of
operations, approximately 97% of the Company's gross income will be generated by
its Investment Portfolio (Mortgage Securities -- approximately 47%; Multi-Family
Mortgage Loans and Commercial Mortgage Loans -- approximately 16%; and Single-
Family Mortgage Loans -- approximately 34%). The balance of the Company's gross
income, in the form of dividends from its taxable subsidiary, HCP, is estimated
to be approximately 3%. Management of the Company further estimates that the
Investment Portfolio will comprise approximately 99% of the Company's assets
(Mortgage Securities -- approximately 31%, Multi-Family Mortgage Loans, and
Commercial Mortgage Loans -- approximately 21%, and Single-Family Mortgage
Loans -- approximately 47%). There are no assurances that Management's estimates
will ultimately be indicative of the results of the Company's operations.
 
  Business Strategy
 
     The Company's strategy is to pursue acquisitions and originations of
Mortgage Loans where it believes it can receive acceptable rates of return on
invested capital and effectively utilize leverage. Key elements of this strategy
include:
 
          - growing the Investment Portfolio by utilizing the Company's
            wholesale Commercial, Multifamily and Single-family Mortgage Loan
            acquisition network to create attractive investment opportunities;
 
                                       42

<PAGE>   43
 
          - focusing on Commercial Mortgage Loan and Multifamily Mortgage Loan
            servicing as a means to control credit losses;
 
          - financing the Company's investments to limit the Company's interest
            rate risk while earning an attractive return on equity; and
 
          - owning Mortgage Assets in the REIT structure and, thereby, eliminate
            a layer of taxes relative to most traditional real estate lenders.
 
INVESTMENT PORTFOLIO
 
  General
 
     The primary business of the Company will be investing, generally on a
long-term basis, in first lien Single-Family Mortgage Loans, Multifamily
Mortgage Loans and Commercial Mortgage Loans and Mortgage Securities secured by
or representing an interest in Mortgage Loans (the "Investment Portfolio"). The
percentage of the Company's Mortgage Assets which will be invested in the
Investment Portfolio varies significantly depending upon the availability of
Mortgage Loans and Mortgage Securities. The Company intends to utilize its
organization to acquire and securitize Single-Family Mortgage Loans and
Commercial Mortgage Loans to earn higher returns than could generally be earned
from purchasing Mortgage Securities in the marketplace. No Mortgage Loans will
be held in the Investment Portfolio before the closing of the Offering.
 
  Single Family Mortgage Operations
 
     Prior Activities of HCP.  HCP has rendered management services in
connection with the short-term trading of seasoned (more than one year since
origination) Single-Family Mortgage Loans since 1995. In managing purchase
activities, HCP typically targets Mortgage Loan pools containing subprime
Single-Family Mortgage Loans with deficiencies that can be corrected so as to
permit resales on favorable terms. In managing sale activities, HCP generally
has pursued a strategy of selling Single-Family Mortgage Loans within eighteen
months after their acquisition. HCHI, on the other hand, generally will hold
Mortgage Loans on a long-term basis, so that returns will be earned over the
lives of Mortgage Loans rather than from their sales.
 
     HCP has engaged in Single-Family Mortgage Loan acquisition, financing,
hedging and sale activities pursuant to private management arrangements with (i)
Alpine Associates, a Limited Partnership ("Alpine Associates"), (ii) a limited
liability company formed by HCP, Alpine Associates and an affiliate of Bankers
Trust New York Corp. and (iii) certain affiliates of Bankers Trust New York
Corp. The objective in each of those arrangements has been to profit from
purchasing and reselling Mortgage Loans rather than, as in the case of the
Company, from holding, financing and securitizing Mortgage Loans.
 
     Alpine/Hanover LLC.  Alpine Associates and HCP formed Alpine/Hanover LLC in
May of 1996, as a successor to a partnership formed by them in February of 1994,
to trade in portfolios of subprime Single-Family Mortgage Loans. HCP and a
representative of Alpine Associates are the managers of Alpine/Hanover LLC under
Alpine/Hanover LLC's limited liability company agreement. HCP identifies
portfolios of Single-Family Mortgage Loans for purchase by Alpine/Hanover LLC,
provides the manager appointed by Alpine Associates with information regarding
the portfolios and recommends pricing and disposition strategies. Although HCP
has sole authority to manage Alpine/Hanover LLC's hedging activities (upon the
approval of hedging strategies by the manager appointed by Alpine Associates)
and to sell portfolios at gains, it has no authority to purchase a portfolio or
sell a portfolio at a loss without the approval of the manager appointed by
Alpine Associates. Purchases are made using contributions to Alpine/Hanover LLC
primarily by Alpine Associates, undistributed proceeds of prior sales and, in
some instances, the proceeds of borrowings arranged by HCP and approved by the
manager appointed by Alpine Associates.
 
     For providing management services to Alpine/Hanover LLC, HCP is entitled to
receive shares of Alpine/Hanover LLC's profits that increase to up to 50% as
Alpine/Hanover LLC's profits increase. HCP's share of Alpine/Hanover LLC's
profits is only 1% until Alpine Associates has earned a 15% cumulative return
 
                                       43

<PAGE>   44
 
on its invested capital. Once Alpine Associates has earned a 15% cumulative
return, HCP is allocated 40% of the profits of Alpine/Hanover LLC until Alpine
Associates has earned a 30% return on its investment for the current fiscal
year. Once Alpine Associates has earned a 15% cumulative return and a 30% return
for the current fiscal year, HCP is allocated 50% of Alpine/Hanover LLC's
profits. Between May 25, 1995 and October 31, 1995, HCP purchased five pools of
Single-Family Mortgage Loans, aggregating $23,999,000 in principal amount, on
behalf of Alpine/Hanover LLC for $23,493,000. All five of the pools were sold by
October 31, 1995. The annualized return before incentive profit distributions to
HCP on those Single-Family Mortgage Loans and the balance of the other operating
activities of Alpine/Hanover LLC was 14.26%. Since the annualized return before
incentive profit distributions to HCP did not exceed 15%, HCP was not entitled
to receive any incentive profit distributions. See "Prior Performance Table"
below.
 
     Alpine/Hanover LLC will be wound down and terminated as part of the
Formation Transactions. See "Structure and Formation Transactions."
 
     ABH-I LLC.  In October of 1995, HCP, Alpine/Hanover LLC and BAHT 1995-1
Corp., an affiliate of Bankers Trust New York Corp., formed ABH-I LLC to trade
in subprime Single-Family Mortgage Loans. Alpine/Hanover LLC and BAHT 1995-1
Corp. are the managers under ABH-I LLC's limited liability company agreement.
HCP, however, acts as asset manager to ABH-I LLC under a separate asset
management agreement between HCP and ABH-I LLC. Under the asset management
agreement between HCP and ABH-I LLC, HCP is responsible for (i) analyzing
portfolios of Single-Family Mortgage Loans, recommending prices, determining the
scope of due diligence to be conducted and reporting to ABH-I LLC in connection
with purchases and sales, (ii) determining whether to transfer or release
servicing rights, negotiating and effecting transfers and releases of servicing
rights and managing relationships with servicers and master servicers, (iii)
negotiating representations and warranties in connection with purchases and
sales, (iv) preparing offering memoranda, bid packages and other offering
materials, (v) contacting and making presentations to potential purchasers and
(vi) recombining participations. Although HCP has sole authority to sell
portfolios at gains, it has no authority to purchase any portfolio or to sell a
portfolio at a loss without the approval of Alpine/Hanover LLC (the manager
appointed by Alpine Associates) and BAHT 1995-1 Corp. Purchases are made
primarily using the contributions of Alpine/Hanover LLC (49.5%), BAHT 1995-1
Corp. (49.5%) and HCP (1%).
 
     Under the asset management agreement, HCP is entitled to receive management
fees of up to 50% of the gains and other earnings of ABH-I LLC depending upon
the returns earned by ABH-I LLC. Once the members of ABH-I LLC have earned a 15%
cumulative return on their average capital contributions, HCP is entitled to
receive as asset management fees 40% of the profits of ABH-I LLC until the
members have earned a 30% noncumulative return on their average contributions.
After the members have earned the 30% return, HCP is entitled to receive as
asset management fees 50% of the profits of ABH-I LLC.
 
     Between November 8, 1995 and July 31, 1997, HCP purchased seven pools of
Single-Family Mortgage Loans, aggregating $85,185,000 in principal amount, on
behalf of ABH-I LLC for $81,904,000. All but $1,240,000 in principal amount of
the Single-Family Mortgage Loans had been sold by July 31, 1997. The annualized
return before asset management fees on those Single-Family Mortgage Loans was
53.30%. HCP was paid asset management fees totaling $1,149,000 for the period.
See "Prior Performance Table" below.
 
     ABH-I LLC will be wound down and terminated as part of the Formation
Transactions. See "Structure and Formation Transactions."
 
     BT Realty Resources, Inc.  Pursuant to separate asset management contracts
with BT Realty Resources, Inc., HCP has rendered management services similar to
those it has rendered for ABH-I LLC. As compensation for its services, HCP has
been entitled to receive portions of the amounts earned by BT Realty Resources,
Inc. on the managed portfolios, on a portfolio-by-portfolio basis. With respect
to any portfolio, HCP has been entitled to receive up to 50% of the gains and
other earnings on the portfolio depending upon BT Realty Resources Inc.'s return
on the portfolio.
 
     Between November 4, 1995 and July 31, 1997, HCP purchased four pools of
Single-Family Mortgage Loans, aggregating $78,105,000 in principal amount, on
behalf of BT Realty Resources, Inc. for $67,937,000.
 
                                       44

<PAGE>   45
 
All but $664,000 in principal amount of the loans had been sold by July 31,
1997. The annualized return before asset management fees on those Single-Family
Mortgage Loans was 68.47%. HCP was paid asset management fees totaling
$2,095,000 for the period. See "Prior Performance Table" below.
 
     HCP will wind down and terminate its management arrangement with BT Realty
Resources, Inc. as part of the Formation Transactions. See "Structure and
Formation Transactions."
 
     An affiliate of HCP also acted as the subadvisor to the Midwest Income
Trust Adjustable Rate Government Securities Fund, a mortgage-backed securities
fund that was rated AAAf by Standard & Poor's. As subadvisor, the affiliate had
discretion over the portfolio of agency adjustable rate mortgage securities. For
the twelve month period ending October 31, 1996, the fund was ranked 16th of 53
by Lipper Analytical Servicer. Effective February 1, 1997, the affiliate no
longer acts as a subadvisor for this Fund as result of a merger at the Fund
level.
 
     Prior Performance Table.  The following table sets forth information
regarding the amounts of Single-Family Mortgage Loans purchased by HCP on behalf
of Alpine/Hanover LLC, ABH-I LLC and BT Realty Resources, Inc., the amounts of
asset management fees paid to HCP with respect to those Single-Family Mortgage
Loans and the annualized returns (before HCP's incentive profit distributions or
management fees) generated by purchasing those Single-Family Mortgage Loans,
correcting their deficiencies and then selling the same. The annualized returns
were generated by HCP's management efforts in selecting the Single-Family
Mortgage Loans to be purchased, purchasing the Single-Family Mortgage Loans,
correcting the deficiencies with respect to the Single-Family Mortgage Loans and
then selling the Single-Family Mortgage Loans.
 

<TABLE>
<CAPTION>
                                  ALPINE/                                BT REALTY
                                HANOVER LLC        ABH-I LLC          RESOURCES, INC.            TOTAL
                                -----------        ----------         ---------------         -----------
<S>                             <C>                <C>                <C>                     <C>
Date program commenced(A).....     5/25/95           11/8/95                11/4/95
Date program substantially
  completed(B)................    10/31/95           7/31/97                7/31/97
Number of pools purchased.....           5                 7                      4                    16
Dollar amount raised and
  invested for purchases......   5,690,000         17,096,000            18,036,000            40,822,000
Dollar amount financed........  17,803,000         64,808,000            49,901,000           132,512,000
Dollar amount of purchases....  23,493,000         81,904,000            67,937,000           173,334,000
Principal amount of Mortgage
  Loans purchased.............  23,999,000         85,185,000            78,105,000           187,289,000
Remaining principal amount....           0         1,240,000                664,000             1,904,000
Asset management fee paid.....           0 (C)     1,149,000              2,095,000             3,244,000
Annualized return
  percentage..................       14.26% (D)        53.30% (E)(F)          68.47%(E)(F)          53.55%(E)(F)
</TABLE>

 
- ---------------
(A) HCP entered into participation agreements with the respective investors
    which provide for concurrent funding of approved investments. Accordingly,
    the dates of program commencement represent the initial investment funding
    date for each program.
 
(B) The dates indicated as the date program substantially completed represent
    the approximate date on which the program investments had been substantially
    liquidated.
 
(C) No incentive profit distribution/asset management fee was paid during this
    period because the annualized return did not exceed 15%.
 
(D) The annualized return percentage reflects returns generated from the
    purchasing, holding and selling of Single-Family Mortgage Loans and the
    balances of other operating activities before incentive distributions or
    management fees to HCP.
 
(E) The annualized return percentage reflects returns generated from the
    purchasing, holding and selling of Single-Family Mortgage Loans before
    incentive distributions or management fees to HCP.
 
(F) HCP's management fees increase by formula as program returns increase. The
    annualized return percentages were estimated by HCP based on unaudited
    information prepared and provided to it by other participants in the
    programs. There can be no assurances as to the accuracy of the information
    prepared by those other participants.
 
                                       45

<PAGE>   46
 
     THERE ARE NO ASSURANCES THAT THE INFORMATION SET FORTH IN THE PRIOR
PERFORMANCE TABLE IS INDICATIVE IN ANY WAY OF THE EXPECTED PERFORMANCE OF THE
COMPANY. THE RETURNS DESCRIBED IN THE TABLE WERE GENERATED BY SHORT-TERM TRADING
IN MORTGAGE LOANS. THE COMPANY'S INVESTMENT STRATEGIES WILL BE LONG-TERM IN
NATURE AND WILL THEREFORE BE SIGNIFICANTLY DIFFERENT FROM THE STRATEGIES THAT
HCP HAS EMPLOYED IN MANAGING TRADING ACTIVITIES. ACCORDINGLY, THE RETURN
INFORMATION SET FORTH IN THE TABLE SHOULD NOT BE RELIED UPON IN MAKING AN
INVESTMENT IN THE COMPANY.
 
     Single-Family Acquisitions Process.  The Company will focus on the purchase
of pools of whole Single-Family Mortgage Loans that do not fit into the large
government-sponsored or conduit programs. Single-Family Mortgage Loans generally
are acquired in pools from a wide variety of sources, including private sellers
such as banks, thrifts, finance companies, mortgage companies and governmental
agencies. The Principals believe that banks, finance companies, mortgage
companies and investment banks with which HCP, HCMC and their employees have
developed relationships will be a continuing source of information on available
Single-Family Mortgage Loan portfolios. Sales representatives, who will be
employees of the Company, will be located in Illinois, Minnesota, California,
Massachusetts and New York. In addition, HCP has a due diligence and
underwriting staff, located in Edison, New Jersey, consisting of approximately
seven full-time employees. The due diligence staff will contribute to the
Single-Family Mortgage Loan acquisition process by providing expertise in the
analysis of many characteristics of the Single-Family Mortgage Loans. It has
been the Principals' experience that buyers generally discount the price of a
Single-Family Mortgage Loan when there exists a lack of information. By
providing additional information on loan pools through the Due Diligence
Operations, the Company will be able to better assess the value of loan pools
than in the absence of such information. See "Risk Factors -- Risks Related to
Operations." See "Management -- Directors and Executive Officers."
 
     Single-Family Mortgage Loan portfolios are usually acquired through
competitive bids and negotiated transactions. The competition for larger
Single-Family Mortgage Loan portfolios is generally more intense. In addition to
bidding on and acquiring large Single-Family Mortgage Loan portfolios, the
Company intends to acquire small Single-Family Mortgage Loan portfolios where
competition is less intense. The Principals believe that the Company's funding
flexibility, personnel, proprietary due diligence software and Single-Family
Mortgage Loan trading relationships will provide it with certain advantages over
competitors in pricing and purchasing certain Single-Family Mortgage Loan
portfolios. See "Risk Factors -- Risks Related to Operations -- Ability to
Acquire Mortgage Assets at Favorable Spreads Relative to Borrowing Costs;
Competition and Supply."
 
     Prior to making an offer to purchase a Single-Family Mortgage Loan
portfolio, the Company's employees who specialize in the analysis of
Single-Family Mortgage Loans will conduct an extensive investigation and
evaluation of the individual Single-Family Mortgage Loans in the portfolio. This
examination typically consists of analyzing the information made available by
the portfolio seller (generally, an initial outline of a Single-Family Mortgage
Loan portfolio with the respective credit and collateral files for the
Single-Family Mortgage Loan), reviewing other relevant material that may be
available, analyzing the underlying collateral (including reviewing the
Company's Single-Family Mortgage Loan database which contains, among other
things, listings of property values and loan loss experience in local markets
for similar assets), and obtaining opinions of value from third parties (and, in
some cases, conducting site inspections). The Company's senior employees will
determine the amount to be offered by the Company to acquire the Single-Family
Mortgage Loan portfolio by using a proprietary stratification and pricing system
which focuses on, among other things, rate, term, location and types of the
loans. The Company will also review information on the local economy and real
estate markets (including the amount of time and procedures legally required to
foreclose on real property) in the area in which the Single-Family Mortgage Loan
collateral is located.
 
     In conducting due diligence operations, HCP often discovers non-conforming
elements of Single-Family Mortgage Loans, such as: (i) problems with documents,
including missing or lost documentation, errors on documents, nonstandard forms
of documents and inconsistent dates between documents, (ii) problems with the
real estate, including inadequate initial appraisals, deterioration in property
values or economic decline in the general geographic area, and (iii)
miscellaneous problems, including poor servicing, poor credit history of the
borrower, poor payment history by the borrower and currently delinquency status.
 
                                       46

<PAGE>   47
 
     The Company will maintain an internal process to improve the value of its
Single-Family Mortgage Loan portfolio, including updating data, obtaining lost
note affidavits in the event that a note has been misplaced, updating property
values with new appraisals, assembling historical records, obtaining mortgage
insurance if the value of a Single-Family Mortgage Loan is in question, grouping
Single-Family Mortgage Loans in similar packages for sale, and segmenting
portfolios for different buyers. The Principals have applied all of these
procedures in the past to improve and sell portfolios at gains on behalf of
third party investors for which HCP has rendered asset management services.
However, there are no assurances that the Principals will be able to do so in
the future. The Company will utilize the same bidding, underwriting and clean up
processes as HCP has utilized in rendering asset management and due diligence
services. However, management believes any value created will be extracted by
financing or securitizing the Single-Family Mortgage Loans and then realizing
the value to the Company by the enhanced spread on the retained pool, as opposed
to recognizing a gain upon sale of the Single-Family Mortgage Loan portfolio.
 
     Single-Family Market Trends.  The Company will focus on subprime Mortgage
Loans and seasoned (generally twelve months or older) Mortgage Loans which are
generally available to purchase in bulk from loan originators such as mortgage
bankers, banks and thrifts that originate primarily for sale and from mortgage
portfolio holders as they restructure their holdings, many times as a result of
mergers or acquisitions of portfolio companies.
 
     Single-Family Acquisition Strategy.  The Company believes that it can
acquire Single-Family Mortgage Loans that have a relatively high yield when
compared to the applicable risk of loss. In many cases, portions of the pools
purchased may be made eligible for inclusion in agency pools, which will raise
the credit level of the Investment Portfolio, while keeping the higher yield
obtained at the time of purchase. The Company also intends to create private
securities in many cases from the Single-Family Mortgage Loan pools purchased.
In structuring the securitization of these Single-Family Mortgage Loans, the
Company will retain subordinated or other interests.
 
     Single-Family Underwriting Guidelines.  The Company has developed an
underwriting approval policy to maintain uniform control over the quality of the
Single-Family Mortgage Loans purchased. This policy sets forth the review
process required for the pricing and purchase in bulk of Single-Family Mortgage
Loans. The review is comprised of three aspects: (i) collateral valuation, (ii)
credit review, and (iii) property valuation. Prior to the pricing or final
purchase of a portfolio, a senior manager of the Company will review the results
of all three underwriting evaluations. The collateral valuation entails a check
on the collateral documents (i.e., the note, mortgage, title policy and
assignment chain). The documents are examined for conformity among each of the
documents and adherence to secondary market standards. The credit review
involves an analysis of the credit of the borrower, including, with respect to a
new Single-Family Mortgage Loan, an examination of the origination and credit
documents, factual credit report and payment history. On more Seasoned Single-
Family Mortgage Loans, the analysis may be more directed at payment histories
and credit scores. The property valuation involves an analysis of the
loan-to-value of the Single-Family Mortgage Loans, including an examination of
the original appraisal as it relates to the current regional property market
conditions and often a drive-by appraisal of the subject property with a review
of recent comparable sales.
 
     Single-Family Servicing.  Pools of Single-Family Mortgage Loans will be
purchased both with servicing retained and servicing released. In the cases of
pools purchased with servicing released, the Company will place the servicing
with a qualified residential servicer. In the cases of pools purchased with
servicing retained, the Company will consider reputation and review the
servicing capabilities of the servicer. In some instances, it may be a
requirement to insert a master servicer over the servicer to provide the
assurance of the quality required. A master servicer provides oversight review
of its subservicers and stands ready, and is contractually obligated, to take
over the servicing if there is a problem with the subservicer. In certain
instances, the Company may retain the ownership of the servicing rights and
contract with a qualified servicer to provide subservicing. In this instance,
the Company would keep the risk of ownership of the servicing with respect to
any change in value as a result of prepayment of the underlying Single-Family
Mortgage Loans or other factors. No Single-Family Mortgage Loans are currently
serviced by the Company. See "-- Commercial Mortgage Loans and Multifamily
Mortgage Loans -- Commercial and Multifamily Loan Servicing."
 
                                       47

<PAGE>   48
 
  Commercial Mortgage Loans and Multifamily Mortgage Loans
 
     Since its inception in 1992 through December 31, 1996, HCMC has originated
approximately $500 million in Multifamily Mortgage Loans for delivery to "Wall
Street" conduits (including Daiwa Finance Corp., Paine Webber, Nomura Securities
International, Inc., Donaldson Lufkin & Jenrette, Inc., Chemical Bank, LaSalle
National Bank, Piper Capital Management Inc., J.P. Morgan Securities, Inc. and
General Electric Mortgage Corporation), private investors and the Department of
Housing and Urban Development, for which HCMC received origination and servicing
fee income. These Multifamily Mortgage Loans were table-funded by the investors
(i.e., the investors paid the face amount of such loans at closing); HCMC did
not use its own capital for such loans and did not have a profit or a loss for
any such loans. HCMC did not acquire loans that it could not sell or only sell
at a discount. The origination and servicing fee income received from such loans
represented substantially all of HCMC's income for such period, which resulted
in cumulative after tax net income for HCMC of $903,059 for such period. HCMC
has not originated or securitized Commercial Mortgage Loans. The Principals
believe HCMC was one of the first commercial mortgage banking operations to
originate Multifamily Mortgage Loans for sale to conduits and, from direct
borrower originations and its network of third party brokers, can provide
Multifamily Mortgage Loans and Commercial Mortgage Loans of sufficient credit
quality to meet the requirements for securitization and sales to third party
investors and into the Investment Portfolio. Subsequent to the closing of the
Offering, the Company will primarily originate Multifamily Mortgage Loans and
Commercial Mortgage Loans, including Mortgage Loans secured by income-producing
commercial properties such as office, retail, warehouse and mini-storage
facilities, through HCMC and subsequently either sell the Mortgage Loans to
investors or hold them in the Investment Portfolio. The Principals believe that
the Company will have certain competitive advantages over other entities in the
commercial mortgage market due to the speed, consistency and flexibility which
it will seek to obtain by being a vertically integrated company (acting as
originator, servicer, and owner of Commercial Mortgage Loans).
 
     Commercial Production Process.  The commercial process differs from the
Single-Family Mortgage Loan acquisition process because the Company will operate
as a direct originator of new Commercial Mortgage Loans. The Company has been
engaged in this process since 1992 and has been an active supplier to the Wall
Street conduit/securitization firms, which are Wall Street dealer firms that
have set up a conduit to purchase Multifamily Mortgage Loans and Commercial
Mortgage Loans from national brokers for the purpose of issuing commercial
mortgage-backed securities. HCMC has the ability to source new Commercial
Mortgage Loans both directly and through brokers, to process and underwrite the
Commercial Mortgage Loans to the Company's standards and to service the
Commercial Mortgage Loans. The Company will be integrated from origination to
underwriting, warehousing, servicing and securitization. The Company will also
have the ability to hold subordinated or residual pieces of the securitizations,
enabling the Company to seek to obtain a profit in each area of the process.
 
     Commercial and Multifamily Loans Acquisition/Production Strategies.  The
Company will adhere to specified underwriting and due diligence requirements for
the origination of Multifamily Mortgage Loans and Commercial Mortgage Loans,
such that they will qualify either for sale to third party conduits or for
inclusion by the Company in commercial and multifamily securitizations. The
Company will continually monitor the underwriting criteria by contacting rating
agencies and the third party conduit purchasers. In addition to the underwriting
and due diligence completed at the origination level, a separate credit
committee will approve all Multifamily Mortgage Loans and Commercial Mortgage
Loans purchased. The Company intends that, with prudent underwriting and due
diligence, combined with the securitization process, it will achieve a
satisfactory reward/risk ratio; however, there are no assurances that it will be
able to do so.
 
     While the sales force that the Company will maintain in Illinois,
Minnesota, California, Massachusetts and New York will concentrate primarily on
sourcing pools of Single-Family Mortgage Loans and selling the resultant
securities and whole loan pools, they will also find leads for the Multifamily
Mortgage Loan and Commercial Mortgage Loan origination business of HCMC and the
Due Diligence Operations of HCP. HCMC will originate new Multifamily Mortgage
Loans and Commercial Mortgage Loans through originators that will call on
brokers as well as real estate developers and owners. These originators have
been a part of the
 
                                       48

<PAGE>   49
 
operation of HCMC which will be contributed to the Company as a part of the
consummation of the Formation Transactions.
 
     Commercial and Multifamily Underwriting Guidelines.  The Company's policy
regarding underwriting guidelines for Commercial Mortgage Loans and Multifamily
Mortgage Loans centers on the origination process for Commercial Mortgage Loans
and Multifamily Mortgage Loans within the framework of creating loans eligible
for securitization. The due diligence process in underwriting Commercial
Mortgage Loans and Multifamily Mortgage Loans focuses on four main areas: (i) a
property level review, (ii) borrower credit issues, (iii) cash flow structures,
and (iv) adequacy of legal documentation. The property level review begins with
a review of the on-site inspection by the underwriting group and includes an
analysis of the third party reports, including the appraisal, engineering report
and the environmental report. The borrower credit issues include an analysis of
the borrower's legal structure, a review of financials to determine net worth,
past credit history of principals, management ability and experience and
prior/existing relationships. The cash flow structures include an analysis of
the loan-to-value ratio, the expense ratio, the debt service coverage, the value
per unit, the occupancy levels and the historical expense records. The legal
documentation review includes a review of any changes to the approved program
loan documents, including the note, the mortgage, the reserve agreements, the
assignments of leases and rents and any borrower certifications. The program
loan documents will be structured in order to meet the requirements of
securitization with respect to prepayment penalties, recourse carve-outs and the
overall soundness of the documents. In addition, the Company obtains a "Phase I"
environmental site assessment (i.e., generally a record search with no invasive
testing) on properties for Commercial and Multifamily Mortgage Loans prior to
any loan being made. Depending on the results of the Phase I environmental site
assessment, the Company may require a Phase II environmental site assessment.
The Company's loan servicing guidelines require that the Company obtain a Phase
I environmental site assessment (i.e., including invasive testing) of any
mortgaged property prior to acquiring title to or assuming operation of the
mortgaged property. This requirement effectively precludes enforcement of the
rights under the Mortgage Loan until a satisfactory Phase I environmental site
assessment is obtained or until any required remedial action is thereafter
taken, but also decreases the likelihood that the Company will become liable for
any material environmental condition at a mortgaged property.
 
     Commercial and Multifamily Mortgage Loan Servicing.  To control the credit
risk of retained interests in loans securitized, HCMC will retain the servicing
rights on the Commercial Mortgage Loans and Multifamily Mortgage Loans held in
the Investment Portfolio. HCMC may also retain the servicing rights on loans
originated and sold to third party conduits. HCMC, as servicer, will have the
risks associated with operating a mortgage servicing business as well as the
risk of ownership of the servicing.
 
     At June 30, 1997, HCMC serviced approximately $121.7 million of Commercial
Mortgage Loans. Servicing Commercial Mortgage Loans involves a contractual right
to receive a fee for processing and administering the Mortgage Loan payments.
This processing involves collecting 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.
 
     The primary risk of operating a servicing business is the improper
servicing of the Commercial Mortgage Loans and Multifamily Mortgage Loans as
specified under the related servicing contracts, whereby the servicer becomes
liable for possible losses suffered by the owner of the Commercial Mortgage
Loans and Multifamily Mortgage Loans. The operational requirements include
proper handling and accounting for all payment and escrow amounts, proper
borrower and periodic credit reviews, proper value and property reviews and
proper payment of all monies due to third parties such as real estate taxing
authorities and hazard insurance companies.
 
     The primary risks of ownership of servicing include the loss of value in
the servicing either through faster than anticipated Commercial Mortgage Loan
and Multifamily Mortgage Loan prepayments (even though there exist prepayment
penalties on most Mortgage Loans) or improper servicing as outlined above.
 
     Commercial Market Trends.  The market for Commercial Mortgage Loans has
undergone dramatic changes in recent years. Securitization has provided the
mechanism for a fundamental change in the
 
                                       49

<PAGE>   50
 
mechanics of lending and investing in real estate mortgages. Financing of
income-producing property has evolved from a traditional two-party lending
relationship, with the borrower obtaining funding from a traditional lending
institution, to a market in which new lenders with expertise in the creation of
mortgage-backed securities offer borrowers an alternative source of competitive
financing. Securitization involves multiple parties, each with specialized roles
and responsibilities creating profitable lending opportunities for those with
experience in commercial mortgage finance and the capital markets. The
securitization markets for Commercial Mortgage Loans and Multifamily Mortgage
Loans have grown rapidly during the 1990s.
 
     The growth in securitization of commercial mortgages in the private sector
has been the result of two market forces. First, during the recession of the
early 1990s, traditional lenders withdrew from the real estate credit market.
Securitization filled the role of income producing real estate finance by
traditional lenders. Second, Congress established the RTC in 1989 in order to
liquidate the commercial mortgage assets and single-family mortgage assets of
failed financial institutions. After unsuccessfully trying to sell the
commercial mortgages, the RTC began securitizing commercial mortgages. The RTC's
enormous securitization program stimulated the growth of the private sector
commercial mortgage securitization market by providing experience and knowledge
to securitization market participants such as investment bankers, rating
agencies, mortgage companies, attorneys, accountants and loan servicers who
administer the portfolios of mortgages backing the securities. These
participants have applied the experience and knowledge of the securitization of
RTC assets to the securitization of non-governmental, private-label securities.
The RTC's program also helped create an informed and active investor base for
the securities created from the securitization of commercial assets.
 
     The Company believes that success in the commercial market depends on a
vertically integrated strategy, i.e., one that begins with origination of the
Commercial Mortgage Loans and Multifamily Mortgage Loans, includes the servicing
and securitization of the Commercial Mortgage Loans and Multifamily Mortgage
Loans, and extends to the investment in the residual security after
securitization. The Company will be structured to take advantage of efficiencies
in the vertically integrated strategy, which it anticipates will result in
attractive returns to equity. However, there can be no assurance that such
returns will be achieved.
 
ACCUMULATION PERIOD ACQUISITIONS
 
     The Company intends initially to allocate a majority of the net proceeds
raised in the Offering to build a portfolio of Mortgage Assets, primarily
composed of adjustable rate mortgage pass-through securities of high investment
quality (i.e., Agency, "AAA" or "AA"-rated), to provide income during the time
required to acquire Mortgage Loans. The Company will acquire these Mortgage
Assets in the secondary mortgage market as soon as attractive opportunities are
identified. The Principals intend that the Company will earn an acceptable level
of return on the initial portfolio until the net proceeds from the Offering can
be fully invested in higher yielding Mortgage Assets. However, there is no
assurance that the Company will be able to earn such level of return. A similar
portfolio acquisition strategy will be employed whenever the Company must invest
the net proceeds of a new issuance of debt or equity securities. The Principals
of the Company are experienced in the acquisition of Mortgage Assets.
 
DUE DILIGENCE OPERATIONS
 
     The Company will continue to conduct through HCP the Due Diligence
Operations which have been historically performed for commercial banks,
government agencies, private mortgage banks, credit unions and insurance
companies. The Due Diligence Operations consist of the underwriting of credit,
the analysis of loan documentation and collateral, and the analysis of the
accuracy of the servicing accounting for Mortgage Loans. The due diligence
analyses are performed on a loan by loan basis. Audits of the accuracy of the
interest charged on adjustable rate mortgage loans are frequently a part of the
due diligence services provided to customers. The Company will perform due
diligence on Mortgage Loans it acquires and for third parties. The Principals of
the Company believe that the Due Diligence Operations will provide a source of
revenue and a competitive advantage to the Company through the underwriting and
pricing expertise gained through this business. However, there is no assurance
that the Due Diligence Operations will provide such revenue or competitive
advantages.
 
                                       50

<PAGE>   51
 
FINANCING
 
  General
 
     Mortgage Assets will initially be financed primarily with equity and
short-term borrowings through reverse repurchase agreements, borrowings under
lines of credit and other financings which the Company may establish with
institutional lenders until long-term financing or securitization is achieved.
It is expected that reverse repurchase agreements will be the principal
financing devices utilized by the Company to leverage its Mortgage Loan
portfolio until long-term financing or securitization. The Company anticipates
that, upon repayment of each borrowing in the form of a reverse repurchase
agreement, the collateral will immediately be used for borrowing in the form of
a new reverse repurchase agreement or long term financing. The Company has had
preliminary discussions with a third party lender to provide up to $500 million
of committed or non-committed reverse repurchase facilities to finance the
Company's businesses and expects to finalize shortly after the closing of the
Offering financing in amounts and at interest rates that are consistent with the
Company's financing objectives described herein. There is no assurance that the
Company will successfully finalize such facilities in the time or amount
desired. The Company will seek to establish commitments under which certain of
its lenders would be required to enter into new reverse repurchase agreements as
needed by the Company during specified periods of time.
 
  Reverse Repurchase Agreements
 
     A reverse repurchase agreement, although structured as a sale and
repurchase obligation, effects a financing under which the Company pledges its
Mortgage Assets as collateral to secure a short-term loan. Generally, the other
party to the agreement will make the loan pursuant to the repurchase agreement
in an amount equal to a percentage of the market value of the pledged
collateral, typically 80% to 98%. At the maturity of the reverse repurchase
agreement, the Company will be required to repay the loan pursuant to the
repurchase agreement and correspondingly receives back its collateral. Under
reverse repurchase agreements, the Company generally will retain the incidents
of beneficial ownership, including the right to distributions on the collateral
and the right to vote on matters as to which certificate holders vote. Upon a
payment default under such agreements, the lending party may liquidate the
collateral.
 
     The Company expects that all of its borrowing agreements will require the
Company to pledge cash or additional securities backed by Mortgage Loans in the
event the market value of existing collateral declines. If cash reserves are
insufficient to cover such deficiencies in collateral, the Company may be
required to sell assets to reduce the borrowings. See "Risk Factors -- Risks
Related to Operations -- Losses Related to Borrowings and Substantial Leverage
by the Company."
 
     In the event of the insolvency or bankruptcy of the Company, certain
reverse repurchase agreements may qualify for special treatment under the
Bankruptcy Code, thereby allowing the creditor under such agreements to avoid
the automatic stay provisions of the Bankruptcy Code and to foreclose on the
collateral agreements without delay. In the event of the insolvency or
bankruptcy of a lender during the term of a reverse repurchase agreement, the
lender may be permitted, under the Bankruptcy Code, to repudiate the contract,
and the Company's claim against the lender for damages therefrom may be treated
simply as one of the unsecured creditors. In addition, if the lender is a broker
or dealer subject to the Securities Investor Protection Act of 1970, the
Company's ability to exercise its rights to recover its securities under a
reverse repurchase agreement or to be compensated for any damages resulting from
the lender's insolvency may be further limited by such statute. If the lender is
an insured depository institution subject to the Federal Deposit Insurance Act,
the Company's ability to exercise its rights to recover its Mortgage Assets
under a reverse repurchase agreement or to be compensated for damages resulting
from the lender's insolvency may be limited by such statute rather than the
Bankruptcy Code. The effect of these various statutes is, among other things,
that a bankrupt lender, or its conservator or receiver, may be permitted to
repudiate or disaffirm its reverse repurchase agreements, and the Company's
claims against the bankrupt lender for damages resulting therefrom may be
treated simply as one of an unsecured creditor. Should this occur, the Company's
claims would be subject to significant delay and, if and when received, may be
substantially less than the damages actually suffered by the Company.
 
                                       51

<PAGE>   52
 
     To reduce its exposure to the credit risk of reverse repurchase agreements,
the Company intends to enter into such agreements with several different
parties. The Company will monitor the financial condition of its reverse
repurchase agreement lenders on a regular basis, including the percentage of its
Mortgage Loans that are the subject of reverse repurchase agreements with a
single lender. Notwithstanding these measures, no assurance can be given that
the Company will be able to avoid such third party risks.
 
SECURITIZATION AND SALE PROCESS
 
  General
 
     The Company will initially use reverse repurchase agreements and equity to
finance the acquisition of Mortgage Loans. When a sufficient volume of Mortgage
Loans with similar characteristics has been accumulated, generally $50 million
to $100 million or more, the Company may securitize them through the issuance of
mortgage-backed securities in the form of REMICs or CMOs or, to the extent
consistent with the Company's qualification as a REIT, resell them in bulk whole
loan sales. In any such case, the length of time between when the Company will
commit to purchase a Mortgage Loan and when it sells or securitizes such
Mortgage Loan will generally range from 30 days to one year or more, depending
on certain factors, including the length of the purchase commitment period, the
amount and type of the Mortgage Loan, and the securitization process. Although
HCP has previously rendered advisory services in connection with securitization
transactions, neither it nor HCMC has securitized any significant amount of
Mortgage Loans.
 
     Any decision by the Company to issue CMOs or REMICs or to sell the Mortgage
Loans in bulk may be influenced by a variety of factors. For accounting and tax
purposes, the Mortgage Loans financed through the issuance of CMOs are treated
as assets of the Company, and the CMOs are treated as debt of the Company. The
Company will earn the net interest spread between the interest income on the
applicable Mortgage Loans and the interest and other expenses associated with
the CMO financing. The net interest spread will be directly impacted by the
levels of prepayment of the underlying Mortgage Loans and, to the extent CMO
classes have variable rates of interest, may be affected by changes in
short-term interest rates. See "Risk Factors -- Risks Related to
Operations -- Negative Effects of Fluctuating Interest Rates," and "-- Reduction
of Income Due to Prepayments on Mortgage Assets."
 
     As an alternative to CMOs, the Company may issue REMICs. REMIC transactions
are generally accounted for as sales of the Mortgage Loans and can eliminate or
minimize any long-term residual investment in such Mortgage Loans. REMIC
securities consist of one or more classes of "regular interests" and a single
class of "residual interest." The regular interests are tailored to the needs of
investors and may be issued in multiple classes with varying maturities, average
lives and interest rates. These regular interests are predominantly senior
securities but, in conjunction with providing credit enhancement, may be
subordinated to the rights of other regular interests. The residual interest
represents the remainder of the cash flows from the applicable Mortgage Loans
(including in some instances, reinvestment income) over the amounts required to
be distributed on the regular interests. In some cases, the regular interests
may be structured so that there is no significant residual cash flow, thereby
allowing the Company to sell its entire interest in the Mortgage Loans. As a
result, in some cases, all of the capital originally invested in the Mortgage
Loans by the Company may be redeployed by the Company. The Company may retain
regular and residual interests on a short-term or long-term basis. Income from
REMIC issuances is not treated as REIT qualifying income. Accordingly, REMIC
issuances will not be the Company's primary securitization technique and will
generally be undertaken through taxable subsidiaries.
 
     The Company expects that its retained interests in securitizations,
regardless of the form used, will be subordinated to the classes of securities
issued to investors in such securitizations with respect to losses of principal
and interest on the underlying Mortgage Loans. Accordingly, any such losses
incurred on the underlying Mortgage Loans will be applied first to reduce the
remaining amount of the Company's retained interest, until reduced to zero. Any
such retained regular interest may include "principal only" or "interest only"
securities or other interest rate or prepayment sensitive securities or
investments. Any such retained securities or investments may subject the Company
to credit, interest rate and/or prepayment risks. The
 
                                       52

<PAGE>   53
 
Company anticipates it will retain such securities only on terms which it
believes are sufficiently attractive to compensate it for assuming such
associated risks.
 
     The Company may also retain subordinated securities, with ratings ranging
from AA to unrated, primarily fixed-rate and backed by Mortgage Loans. The
fixed-rate securities are anticipated to primarily evidence interests in 30-year
Single-Family Mortgage Loans. Securities backed by Commercial and Multifamily
Mortgage Loans are anticipated to primarily evidence interests in 7 or 10 year
balloon loans with 25 or 30 year amortization schedules. In general,
subordinated classes of a particular series of securities bear all losses prior
to the related senior classes. Losses in excess of expected losses at the time
such securities are purchased would adversely affect the Company's yield on such
securities and, in extreme circumstances, could result in the failure of the
Company to recoup its initial investment. See "Risk Factors -- Risks Related to
Operations -- Negative Effects of Fluctuating Interest Rates;" "-- Reduction of
Income Due to Prepayment;" and "-- Losses Related to Investing in Subordinated
Classes of Mortgage-Backed Securities."
 
     Except in the case of a breach of the standard representations and
warranties made by the Company when Mortgage Loans are securitized, Mortgage
Assets created by the Company will be non-recourse to the Company. Typically,
the Company will have recourse to the sellers of Mortgage Loans for any such
breaches, but there can be no assurance of the sellers' abilities to honor their
respective obligations.
 
     The Company will also use securitization as a tool to transfer some of the
interest rate risk of the Mortgage Loan collateral to the CMO bondholder and
credit risk to third party monoline bond insurers. Due to the fact that the CMO
financing is generally non-recourse to the Company (except in the event of a
breach of a representation or warranty), the Company is able to maintain the
economic benefit of financing the Mortgage Assets and earning a positive net
interest spread, while limiting its potential risk of credit loss to its
investment in the subordinated or residual classes of securities (generally
approximately 5% to 10% of the loan pool amount). A second advantage to the CMO
structure is that it is permanent financing and, therefore, not subject to
margin calls during periods in which the value of the pool assets are declining
due to increases in interest rates.
 
     The Company would typically pay a monoline bond insurer a monthly fee to
assume a portion of the credit risk in a pool of Mortgage Loans. The monoline
insurer would generally require the issuer to retain a portion of the credit
risk and over-collateralize a particular pool of Mortgage Loans.
 
     Proceeds from such securitizations will be available to support new loan
originations and acquisitions. In addition to providing relatively less
expensive long-term financing, the Principals intend that the Company's
securitizations will reduce the Company's interest rate risk on Mortgage Assets
held for long-term investment. The Company's securitizations may generate excess
inclusion income to its stockholders. See "Risk Factors -- Potential
Characterization of Distributions as UBTI; Taxation of Tax-Exempt Investors;"
and "Federal Income Tax Considerations -- Special Considerations."
 
  Credit Enhancement
 
     Any REMICs or CMOs created by the Company are expected to be structured so
that one or more of the classes of such securities are rated investment grade by
at least one nationally recognized rating agency. In contrast to Agency
Certificates in which the principal and interest payments are guaranteed by the
U.S. Government or an agency thereof, Mortgage Assets created by the Company
will not benefit from any such guarantee. The ratings for the Company's Mortgage
Assets will be based on the perceived credit risk by the applicable rating
agency of the underlying Mortgage Loans, the structure of the Mortgage Assets
and the associated level of credit enhancement. Credit enhancement is designed
to provide protection to the security holders in the event of borrower defaults
and other losses including those associated with fraud or reductions in the
principal balances or interest rates on Mortgage Loans as required by law or a
bankruptcy court. The Company can utilize multiple forms of credit enhancement,
including special hazard insurance, monoline insurance, reserve funds, letters
of credit, surety bonds and subordination or any combination thereof. A decline
in the credit quality of the Mortgage Loans backing any Mortgage Assets
(including delinquencies and/or credit losses above initial expectations) or of
any third party credit enhancement provider, or adverse
 
                                       53

<PAGE>   54
 
developments in general economic trends affecting real estate values or the
mortgage industry, could result in downgrades of such ratings. See "Risk
Factors -- Risks Related to Operations."
 
     In determining whether to provide credit enhancement through subordination
or other credit enhancement methods, the Company will take into consideration
the costs associated with each method. The Company anticipates principally
providing credit enhancement through the issuance of mortgage-backed securities
in senior/subordinated structures or over-collateralization of its Mortgage
Assets. The need for additional collateral or other credit enhancements will
depend upon factors such as the type of collateral provided and the interest
rates paid thereon, the geographic concentration of the mortgaged property
securing the collateral and other criteria established by the rating agency. The
pledge of additional collateral would reduce the capacity of the Company to
raise additional funds through short-term secured borrowings or additional CMOs
and will diminish the potential expansion of the Investment Portfolio. As a
result, collateral would be pledged for CMOs only in the amount required to
obtain a rating for the CMOs up to the highest rating category of a
nationally-recognized rating agency. The subordinated Mortgage Assets may be
sold, retained by the Company or accumulated for sale in subsequent
transactions.
 
  Other Mortgage-Backed Securities
 
     As an additional alternative for the financing of the Investment Portfolio,
the Company may cause to be issued other mortgage-backed securities, if, in the
determination of the Company, the issuance of such other securities is
advantageous and consistent with the Company's qualification as a REIT. In
particular, mortgage pass-through certificates representing undivided interests
in pools of mortgage loans formed by the Company may prove to be attractive
vehicles for raising funds.
 
     The holders of mortgage pass-through certificates receive their pro rata
share of the principal payments made on a pool of Mortgage Loans and interest at
a pass-through interest rate that is fixed at the time of the applicable
offering. The Company intends to retain up to a 100% undivided interest in a
significant number of the pools of Mortgage Loans underlying such pass-through
certificates. The retained interest, if any, may also be subordinated so that,
in the event of a loss, payments to certificate holders will be made before the
Company receives its payments. Unlike the issuance of CMOs, the issuance of
mortgage pass-through certificates will not create an obligation of the Company,
or any subsidiary, to security holders in the event of a borrower default.
However, as in the case of CMOs, the Company may be required to obtain various
forms of credit enhancement in order to obtain ratings for issuances of mortgage
pass-through certificates in one of the top two rating categories established by
a nationally-recognized rating agency.
 
  Capital Allocation Guidelines (CAG)
 
     The Company's goal is to strike a balance between the under-utilization of
leverage and excess dependence on leverage, which could reduce the Company's
ability to meet its obligations during adverse market conditions. Therefore, the
Company intends to adopt capital allocation guidelines ("CAG"). The CAG will be
finalized and presented to the Company's Board of Directors for its approval
within 45 days after the closing of the Offering. Modifications to the CAG will
require the approval of a majority of the Company's Board of Directors. The CAG
are intended to keep the Company's leverage balanced by (i) matching the amount
of leverage allowed to the riskiness (return and liquidity) of a Mortgage Asset,
and (ii) monitoring the credit and prepayment performance of each Mortgage Asset
to adjust the required capital. This analysis takes into account the Company's
various hedges and other risk programs discussed below. In this way, the use of
balance sheet leverage will be better than without the CAG controls. The Company
will use a range of expected minimum lender haircuts for loan or asset pools
based on the characteristics of the pool. This expected minimum lender haircut
indicates the minimum amount of equity, as estimated by the Company, a typical
lender would require with a Mortgage Asset from the applicable Mortgage Asset
category. There is some variation in haircut levels among lenders, from time to
time. From the lender's perspective, this is a "cushion" to protect capital in
case the borrower is unable to meet a margin call. The size of the haircut
depends on the liquidity and price volatility of the Mortgage Asset. Agency
securities are very liquid, with price volatility in line with the fixed income
markets which means a lender requires a smaller haircut, typically 3%. On the
other extreme, "B" rated securities and securities not registered with the
Commission are
 
                                       54

<PAGE>   55
 
substantially less liquid, and have more price volatility than Agency
securities, which results in a lender requiring a larger haircut. Particular
securities that are performing below expectations would also typically require a
larger haircut. The haircut for whole loan pools will generally be between
13%-15% depending on the documentation and delinquency characteristics of the
pool. Certain whole loan pools may have haircuts which may be negotiated with
lenders in excess of 15% due to other attributes of the pool.
 
     In addition to the expected minimum lender haircut, the Company will
allocate an additional liquidity cushion, which is an amount necessary, as
determined by the Principals, to reasonably protect the Company from lender
margin calls. The size of each cushion is based on the Principals' experience
with the price volatility and liquidity in the various Mortgage Asset
categories. Individual Mortgage Assets that have exposure to substantial credit
risk will be measured individually and the leverage adjusted as actual
delinquencies, defaults and losses differ from the Principals' expectations.
Management anticipates that this additional cushion will be approximately 5%.
 
  Implementation of the CAG -- Mark to Market Accounting
 
     Each quarter, the Company will mark its Mortgage Assets to market. This
process will consist of two steps: (i) valuing the Company's Mortgage Assets
acquired in the secondary market, and (ii) valuing the Company's non-security
investments such as its retained interests in securitizations. For the purchased
Mortgage Assets, the Company will obtain market quotes for its Mortgage Assets
from traders who make markets in securities similar to those in the Company's
Investment Portfolio. Market values for the Company's retained interests in
securitizations will be calculated internally using market assumptions for
losses, prepayments and discount rates.
 
     The face amount of all the financing used for the securities and retained
interests in securitizations will be subtracted from the current market value of
the Mortgage Assets (and hedges). This will be the current market value of the
Company's equity. This number will be compared to the required capital as
determined by the CAG. If the actual equity of the Company falls below the
capital required by the CAG, the Company must prepare a plan to bring the actual
capital above the level required by the CAG.
 
     Each quarter, Management will present to the Board of Directors the results
of the CAG compared to actual equity. At such time, Management may propose
changing the capital required for a class of investments or for an individual
investment based on its prepayment and credit performance relative to the market
and the ability of the Company to predict or hedge the risk of the Mortgage
Asset.
 
     As a result of these procedures, the leverage of the balance sheet will
change with the performance of the Company's Mortgage Assets. Good credit or
prepayment performance may release equity for purchase of additional Mortgage
Assets, leading to increased earnings. Poor credit or prepayment performance may
cause additional equity to be allocated to existing investments, forcing a
reduction in Mortgage Assets on the balance sheet and lower future earnings. In
either case, the constant Mortgage Asset performance evaluation, along with the
corresponding leverage adjustments, will help maintain the maximum acceptable
leverage (and earnings) while protecting the capital base of the Company.
 
RISK MANAGEMENT
 
     The Company believes that its portfolio income will be subject to three
primary risks: credit risk, interest rate risk and prepayment risk. See "Risk
Factors" for a full discussion of risks which investors should consider prior to
investing in the Offering.
 
  Credit Risk Management
 
     The Company intends to reduce credit risk through (i) the underwriting of
each Mortgage Loan purchased to ensure that it meets the guidelines established
by the Company, (ii) geographic diversification of the Mortgage Assets, (iii)
use of early intervention, aggressive collection and loss mitigation techniques
in the servicing process, (iv) use of insurance and the securitization process,
(v) maintenance of appropriate capital and reserve levels, and (vi) obtaining
representations and warranties, to the extent possible, from originators.
Although the Company does not intend to set specific geographic diversification
requirements, the Company
 
                                       55

<PAGE>   56
 
intends to closely monitor the geographic dispersion of the Mortgage Loans and
will make decisions on a portfolio by portfolio basis about adding to specific
concentrations.
 
     The Commercial Mortgage Loans held will primarily be originated by HCMC to
underwriting standards established by the Company. These underwriting standards
reflect the experience of HCMC in its past originations as well as the
requirements of the rating agencies for Commercial Mortgage Loans. The credit
underwriting will include a financial and credit check review of the borrower,
technical reports including appraisal, engineering and environmental reports, as
well as a review of the economic status of the geographic area of the mortgaged
property. In addition to these credit underwriting activities of HCMC, a
separate credit sign-off will be required before Commercial Mortgage Loans are
transferred to the Investment Portfolio from HCMC. The Mortgage Loans will be
monitored after inclusion in the Mortgage Assets by the servicing department of
HCMC. This monitoring will include a review of financial statements of the
properties financed as well as property inspections.
 
     Single-Family Mortgage Loans will generally be purchased in bulk pools in
the range of $2 million to $100 million. The credit underwriting process will
vary depending on the pool characteristics, including seasoning, loan-to-value
ratios and payment histories. For a new pool of Single-Family Mortgage Loans, a
full due diligence review of the Single-Family Mortgage Loans will be completed
including a review of the documentation, appraisal reports and credit
underwriting of the Single-Family Mortgage Loans. Where required, an updated
property valuation will be obtained. The bulk of the work will be completed by
employees in the Due Diligence Operations of the Company who evaluate mortgage
credit risks. See "Risk Factors -- Risks Related to Operations -- Default by
Borrowers under Mortgage Assets."
 
  Interest Rate Risk Management
 
     There will be two basic types of Mortgage Loans held by the Company:
Mortgage Loans held for securitization or sale and Mortgage Loans held in
securitized form. The Mortgage Loans held for securitization or sale will
generally be hedged to protect the value of the purchased or originated Mortgage
Loans. A variety of hedging instruments may be used, depending on the asset to
be hedged, as well as on the relative price of the various hedging instruments.
These instruments include forward sales of mortgages or mortgage securities,
interest rate futures or options, interest rate swaps, and cap and floor
agreements. See "Business -- Hedging." The Mortgage Loans held in securitized
form will be financed primarily in a manner designed to maintain a consistent
spread in a variety of interest rate environments.
 
     The Company will primarily address the interest rate risk of the Investment
Portfolio through its securitization strategy, which is designed to provide
long-term financing for its Mortgage Assets while maintaining a consistent
spread in a variety of interest rate environments. In order to address any
remaining mismatch of assets and liabilities, and in order to address the
interest rate risks to which its Mortgage Assets will be subject prior to
securitization, the Company will follow an interest rate risk management
program, to the extent consistent with the Company's qualification as a REIT,
intended to protect against the effects of material interest rate changes.
Specifically, the Company's interest rate risk management program will be
formulated with the intent to offset the potential adverse effects resulting
from rate adjustment limitations, if any, on its Mortgage Assets and the
differences between interest rate adjustment indices and interest rate
adjustment periods of its ARM loans and related borrowings.
 
     The Company may purchase interest rate caps, interest rate swaps and
similar instruments to attempt to mitigate the risk of the cost of its variable
rate liabilities increasing at a faster rate than the earnings on its Mortgage
Assets during a period of rising interest rates. The Company intends generally
to hedge as much of the interest rate risk as management determines is in the
best interest of its stockholders, given the cost of such hedging transactions
and the need to maintain the Company's status as a REIT, among other factors.
See "Federal Income Tax Considerations -- Requirements for Qualification as a
REIT." This determination may result in the Principals electing to have the
Company bear a level of interest rate risk that could otherwise be hedged when
the Principals believe, based on all relevant facts, that bearing the risk is
advisable. The Company may also, to the extent consistent with its qualification
as a REIT and Maryland law, utilize financial futures contracts, options and
forward contracts and other instruments as a hedge against future
 
                                       56

<PAGE>   57
 
interest rate changes. See "Risk Factors -- Risks Related to
Operations -- Negative Effects of Fluctuating Interest Rates."
 
  Prepayment Risk Management
 
     With respect to the Commercial Mortgage Loans and Multifamily Mortgage
Loans, the Company will seek to minimize the effects of faster or slower than
anticipated prepayment rates by originating Mortgage Loans with prepayment
penalties (as available) and utilizing various financial instruments in the
hedging process. With respect to the Single-Family Mortgage Loans, the Company
will also utilize various financial instruments as a hedge against prepayment
risk. Prepayment risk will be monitored by the senior management and through
periodic review of the impact of a variety of prepayment scenarios on the
Company's revenues, net earnings, dividends, cash flow and net balance sheet
market value. See "Risk Factors -- Risks Related to Operations -- Reduction of
Income Due to Prepayment."
 
     Although the Company believes it will develop a cost-effective
asset/liability management program to provide a level of protection against
interest rate and prepayment risks, no strategy can completely insulate the
Company from the effects of interest rate changes, prepayments and defaults by
counterparties. Further, certain of the Federal income tax requirements that the
Company must satisfy to qualify as a REIT limit the Company's ability to fully
hedge its interest rate and prepayment risks. See "Federal Income Tax
Consequences -- Requirements for Qualification as a REIT."
 
HEDGING
 
  Investment Portfolio
 
     The Company will primarily address the interest rate risk of the Investment
Portfolio through its strategy of securitizing Mortgage Loans with CMO
borrowings, which are designed to provide long term financing while maintaining
a consistent spread in a variety of interest rate environments. The Company
believes that its primary interest rate risk will be with respect to Mortgage
Assets financed with reverse repurchase agreements and Mortgage Loans held prior
to securitization.
 
     The Company will conduct certain hedging activities in connection with the
management of the Investment Portfolio. To the extent consistent with the
Company's election to qualify as a REIT, the Company will follow a hedging
program intended to protect against interest rate changes and to enable the
Company to earn net interest income in periods of generally rising, as well as
declining or static, interest rates. Specifically, the Company's hedging program
is formulated with the intent to offset the potential adverse effects of (i)
changes in interest rate levels relative to the interest rates of the Mortgage
Assets held in the Investment Portfolio, and (ii) differences between the
interest rate adjustment indices and periods of the Company's ARM loans and the
mortgage-backed securities or other borrowings secured by such Mortgage Assets.
As part of its hedging program, the Company will also monitor on an ongoing
basis the prepayment risks that arise in fluctuating interest rate environments.
 
     The Company's hedging program will encompass a number of procedures. First,
the Company will attempt to structure its commitments to purchase Mortgage
Assets so that the ARM loans purchased will have interest rate adjustment
indices and adjustment periods that, on an aggregate basis, correspond as
closely as practicable to the interest rate adjustment indices and interest rate
adjustment periods of the anticipated financing source. In addition, the Company
expects to structure its reverse repurchase borrowing agreements to have a range
of different maturities (although substantially all will have maturities of less
than one year). As a result, the Company expects to be able to adjust the
average maturity of its borrowings on an ongoing basis by changing the mix of
maturities as borrowings come due and are renewed. In this way, the Company
intends to minimize any differences between interest rate adjustment periods of
Mortgage Loans and related borrowings that may occur due to prepayments of
Mortgage Loans or other factors.
 
     The Company will also attempt to purchase interest rate caps to attempt to
limit or partially offset adverse changes in interest rates associated with its
borrowings. In a typical interest rate cap agreement, the cap purchaser makes an
initial lump sum cash payment to the cap seller in exchange for the seller's
promise to
 
                                       57

<PAGE>   58
 
make cash payments to the purchaser on fixed dates during the contract term if
prevailing interest rates exceed the rate specified in the contract. In this
way, the Company intends generally to hedge as much of the interest rate risk
arising from lifetime rate caps on its Mortgage Loans and from periodic rate
and/or payment caps as it determines is in its best interest, given the cost of
such hedging transactions, the risks associated therewith, and the need to
maintain its status as a REIT. Such periodic caps on the Company's Mortgage
Loans may also be hedged by the purchase of mortgage derivative securities.
Mortgage derivative securities can be effective hedging instruments in certain
situations as the value and yields of some of these instruments tend to increase
as interest rates rise and tend to decrease in value and yields as interest
rates decline, while the experience for others is the converse. The Company
intends to limit its purchases of mortgage derivative securities to investments
that qualify as Qualified REIT Assets or Qualified Hedges so that income from
such investments will constitute qualifying income for purposes of the 95% and,
in the case of Qualified REIT Assets, 75% of income tests. See "Federal Income
Tax Considerations -- Requirements for Qualification as a REIT." To a lesser
extent, the Company may also enter into interest rate swap agreements, buy and
sell financial futures contracts and options on financial futures contracts and
trade forward contracts as a hedge against future interest rate changes;
however, the Company will not invest in these instruments unless the Company is
exempt from the registration requirements of the Commodity Exchange Act or
otherwise complies with the provisions of that Act. The REIT provisions of the
Code may restrict the Company's ability to purchase certain instruments and may
restrict the Company's ability to employ other strategies. See "Federal Income
Tax Considerations -- Requirements for Qualification as a REIT." In all its
hedging transactions, the Company will deal only with counterparties that the
Company believes are sound credit risks.
 
     In connection with securitizations of Mortgage Loans, the Company is
subject to the risk of rising mortgage interest rates between the time it
commits to purchase Mortgage Loans at a fixed price and the time it sells or
securitizes those Mortgage Loans. To mitigate this risk, the Company may enter
into transactions designed to hedge interest rate risks, including mandatory and
optional forward selling of mortgage loans or mortgage-backed securities,
interest rate caps and floors, and buying and selling of futures and options on
futures. The nature and quantity of these hedging transactions is determined by
the management of the Company based on various factors, including market
conditions and the expected volume of Mortgage Loan purchases.
 
  Costs and Limitations
 
     The Company believes that it has implemented a cost-effective hedging
policy to provide an adequate level of protection against interest rate risks.
However, maintaining an effective hedging strategy is complex, and no hedging
strategy can completely insulate the Company from interest rate risks. Moreover,
as noted above, certain of the REIT provisions of the Code limit the Company's
ability to fully hedge its interest rate risks. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT." The Company intends
to monitor carefully, and may have to limit, its hedging strategies to assure
that it does not realize excessive hedging income or hold hedging assets having
excess value in relation to total Mortgage Assets, which would result in the
Company's disqualification as a REIT or, in the case of excess hedging income,
the payment of a penalty tax for failure to satisfy certain REIT income tests
under the Code, provided such failure was for reasonable cause. See "Federal
Income Tax Considerations -- Taxation of HCHI."
 
     In addition, hedging involves transaction and other costs, and such costs
increase dramatically as the period covered by the hedging protection increases
and also increase in periods of rising and fluctuating interest rates.
Therefore, the Company may be prevented from effectively hedging its interest
rate risks without significantly reducing the Company's return on equity.
 
RELATIONSHIPS AMONG AFFILIATES
 
     After the consummation of the Formation Transactions and the closing of the
Offering, the Company will acquire and hold the Investment Portfolio. HCP will
continue to conduct the Due Diligence Operations and, in addition, will support
HCHI's acquisition and investment activities by providing due diligence services
to HCHI. HCMC will originate, sell and service Multifamily Mortgage Loans and
Commercial Mortgage Loans and, in addition, will support HCHI's acquisition and
investment activities by serving as a source of
 
                                       58

<PAGE>   59
 
Multifamily Mortgage Loans and Commercial Mortgage Loans. HCS will facilitate
the Company's trading activities by acting as a broker/dealer. See "Structure
and Formation Transactions."
 
     HCHI will own all of the HCP Preferred, and the Principals will own all of
the HCP Common subject to certain repurchase rights pursuant to the HCP
Shareholders' Agreement. See "Certain Transactions -- The HCP Shareholders'
Agreement." HCP will own all of the capital stock of HCMC and HCS. The
Principals will be directors and officers of HCHI, HCP, HCMC and HCS. HCHI, HCP,
HCMC and HCS will also have certain other common officers and employees. See
"Risk Factors -- Principals' Conflicts of Interest."
 
PMSR/OMSR
 
     Whether servicing is purchased (along with purchased Single-Family Mortgage
Loans) or created (by the origination of Multifamily Mortgage Loans and
Commercial Mortgage Loans), a value will be placed on the servicing as a
purchased mortgage servicing right ("PMSR") or an originated mortgage servicing
right ("OMSR"), as the case may be, and recorded as an asset on the books of the
Company.
 
     The valuation of a PMSR and an OMSR includes an analysis of the
characteristics of the Mortgage Loan's size, coupon, escrow amounts, type,
maturity, etc., as well as an estimate of the Mortgage Loan's remaining life. To
the extent the characteristics change or the estimate of remaining life changes,
the value of the PMSR or OMSR will also change. For example, if Mortgage Loans
are repaid more quickly than originally forecasted (increased speed), the value
of the OMSR or PMSR will be reduced.
 
REGULATION
 
     There are various state and local laws and regulations affecting the
Investment Portfolio. HCMC has mortgage-banking licenses in Arizona, Illinois,
New Jersey, Vermont and Wisconsin. In addition, the Company's activities are
subject to the rules and regulations of HUD. Mortgage operations also may be
subject to applicable state usury and collection statutes. The Company believes
that it is in present compliance with all material rules and regulations to
which it is subject and has current licenses in all jurisdictions required of
it. See "Risks Factors -- Legislative and Regulatory Risk."
 
COMPETITION
 
     In purchasing Mortgage Loans and issuing Mortgage Securities backed by such
Mortgage Loans, the Company will compete with other REITs, established mortgage
conduit programs, investment banking firms, savings and loan associations,
banks, thrift and loan associations, finance companies, mortgage bankers,
insurance companies, other lenders and other entities purchasing Mortgage
Assets. In addition, there are several mortgage REITs similar to the Company and
others may be organized in the future. Continued consolidation in the mortgage
banking industry may reduce the number of current sellers of Mortgage Loans to
the Company, thus reducing the Company's potential customer base, resulting in
the Company's purchasing a larger percentage of Mortgage Loans from a smaller
number of sellers. Such changes could negatively impact the Company. Mortgage
Securities issued by the Company face competition from other investment
opportunities available to prospective investors. The Company intends to
participate on a national level in the mortgage market. The mortgage market for
Single-Family Mortgage Loans is estimated at $3.8 trillion and the mortgage
market for Commercial and Multifamily Mortgage Loans is estimated at $1.0
trillion. The Company will not have a dominant position in either of these
markets. See "Risk Factors -- Risks Related to Operations -- Ability to Acquire
Mortgage Loans Relative to Borrowing Costs; Competition and Supply."
 
EMPLOYEES
 
     At the closing of the Offering, the Company will employ most or all of the
employees currently employed by the contributed operations of HCMC's mortgage
conduit operations and HCP's Due Diligence Operations, which numbered 14 and 39,
respectively, at June 30, 1997.
 
                                       59

<PAGE>   60
 
SERVICE MARKS
 
     HCP owns two service marks that have been registered with the United States
Patent and Trademark Office, each of which expires in the year 2003. HCP will
continue to own the service marks after the consummation of the Formation
Transactions.
 
FACILITIES
 
     The executive offices, approximately 2,300 square feet, are located in New
York, New York. The lease for the executive offices requires minimum annual
rental payments of $41,900 and expires in November 2001. In addition to the
executive offices, the Company's operations will be conducted in office space
pursuant to various lease agreements throughout the United States. A summary of
the office leases is shown below:
 

<TABLE>
<CAPTION>
                           OFFICE     MINIMUM
                           SPACE       ANNUAL       EXPIRATION
        LOCATION          (SQ.FT)      RENTAL          DATE                    OFFICE USE
- ------------------------  --------    --------    ---------------   --------------------------------
<S>                       <C>         <C>         <C>               <C>
New York, New York......    2,300     $ 41,900    November 2001     Executive, Administration,
                                                                      Investment Operations
Edison, New Jersey......    5,850     $ 74,400    June 2002         Accounting, Administration, Due
                                                                      Diligence Operations, Mortgage
                                                                      Loan Servicing, Investment
                                                                      Operations
Chicago, Illinois.......    3,900       57,000    June 1999         Due Diligence Operations,
                                                                      Investment Operations
St., Louis, Missouri....    3,800       93,000    February 1998     Mortgage Origination Operations
Rockland,
  Massachusetts.........      300        6,000    Month to Month    Investment Operations
Sacramento,
  California............      150        6,800    Month to Month    Due Diligence Operations,
                                                                      Investment Operations
St. Paul, Minnesota.....      150        5,100    Month to Month    Investment Operations
                           ------     --------
          Total:........   16,450     $284,200
                           ======     ========
</TABLE>

 
     The Principals believe that these facilities are adequate for the Company's
foreseeable needs and that lease renewals and/or alternate space at comparable
rental rates is available, if necessary.
 
FUTURE REVISIONS IN POLICIES AND STRATEGIES
 
     The Board of Directors of the Company has established the investment and
operating policies and strategies set forth in this Prospectus. The Board of
Directors has the power to modify or waive such policies and strategies without
the consent of the stockholders to the extent that the Board of Directors
determines that such modification or waiver is in the best interests of
stockholders. Among other factors, developments in the market which affect the
policies and strategies mentioned herein or which change the Company's
assessment of the market may cause the Board of Directors to revise the
Company's policies and strategies. See "Risk Factors -- Negative Effect on
Financial Condition Due to Board of Director's Ability to Change Policies of the
Company."
 
LEGAL PROCEEDINGS
 
     On or about January 15, 1997, Quarters on Melody Lane Partnership
("Quarters") brought suit against HCMC in the District Court in Dallas County,
Texas (titled Quarters on Melody Lane Partnership v. Hanover Capital Mortgage
Corporation et al.) In a letter dated December 17, 1996, Quarters threatened to
bring an action against HCMC and others unless Quarters was permitted to repay a
Multifamily Mortgage Loan,which had been originated by HCMC, without pre-payment
penalties. The initial principal balance of the Multifamily Mortgage Loan, which
closed on June 28, 1994, was approximately $1.76 million. A portion of the
proceeds of the Multifamily Mortgage Loan was retained in an escrow account, in
accordance with the loan documents, to fund the costs of repairs, replacements
and improvements. In the December 17 letter, Quarters alleged that HCMC
personnel orally represented before the closing of the Multifamily Mortgage
 
                                       60

<PAGE>   61
 
Loan that funds would be disbursed from the escrow account other (and more
favorably to the obligor) than as provided in the Mortgage Loan documents.
Disbursements have not been made in accordance with such alleged
representations. After originating the Mortgage Loan, HCMC sold the Mortgage
Loan on the day of closing and sold the rights to service the Mortgage Loan in
December 1994. In a draft petition attached to the December 17 letter, Quarters'
attorney sought an accounting and alleged that HCMC is guilty of fraudulent
misrepresentation, breach of contract, fraudulent withholding of funds, breach
of fiduciary duty and conversion. The draft petition sought damages caused by
the obligor's inability to obtain disbursements from the escrow account,
including lost profits and legal fees and expenses. In a written response to
Quarters, HCMC denied that its representatives made any misrepresentations to
Quarters. After HCMC sent such written response, Quarters filed the petition
attached to the December 17 letter, naming HCMC and others as defendants, in
District Court in Dallas County, Texas. HCMC has retained counsel and is
defending itself in such action. Management of the Company does not believe that
this claim will have a material adverse effect on the Company's financial
condition and results of operations.
 
     The IRS has proposed a tax deficiency against HCP arising from HCP's
treatment of certain alleged employees as independent contractors for tax
purposes. HCP is currently negotiating a closing agreement with the IRS and has
accrued approximately $122,000 (at December 31, 1996) to pay any amount that is
agreed or determined to be due. HCP has recently adjusted its accrued liability
to $100,000 (at June 30, 1997) based on a revised settlement offer received from
the IRS. This settlement offer requires HCP to treat the individuals in question
as employees going forward. If HCP accepts this settlement offer, which it
intends to do, the treatment of the individuals as employees will require HCP to
withhold income and employment taxes from payments made to them and to make
certain matching employment tax payments. Management of the Company does not
believe that this proposed tax deficiency will have a material adverse effect on
the Company's financial condition and results of operations.
 
                                       61

<PAGE>   62
 
                           HCHI ORGANIZATIONAL CHART
 
     The following chart depicts the organization structure of HCHI:
                           [HCHI ORGANIZATION CHART]
 
     Each of Irma N. Tavares, Joyce S. Mizerak, George J. Ostendorf and Ralph F.
Laughlin report to John A. Burchett, Chairman of the Board, Chief Executive
Officer and President of HCHI. James C. Strickler and Julia Curran report to Ms.
Tavares and Ms. Mizerak, respectively.
 
                                       62

<PAGE>   63
 
                                   MANAGEMENT
 
DIRECTORS AND EXECUTIVE OFFICERS
 
     The Company was incorporated in the state of Maryland on June 10, 1997. The
following table sets forth certain information with respect to the directors and
executive officers of the Company:
 

<TABLE>
<CAPTION>
                NAME                   AGE                   POSITION
- -------------------------------------  ---   -----------------------------------------
<S>                                    <C>   <C>
John A. Burchett.....................  55    Chairman of the Board, Chief Executive
                                               Officer and President
Irma N. Tavares......................  42    Managing Director and a Director
Joyce S. Mizerak.....................  41    Managing Director, Secretary and a
                                             Director
George J. Ostendorf..................  52    Managing Director and a Director
Ralph F. Laughlin....................  44    Senior Vice President, Chief Financial
                                             Officer, Treasurer and Assistant
                                               Secretary
Julia Curran.........................  35    Senior Vice President
James C. Strickler...................  40    Senior Vice President
John A. Clymer(1)....................  49    Director Elect
John Nicholas Rees(1)................  63    Director Elect
Paul E. Mullings(1)..................  47    Director Elect
TBD..................................        Director Elect
TBD..................................        Director Elect
</TABLE>

 
- ---------------
(1) Elected to serve as a director of the Company immediately after the
    consummation of the Offering.
 
     John A. Burchett has been the Chairman of the Board, President and Chief
Executive Officer of HCP since its formation in 1989. He has been Chairman of
the Board, President and Chief Executive Officer of HCMC since October 1992.
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 ("Citicorp") from 1980 to 1987 and Bankers Trust
Company ("Bankers Trust") from 1987 to 1989. Mr. Burchett was also Senior Vice
President and Chief Financial Officer from 1976 to 1980 for City Federal
Savings, which was one of the largest thrift institutions in the United States
at the time he left. Mr. Burchett has an MBA in Finance from Columbia University
and a BSME in Mechanical and Aerospace Sciences from the University of
Rochester.
 
     While at Citicorp, Mr. Burchett served as co-head of Global Mortgage
Finance, managing a seven office national institutional sales force, the New
York mortgage trading desk, mortgage trading operations, the Citimae mortgage
conduit, mortgage pipeline hedging, mortgage research, contracts and private
label securities structuring and rating. During Mr. Burchett's tenure, Citicorp
bought and sold Mortgage Loans and mortgage-backed securities and operated the
Citimae mortgage conduit, a single-family residential mortgage conduit created
during his tenure. During that period, Citimae issued fixed rate and adjustable
rate, AA rated, pass-through certificates and multi-tranche CMOs. Mr. Burchett's
duties also included the management of sales and trading of Agency
mortgage-backed securities.
 
     While at Bankers Trust, Mr. Burchett managed its then newly formed Mortgage
Finance group, which included the retail mortgage banking operations as well as
origination, sales and trading of mortgage loans and mortgage-backed securities.
During Mr. Burchett's tenure, Bankers Trust became a member of FNMA's dealer
group, issued its first CMOs and participated in the securitization of mortgage
loans for several state pension funds.
 
     Irma N. Tavares, Managing Director of HCP, has been with HCP since its
formation in 1989. Ms. Tavares is presently responsible for HCP's whole loan
trading and related hedging activities and oversees the purchase of
Single-Family Mortgage Loans by entities for which HCP renders management
services. At HCP, Ms. Tavares has valued, purchased and re-sold whole loans
through a six member sales force on behalf of Alpine/Hanover LLC and ABH-I LLC.
Ms. Tavares has managed the purchase of a wide variety of
 
                                       63

<PAGE>   64
 
performing and semi-performing pools of primarily Single-Family Mortgage Loans
ranging from heterogeneous pools purchased from RTC and the FDIC to highly
structured pools of performing newly originated Mortgage Loans sold by banks,
thrift institutions and mortgage companies throughout the U.S.
 
     While at HCP, Ms. Tavares has also served for three years as investment
manager for a publicly-traded mutual fund, Midwest Income Trust's Adjustable
Rate U.S. Government Securities Fund. That Fund, designed by HCP, was one of the
first of its kind to be rated AAAf by Standard and Poor's Corporation. For the
twelve month period ending October 31, 1996, its performance was ranked 16th of
53 such funds by Lipper Analytical Services. The Fund invests in Agency
adjustable rate mortgage backed securities with the objective of high current
income while maintaining stable net asset values.
 
     Prior to joining HCP, Ms. Tavares held similar trading positions at both
Citicorp from 1983 to 1987 and Bankers Trust from 1987 to 1989 working with Mr.
Burchett. Ms. Tavares holds a BS in Accounting from Seton Hall University.
 
     Joyce S. Mizerak, Managing Director of HCP, has been with HCP since its
formation in 1989. Ms. Mizerak's duties include the approval of Multifamily
Mortgage Loans and Commercial Mortgage Loans originated by HCMC, the
establishment of investor relationships with purchasers of such Mortgage Loans,
as well as oversight of the mortgage operations group which provides
transactional due diligence and contractual review services for HCP's mortgage
trading activities. Ms. Mizerak has negotiated various investor relationships
with entities that have been securitizing HCMC's Mortgage Loan production.
 
     Prior to joining HCP, Ms. Mizerak had responsibilities at Bankers Trust
from 1988 to 1989 for mortgage transaction contracts. Before joining Bankers
Trust, Ms. Mizerak held a variety of positions at Citicorp from 1984 to 1988
including the trading of whole Mortgage Loans for Citicorp's Citimae residential
mortgage conduit. Prior to joining Citicorp, Ms. Mizerak was a mortgage-backed
securities rating analyst at Standard and Poor's Corporation. Ms. Mizerak holds
a BA from the University of Scranton and an MBA in Finance from Temple
University.
 
     George J. Ostendorf, Managing Director of HCP, has been with 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
the largest mortgage lenders in the country. Mr. Ostendorf has caused HCP to
enter a number of businesses including mortgage securitization advisory
services, due diligence and ARM auditing. In 1992, Mr. Ostendorf finalized the
initial conduit structure which led to HCP's entry into the Multifamily Mortgage
Loan and Commercial Mortgage Loan origination business and the formation of
HCMC. A frequent speaker at mortgage industry events, Mr. Ostendorf has written
several articles for mortgage industry publications.
 
     Prior to joining HCP, Mr. Ostendorf was responsible for origination and
distribution of mortgage securities transactions by Chicago based sales forces
that he managed for Citicorp and later for Bankers Trust. Mr. Ostendorf was
Chief Lending Officer for Horizon Federal Savings, one of Illinois's largest
thrift institutions at the time, prior to joining Citicorp. Mr. Ostendorf holds
an MBA in Finance and a BS degree from DePaul University.
 
     Ralph F. Laughlin, Chief Financial Officer, joined HCP in 1996 after
thirteen years with Middex Development Corporation ("Middex"), a New York based
owner and operator of office buildings, shopping centers and hotels, and the
holder of a controlling interest in Hodgson Houses, Inc., a publicly traded
modular home builder. Mr. Laughlin is responsible for HCP's accounting and
financial reporting. As Vice President of Finance and Chief Financial Officer of
Middex, Mr. Laughlin was responsible for the development and management of all
financial and administrative functions, including strategic planning, budgeting,
accounting and procedures. Prior to joining Middex, Mr. Laughlin was employed as
a Certified Public Accountant at Deloitte & Touche LLP. Mr. Laughlin has a BBA
in Accounting from Kent State University.
 
     Julia Curran, Senior Vice President, joined HCP in 1990. Ms. Curran has
primary responsibility for the Commercial Mortgage Loan delivery and servicing
operation of HCP. She is also responsible for day-to-day management of HCP's due
diligence and ARM auditing operations. Prior to joining HCP, Ms. Curran held
 
                                       64

<PAGE>   65
 
various mortgage servicing positions at Bankers Trust Company and mortgage loan
delivery and servicing at City Federal Savings. Ms. Curran holds a BA in
Economics and Business from Lafayette College.
 
     James C. Strickler, Jr., Senior Vice President, joined HCP in 1995. Mr.
Strickler's responsibilities include day-to-day trading and hedging of the
firms' whole loan portfolio held for sale. Mr. Strickler has developed several
models to evaluate performing, non-performing and poorly documented fixed and
ARM portfolios. Prior to purchase, Mr. Strickler analyzes the Mortgage Loan
pools to obtain sufficient demographic, geographic, credit and empirical
information to evaluate prospective Mortgage Loan pool pricing. After purchase,
Mr. Strickler provides the sales force with various methods of comparing the
characteristics of portfolios held for sale to other opportunities available to
prospective buyers in the mortgage marketplace and structures pools of Mortgage
Loans to appeal to various types of buyers so as to seek to optimize the return
to HCP.
 
     Prior to joining HCP, Mr. Strickler held positions as a trader of whole
loans, asset backed securities, non-Agency mortgage backed securities, and asset
backed securities at Morgan Stanley & Co., Incorporated from 1984 to 1988,
Chemical Bank from 1988 to 1992, and most recently, Lehman Brothers Inc. from
1992 to 1995. Mr. Strickler received an MBA with a concentration in Finance from
the University of Chicago and an A.B. from Duke University.
 
     John A. Clymer will serve as a director of the Company immediately after
the consummation of the Offering. Since September 1994, Mr. Clymer has been the
President and Chief Investment Officer of Resource Capital Advisers, Inc. From
1972 until January 1994, Mr. Clymer was the President of Minnesota Mutual Life
Insurance. He has an MBA in Finance and a B.S. in Engineering from the
University of Wisconsin.
 
     John Nicholas Rees will serve as a director of the Company immediately
after the consummation of the Offering. Since 1985, Mr. Rees has been President
of Pilot Management, a privately held investor/consultant firm. From 1974 to
1985, Mr. Rees was Vice Chairman of the Bank of New England Corporation where he
was responsible for its finance, strategic planning, money market, government
banking and data processing operations. He has an MBA from Harvard University
and a B.A. in Economics from the University of Virginia. Mr. Rees also serves as
a director of various private corporations.
 
     Paul E. Mullings will serve as a director of the Company immediately after
the consummation of the Offering. Since February 1996, Mr. Mullings has been the
President and Chief Executive Officer of Mortgage Electronic Registration
Systems, which is a company that electronically registers and tracks the
ownership interests in mortgages. From October 1992 to January 1996, Mr.
Mullings was the President and Chief Executive Officer of First Interstate
BanCorp.'s residential mortgage division. He was the Executive Vice President of
Retail Lending for Glendale Federal Bank from November 1979 to September 1992.
Mr. Mullings is a graduate of the Institute of Accounting Staff, in London,
England.
 
TERMS OF DIRECTORS AND OFFICERS
 
     The Company's Board of Directors consists of such number of persons as
shall be fixed by the Board of Directors from time to time by resolution to be
divided into three classes, designated Class I, Class II and Class III, with
each class to be as nearly equal in number of directors as possible. Currently
there are four directors. George J. Ostendorf is a Class I director, Irma N.
Tavares and Joyce S. Mizerak are Class II directors and John A. Burchett is a
Class III director. Class I, Class II and Class III directors will stand for
reelection at the annual meetings of stockholders of the Company held in 1998,
1999 and 2000, respectively. At each annual meeting, the successors to the class
of directors whose term expires at that time are to be elected to hold office
for a term of three years, and until their respective successors are elected and
qualified, so that the term of one class of directors expires at each such
annual meeting. The Company intends to maintain the composition of the Board so
that there will be no more than nine directors, with a majority of independent
directors at all times after the initial issuance of the Units, at least two of
whom shall serve on the Audit and/or Compensation Committees. In the case of any
vacancy on the Board of Directors, including a vacancy created by an increase in
the number of directors, the vacancy may be filled by election of the Board of
Directors or the stockholders, with the director so elected to serve until the
next annual meeting of
 
                                       65

<PAGE>   66
 
stockholders (if elected by the Board of Directors) or for the remainder of the
term of the director being replaced (if elected by the stockholders); any
newly-created directorships or decreases in directorships are to be assigned by
the Board of Directors so as to make all classes as nearly equal in number as
possible. Directors may be removed only for cause and then only by the
affirmative vote of two-thirds of the combined voting power of stockholders
entitled to vote in the election for directors. Subject to the voting rights of
the holders of any Preferred Stock, the charter may be amended by the
affirmative vote of two-thirds of the combined voting power of stockholders,
provided that amendments to the charter dealing with directors may only be
amended if it is advised by at least two-thirds of the Board of Directors and
approved by vote of at least two-thirds of the combined voting power of
stockholders. The effect of the foregoing as well as other provisions of the
Company's charter and bylaws may discourage takeover attempts and make more
difficult attempts by stockholders to change management. Prospective investors
are encouraged to review the charter and bylaws in their entirety. See "Risk
Factors -- Preferred Stock; Restrictions on Ownership of Common Stock;
Antitakeover Risk."
 
COMMITTEES OF THE BOARD
 
     Audit Committee.  The Company intends to establish an Audit Committee
composed of two independent directors. The Audit Committee will make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, review with the independent public accountants the Company's
compliance with the REIT provisions of the Code and the Investment Company Act,
approve professional services provided by the independent public accountants,
review the independence of the independent public accountants, consider the
range of audit and non-audit fees and review the adequacy of the Company's
internal accounting controls.
 
     Compensation Committee.  The Company intends to establish a Compensation
Committee composed of two independent directors. The Compensation Committee will
determine the compensation of the Company's executive officers.
 
     Other Committees.  The Board of Directors may establish other committees as
deemed necessary or appropriate from time to time, including, but not limited
to, an Executive Committee of the Board of Directors.
 
COMPENSATION OF DIRECTORS
 
     Following the closing of the Offering, the Company expects to pay
independent directors $15,000 per year, $500 for each meeting attended in person
and stock options pursuant to the 1997 Stock Option Plan. See
"Management -- 1997 Stock Option Plan." All directors will receive reimbursement
of reasonable out-of-pocket expenses incurred in connection with meetings of the
Board of Directors. No director who is an employee of the Company will receive
separate compensation for services rendered as a director.
 
COMPENSATION COMMITTEE INTERLOCKS
 
     No interlocking relationship exists between the Company's Board of
Directors or officers responsible for compensation decisions and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
 
                                       66

<PAGE>   67
 
EXECUTIVE COMPENSATION
 
     The following table contains information concerning compensation (i) earned
in the year ended December 31, 1996 by HCP's Chief Executive Officer and its
three other most senior executive officers who received total salary and bonus
in excess of $100,000 during the fiscal year ended December 31, 1996 (the "Named
Executive Officers"); and (ii) to be paid by the Company for the year ending
December 31, 1997 to the Named Executive Officers.
 

<TABLE>
<CAPTION>
                                                            ANNUAL COMPENSATION(1)
                                                            ----------------------        OTHER
           NAME AND PRINCIPAL POSITION             YEAR     SALARY(2)     BONUS(2)     COMPENSATION
- -------------------------------------------------  ----     ---------     --------     ------------
<S>                                                <C>      <C>           <C>          <C>
John A. Burchett.................................  1996     $ 250,000     $110,000       $ 25,195(3)
  Chairman of the Board,                           1997       287,500(4)   173,766         25,210(5)
  Chief Executive Officer and President
Irma N. Tavares..................................  1996       180,000      150,000          9,054(6)
  Managing Director and a Director                 1997       213,750(7)                    9,470(8)
Joyce S. Mizerak.................................  1996       180,000      150,000          7,515(9)
  Managing Director and a Director                 1997       213,750(7)                    7,989(10)
George J. Ostendorf..............................  1996       225,000       35,000         16,972(11)
  Managing Director and a Director                 1997       225,000                      18,070(12)
</TABLE>

 
- ---------------
 (1) On the closing of the Offering, each of the persons in the above table will
     enter into an Employment Agreement with the Company. See
     "Management -- Employment Agreements."
 
 (2) Salary and bonus amounts are presented in the year earned; however, the
     payment of such amounts may have occurred in other years.
 
 (3) Includes $6,609 for an automobile allowance, $16,246 for life insurance
     premiums and $2,340 for club membership dues.
 
 (4) Pursuant to his Employment Agreement, Mr. Burchett will have an initial
     base salary of $300,000.
 
 (5) Includes $6,610 for an automobile allowance, $16,260 for life insurance
     premiums and $2,340 for club membership dues.
 
 (6) Includes $6,800 for personal use of a company leased automobile and $2,254
     for life insurance premiums.
 
 (7) Pursuant to their respective Employment Agreements, each of Ms. Tavares and
     Ms. Mizerak will have an initial base salary of $225,000.
 
 (8) Includes $7,200 for personal use of a company leased automobile and $2,270
     for life insurance premiums.
 
 (9) Includes $5,541 for an automobile allowance and $1,974 for life insurance
     premiums.
 
(10) Includes $5,999 for an automobile allowance and $1,990 for life insurance
     premiums.
 
(11) Includes $6,516 for an automobile allowance, $8,656 for life insurance
     premiums and $1,800 for club membership dues.
 
(12) Includes $7,200 for an automobile allowance, $9,070 for life insurance
     premiums and $1,800 for club membership dues.
 
BONUS INCENTIVE COMPENSATION PLAN
 
     A Bonus Incentive Compensation Plan will be established for eligible
participants of the Company to be effective after the closing of the Offering.
The annual bonus pursuant to the Bonus Incentive Compensation Plan will be paid
one-half in cash and, subject to the Ownership Limit, one-half in shares of
Common Stock, annually, following receipt of the Company's audit from its
independent public accountants for the related
 
                                       67

<PAGE>   68
 
fiscal year (or prorated fiscal year). This Bonus Incentive Compensation Plan
will award bonuses annually to those eligible participants out of a total pool
based upon annual net income before bonus incentive compensation as follows:
 

<TABLE>
<CAPTION>
            ACTUAL
            ROE(1)
          IN EXCESS
              OF
             BASE
           BROE(2)                                                           PLUS FIXED
             BY:      BONUS %           MULTIPLIED BY                      MINIMUM BONUS
          ----------  -------     -------------------------     ------------------------------------
          <S>         <C>         <C>                           <C>
          Zero or
            less....       0%           Bonus Base(4)                                             0%
          Zero to
            6%......   12.00%           Bonus Base(4)                                             0%
          Greater
            than
            6%......   15.00%     Incremental Bonus Base(5)     Average Net Worth multiplied by .72%
</TABLE>

 
- ---------------
(1) "Actual ROE" means the Company's return on equity and is determined on an
    annual basis by dividing (a) the Company's annual Net Income before bonus
    incentive compensation, by (b) the Average Net Worth for the same fiscal
    year. For such calculations "Net Income" of the Company means the net income
    or net loss of the Company determined according to GAAP.
(2) "Base BROE" is the average weekly Ten-Year U.S. Treasury Rate, plus 4.0% for
    each fiscal year.
(3) "Average Net Worth" is the annual average of the end of the month Net Worth
    of the Company (as determined in accordance with GAAP); without regard to
    earnings or losses generated in the current fiscal year.
(4) "Bonus Base" is equal to (a) the annual Net Income before bonus incentive
    compensation minus (b) (i) the Average Net Worth multiplied by (ii) the Base
    BROE.
(5) "Incremental Bonus Base" is equal to (a) the annual Net Income before bonus
    incentive compensation minus (b) (i) the Average Net Worth multiplied by
    (ii) the Base BROE, minus (c) (i) the Average Net Worth multiplied by (ii)
    6%.
 
     Of the amount so determined, one-half will be deemed contributed to the
total pool in cash and the other half will be deemed contributed to the total
pool in the form of shares of Common Stock with the number of shares of Common
Stock to be calculated based on the average price per share of the Common Stock
during the twenty day period that ends on the date of such determination.
 
EMPLOYMENT AGREEMENTS
 
     Upon the consummation of the Formation Transactions and the closing of the
Offering, the Company will enter into an employment agreement with each of the
Principals. Each employment agreement provides for an initial term of five years
and will be automatically extended for an additional year at the end of each
year of the employment agreement, unless either party provides prior written
notice to the contrary or the employee has been terminated pursuant to the terms
thereof. The employment agreements provide for an initial annual base salary of
$300,000, $225,000, $225,000 and $225,000 for Mr. Burchett, Ms. Mizerak, Ms.
Tavares and Mr. Ostendorf, respectively. Each employment agreement also provides
for participation by the executive officer in the Company's Bonus Incentive
Compensation Plan and the Company's 1997 Stock Option Plan. See
"Management -- Bonus Incentive Compensation Plan;" "-- 1997 Stock Option Plan."
Each employment agreement also contains a covenant not to compete provision
which prohibits the executive officer from competing with the Company for a
certain period of time following the Company's termination of the executive
officer with good cause or termination by the executive officer without cause.
The Company may terminate each executive officer pursuant to each employment
agreement for "good cause" upon (i) the conviction of the executive officer of
(or the plea by the executive officer of nolo contendere to) a felony; (ii) the
good faith determination by the Board of Directors that the executive officer
has willfully and deliberately failed to perform a material amount of executive
officer's duties pursuant to the employment agreement (other than a failure to
perform duties resulting from the executive officer's incapacity due to physical
or mental illness), which failure to perform duties shall not have been cured
within thirty (30) days after the receipt by the executive officer of written
notice thereof from the Board of Directors specifying with reasonable
particularity such alleged failure; (iii) any absence from the Company's regular
full-time employment in excess of three consecutive days that is not due to a
vacation, participation in a permitted
 
                                       68

<PAGE>   69
 
activity, bona fide illness, disability, death or other reason expressly
authorized by the Board of Directors in advance; or (iv) any act or acts of
personal dishonesty (including, without limitation, any insider trading or
unauthorized trading in the Company's securities) by the executive officer which
have a material adverse effect on the Company or any of its subsidiaries.
 
     In addition, in the event the executive officer is terminated by the
Company without good cause or the executive officer resigns from the Company
within ninety days after being removed from, or not re-elected to the Board of
Directors, despite the executive officer's efforts to remain on the Board of
Directors, the executive officer will be entitled to receive his or her base
salary then in effect until the later of one year from the date of termination
or the end of the term of the employment agreement. In the event that the
executive officer is terminated without good cause within ninety days after a
change of control (as defined in the employment agreement), then the executive
officer will be entitled to receive his or her base salary then in effect until
the later of two years from the date of termination or the end of the term of
the employment agreement.
 
401(K) PLAN
 
     On the closing of the Offering, the Company will commence participation in
the HCP non-contributory retirement plan ("401(k) Plan"). The 401(k) Plan is
available to all full-time Company employees with at least six months of
service. The 401(k) Plan is designed to be tax deferred in accordance with
provisions of Section 401(k) of the Code. The 401(k) Plan provides that each
participant may contribute 15.0% of his or her salary subject to the maximum
allowable each fiscal year ($9,500 in 1997). Under the 401(k) Plan, an employee
may elect to enroll on January 1, or July 1, provided that the employee has met
the six month employment service requirement.
 
1997 STOCK OPTION PLAN
 
     General.  The Company's 1997 Executive and Non-Employee Director Stock
Option Plan (the "1997 Stock Option Plan") provides for the grant of qualified
incentive stock options ("ISOs") which meet the requirements of Section 422 of
the Internal Revenue Code, stock options not so qualified ("NQSOs"), deferred
stock, restricted stock, performance shares, stock appreciation rights and
limited stock awards ("Awards") and dividend equivalent rights ("DERs").
 
     Purpose.  The 1997 Stock Option Plan is intended to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to afford additional incentive to others to increase their efforts
in providing significant services to the Company.
 
     Administration.  The 1997 Stock Option Plan will be administered by the
Compensation Committee, which shall at all times be composed solely of
"non-employee directors" as required by Rule 16b-3 under the Exchange Act.
Members of the Compensation Committee are eligible to receive only NQSOs
pursuant to automatic grants of stock options discussed below.
 
     Options and Awards.  Options granted under the 1997 Stock Option Plan will
become exercisable in accordance with the terms of grant made by the
Compensation Committee. Awards will be subject to the terms and restrictions of
the Awards made by the Compensation Committee. Option and Award recipients shall
enter into a written stock option agreement with the Company. The Compensation
Committee has discretionary authority to select participants from among eligible
persons and to determine at the time an option or Award is granted when and in
what increments shares covered by the option or Award may be purchased or will
vest and, in the case of options, whether it is intended to be an ISO or a NQSO,
provided, however, that certain restrictions applicable to ISOs are mandatory,
including a requirement that ISOs not be issued for less than 100% of the then
fair market value of the Common Stock (110% in the case of a grantee who holds
more than 10% of the outstanding Common Stock) and a maximum term of ten years
(five years in the case of a grantee who holds more than 10% of the outstanding
Common Stock). Fair market value means as of any given date, with respect to any
option or Award granted, at the discretion of the Board of Directors or the
Compensation Committee, (i) the closing sale price of the Common Stock on such
date as reported in the Wall Street Journal, or (ii) the average of the closing
price of the Common Stock on each day of which it was traded over a period of up
to twenty trading days immediately prior to such date, or (iii) if the Common
Stock is not publicly traded (e.g., prior to the closing of the Offering), the
fair market value of the Common Stock as otherwise determined by the Board of
Directors or the Compensation Committee in the good faith exercise of its
discretion.
 
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<PAGE>   70
 
     Eligible Persons.  Officers, directors and employees of the Company, and
other persons expected to provide significant services to the Company, are
eligible to participate in the 1997 Stock Option Plan. ISOs may be granted to
the officers and key employees of the Company. NQSOs and Awards may be granted
to the directors, officers, key employees, agents and consultants of the Company
or any of its subsidiaries.
 
     Shares Subject to the Plan.  Subject to anti-dilution provisions for stock
splits, stock dividends and similar events, the 1997 Stock Option Plan
authorizes the grant of options to purchase, and Awards of, an aggregate of up
to 325,333 shares of the Common Stock. If an option granted under the 1997 Stock
Option Plan expires or terminates, or an Award is forfeited, the shares subject
to any unexercised portion of such option or Award will again become available
for the issuance of further options or Awards under the 1997 Stock Option Plan.
 
     Term of the Plan.  Unless previously terminated by the Board of Directors,
the 1997 Stock Option Plan will terminate ten years from the date of approval
and no options or Awards may be granted under the 1997 Stock Option Plan
thereafter, but existing options or Awards remain in effect until the options
are exercised or the options or the Awards are terminated by their terms.
 
     Term of Options.  Each option must terminate no more than ten years from
the date it is granted (or five years in the case of ISOs granted to an employee
who is deemed to own in excess of 10% of the combined voting power of the
Company's outstanding equity stock). Options may be granted on terms providing
for exercise either in whole or in part at any time or times during their
restrictive terms, or only in specified percentages at stated time periods or
intervals during the term of the option.
 
     Number of Options.  The aggregate fair market value (determined as of the
time of grant) of the shares of the Common Stock with respect to which ISOs are
exercisable for the first time by an employee during any calendar year may not
exceed $100,000.
 
     Option Exercise.  The exercise price of any option granted under the 1997
Stock Option Plan is payable in full in cash, or its equivalent as determined by
the Compensation Committee. The Company may make loans available to option
holders to permit them to exercise options. Any such loan will be evidenced by a
promissory note executed by the option holder and secured by a pledge of Common
Stock of the Company with fair value at least equal to the principal of the
promissory note unless otherwise determined by the Compensation Committee.
 
     Amendment and Termination of Stock Option Plan.  The Board of Directors
may, without affecting any outstanding options or Awards, from time to time
revise or amend the 1997 Stock Option Plan, and may suspend or discontinue it at
any time. However, no such revision or amendment may, without approval by
stockholders of the Company, increase the number of shares of Common Stock
subject to the 1997 Stock Option Plan, modify the class of participants eligible
to receive options or Awards granted under the 1997 Stock Option Plan or extend
the maximum option term under the 1997 Stock Option Plan.
 
     Contingent Options.  All stock options granted by the Compensation
Committee pursuant to the 1997 Stock Option Plan will be contingent and may
vest, subject to other vesting requirements imposed by the Compensation
Committee in full or in part on any September 30 beginning with September 30,
1998 and ending with September 30, 2002 (each, an "Earn-Out Measuring Date").
Subject to any other applicable vesting restrictions, any outstanding stock
options will vest in full as of any Earn-Out Measuring Date through which the
return on a Unit is at least equal to the initial public offering price of the
Unit. In addition, subject to any other applicable vesting restrictions,
one-third of any outstanding stock options will vest as of any Earn-Out
Measuring Date through which the return on a Unit is at least equal to a 20%
annualized return on the initial public offering price of the Unit. The return
on a Unit is determined by adding (i) the appreciation in the value of the Unit
since the closing of the Offering and (ii) the amount of distributions made by
the Company on the share of Common Stock included in the Unit since the closing
of the Offering. The appreciation in the value of a Unit as of any Earn-Out
Measuring Date is the average difference, during the 30 day period that ends on
the Earn-Out Measuring Date, between the market price of the share of Common
Stock included in the Unit and the initial public offering price of the Unit
multiplied by two to take into account the value of the Warrant included in the
Unit. In determining whether such stock options have vested, appropriate
adjustments will be made for stock splits, recapitalizations, stock dividends
and transactions having similar effects.
 
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<PAGE>   71
 
                      STRUCTURE AND FORMATION TRANSACTIONS
 
THE STRUCTURE OF THE COMPANY
 
     The Company will conduct its operations through several entities. The
structure is designed primarily to (i) permit the Company to acquire the
ownership of a majority of the shares of stock in HCP and HCP's subsidiaries
while preserving the Company's qualification as a REIT, and (ii) permit certain
activities of HCP to be wound down before and after the closing of the Offering.
See "Federal Income Tax Considerations -- Requirements for Qualification as a
REIT."
 
HCHI
 
     HCHI will acquire the Investment Portfolio using the net proceeds of the
Offering and the net proceeds of borrowings and securitizations. It is
anticipated that HCHI's assets will consist primarily of the Investment
Portfolio and the HCP Preferred.
 
     Initially, the Principals will own 716,677 shares of Common Stock of HCHI,
or 12.54% of the outstanding shares of Common Stock. The Principals may acquire
additional shares of Common Stock upon the exercise of vested stock options
granted to them under the Company's 1997 Executive and Non-Employee Director
Stock Option Plan or pursuant to the Company's Bonus Incentive Compensation
Plan. See "Management -- 1997 Stock Option Plan;" and "Management -- Bonus
Incentive Compensation Plan." Up to 216,667 additional shares of Common Stock
will be issued to the Principals (giving them up to 15.73% of the outstanding
shares of Common Stock, subject to dilution by other issuances), if the Earn-Out
vests. The Earn-Out may vest in full or in part on any September 30 beginning
with September 30, 1998 and ending with September 30, 2002 (each, an "Earn-Out
Measuring Date"). The Earn-Out will vest in full as of any Earn-Out Measuring
Date through which the return on a Unit is at least equal to the initial public
offering price of the Unit. One-third of the Earn-Out will vest as of any
Earn-Out Measuring Date through which the return on a Unit is at least equal to
a 20% annualized return on the initial public offering price of the Unit. The
return on a Unit is determined by adding (i) the appreciation in the value of
the Unit since the closing of the Offering and (ii) the amount of distributions
made by the Company on the share of Common Stock included in the Unit since the
closing of the Offering. The appreciation in the value of a Unit as of any
Earn-Out Measuring Date is the average difference, during the 30 day period that
ends on the Earn-Out Measuring Date, between the market price of the share of
Common Stock included in the Unit and the initial public offering price of the
Unit multiplied by two to take into account the value of the Warrant included in
the Unit. In determining whether the Earn-Out has vested, appropriate
adjustments will be made for stock splits, recapitalizations, stock dividends
and transactions having similar effects. The shares of Common Stock acquired by
the Principals (including any additional shares to be issued upon the vesting of
the Earn-Out) and the forgiveness of any loans to the Principals upon the
vesting of the Earn-Out represent the consideration given to the Principals in
exchange for their contribution of the HCP Preferred to HCHI.
 
     It is anticipated that HCHI will receive substantially all of its revenue
from the Investment Portfolio and the operations of HCP, HCMC and HCS. The
amounts that HCHI may in turn distribute to its stockholders will be reduced by
any tax that HCHI must pay because it fails to qualify as a REIT or is otherwise
taxable. See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT" and "-- Taxation of HCHI."
 
HCP, HCMC AND HCS
 
     Except as described below, HCP, HCMC and HCS will continue to own their
pre-Offering assets and conduct their pre-Offering activities as taxable,
non-controlled subsidiaries of HCHI. HCP will conduct the Due Diligence
Operations and will support HCHI's acquisition and investment activities by
providing due diligence services. HCMC will originate, sell and service
Multifamily Mortgage Loans and Commercial Mortgage Loans and will serve as a
source of Multifamily Mortgage Loans and Commercial Mortgage Loans for HCHI. HCS
will facilitate the Company's trading activities by acting as a broker/dealer.
 
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<PAGE>   72
 
     HCHI will own all of the HCP Preferred but will generally have no right to
control the affairs of HCP, HCMC and HCS (other than to approve certain
fundamental transactions such as mergers, consolidations, sales of all or
substantially all assets, and voluntary liquidation) because the HCP Preferred
is nonvoting. Instead, as the holders of all of the HCP Common, the Principals
will control the operations and affairs of HCP, HCMC and HCS. This ownership
structure is required because, as a REIT, HCHI generally may not own more than
10% of the voting securities of any other issuer. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT -- Nature of Assets."
Accordingly, the purchasers of Units in the Offering will not own an interest in
any entity that controls HCP, HCMC or HCS.
 
     HCP will make dividend distributions on a quarterly basis to the extent
consistent with HCHI's qualification as a REIT. For purposes of receiving
dividends, there is no difference between a share of the HCP Preferred and a
share of the HCP Common, so that the HCP Preferred will have no dividend rate or
preference over the HCP Common. Instead, dividend distributions by HCP will be
made in the same amount per share of HCP Preferred and HCP Common. Accordingly,
each dividend distribution by HCP will be made to HCHI and the Principals in
proportion to the numbers of shares held by them (so that, initially, each
dividend distribution will be made 97% to HCHI and 3% to the Principals). As the
holder of the HCP Preferred, however, based on a price of the Common Stock in
the Offering of $15.00 per share, HCHI will have the right to receive
$10,750,005 (up to $15,750,010 if the Earn-Out fully vests) in HCP's liquidation
before any other shareholders receive anything. Thus, the Principals will
control the operations and affairs of HCP, HCMC and HCS but will have rights to
receive only 3% of any dividend distribution made by HCP. See "Risk
Factors -- Principals' Conflicts of Interest." Shares of HCP Common held by a
Principal may be repurchased if, among other things, the Principal ceases to be
employed by the Company or to own an interest in HCHI. See "-- The Formation of
HCHI -- Benefits to the Principals" and "Certain Transactions -- The HCP
Shareholders' Agreement.
 
THE FORMATION OF HCHI
 
     Structure of HCP and Subsidiaries Prior to the Consummation of the
Formation Transactions
 
     Historically, HCP has owned interests in other entities in addition to HCMC
and HCS. Some of those entities are inactive, have no value and will be
dissolved and terminated before the closing of the Offering (or as soon
thereafter as reasonably possible). Four of the entities may still own assets at
the time of the closing of the Offering. Two of the entities (Alpine/Hanover LLC
and ABH-I LLC) were formed with institutional investors (Alpine Associates in
the case of Alpine/Hanover LLC; Alpine/Hanover LLC and BT Realty Resources, Inc.
in the case of ABH-I LLC), to engage in mortgage loan trading activities with
HCP acting as asset manager entitled to receive up to 50% of profits depending
upon performance. The third entity (Alpine/Hanover II, L.L.C.) was formed with
Alpine Associates, a Limited Partnership, to trade non-mortgage receivables with
HCP acting as sole asset manager entitled to receive up to 50% of profits
depending upon performance. The fourth entity (AGR Financial, L.L.C.) was formed
with an unaffiliated individual (who acted as the managing member) to invest and
trade in receivables of temporary employment agencies with HCP as a 25% passive
investor.
 
     HCP will transfer its interests in Alpine/Hanover II, L.L.C. and AGR
Financial, L.L.C. to an entity owned by the Principals before the closing of the
Offering. Although HCP will retain its interests in Alpine/Hanover LLC and ABH-I
LLC, it will distribute to the Principals before the closing of the Offering its
rights to any receivables from those entities arising between June 30, 1997 and
the closing of the Offering. HCP has also separately managed assets for BT
Realty Resources, Inc. pursuant to a management contract entitling it to receive
up to 50% of profits depending upon performance. HCP will wind down its
activities under that contract but, as of the time of the closing of the
Offering, may not have completed the disposition of all of the managed assets.
HCP will distribute to the Principals before the closing of the Offering its
rights to any receivables arising between June 30, 1997 and the closing of the
Offering under its management contract with BT Realty Resources, Inc. The
receivables to be distributed are expected to approximate $1,000,000 in the
aggregate. Except in satisfaction of any notes that it has contributed to the
limited liability companies, HCP is not obligated to make further contributions
to any of the limited liability companies.
 
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<PAGE>   73
 
     Formation Transactions
 
     All but the last three of the following Formation Transactions will be
consummated prior to or on the closing of the Offering (and, in the case of the
completion of the termination of Alpine/Hanover LLC, ABH-I LLC and any other
entities beside HCMC and HCS in which HCP owns interests and that were not
terminated before the closing of the Offering, as soon as practicable after the
close of the Offering):
 
        - HCHI has been formed as a Maryland corporation.
 
        - HCP will begin to liquidate (or dispose of its interests in) its
          inactive corporate subsidiaries and affiliates.
 
        - HCP will amend its charter to authorize the HCP Preferred and the HCP
          Common (and a class of nonvoting common stock shares of which may be
          issued to HCHI in exchange for any shares of HCP Common it acquires).
 
        - The Principals will exchange, in tax-free recapitalizations, their
          shares of stock in HCP for all of the HCP Preferred and all of the HCP
          Common.
 
        - To the extent consistent with its contractual and fiduciary
          obligations, HCP will begin to wind down (or dispose of its interests
          in) the limited liability companies of which it is a member. Some or
          all of those interests may be transferred to the Principals without
          consideration. If HCP is not able to divest itself of all of its
          interests in two of those limited liability companies (Alpine/Hanover
          LLC and ABH-I LLC) and as asset manager to BT Realty Resources, Inc.
          prior to the consummation of the Offering, HCP will distribute to the
          Principals prior to the consummation of the Offering its rights to any
          receivables arising between June 30, 1997 and the closing of the
          Offering from these investment entities. The receivables are expected
          to approximate $1,000,000. See "Structure and Formation
          Transactions -- Benefits to the Principals."
 
        - HCHI will sell 5,000,000 Units in the Offering.
 
        - The Principals will contribute the HCP Preferred to HCHI in exchange
          for 716,667 shares of Common Stock.
 
        - HCP will complete the wind down of (or the disposition of its
          interests in) Alpine/Hanover LLC, ABH-I LLC and any other entities
          (other than HCMC and HCS) in which it owns interests and that were not
          terminated before the closing of the Offering.
 
        - HCHI will lend up to $1,750,000 to the Principals to enable the
          Principals to pay tax on the gains they must recognize upon
          contributing the HCP Preferred to HCHI for shares of Common Stock. The
          loans will be secured by 116,667 shares of the Principals' Common
          Stock but will otherwise be nonrecourse to the Principals (so that,
          upon a default by a Principal, HCHI could not reach other assets of
          the Principal for repayment). The loans will bear interest at the
          lowest "applicable federal rate." See "Certain Transactions -- Loans
          to the Principals."
 
        - If the Earn-Out vests, as additional consideration to the Principals
          for their contribution of the HCP Preferred to HCHI, HCHI will (i)
          issue to the Principals up to 216,667 additional shares of Common
          Stock, increasing the Principals' percentage ownership of the
          outstanding shares of Common Stock to up to 15.73%, and (ii) forgive
          the $1,750,000 in loans made to the Principals to enable them to pay
          taxes to the extent that the Earn-Out vests. See "-- HCHI."
 
  Consequences of the Formation Transactions
 
     The consummation of the Formation Transactions and the closing of the
Offering will have the following consequences:
 
        - The Company will be comprised of HCHI, HCP, HCMC and HCS.
 
        - The purchasers of Units in the Offering will own 87.46% of the
          outstanding Common Stock in HCHI (and all of the Warrants, except for
          the Representatives' Warrants). The percentage of the
 
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<PAGE>   74
 
outstanding Common Stock owned by the purchasers of Units in the Offering may
decrease to 84.27% if the Earn-Out vests.
 
        - The Principals will own 12.54% of the outstanding Common Stock. The
          percentage of the outstanding Common Stock owned by the Principals may
          increase to up to 15.73%, subject to dilution by the issuance of other
          interests in HCHI, if the Earn-Out vests.
 
        - HCHI will own all of the HCP Preferred (entitling HCHI to receive 97%
          of the dividend distributions made by HCP).
 
        - The Principals will own all of the HCP Common (entitling them to
          receive 3% of the dividend distributions made by HCP).
 
        - HCMC and HCS will continue to be wholly owned subsidiaries of HCP.
 
        - The Principals will be entitled to borrow up to $1,750,000 from HCHI
          to enable them to pay taxes. The loans will be nonrecourse, secured by
          116,667 shares of their Common Stock and subject to being forgiven to
          the extent the Earn-Out vests.
 
  Determination and Valuation of Ownership Interests
 
     The percentage interest of the Principals in HCHI was determined based upon
negotiations between the Representatives and the Principals. See "Underwriting."
Assuming the issuance of 5,000,000 Units in the Offering, the Principals will
initially hold 12.54% of the outstanding Common Stock of HCHI. As additional
consideration for the sale of the HCP Preferred by the Principals to HCHI, if
the Earn-Out vests, (i) the Principals may be issued up to 216,667 additional
shares of Common Stock (in the aggregate increasing the percentage of shares of
Common Stock owned by them to up to 15.73%) subject to dilution by other
issuances of shares of Common Stock, and (ii) up to $1,750,000 in loans made by
HCHI to the Principals to enable the Principals to pay taxes on their gains from
contributing the HCP Preferred to HCHI may be forgiven. See "-- The Structure of
the Company." If the Underwriters' over-allotment option is exercised in full,
the Principals will hold 11.08% of the outstanding Common Stock. This percentage
interest will not be affected by the initial public offering price.
 
     In connection with the contribution of the HCP Preferred to HCHI, no
third-party appraisal has been or will be obtained as to the value of the HCP
Preferred or of any of the assets of HCP or any entity (including HCMC and HCS)
in which HCP owns an interest. In addition, no opinion has been or will be
obtained as to the fairness of the allocation of shares to the purchasers in the
Offering. The valuation of the Company and its components, and the amounts and
terms of the loans of up to $1,750,000 to be made available by HCHI to the
Principals to enable the Principals to pay taxes on their gains from
contributing the HCP Preferred to HCHI, has been determined based solely upon
negotiations between the Representatives and the Principals. See "Underwriting."
Based on a public offering price of $15.00 per Unit and no value for the
Warrants, the aggregate consideration to be paid by HCHI for the HCP Preferred
consists of $10,750,005 in Common Stock (and may increase to $15,750,010 if the
Earn-Out vests, including the forgiveness of loans from HCHI of up to
$1,750,000, but without regard to any receivables distributed by HCP to the
Principals, any salaries or other compensation for services, any additional
shares of Common Stock that may be issued as compensation for services and any
releases of personal guarantees). There can be no assurance that the
consideration received by the Principals in the Formation Transactions will be
equivalent to the fair market value of the HCP Preferred.
 
     The Principals will receive 716,667 shares of Common Stock (representing
12.54% of the outstanding shares of Common Stock) in exchange for the HCP
Preferred (which represent 97% of the book value of HCP at June 30, 1997, or
$688,850). HCHI will record the carrying value of its investment in HCP at cost
(which has been determined to be the net book value of the HCP Preferred) and
account for the investment under the equity method. See "Pro Forma Financial
Data". Upon the partial or full vesting of the Earn-Out, up to 216,667
additional shares of Common Stock may be issued to the Principals, giving the
Principals up to 15.73% of the outstanding Common Stock (taking into account the
issuance of such additional shares of Common Stock). HCHI will receive no
additional consideration in exchange for the 216,667 additional shares
 
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<PAGE>   75
 
of Common Stock. See "Pro Forma Financial Data." In addition, up to $1,750,000
in loans made by HCHI to the Principals to enable the Principals to pay taxes
will be forgiven to the extent that the Earn-Out vests. See "Structure and
Formation Transactions -- The Formation of HCHI."
 
  Benefits to the Principals
 
     The Principals will realize certain material benefits in connection with
the consummation of the Formation Transactions and the closing of the Offering,
including the following:
 
        - To the extent consistent with its contractual and fiduciary
          obligations, HCP will begin to wind down (or dispose of its interests
          in) the limited liability companies of which it is a member. Some or
          all of those interests may be transferred to the Principals without
          consideration. If HCP is not able to divest itself of all of its
          interests in Alpine/Hanover LLC and ABH-I LLC and as sole asset
          manager to BT Realty Resources, Inc. prior to the consummation of the
          Offering, HCP will distribute to the Principals prior to the
          consummation of the Offering its rights to any receivables arising
          between June 30, 1997 and the closing of the Offering from these
          investment entities. The receivables are expected to approximate
          $1,000,000.
 
        - At the closing of the Offering, the Principals will receive in
          exchange for the HCP Preferred 12.54% of the initially outstanding
          Common Stock of HCHI (with a total value of $10,750,005 based on a
          price of the Common Stock in the Offering of $15.00 per share).
          Thereafter, if the Earn-Out partially or fully vests, the Principals
          will receive as additional consideration up to 216,667 additional
          shares of Common Stock of HCHI (increasing their percentage of Common
          Stock to up to 15.73%, subject to dilution by other issuances of
          Common Stock), and the forgiveness of up to $1,750,000 in loans made
          by HCHI to the Principals to enable the Principals to pay taxes. The
          terms of the agreements by which the Principals will acquire their
          shares of Common Stock and loans have not been determined through
          arm's length negotiation. The Principals' obligations to enforce those
          agreements as directors and officers of HCHI may conflict with their
          interests as stockholders of HCHI. See "Risk Factors -- Benefits to
          the Principals;" and "Management -- 1997 Stock Option Plan." At June
          30, 1997, the book value of the HCP Preferred to be contributed to
          HCHI by the Principals was $688,854. The value of the benefits to be
          received by the Principals in exchange for the HCP Preferred may equal
          $15,750,010 if the Earn-Out fully vests (including the forgiveness of
          loans from HCHI of up to $1,750,000, but without regard to any
          receivables distributed by HCP to the Principals, any salaries or
          other compensation for services, any additional shares of Common Stock
          that may be issued as compensation for services and any releases of
          personal guarantees) based upon a public offering price of $15.00 per
          Unit and no value for the Warrants.
 
        - Subject to lender approval, John A. Burchett will be released from his
          personal guarantee of indebtedness of HCP which equaled $2,115,000 as
          of June 30, 1997. See "Risk Factors -- Benefits to the Principals."
 
        - HCHI will lend up to $1,750,000 to the Principals to enable the
          Principals to pay tax on the gains they must recognize upon
          contributing the HCP Preferred to HCHI for shares of Common Stock. The
          loans will be secured by 116,667 shares of the Principals' Common
          Stock but will otherwise be nonrecourse to the Principals (so that,
          upon a default by a Principal, HCHI could not reach other assets of
          the Principal for repayment). In addition, the loans to the Principals
          will be forgiven to the extent that the Earn-Out vests. See "Certain
          Transactions -- Loans to the Principals."
 
        - The Principals will serve as directors and officers of HCHI, for which
          they will receive aggregate base salaries of $975,000 and will be
          eligible to participate in the 1997 Stock Option Plan and the Bonus
          Incentive Compensation Plan. See "Management -- Executive
          Compensation;" "-- 1997 Stock Option Plan;" and "-- Bonus Incentive
          Compensation Plan."
 
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<PAGE>   76
 
        - The Principals will continue to own all 3,000 of the outstanding
          shares of HCP Common. Shares of HCP Common held by a Principal may be
          repurchased, at a price based upon the valuation of HCP, if, among
          other things, the Principal ceases to be employed by the Company or to
          own an interest in HCHI. See "Certain Transactions -- the HCP
          Shareholders' Agreement."
 
     See "Risk Factors -- Principals' Conflicts of Interest;" and "Certain
Transactions."
 
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<PAGE>   77
 
                              CERTAIN TRANSACTIONS
 
THE HCP SHAREHOLDERS' AGREEMENT
 
     Upon the closing of the Offering, HCHI, HCP and the Principals will enter
into a shareholders' agreement (the "HCP Shareholders' Agreement") that will
govern, among other things, (i) the rights of the Principals to transfer their
shares of HCP Common, and (ii) the purchase of shares of HCP Common from the
Principals by HCP, HCHI and the other Principals. Under the HCP Shareholders'
Agreement, a Principal may not transfer his or her shares of HCP Common other
than to a family member, an affiliate or another HCP stockholder without first
offering such HCP Common to HCP, the other holders of HCP Common and the holders
of HCP Preferred (in that order) on the same terms and conditions. In addition,
HCP, the other holders of HCP Common and the holders of HCP Preferred will have
the right to purchase the shares of HCP Common of a Principal (or of a permitted
transferee of a Principal) if such Principal (a) ceases to be employed by the
Company (including by death, disability or voluntary or involuntary
termination), (b) ceases to own any equity interest in HCHI, (c) becomes
bankrupt, or (d) transfers any shares of HCP Common in connection with a divorce
or by operation of law. The amount payable to a Principal who suffers any of the
foregoing events is based upon the valuation of HCP. To avoid the loss of HCHI's
REIT status, HCHI is permitted to assign its rights to purchase HCP Common and
to exchange any HCP Common it purchases for shares of nonvoting common stock of
HCP.
 
THE FORMATION TRANSACTIONS
 
     The terms of the Formation Transactions, including certain benefits to the
Principals, are described in "Structure and Formation Transactions -- The
Formation of HCHI."
 
EMPLOYMENT AGREEMENTS
 
     The Company will enter into employment agreements with each of the
Principals. Each employment agreement will provide for, among other things, an
initial term of five years. See "Management -- Employment Agreements."
 
PRINCIPALS' OWNERSHIP
 
     After the closing of the Offering, HCMC and HCS will continue to be
wholly-owned subsidiaries of HCP and the Principals will own all of the HCP
Common. The Principals will have the exclusive power to manage and conduct the
businesses of HCP, HCMC and HCS subject to certain limited exceptions. See
"Structure and Formation Transactions."
 
LOANS TO THE PRINCIPALS
 
     Since the exchange by the Principals of their shares of HCP Preferred for
shares of Common Stock will be a taxable transaction, HCHI will make up to
$1,750,000 in loans available to the Principals to enable them to pay their
taxes. Each loan will have a term of five years and will bear interest at the
lowest "applicable federal rate" in effect for the month in which the loan is
made. No payments of principal on a loan will be due before maturity unless the
borrowing principal is terminated for "good cause" under his or her employment
agreement with HCHI, in which case the loan will become immediately due and
payable. See "Management -- Employment Agreements." Interest, however, will be
payable on a quarterly basis in arrears. The loans to the Principals will be
secured by 116,667 of their shares of Common Stock but will otherwise be
nonrecourse to them. A Principal will not be able to sell the shares of Common
Stock that are pledged to secure his or her loan. Accordingly, if a Principal
defaults in repaying his or her loan, HCHI will be able to look only to the
shares of Common Stock the Principal pledged to secure his or her loan and not
to any personal assets of the Principal. Thus, a decline in the value of the
Common Stock could result in a Principal's failure to repay his or her loan. As
additional consideration to the Principals for their contribution of the HCP
Preferred to HCHI, the outstanding balance of the loans will be forgiven to the
extent that the Earn-Out vests. See "Structure and Formation
Transactions -- HCHI." The terms of the loans were not determined through
arm's-length negotiations and may be more favorable to the Principals than would
otherwise be available to them.
 
                                       77

<PAGE>   78
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth certain information respecting the
beneficial ownership of the Common Stock as of August 25, 1997 as adjusted to
give effect to (i) the issuance of the 716,667 shares of Common Stock to be
issued to the Principals in consideration for their contribution of the HCP
Preferred to HCHI, and (ii) to give effect to the Offering, by (1) each person
known to the Company to beneficially own more than 5% of the Common Stock, (2)
each Director of the Company, (3) the Company's Named Executive Officers, and
(4) all Directors and executive officers as a group. Unless otherwise indicated
in the footnotes to the table, the beneficial owners named have, to the
knowledge of the Company, sole voting and investment power with respect to the
shares beneficially owned, subject to community property laws where applicable.
 

<TABLE>
<CAPTION>
                                                                             PERCENTAGE OF SHARES OF
                                                 NUMBER OF SHARES           COMMON STOCK BENEFICIALLY
                                                 OF COMMON STOCK                      OWNED
                                                   BENEFICIALLY       -------------------------------------
           NAME OF BENEFICIAL OWNER                  OWNED(1)         BEFORE OFFERING     AFTER OFFERING(2)
- -----------------------------------------------  ----------------     ---------------     -----------------
<S>                                              <C>                  <C>                 <C>
John A. Burchett(3)(4).........................       394,177               55.00%               6.90%
Irma N. Tavares(5).............................       107,500               15.00%               1.88%
Joyce S. Mizerak(5)............................       107,500               15.00%               1.88%
George J. Ostendorf(6).........................       107,500               15.00%               1.88%
                                                      -------              ------               -----
All Directors and executive officers as a group
  (7 persons)..................................       716,677              100.00%              12.54%
                                                      =======              ======               =====
</TABLE>

 
- ---------------
(1) Includes the 716,667 shares of Common Stock to be issued to the Principals
    in consideration for their contribution of the HCP Preferred to HCHI upon
    the closing of the Offering. See "Structure and Formation
    Transactions -- The Structure of the Company." Does not include the 216,667
    shares of Common Stock that may be issued to the Principals upon full
    vesting of the Earn-Out or the exercise of any options that may be granted
    to the Principals pursuant to the 1997 Stock Option Plan. See
    "Management -- 1997 Stock Option Plan" and "Structure and Formation
    Transactions -- HCHI."
 
(2) Assuming no exercise of the Underwriters' over-allotment option and no
    purchases in the Offering by the Principals.
 
(3) Address: 90 West Street, Suite 1508, New York, New York 10006.
 
(4) Subject to the Ownership Limit.
 
(5) Address: 100 Metroplex Drive, Suite 301, Edison, New Jersey 08817.
 
(6) Address: 7140 West Higgins Avenue, Chicago, Illinois 60656.
 
                           DESCRIPTION OF SECURITIES
 
     The authorized stock of the Company consists of 90,000,000 shares of Common
Stock, $.01 par value, and (ii) 10,000,000 shares of Preferred Stock, $.01 par
value. The following description of the capital stock of the Company does not
purport to be complete or to give full effect to the provisions of statutory or
common law and is subject in all respects to the provisions of the Company's
charter as in effect from time to time. The authorized stock of the Company may
be increased and altered from time to time as permitted by Maryland law. The
charter authorizes the Board of Directors to reclassify any unissued shares of
its capital stock in one or more classes or series.
 
COMMON STOCK
 
     Voting.  Each holder of Common Stock is entitled to one vote for each share
of record on each matter submitted to a vote of holders of capital stock of the
Company. The Company's charter does not provide for cumulative voting and,
accordingly, the holders of a majority of the outstanding shares of Common Stock
have the power to elect all directors to be elected each year.
 
     Annual Meeting.  Annual meetings of the stockholders of the Company will be
held commencing in 1998, and special meetings may be called by the Chairman of
the Board of Directors, by the President, by a majority of the Board of
Directors, or by stockholders holding at least a majority of the outstanding
shares of
 
                                       78

<PAGE>   79
 
capital stock entitled to be voted at the meeting. The charter of the Company
may be amended in accordance with Maryland law, subject to certain limitations
set forth in the charter.
 
PREFERRED STOCK
 
     The Company's Board of Directors is authorized by the charter to fix or
alter the rights, preferences, privileges and restrictions of any series of
Preferred Stock, including the dividend rights, original issue price, conversion
rights, voting rights, terms of redemption, liquidation preferences and sinking
fund terms thereof, and the number of shares constituting any such series and
designating thereof, and to increase or decrease the number of shares of such
series subsequent to the issuance of shares of such series (but not below the
number of shares outstanding). As the terms of the Preferred Stock can be fixed
by the Board of Directors without shareholder action, the Board of Directors may
issue Preferred Stock with terms calculated to defeat a proposed takeover of the
Company or to make the removal of management more difficult. The Board of
Directors, without shareholder approval, could issue Preferred Stock with
dividend, voting, conversion and other rights which could adversely affect the
rights of the holders of Common Stock. The Company's Board of Directors
currently has no plans to issue shares of Preferred Stock in the Company. See
"Risk Factors -- Preferred Stock; Restrictions on Ownership of Common Stock;
Anti-takeover Risk."
 
WARRANTS
 
     The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") dated as of the closing of the Offering between the Company and the
warrant agent (the "Warrant Agent"). State Street Bank & Trust Company will
initially act as Warrant Agent. The following is a brief summary of certain
provisions of the Warrant Agreement and does not purport to be complete and is
qualified in its entirety by reference to the Warrant Agreement including the
definitions therein of certain terms used below. A copy of the proposed form of
Warrant Agreement to be filed as an exhibit to the Registration Statement of
which this Prospectus is a part. See "Additional Information."
 
     Each Unit consists of one share of Common Stock and one Warrant. The
Warrants will not become detachable from shares of Common Stock until six months
after the closing of the Offering. The Warrants will become exercisable six
months following the closing of the Offering and will remain exercisable until
5:00 p.m. Eastern Time on the third anniversary of the date of this Prospectus
(the "Expiration Date") at the initial public offering price and will be subject
to certain anti-dilution protection. Each Warrant, when exercised, will entitle
the holder thereof to receive one share of Common Stock.
 
     The Warrants may be exercised by surrendering to the Warrant Agent the
definitive Warrant Certificates evidencing such Warrants, with the accompanying
form of election to purchase properly completed and executed, together with
payment of the exercise price. Payment of the exercise price may be made (a) in
the form of cash or by certified or official bank check payable to the order of
the Company, or (b) by surrendering additional Warrants or shares of Common
Stock for cancellation to the extent the Company may lawfully accept shares of
Common Stock, with the value of such shares of Common Stock for such purpose to
equal the average trading price of the Common Stock during the 20 trading days
preceding the date surrendered and the value of the Warrants to equal the
difference between such value of a share of Common Stock and the exercise price.
Upon surrender of the Warrant Certificate and payment of the exercise price and
any other applicable amounts, the Warrant Agent will deliver or cause to be
delivered, to or upon the written order of such holder, stock certificates
representing the number of whole shares of Common Stock or other securities or
property to which such holder is entitled. If less than all of the Warrants
evidenced by a Warrant certificate are to be exercised, a new Warrant
Certificate will be issued for the remaining number of Warrants.
 
     The Warrants are in registered form and may be presented to the Warrant
Agent for transfer, exchange or exercise at any time on or prior to 5:00 p.m.
Eastern Time on the Expiration Date, at which time the Warrants become wholly
void and of no value. The Company has applied to have the Warrants approved for
quotation on the American Stock Exchange. If a market for the Warrants develops,
the holder may sell the Warrants instead of exercising them. There can be no
assurance, however, that a market for the Warrants will develop or continue.
 
                                       79

<PAGE>   80
 
     For a holder to exercise the Warrants, there must be a current prospectus
covering the shares of Common Stock issuable upon the exercise of the Warrants,
and such shares must be registered, qualified or deemed to be exempt under
federal and state securities laws. Although the Company will use its best
efforts to have all of the shares of Common Stock issuable upon the exercise of
the Warrants registered or qualified on or before the Exercise Date and to
maintain a current prospectus relating thereto until the Expiration Date of the
Warrants, there can be no assurance that it will be able to do so.
 
     No fractional shares of Common Stock will be issued upon exercise of the
Warrants. The holders of the Warrants have no right to vote on matters submitted
to the stockholders of the Company and have no right to receive dividends. The
holders of the Warrants not yet exercised are not entitled to share in the
assets of the Company in the event of liquidation, dissolution or the winding up
of the affairs of the Company.
 
     The exercise price of the Warrants will be appropriately adjusted if the
Company (i) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock or makes certain other dividends or distributions on
its Common Stock (other than cash dividends out of funds legally available
therefor), (ii) subdivides its outstanding shares of Common Stock into a greater
number of shares, (iii) combines its outstanding shares of Common Stock into a
smaller number of shares, (iv) issues by reclassification of its Common Stock
any shares of its capital stock.
 
     In case of certain consolidations or mergers of the Company, or the
liquidation of the Company or the sale of all or substantially all of the assets
of the Company to another corporation, each Warrant will thereafter be deemed
exercised for the right to receive the kind and amount of shares of stock or
other securities or property to which such holder would have been entitled as a
result of such consolidation, merger or sale had the Warrants been exercised
immediately prior thereto, less the exercise price.
 
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
 
     Two of the requirements of qualification for the tax benefits accorded by
the REIT provisions of the Code are that (i) during the last half of each
taxable year not more than 50% in value of the outstanding shares may be owned
directly or indirectly by five or fewer individuals, and (ii) there must be at
least 100 stockholders on 335 days of each taxable year of 12 months.
 
     For the Company to meet these requirements at all times, the charter
prohibits any person or group of persons from acquiring or holding, directly or
indirectly, shares of Common Stock in excess of 9.5% of the value of the
aggregate of the outstanding shares of Common Stock, provided that John A.
Burchett will be permitted to hold up to 11.99%. For this purpose, the term
"ownership" is defined in accordance with the REIT provisions of the Code, the
constructive ownership provisions of Section 544 of the Code, as modified by
Section 856(h)(1)(B) of the Code, and the term "person" is defined to include a
"group," which is defined to have the same meaning as that term has for purposes
of Section 13(d)(3) of the Exchange Act. Accordingly, shares of Common Stock
owned or deemed to be owned by a person who individually owns less than 9.5% (or
11.99% in the case of Mr. Burchett) of the shares of Common Stock outstanding
may nevertheless be in violation of the ownership limitations set forth in the
Company's charter.
 
     The constructive ownership provisions applicable under Section 544 of the
Code attribute ownership of securities owned by a corporation, partnership,
estate or trust proportionately to its stockholders, partners or beneficiaries,
attribute ownership of securities owned by family members to other members of
the same family and by partners to other partners of the same partnership, treat
securities with respect to which a person has an option to purchase as actually
owned by that person, and set forth rules as to when securities constructively
owned by a person are considered to be actually owned for the application of
such attribution provisions (i.e., "reattribution"). For purposes of determining
whether a person holds shares of Common Stock in violation of the Ownership
Limitation set forth in the Company's charter, a person or group will thus be
treated as owning not only shares of Common Stock actually or beneficially
owned, but also any shares of Common Stock attributed to such person or group
under the attribution rules described above. Ownership of shares of the Common
Stock through such attribution is generally referred to as constructive
ownership.
 
                                       80

<PAGE>   81
 
     The Company's charter further prohibits (a) any person from beneficially or
constructively owning shares of Common Stock that would result in the Company's
being "closely held" under Section 856(h) of the Code or otherwise cause the
Company to fail to qualify as a REIT, and (b) any person from transferring
shares of Common Stock if such transfer would result in shares of Common Stock
being owned by fewer than 100 persons. If any transfer of shares of Common Stock
occurs which, if effective, would result in any person beneficially or
constructively owning shares of Common Stock in excess or in violation of the
above transfer or ownership limitations, then that number of shares of Common
Stock the beneficial or constructive ownership of which otherwise would cause
such person to violate such limitations (rounded to the nearest whole shares)
shall be automatically transferred to a trustee (the "Trustee") as trustee of a
trust (the "Trust") for the exclusive benefit of one or more charitable
beneficiaries (the "Charitable Beneficiary"), and the intended transferee shall
not acquire any rights in such shares. Shares held by the Trustee shall be
issued and outstanding shares of Common Stock. The intended transferee shall not
benefit economically from ownership of any shares held in the Trust, shall have
no rights to dividends and shall not possess any rights to vote or other rights
to the shares held in the Trust. The Trustee shall have all voting rights and
rights to dividends or other distributions with respect to shares held in the
Trust, which rights shall be exercised for the exclusive benefit of the
Charitable Beneficiary. Any dividend or other distribution paid prior to the
discovery by the Company that shares of Common Stock have been transferred to
the Trustee shall be paid with respect to such shares to the Trustee upon demand
and any dividend or other distribution authorized but unpaid shall be paid when
due to the Trustee. Any dividends or distributions so paid over to the Trustee
shall be held in trust for the Charitable Beneficiary. The Board of Directors of
the Company may, in their discretion, waive these requirements on owning shares
in excess of the Ownership Limit.
 
     Within 20 days of receiving notice from the Company that shares of Common
Stock have been transferred to the Trust, the Trustee shall sell the shares held
in the Trust to a person, designated by the trustee, whose ownership of the
shares will not violate the ownership limitations set forth in the Company's
charter. Upon such sale, the interest of the Charitable Beneficiary in the
shares sold shall terminate and the Trustee shall distribute the net proceeds of
the sale to the intended transferee and to the Charitable Beneficiary as
follows. The intended transferee shall receive the lesser of (i) the price paid
by the intended transferee for the shares or, if the intended transferee did not
give value for the shares in connection with the event causing the shares to be
held in the trust (e.g., in the case of a gift, devise or other such
transaction), the Market Price (as defined below) of the shares on the day of
the event causing the shares to be held in the Trust, and (ii) the price per
share received by the Trustee from the sale or other disposition of the shares
held in the Trust. Any net sale proceeds in excess of the amount payable to the
intended transferee shall be immediately paid to the Charitable Beneficiary.
 
     The term "Market Price" on any date shall mean, with respect to any class
or series of outstanding shares of the Company's stock, the Closing Price (as
defined below) for such shares on such date. The "Closing Price" on any date
shall mean the last sale price for such shares, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, for such shares, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which such shares are listed or
admitted to trading or, if such shares are not listed or admitted to trading on
any national securities exchange, the last quoted price, or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal other
automated quotation system that may be in use or, if such shares are not quoted
by any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in such shares elected
by the Board of Directors or, in the event that no trading price is available
for such shares, the fair market value of the shares, as determined in good
faith by the Board of Directors.
 
     Every owner of 5% or more (or such lower percentage as required by the Code
or the regulations promulgated thereunder) of all classes or series of the
Company's capital stock, including shares of Common Stock, within 30 days after
the end of each taxable year, is required to give written notice to the Company
stating the name and address of such owner, the number of shares of each class
and series of stock of the
 
                                       81

<PAGE>   82
 
Company beneficially owned and a description of the manner in which such shares
are held. Each such owner shall provide to the Company such additional
information as the Company may request in order to determine the effect, if any,
of such beneficial ownership on the Company's status as a REIT and to ensure
compliance with the Ownership Limit. See "Federal Income Tax
Considerations -- Record Keeping Requirements."
 
TRANSFER AGENT
 
     The transfer agent and registrar for the Common Stock is State Street Bank
& Trust Company, Canton, Massachusetts.
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
GENERAL
 
     Upon the closing of the Offering, the Company will have outstanding
5,716,677 shares of Common Stock (including 716,677 shares issued to the
Principals), 5,000,000 shares of Common Stock reserved for the Warrants, 150,000
shares of Common Stock (172,500 shares if the over-allotment option is
exercised) reserved for the Representatives' Warrants and 216,667 shares
reserved for the issuance to the Principals that will be issued to them upon the
vesting of the Earn-Out. The Units issued in the Offering will be freely
tradable immediately after the Offering, and the Warrants and Common Stock
issued in the Offering will be freely tradeable six months after the Offering,
in each case by persons other than "affiliates" of the Company without
restriction under the Securities Act, subject to the limitations on ownership
set forth in the charter. See "Description of Securities." The Units, Warrants
and Common Stock to be owned by the Company's directors, executive officers and
employees (collectively, the "Restricted Stock"), will be "restricted
securities" within the meaning of Rule 144 promulgated under the Securities Act
("Rule 144") and may not be sold except pursuant to registration under the
Securities Act or pursuant to an exemption from registration, including
exemptions contained in Rule 144. As described below under "Registration
Rights," the Company has granted certain holders registration rights with
respect to their Common Stock. See "-- Registration Rights."
 
     In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of Restricted Stock from the Company
or any "affiliate" of the Company, as that term is defined under the Securities
Act, the acquirer or subsequent holder thereof is entitled to sell within any
three-month period a number of shares of Common Stock that does not exceed the
greater of 1% of the then outstanding Common Stock or the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144 are
also subject to certain manner of sale provisions, public information
requirements and notice requirements. After one year has elapsed since the date
of acquisition of Restricted Stock from the Company or from any "affiliate" of
the Company, and the acquirer or subsequent holder thereof is deemed not to have
been an "affiliate" of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares in the public market
under Rule 144(k) without regard to the volume limitation, manner of sale,
public information or notice requirements.
 
     Prior to the date of this Prospectus, there has been no public market for
the Units. Trading of the Units on the American Stock Exchange is expected to
commence effective upon the closing of the Offering. Sales of substantial
amounts of Common Stock or Warrants (including shares issued upon the exercise
of stock options), or the perception that such sales occur, could adversely
affect prevailing market prices of the Common Stock and Warrants. See "Risk
Factors -- Shares Available for Future Sale."
 
     The Company has reserved for issuance an aggregate of 325,333 shares of
Common Stock to be issued pursuant to the exercise of stock options to be
granted under the 1997 Stock Option Plan. All stock options granted pursuant to
the 1997 Stock Option Plan will be contingent, with vesting based upon the
financial performance of the Company and such other criteria as the Compensation
Committee determines to be appropriate. See "Management -- 1997 Stock Option
Plan."
 
     For a description of certain restrictions on transfers of Common Stock held
by the Principals, see "Underwriting."
 
                                       82

<PAGE>   83
 
REGISTRATION RIGHTS
 
     Pursuant to the Registration Rights Agreement to be filed as an exhibit to
the Registration Statement, the Company has granted the Principals certain
"demand" and "piggyback" registration rights with respect to the Common Stock
that they will acquire.
 
     Pursuant to the Registration Rights Agreement, Principals who do not own
less than 30% of the Registrable Securities (as defined therein) may request,
(i) on any one occasion on or after January 1, 1998, that the Company file one
registration on Form S-11 or other form (including Form S-3) that may be
available, at the Company's expense, with respect to up to 100,000 of the
Registrable Shares of the Principals to pay tax on the gains they must recognize
upon contributing the HCP Preferred to HCHI for shares of Common Stock and (ii)
on any two occasions on or after one year after the closing of the Offering,
that the Company file a shelf registration on Form S-3 with respect to the
number of Registrable Shares requested by the Principals, with the Company
paying all registration expenses in connection with the first such shelf
registration and the Principals paying all registration expenses in connection
with the second such shelf registration. In addition, in the event that the
Company proposes to register any of its Securities under the Securities Act,
whether for its own account or otherwise, the Principals are entitled to notice
of such registration and are entitled to include their Registrable Shares,
subject to certain conditions and limitations.
 
                     CERTAIN PROVISIONS OF MARYLAND LAW AND
                      OF THE COMPANY'S CHARTER AND BYLAWS
 
     The following summary of certain provisions of the MGCL and of the charter
and the bylaws of the Company does not purport to be complete and is subject to
and qualified in its entirety by reference to Maryland law and the charter and
the bylaws of the Company, copies of which will be filed as exhibits to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
 
REMOVAL OF DIRECTORS
 
     The charter provides that a director may be removed at any time but only by
the affirmative vote of at least a majority of the votes entitled to be cast in
the election of directors.
 
BUSINESS COMBINATIONS
 
     Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, as asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the outstanding
voting stock of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question was the
beneficial owner of 10% or more of the voting power of the then outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate of
such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative vote
of at least (a) 80% of the votes entitled to be cast by holders of voting stock
of the corporation and (b) 66 2/3% of the votes entitled to be cast by holders
of voting stock other than shares held by the Interested Stockholder with whom
(or with whose affiliate) the business combination is to be effected, unless,
among other conditions, the corporation's common stockholders receive a minimum
price (as defined in the MGCL) for their shares and their consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the board of
directors of the corporation prior to the time that the Interested Stockholder
becomes an Interested Stockholder.
 
CONTROL SHARE ACQUISITIONS
 
     The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquirer, by officers or by directors who
are
 
                                       83

<PAGE>   84
 
employees of the corporation. "Control shares" are voting shares of stock which,
if aggregated with all other such shares of stock, previously acquired by the
acquirer or in respect of which the acquirer is able to exercise or direct the
exercise of voting power (except solely by virtue of a revocable proxy), would
entitle the acquirer to exercise voting power in electing directors within one
of the following ranges of voting power: (1) one-fifth or more but less than
one-third, (2) one-third or more but less than a majority or (3) a majority or
more of all voting power. Control shares do not include shares the acquiring
person is entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control shares,
subject to certain exceptions.
 
     A person who has made or proposed to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses)
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
 
     If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for whom voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquirer or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquirer
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquirer in the control share acquisition.
 
     The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
 
     The bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's shares of stock. There can be no assurance that such provision will
not be amended or eliminated at any time in the future.
 
AMENDMENT TO THE CHARTER
 
     The Company reserves the right from time to time to make any amendment to
its charter, now or hereafter authorized by law. Provisions on removal of
directors may be amended only by the affirmative vote of the holders of not less
than two-thirds of all of the votes entitled to be cast on the matter.
 
DISSOLUTION OF THE COMPANY
 
     The dissolution of the Company must be proposed by the Board of Directors
and approved by the affirmative vote of the holders of not less than two-thirds
of all of the votes entitled to be cast on the matter.
 
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
 
     The bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by stockholders may be made only (1)
pursuant to the Company's notice of the meeting, (2) by the Board of Directors
or (3) by a stockholder who is entitled to vote at the meeting and has complied
with the advance notice procedures set forth in the bylaws and (b) with respect
to special meetings of stockholders, only the business specified in the
Company's notice of meeting may be brought before the meeting of stockholders
and nominations of persons for election to the Board of Directors may be made
only (1) pursuant to the Company's notice of the meeting, (2) by the Board of
Directors or (3) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by a stockholder who is entitled to
vote at the meeting and has complied with the advance notice provisions set
forth in the bylaws.
 
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<PAGE>   85
 
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER
AND BYLAWS
 
     The business combination provisions and, if the applicable provision in the
bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the charter on removal of directors and the advance notice
provisions of the bylaws could delay, defer or prevent a transaction or a change
in control of the Company that might involve a premium price for stockholders or
otherwise be in their best interest.
 
LIMITATION OF LIABILITY AND INDEMNIFICATION
 
     The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting form (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Company's charter
contains such a provision, which eliminates such liability to the maximum extent
permitted by the MGCL.
 
     The Company's charter obligates the Company, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer who is made a party to the proceeding by reason of
his service in that capacity or (b) any individual who, at the request of the
Company, serves or has served another entity and who is made a party to the
proceeding by reason of his service in that capacity. The MGCL also permits the
Company to indemnify and advance expenses to any person who served a predecessor
of the Company in any of the capacities described above and to any employee or
agent of the Company or a predecessor of the Company.
 
     The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (1) was
committed in bad faith or (2) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the bylaws and (b) a written undertaking by or on
his behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met. The Company
will enter into indemnification agreements with all of its officers and
directors which provide for the indemnification of such officers and directors
to the fullest extent permitted under Maryland law. Insofar as indemnification
by the Company for liabilities arising under the Securities Act may be permitted
to directors, officers and controlling persons of the Company pursuant to the
indemnity agreements referenced herein or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable.
 
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<PAGE>   86
 
                       FEDERAL INCOME TAX CONSIDERATIONS
 
     THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES THAT MAY BE RELEVANT TO A PROSPECTIVE PURCHASER OF UNITS. THIS
DISCUSSION IS BASED ON CURRENT LAW. THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE
OF ALL POSSIBLE TAX CONSIDERATIONS. IT DOES NOT GIVE A DETAILED DISCUSSION OF
ANY STATE, LOCAL OR FOREIGN TAX CONSIDERATIONS, NOR DOES IT DISCUSS ALL OF THE
ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PROSPECTIVE
INVESTOR IN LIGHT OF SUCH INVESTOR'S PARTICULAR CIRCUMSTANCES OR TO CERTAIN
TYPES OF INVESTORS (INCLUDING INSURANCE COMPANIES, CERTAIN TAX-EXEMPT ENTITIES,
FINANCIAL INSTITUTIONS, BROKER/DEALERS, FOREIGN CORPORATIONS AND PERSONS WHO ARE
NOT CITIZENS OR RESIDENTS OF THE UNITED STATES) SUBJECT TO SPECIAL TREATMENT
UNDER THE FEDERAL INCOME TAX LAWS.
 
     PROSPECTIVE PURCHASERS OF UNITS ARE URGED TO CONSULT WITH THEIR OWN TAX
ADVISORS REGARDING THE SPECIFIC CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND SALE OF UNITS, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSIDERATIONS OF SUCH PURCHASE, OWNERSHIP AND SALE AND THE POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
 
GENERAL
 
     The Code provides special tax treatment for organizations that qualify and
elect to be taxed as REITs. The discussion below summarizes the material
provisions applicable to the Company as a REIT for Federal income tax purposes
and to its stockholders in connection with their ownership of Units. However, it
is impractical to set forth in this Prospectus all aspects of Federal, state,
local and foreign tax law that apply to an investor's purchase of Units. The
discussion of various aspects of Federal taxation contained herein is based on
the Code, rules and regulations promulgated thereunder and judicial and
administrative interpretations thereof, all of which are subject to change on a
prospective or retroactive basis. Generally, if certain detailed conditions
imposed by the Code are met, and with certain limited exceptions, entities that
invest primarily in real estate assets and mortgage loans, and that otherwise
would be taxed as corporations, are not taxed at the corporate level on their
taxable income that is currently distributed to their stockholders. This
treatment eliminates most of the "double taxation" (at the corporate level and
then again at the stockholder level when the income is distributed) that
typically results from the use of corporate investment vehicles. A qualifying
REIT, however, may be subject to certain excise and other taxes, including
normal corporate tax on taxable income that is not currently distributed to its
stockholders. See "-- Taxation of HCHI."
 
     HCHI plans to make an election to be taxed as a REIT under the Code
commencing with its taxable year ending December 31, 1997. The election will not
cover HCP, HCMC, HCS or any other taxable affiliate of HCHI.
 
OPINION OF COUNSEL
 
     Morse, Barnes-Brown & Pendleton, P.C. ("Counsel"), counsel to the Company,
has advised the Company in connection with the offering of Units and HCHI's
election to be taxed as a REIT. Based on existing law and certain
representations made to Counsel by the Company and assuming that HCHI operates
in the manner described in the Prospectus, in the opinion of Counsel, commencing
with HCHI's taxable year ending December 31, 1997, HCHI has been organized in
conformity with the requirements for qualification as a REIT under the Code, and
HCHI's proposed methods of operation described in this Prospectus and as
represented by the Company to Counsel will enable HCHI to qualify as a REIT.
Whether HCHI will in fact so qualify, however, will depend on actual operating
results and compliance with the various tests for qualification as a REIT
relating to its income, assets, distributions, ownership and certain
administrative matters, the results of which have not been and will not be
reviewed by Counsel. Counsel's opinions are based on various assumptions and on
the factual representations of HCHI concerning its business and assets. There
 
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<PAGE>   87
 
can be no assurance that the courts or the IRS will agree with this opinion. In
addition, qualification as a REIT depends on future transactions and events that
cannot be known at this time. Accordingly, Counsel is unable to opine whether
HCHI will in fact qualify as a REIT under the Code in all events. In the opinion
of Counsel, the section of the Prospectus entitled "Federal Income Tax
Considerations" identifies and fairly summarizes the Federal income tax
considerations that are likely to be material to a holder of Units and to the
extent such summaries involve matters of law, such statements of law are correct
under the Code. Further, the anticipated income tax treatment described in the
Prospectus may be changed, perhaps retroactively, by legislative, administrative
or judicial action at any time. Counsel's opinions also are based in part on the
opinion of special Maryland counsel, Piper & Marbury L.L.P., that HCHI is duly
organized and existing under Maryland law. Counsel's opinion will be filed as an
exhibit to the Registration Statement of which this Prospectus is a part. See
"-- Requirements for Qualification as a REIT;" "-- Termination or Revocation of
REIT Status." See "Additional Information."
 
     In the event that HCHI does not qualify as a REIT in any year, it will
subject to Federal income tax as a domestic corporation, and its stockholders
will be taxed in the same manner as stockholders of ordinary corporations. To
the extent that the Company would, as a consequence, be subject to potentially
significant tax liabilities, the amount of earnings and cash available for
distribution to its stockholders would be reduced. See "-- Termination or
Revocation of REIT Status."
 
REQUIREMENTS FOR QUALIFICATION AS A REIT
 
     To qualify for tax treatment as a REIT under the Code, HCHI must be managed
by one or more trustees or directors and use the calendar year as its taxable
year (which requirements will be satisfied by HCHI). In addition, HCHI must meet
certain tests which are described immediately below.
 
     Ownership of Common Stock.  HCHI's shares of Common Stock must be
transferable for all taxable years for which a REIT election is made. After the
first taxable year for which a REIT election is made, HCHI's shares must be held
by a minimum of 100 persons for at least 335 days of a 12 month year (or a
proportionate part of a short tax year). In addition, at all times during the
second half of each taxable year, no more than 50% in value of the shares of
Common Stock may be owned directly or indirectly by five or fewer individuals.
In determining whether HCHI's shares are held by five or fewer individuals, the
attribution rules of Section 544 of the Code apply. For a description of these
attribution rules and of Rule 13d-3 promulgated under the Exchange Act, see
"Description of Securities." HCHI believes that it will issue sufficient shares
of Common Stock with sufficient diversity to allow it to satisfy the ownership
requirements. In addition, the charter of HCHI imposes certain repurchase and
transfer restrictions intended to prevent the shares of Common Stock from being
held by fewer than 100 persons and to prevent more than 50% in value of the
Common Stock from being held by five or fewer individuals (directly or
constructively) at any time during the last half of any taxable year. Such
repurchase and transfer restrictions, however, may not ensure that HCHI will, in
all cases, be able to satisfy the ownership requirements. If HCHI fails to
satisfy the ownership requirements, its status as a REIT will terminate. See
"-- Termination or Revocation of REIT Status."
 
     Nature of Assets.  On the last day of each calendar quarter, HCHI must
satisfy three tests relating to the nature of its assets. First, at least 75% of
the value of HCHI's assets must consist of Qualified REIT Assets, government
securities, cash and cash items (the "75% of assets test"). Qualified REIT
Assets include interests in real property, interests in Mortgage Loans secured
by real property and interests in REMICs and other REITs. Second, not more than
25% of the value of HCHI's total assets may be represented by securities that do
not qualify under the 75% of assets test (the "25% of assets limit"). Third, of
securities that do not qualify under the 75% of assets test, the value of any
one issuer's securities owned by HCHI may not exceed 5% of the value of HCHI's
total assets (the "5% of assets limit"), and HCHI may not own more than 10% of
any one issuer's voting securities (the "10% of voting securities limit").
 
     It is anticipated that, for purposes of applying the asset tests,
substantially all of HCHI's assets will consist of Qualified REIT Assets, cash,
cash items and HCP Preferred (which will be nonvoting). Hedging contracts (other
than those which are Qualified REIT Assets) and certain other types of Mortgage
Assets may be treated as securities of the entities issuing them. HCHI does not
expect the value of such contracts,
 
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<PAGE>   88
 
interests or assets issued by any one issuer ever to exceed 5% of the value of
its assets. Moreover, HCHI intends to closely monitor (on not less than a
quarterly basis) the purchase and holding of the assets of HCHI to ensure
compliance with the asset tests.
 
     Since HCHI will not own any voting securities of HCP, the ownership of the
HCP Preferred by HCHI will not cause HCHI to violate the 10% of voting
securities limit. If the value of the HCP Preferred exceeds 5% of the value of
HCHI's total assets, however, HCHI will violate the 5% of assets limit. See
"-- Termination or Revocation of REIT Status." In that regard, the HCP Preferred
will initially be valued at $10,750,005 and may thereafter be revalued at
$15,750,010 if additional shares of Common Stock are issued to the Principals
upon the vesting of the Earn-Out. HCHI intends to monitor the value of the HCP
Preferred and believes that the value of the HCP Preferred will not exceed 5% of
the total value of its assets. Counsel is relying on the representation of HCHI
to such effect, which representation is based on the assumption that the Company
will own sufficient assets purchased with borrowing proceeds (by the close of
each quarter beginning with the third quarter of 1997) to cause the value of the
HCP Preferred to be less than 5% of the value of HCHI's total assets. No
independent appraisals have been obtained to support this conclusion. There can
be no assurance that the Company will be able to maintain sufficient levels of
borrowings to avoid a violation of the 5% of assets limit or that the IRS will
agree with the Company's determination of the value of the HCP Preferred.
 
     When purchasing mortgage-related securities, HCHI may rely on opinions of
counsel for the issuer or sponsor of such securities given in connection with
the offering of such securities, or statements made in related offering
documents, for purposes of determining whether and to what extent those
securities (and the income therefrom) constitute Qualified REIT Assets (and
income) for purposes of the 75% of assets test (and the source of income tests
discussed below). A regular or residual interest in a REMIC will be treated as a
Qualified REIT Asset for purposes of the REIT asset tests (and income derived
with respect to such interest will be treated as interest on obligations secured
by mortgages on real property) if at least 95% of the assets of the REMIC are
Qualified REIT Assets. If less than 95% of the assets of the REMIC are Qualified
REIT Assets, only a proportionate share of the assets of and income derived from
the REMIC will qualify under the REIT asset and income tests.
 
     If a failure to satisfy any of the asset tests discussed above results from
an acquisition of securities or other property during a quarter, the failure may
be cured by the disposition of sufficient nonqualifying assets within 30 days
after the close of such quarter. HCHI intends to maintain adequate records of,
and closely monitor the value of its assets to determine its compliance with the
asset tests, and intends to take such actions as may be required to cure any
failure to satisfy the test within 30 days after the close of any quarter.
 
     Sources of Income.  HCHI must satisfy three separate income-based tests for
each year in order to qualify as a REIT.
 
     Under the first test (the "75% of income test"), at least 75% of HCHI's
gross income (excluding gross income from "prohibited transactions;" see
"-- Taxation of HCHI") for the taxable year must be derived directly or
indirectly from the following sources: (i) rents from real property; (ii)
interest (other than interest based in whole or in part on the income or profits
of any person) on obligations secured by mortgages on real property or on
interests in real property; (iii) gains from the sale or other disposition of
interests in real property and real estate mortgages not held primarily for sale
to customers in the ordinary course of business ("dealer property"); (iv)
dividends or other distributions on shares in REITs and, provided such shares
are not dealer property, gain from the sale of such shares; (v) abatements and
refunds of real property taxes; (vi) income from the operation, and gain from
the sale, of property acquired at or in lieu of a foreclosure of the mortgage
secured by such property (or as a result of a default under a lease of such
property) and which is not held for more than two years or, for taxable years
beginning after August 5, 1997, the close of the third taxable year following
the year of an acquisition ("foreclosure property"); (vii) amounts (other than
amounts the determination of which depend in whole or in part on the income or
profits of any person) received or accrued as consideration for entering into
agreements (a) to make loans secured by mortgages on real property or on
interests in real property or (b) to purchase or lease real property (including
interests in real property and interests in mortgages on real property (for
example, commitment fees); and (viii) income attributable to
 
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<PAGE>   89
 
stock or debt instruments acquired with the proceeds from the sale of stock or
certain debt obligations ("new capital") of HCHI, received during the one-year
period beginning on the day such proceeds were received ("qualified temporary
investment income").
 
     Under the second test (the "95% of income test"), in addition to deriving
75% of its gross income from the sources qualifying under the 75% of income
test, at least an additional 20% of HCHI's gross income for the taxable year
(excluding gross income from "prohibited transactions;" see "-- Taxation of
HCHI") must be derived from the sources qualifying under the 75% of income test,
dividends, interest and gains from the sale or disposition of stock or other
securities that are not dealer property.
 
     Under the third test (the "30% of income limit"), subject to certain
exceptions in the year of its liquidation, HCHI must derive less than 30% of its
annual gross income (including gross income from "prohibited transactions;" see
"Taxation of HCHI") from the sale or other disposition of (i) Qualified REIT
Assets held for less than four years (other than foreclosure property or
property involuntarily or compulsorily converted through destruction,
condemnation or similar events), (ii) stock or securities held for less than one
year (including Qualified Hedges) and (iii) property in prohibited transactions
(see "-- Taxation of HCHI"). The 30% of income limit has been repealed effective
for taxable years beginning after August 5, 1997. See "-- New Tax Legislation."
 
     HCHI anticipates that the investments it will make will give rise primarily
to mortgage interest qualifying under the 75% of income test. Interest on
mortgage backed securities (other than Qualified REIT Assets), dividends on
stock (including any dividends from HCP), interest on any other obligations not
secured by real property, and gains from the sale or disposition of stock or
other securities that are not Qualified REIT Assets will be qualified income for
purposes of the 95% of income test but will not be qualified income for purposes
of the 75% of income test. Loan guarantee fees and income from mortgage
servicing and other service contracts will not qualify for either the 95% or 75%
of income tests if such income constitutes fees for services rendered by HCHI or
HCLP or is not treated as interest on obligations secured by mortgages on real
property or on interests in real property for purposes of the 75% of income
test. Similarly, income of HCHI from hedging, including from the sale of hedges,
will not qualify under the 75% or 95% of income tests unless the hedges
constitute Qualified Hedges, in which case such income will qualify under the
95% of income test.
 
     It is anticipated that HCP and HCMC will recognize income that, if
recognized by HCHI, would fail to qualify under the 75% and 95% of income tests.
Such non-qualifying income will include income from HCP's due diligence
operations and from HCMC's servicing operations. In addition, it is anticipated
that HCP and HCMC will have income from loan sales which would, if recognized by
HCHI, be subject to the 30% of income limit and constitute income from
prohibited transactions (see "-- Taxation of HCHI"). The Company intends to
issue REMICs primarily through HCP, HCMC or one or more other taxable
subsidiaries. Since REMIC issuances are treated as taxable sales of the
securitized loans, the issuances are also expected to generate income that would
be subject to the 30% of income limit and constitute income from prohibited
transactions if recognized by HCHI. Income of HCP or HCMC is not treated as
income of HCHI for purposes of the income-based tests except to the extent that
such income is distributed as a dividend. As described above, HCHI's share of
dividends paid by HCP are qualified income for purposes of the 95% of income
test but are not qualified income for purposes of the 75% of income test.
 
     HCHI intends to maintain its REIT status by carefully monitoring its
income, including income from dividends, hedging transactions, services and
sales of Mortgage Assets to comply with the 75% of income test, the 95% of
income test and the 30% of income limit. See "-- Taxation of HCHI" for a
discussion of the potential tax cost of HCHI's selling certain mortgage
securities on a regular basis. In order to help insure its compliance with the
REIT requirements of the Code, HCHI has adopted guidelines the effect of which
will be to limit HCHI's ability to earn certain types of income, including
income from hedging, other than income from Qualified Hedges. See
"Business -- Hedging." The policy of HCHI to maintain REIT status may limit the
type of assets, including hedging contracts, that might otherwise be acquired.
In addition, as a result of HCHI's having to closely monitor its gains,
Qualified REIT Assets may be held for four or more years, and securities (other
than securities that are Qualified REIT Assets) and hedges may be held for one
year or more, at times when HCHI might otherwise have opted for the disposition
of such assets for short term gains.
 
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<PAGE>   90
 
     If HCHI fails to satisfy one or both of the 75% of income test or 95% of
income test for any year, it may nevertheless qualify as a REIT for such year if
it is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if HCHI's failure to meet such tests was
due to reasonable cause and not due to willful neglect, HCHI attaches a schedule
of the sources of its income to its federal income tax return, and any incorrect
income on the schedule was not due to fraud with intent to evade tax. It is not
possible to state whether in all circumstances HCHI would be entitled to the
benefit of the relief provisions. Even if the relief provisions apply and HCHI
retains its status as a REIT, a 100% tax would be imposed on an amount equal to
(i) the gross income attributable to the greater of the amount by which HCHI
failed to comply with the 75% of income test or the 95% of income test
multiplied by (ii) a fraction intended to reflect HCHI's profitability. There
can be no assurance that HCHI will always be able to maintain compliance with
the gross income tests for REIT qualification despite its periodic monitoring
procedures. Moreover, there are no comparable relief provisions which could
mitigate the consequences of a failure to satisfy the 30% of income limit. See
"-- Termination or Revocation of REIT Status."
 
     Distributions.  HCHI must distribute dividends (other than capital gain
dividends) to its stockholders each year in an amount at least equal to (i) the
sum of (a) 95% of its "REIT taxable income" determined without regard to the
dividends paid deduction and by excluding its net capital gain (see "-- Taxation
of HCHI") and (b) 95% of the excess of the net income, if any, from foreclosure
property over the tax imposed on such income by the Code, minus (ii) the excess
of the sum of certain "excess non-cash income" over 5% of its "REIT taxable
income" (the "95% distribution test"). In addition, if HCHI recognizes any
Built-In Gain upon the disposition of any Built-In Gain Asset during its
Recognition Period (see "-- Taxation of HCHI"), HCHI will be required, pursuant
to Treasury Regulations which have not yet been promulgated, to distribute at
least 95% of the Built-In Gain (after tax), if any, it recognizes on the
disposition of such asset. Such distributions must be made in the taxable year
to which they relate (although a dividend that is declared in October, November
or December of any calendar year and payable to shareholders of record on a
specified date in such a month will be deemed to be paid not later than December
31 of such year if actually paid during January of the following year) or, at
the election of HCHI if declared before the timely filing of HCHI's tax return
for such year (specifying the dollar amount of such distribution) and paid not
later than the first regular dividend payment after such declaration, in the
following taxable year. See "Dividend Policy and Distributions." Distributions
declared with respect to a prior year before the timely filing of HCHI's tax
return for such year and paid not later than the first regular dividend payment
date after such declaration are taxable to holders of Common Stock (other than
certain tax-exempt entities, as discussed below) in the year in which paid, even
if such distributions relate to the prior year for purposes of the 95%
distribution test. The amount distributed must not be preferential (e.g., each
holder of shares of Common Stock must receive the same distribution per share).
To the extent that HCHI does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax on the undistributed portion at ordinary and
capital gain corporate tax rates. Furthermore, if HCHI should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such year
and (iii) any undistributed taxable income from prior periods, it would be
subject to a 4% excise tax on the excess of such required distributions over the
amounts actually distributed.
 
     HCHI intends to make timely distributions to its stockholders in amounts
sufficient to meet the 95% distribution requirement. It is possible, however,
that HCHI from time to time may not have sufficient cash or other liquid assets
to meet these distribution requirements due to timing differences between (i)
the actual receipt of income and actual payment of deductible expenses and (ii)
the inclusion of such income and deduction of such expenses in arriving at its
taxable income. For instance, HCHI may realize income without a corresponding
cash payment, as in the case of original issue discount on a loan or REMIC
interest or accrued interest on a defaulted loan. In the event that HCHI
recognizes income without the corresponding cash payment, HCHI may have to sell
assets, borrow (or cause HCP or HCMC to sell assets or borrow) or declare a
taxable stock dividend in order to comply with the 95% distribution test.
 
     The IRS has ruled that if a REIT's dividend reinvestment plan ("DRP")
allows stockholders of the REIT to elect to have cash distributions reinvested
in shares of the REIT at a purchase price equal to at least
 
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<PAGE>   91
 
95% of fair market value on the distribution date, then such cash distributions
qualify under the 95% distribution test. The terms of HCHI's DRP will comply
with the ruling. See "Dividend Reinvestment Plan."
 
     Under certain circumstances, HCHI may be able to rectify a failure to meet
the 95% distribution test for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in HCHI's deduction for
dividends paid for the earlier year. HCHI would be liable for interest based on
the amount of any deduction taken for the deficiency dividends. A deficiency
dividend is not permitted if the deficiency is due to fraud with intent to evade
tax or a willful failure to file timely tax returns.
 
RECORD KEEPING REQUIREMENTS
 
     A REIT is required to maintain records, including records regarding the
actual and constructive ownership of its shares, and, within 30 days after the
end of its taxable year, to demand statements from persons owning above a
specified level of the REIT's share (e.g., if HCHI has 2,000 or more
stockholders of record, from persons holding 5% or more of HCHI's outstanding
shares of stock; if HCHI has over 200 but fewer than 2,000 stockholders of
record, from persons holding 1% or more of HCHI's outstanding shares of stock;
and if HCHI has 200 or fewer shareholders of record, from persons holding 1/2%
or more of HCHI's outstanding shares of stock) regarding their ownership of
shares. In addition, HCHI must maintain, as part of its records, a list of those
persons failing or refusing to comply with this demand. Shareholders who fail or
refuse to comply with the demand must submit a statement with their tax returns
setting forth their actual stock ownership and other information. HCHI intends
to maintain the records and demand statements as required by these regulations.
 
TERMINATION OR REVOCATION OF REIT STATUS
 
     If HCHI fails to qualify for taxation as a REIT in any taxable year and the
relief provisions do not apply, HCHI will be subject to tax (including any
applicable alternative minimum tax) at regular corporate rates. Distributions to
stockholders in any year in which HCHI fails to qualify will not be deductible
by HCHI and will not be required to be made. As a result, HCHI's failure to
qualify as a REIT would substantially reduce the cash available for distribution
to its stockholders. In addition, if HCHI fails to qualify as a REIT,
distributions to stockholders will be taxable as ordinary income to the extent
of HCHI's current or accumulated earnings and profits (although, subject to
certain limitations, would be eligible for the dividends received deduction in
the hands of corporate distributees). Unless entitled to relief under specific
statutory provisions, HCHI will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification is lost. It
is not possible to state whether in all circumstances HCHI would be entitled to
such statutory relief. Failure to qualify for even one year could result in
HCHI's incurring substantial indebtedness (to the extent borrowings are
feasible) or liquidating substantial investments in order to pay the resulting
taxes.
 
TAXATION OF HCHI
 
     If HCHI qualifies for taxation as a REIT, it generally will not be subject
to federal income tax on that portion of its net income that is currently
distributed to its stockholders. HCHI will, however, be subject to federal
income tax as follows. First, HCHI will be taxed at regular corporate rates on
any undistributed "REIT taxable income," including undistributed net capital
gains. Generally, REIT taxable income is taxable income adjusted by disallowing
any dividends received deduction, allowing a deduction for dividends paid,
excluding any net income from foreclosure property (see "-- Requirements for
Qualification as a REIT -- Sources of Income") and excluding any net income from
"prohibited transactions" (as described below). Second, under certain
circumstances, HCHI may be subject to the "alternative minimum tax" on its items
of tax preference. Third, HCHI will be taxed at the highest corporate rate on
(i) net income from the sale or other disposition of foreclosure property which
is held primarily for sale to customers in the ordinary course of business or
(ii) other nonqualifying net income from foreclosure property. Fourth, HCHI will
be subject to a 100% tax on any net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property, other than
foreclosure property, held primarily for sale to customers in the ordinary
course of business). Fifth, if HCHI should fail to satisfy the 75% of income
test or the 95% of income test (discussed above under "-- Requirements for
Qualification as a REIT -- Sources of Income") but has
 
                                       91

<PAGE>   92
 
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on an amount equal
to (a) the gross income attributable to the greater of the amount by which HCHI
fails the 75% or 95% test multiplied by (b) a fraction intended to reflect
HCHI's profitability. Sixth, if HCHI should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior periods, it would be subject to a 4%
excise tax on the excess of such required distribution over the amounts actually
distributed. Seventh, if HCHI has excess inclusion income (attributable to any
residual interest in a REMIC or any interest in a taxable mortgage pool) and a
disqualified organization (generally, tax-exempt entities not subject to tax on
unrelated business income, including governmental organizations) holds shares of
stock in HCHI, HCHI will be taxed at the highest corporate tax rate on the
amount of excess inclusion income for the taxable year allocable to the shares
held by such disqualified organization. Eighth, with respect to any asset (a
"Built-In Gain Asset") acquired by HCHI from a corporation which is or has been
a regular corporation in a transaction in which the basis of the Built-In Gain
Asset in the hands of HCHI is determined by reference to the basis of the asset
in the hands of the corporation, if HCHI recognizes gain on the disposition of
such asset during the ten-year period (the "Recognition Period") beginning on
the date on which such asset was acquired by HCHI, then, to the extent of the
Built-In Gain recognized by HCHI (i.e., the excess of the fair market value of
the asset over the adjusted basis of HCHI in the asset as of the beginning of
the Recognition Period), such gain will be subject to tax at the highest regular
corporate rate pursuant to Treasury Regulations that have not yet been
promulgated. The results described above with respect to the recognition of
Built-In Gain assume that HCHI will make an election pursuant to IRS Notice
88-19 and that such treatment is not modified by subsequently enacted tax
legislation.
 
     It is intended that the Company will be operated so as to minimize any
taxes that will be payable by HCHI. In addition, HCHI intends to distribute
substantially all of its taxable income to its stockholders on a pro rata basis
in each year. There can be no assurance, however, that HCHI will not have to pay
tax as a result of, among other things, HCHI's failure to distribute all of its
taxable income as a result of differences in the timing between the recognition
of income and the deduction of expenses, dispositions of loans and other assets,
the management and dispositions of foreclosure properties and excused failures
to meet REIT qualification tests. In addition, it is anticipated that CMO
issuances will cause HCHI to own interests in taxable mortgage pools, as a
result of which HCHI will have excess inclusion income. See "-- Special
Considerations."
 
TAXATION OF TAXABLE AFFILIATES
 
     HCP, HCMC and HCS (and any other corporate subsidiaries of HCP) will be
fully taxable at regular corporate rates on their net income. Such income is
expected to include all of the income earned by HCP, HCMC and HCS (and any other
subsidiaries of HCP) from origination and conduit operations, loan
securitizations and due diligence and other activities. As a result, HCP will be
able to distribute only its net after-tax earnings as dividend distributions,
thereby reducing the cash available for distribution by HCHI to its
stockholders.
 
TAXATION OF TAXABLE U.S. STOCKHOLDERS
 
     The Units.  The purchase of a Unit will be treated as the purchase of an
investment unit for Federal income tax purposes. In order to determine the issue
prices of the share of Common Stock and the Warrant included in a Unit, the
aggregate purchase price for the Unit must be allocated between the share of
Common Stock and the Warrant in proportion to their relative fair market values
on the date of issuance. The allocation of the purchase price of a Unit between
the share of Common Stock and the Warrant included therein will be determined
based upon discussions between the Company and the Representative. Although HCHI
expects that such allocation will be reasonable, there can be no assurance that
the IRS will respect such allocation.
 
     The Common Stock.  As used herein, the term "U.S. Stockholder" means a
holder of shares of Common Stock who (for United States Federal income tax
purposes) (i) is a citizen or resident of the United States, (ii) is a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, or (iii) is
an estate or trust the income of which is subject to United States Federal
income taxation regardless of its source.
 
                                       92

<PAGE>   93
 
     As long as HCHI qualifies as a REIT, distributions made by HCHI out of its
current or accumulated earnings and profits (and not designated as capital gain
dividends) will constitute dividends taxable to its taxable U.S. Stockholders as
ordinary income. Such distributions will not be eligible for the dividends
received deduction in the case of U.S. Stockholders that are corporations.
Distributions made by HCHI that are properly designated by HCHI as capital gain
dividends will be taxable to taxable U.S. Stockholders as long-term capital
gains (to the extent that they do not exceed HCHI's actual net capital gain for
the taxable year) without regard to the period for which a U.S. Stockholder has
held his shares of Common Stock. U.S. Stockholders that are corporations may,
however, be required to treat up to 20% of certain capital gain dividends as
ordinary income. To the extent that HCHI makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Stockholder, reducing the adjusted basis which such U.S.
Stockholder has in his shares of Common Stock for tax purposes by the amount of
such distribution (but not below zero), with distributions in excess of a U.S.
Stockholder's adjusted basis in his shares taxable as long-term capital gains
(or short-term capital gains if the shares have been held for one year or less),
provided that the shares have been held as a capital asset. HCHI will notify
stockholders at the end of each year as to the portions of the distributions
which constitute ordinary income, net capital gain or return of capital.
Dividends declared by HCHI in October, November or December of any year and
payable to a stockholder of record on a specified date in any such month will be
treated as both paid by HCHI and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by HCHI on or before
January 31 of the following calendar year out of current or accumulated earnings
and profits. Stockholders may not include in their own income tax returns any
net operating losses or capital losses of HCHI.
 
     Distributions made by HCHI and gain arising from the sale or exchange by a
U.S. Stockholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be able
to apply any "passive losses" against such income or gain. Distributions made by
HCHI (to the extent they do not constitute a return of capital) generally will
be treated as investment income for purposes of computing the net investment
income limitation applicable to deductions of investment interest. Gain arising
from the sale or other disposition of Common Stock, however, will not be treated
as investment income unless the U.S. Stockholder elects to reduce the amount of
such U.S. Stockholder's total net capital gain eligible for the 28% maximum
capital gains rate by the amount of such gain with respect to such Common Stock.
 
     Upon any sale or other disposition of Common Stock, a U.S. Stockholder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any other
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Common Stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and will be long-term gain or loss if such
shares have been held for more than one year. In general, any loss recognized by
a U.S. Stockholder upon the sale or other disposition of shares of Common Stock
that have been held for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss, to the extent of
distributions received by such U.S. Stockholder from HCHI which were required to
be treated as long-term capital gains.
 
     The Warrants.  Upon the exercise of a Warrant, the holder will not
recognize gain or loss and will have a tax basis in the Common Stock of the
Company received equal to the holder's tax basis in the Warrant plus the
exercise price of the Warrant. The holding period for the Common Stock purchased
by exercising a Warrant will begin on the day following the date of exercise and
will not include the period during which the holder held the Warrant.
 
     Upon the sale or other disposition of a Warrant, the holder will recognize
capital gain or loss in an amount equal to the difference between the amount
realized and the holder's tax basis in the Warrant. Such a gain or loss will be
long-term if the holder's holding period is more than one year. In the event a
Warrant lapses unexercised, the holder will recognize a capital loss in an
amount equal to his tax basis in the Warrant. Such loss will be long-term if the
Warrant has been held for more than one year.
 
                                       93

<PAGE>   94
 
WITHHOLDING
 
     HCHI will report to its U.S. Stockholders and the Service the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Stockholder that does not provide HCHI with his correct taxpayer
identification number may also be subject to penalties imposed by the Service.
Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, HCHI may be required to
withhold a portion of capital gain distributions to any stockholders who fail to
certify their non-foreign status to HCHI.
 
TAXATION OF TAX-EXEMPT STOCKHOLDERS
 
     Generally, a tax-exempt investor that is exempt from tax on its investment
income, such as an individual retirement account (IRA) or a pension,
profit-sharing or stock bonus plan which is "qualified" under the Code, that
holds Common Stock as an investment will not be subject to tax on dividends paid
by HCHI. However, if such tax-exempt investor is treated as having purchased its
Common Stock with borrowed funds, some or all of its dividends from the Common
Stock will be subject to tax. In addition, under some circumstances certain
pension plans (including "qualified" plans but not including IRAs) that own more
than 10% (by value) of HCHI's outstanding stock, including Common Stock, could
be subject to tax on a portion of their Common Stock dividends even if their
Common Stock is held for investment and is not treated as acquired with borrowed
funds. The ownership limit (see "Description of Capital Stock -- Repurchase of
Shares and Restrictions on Transfer"), however, should reduce the likelihood of
this result. Tax-exempt investors may also be subject to tax on distributions
from HCHI to the extent HCHI has excess inclusion income. See "-- Special
Considerations."
 
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN
HOLDERS
 
     The following discussion summarizes certain United States Federal tax
consequences of the acquisition, ownership and disposition of the Common Stock
in the Company by an initial purchaser of the Common Stock that, for United
States Federal income tax purposes, is not a "U.S. Stockholder" as defined above
under "-- Taxation of Taxable U.S. Stockholders -- The Common Stock." This
discussion does not consider any specific facts or circumstances that may apply
to a particular Non-United States Holder. Prospective investors are urged to
consult their tax advisors regarding the United States Federal tax consequences
of acquiring, holding and disposing of Common Stock, as well as any tax
consequences that may arise under the laws of any foreign, state, local or other
taxing jurisdiction.
 
     Dividends.  Dividends paid by HCHI out of earnings and profits, as
determined for United States Federal income tax purposes, to a Non-United States
Holder will generally be subject to withholding of United States Federal income
tax at the rate of 30%, unless reduced or eliminated by an applicable tax treaty
or unless such dividends are treated as effectively connected with a United
States trade or business. Distributions paid by HCHI in excess of its earnings
and profits will be treated as a tax-free return of capital to the extent of the
holder's adjusted basis in his Common Stock, and thereafter as gain from the
sale or exchange of a capital asset as described below. If it cannot be
determined at the time a distribution is made whether such distribution will
exceed the earnings and profits of HCHI, the distribution will be subject to
withholding at the same rate as dividends. Amounts so withheld, however, will be
refundable or creditable against the Non-United States Holder's United States
Federal tax liability if it is subsequently determined that such distribution
was, in fact, in excess of the earnings and profits of HCHI. If the receipt of
the dividend is treated as being effectively connected with the conduct of a
trade or business within the United States by a Non-United States Holder, the
dividend received by such holder will be subject to the United States Federal
income tax on net income that applies to U.S. Stockholders generally (and, with
respect to corporate holders and under certain circumstances, the branch profits
tax).
 
                                       94

<PAGE>   95
 
     For any year in which HCHI qualifies as a REIT, distributions to a
Non-United States Holder that are attributable to gain from sales or exchanges
by HCHI of "United States real property interests" will be treated as if such
gain were effectively connected with a United States business and will thus be
subject to tax at the normal capital gain rates applicable to U.S. Stockholders
(subject to applicable alternative minimum tax) under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate stockholder not entitled to a treaty exemption.
HCHI is required to withhold 35% of any distribution that could be designated by
HCHI as a capital gains dividend. This amount may be credited against the Non-
United States Holder's FIRPTA tax liability.
 
     Gain on Disposition.  A Non-United States Holder will generally not be
subject to United States Federal income tax on gain recognized on a sale or
other disposition of the Common Stock unless (i) the gain is effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder, (ii) in the case of a Non-United States Holder who
is a nonresident alien individual and holds the Common Stock as a capital asset,
such holder is present in the United States for 183 or more days in the taxable
year and certain other requirements are met, or (iii) the Non-United States
Holder is subject to tax under the FIRPTA rules discussed below. Gain that is
effectively connected with the conduct of a United States trade or business will
be subject to the United States Federal income tax on net income that applies to
U.S. Stockholders generally (and, with respect to corporate holders and under
certain circumstances, the branch profits tax) but will not be subject to
withholding. Non-United States Holders should consult applicable treaties, which
may provide for different rules.
 
     Gain recognized by a Non-United States Holder upon a sale of its Common
Stock will generally not be subject to tax under FIRPTA if HCHI is a
"domestically controlled REIT," which is defined generally as a REIT in which at
all times during a specified testing period less than 50% in value of its shares
were held directly or indirectly by Non-United States Holders. Because only a
minority of HCHI's stockholders are expected to be Non-United States Holders,
HCHI anticipates that it will qualify as a "domestically controlled REIT."
Accordingly, a Non-United States Holder should not be subject to U.S. tax from
gains recognized upon disposition of the Common Stock.
 
INFORMATION REPORTING AND BACKUP WITHHOLDING
 
     Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax will generally not
apply to dividends paid on the Common Stock to a Non-United States Holder at an
address outside the United States. Payments by a United States office of a
broker of the proceeds of a sale of the Common Stock is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies its Non-United States Holder status under penalties of perjury or
otherwise establishes an exemption. Information reporting requirements (but not
backup withholding) will also apply to payments of the proceeds of sales of the
Common Stock by foreign offices of United States brokers, or foreign brokers
with certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption.
 
     Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States Federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
 
     These information reporting and backup withholding rules are under review
by the United States Treasury and their application to the Common Stock of the
Company could be changed by future regulations.
 
SPECIAL CONSIDERATIONS
 
     HCHI may invest in or otherwise acquire residual interests in REMICs. In
general, a REMIC is a fixed pool of mortgage instruments in which investors hold
multiple classes of interests and for which a REMIC election has been made. Part
or all of any income derived by HCHI from a REMIC residual interest may be
excess inclusion income. Excess inclusion income is generally taxable income
with respect to a residual
 
                                       95

<PAGE>   96
 
interest in excess of a specified return on investment in the residual interest.
In some cases, substantially all taxable income with respect to a residual
interest may be considered excess inclusion income. Pursuant to regulations not
yet published, if HCHI pays any dividends to its stockholders that are
attributable to such excess inclusion income, the stockholders who receive such
dividends would be subject to certain special rules including (i) the
characterization of excess inclusion income as UBTI for tax-exempt stockholders
(including employee benefit plans and individual retirement accounts), (ii) the
application of Federal income tax withholding at the maximum rate (without
reduction for any otherwise applicable income tax treaty) on any excess
inclusion income allocable to Non-United States Holders, (iii) the inability of
a stockholder generally to offset excess inclusion income with net operating
losses, and (iv) the taxation (at the highest corporate tax rate) of a REIT,
rather than its stockholders, on the amount of excess inclusion income for the
taxable year allocable to shares of stock held by disqualified organizations
(generally, tax-exempt entities not subject to tax on unrelated business taxable
income, including governmental organizations). Until regulations or other
guidance are issued, HCHI will use methods it believes are appropriate for
calculating the amount of any excess inclusion income it recognizes from REMICs,
and allocating any excess inclusion income to its stockholders. Because gains
from REMIC issuances are subject to the 30% of income limit described above and
may be taxed at a 100% rate as income from prohibited transactions, it is
anticipated that any REMIC issuances will be effected by HCP, HCMC and one or
more other taxable subsidiaries.
 
     HCHI intends to finance the acquisition of Mortgage Assets by entering into
reverse repurchase agreements (which are essentially loans secured by Mortgage
Assets), CMOs or other secured lending transactions. Such transactions may
result in the existence of debt instruments (i.e., reverse repurchase
agreements, CMOs or other secured loans) with differing maturity dates secured
by a pool of loans. Accordingly, HCHI may be treated, in whole or in part, as a
taxable mortgage pool. If HCHI is treated in whole or in part as a taxable
mortgage pool, a portion of its income will be characterized as excess inclusion
income, thereby subjecting stockholders (or HCHI, to the extent Common Stock is
held by disqualified organizations) to the tax treatment described above with
respect to residual interests in REMICs. There can be no assurance that reverse
repurchase agreements, CMOs or other secured loans will not cause HCHI to
realize excess inclusion income.
 
NEW TAX LEGISLATION
 
     On August 5, 1997, President Clinton signed into law the Taxpayer Relief
Act of 1997 (the "1997 Act"). Effective for taxable years beginning after the
date of the enactment of the 1997 Act, the 1997 Act, among other things, (i)
imposes a financial penalty ($25,000 for an unintentional violation and $50,000
for an intentional violation) rather than termination of REIT status for a
REIT's failure to comply with regulations requiring the maintenance of records
to ascertain ownership for any year, (ii) waives the consequences of a REIT's
being a personal holding company for any year if it complied with regulations
requiring the maintenance of records to ascertain ownership and did not know
(and would not have known using reasonable diligence) that it was a personal
holding company for the year, (iii) permits a REIT to retain and pay tax on its
long-term capital gains and pass credits on to its stockholders for the amounts
of such tax payments, (iv) repeals the 30% of income limit for REIT
qualification, (v) extends the current two year period during which property
acquired at or in lieu of foreclosure of the mortgage secured by such property
(or as a result of a default under a lease of such property) may be treated as
"foreclosure property" to the close of the third taxable year following the
taxable year during which such property was acquired, and (vi) expands the types
of interest rate hedges that may be treated as Qualified Hedges. The 1997 Act
also reduces the maximum federal long-term capital gain rate applicable to
individuals to 20% for property held longer than 18 months.
 
OTHER TAX CONSEQUENCES
 
     HCHI and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of HCHI and its
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
HCHI.
 
                                       96

<PAGE>   97
 
                                ERISA INVESTORS
 
     A fiduciary of a pension, profit-sharing, stock bonus plan or individual
retirement account, including a plan for self-employed individuals and their
employees or any other employee benefit plan (collectively, a "Plan") subject to
the prohibited transaction provisions of the Code or the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of 1974
("ERISA"), should consider (1) whether the ownership of the Common Stock is in
accordance with the documents and instruments governing the Plan, (2) whether
the ownership of Common Stock in the Company is consistent with the fiduciary's
responsibilities and satisfies the requirements of Part 4 of Subtitle A of Title
I of ERISA (if applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA, (3) the prohibitions under ERISA
on improper delegation of control over, or responsibility for "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates in,
or permits (by action or inaction) the occurrence of, or fails to remedy a known
breach of duty by another fiduciary with respect to plan assets, and (4) the
need to value the assets of the Plan annually.
 
     In regard to the "plan assets" issue noted in clause (3) above, the Company
believes that the Common Stock should qualify as a "publicly-offered security,"
and therefore the acquisition of such Common Stock by Plans should not cause the
Company's assets to be treated as assets of such investing Plans for purposes of
the fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of the Code. The Department of Labor has issued final regulations
(the "DOL Regulations") as to what constitutes an asset of a Plan. Under the DOL
Regulations, if a Plan acquires an equity interest in an entity, which interest
is neither a "publicly-offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, as amended, the
Plan's assets would include, for purposes of the fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of the Code, both
the equity interest and an undivided interest in each of the entity's underlying
assets, unless certain specified exemptions apply. The DOL Regulations define a
publicly-offered security as a security that is "widely held," "freely
transferable" and either part of a class of securities registered under the
Exchange Act, or sold pursuant to an effective registration statement under the
Securities Act (provided the securities are registered under the Exchange Act
within 120 days after the end of the fiscal year of the issuer during which the
offering occurred). The Common Stock offered hereby is being sold in an offering
registered under the Securities Act and has been registered under the Exchange
Act.
 
     The DOL Registrations provide that a security is "widely held" only if it
is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control. The Company expects the outstanding shares of its Common Stock
to be "widely held" upon the closing of the Offering.
 
     The DOL Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulations further provide that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with the Offering, certain restrictions ordinarily will
not, alone or in combination, affect the finding that such securities are freely
transferable. The Company believes that the restrictions imposed under the
Company's charter on the transfer of the Common Stock are limited to the
restrictions on transfer generally permitted under the DOL Regulations and are
not likely to result in the failure of the Common Stock to be "freely
transferable." The DOL Regulations only establish a presumption in favor of the
finding of free transferability, and therefore, no assurance can be given that
the Department of Labor and the Treasury Department will not reach a contrary
conclusion.
 
     Fiduciaries of ERISA Plans and IRA's should consult with and rely upon
their own advisors in evaluating the consequences under the fiduciary provisions
of ERISA and the Code of an investment in Common Stock in light of their own
circumstances.
 
                                       97

<PAGE>   98
 
                                  UNDERWRITING
 
     Under the terms of and subject to the conditions contained in the
underwriting agreement (the "Underwriting Agreement") between the Company and
the Underwriters named below (the "Underwriters"), for whom Stifel, Nicolaus &
Company, Incorporated and Montgomery Securities are acting as representatives
(the "Representatives"), the Underwriters have severally agreed to purchase from
the Company and the Company has agreed to sell to the Underwriters severally the
respective number of Units set forth opposite its name below:
 

<TABLE>
<CAPTION>
                                                                        NUMBER OF UNITS
        UNDERWRITER                                                     TO BE PURCHASED
        --------------------------------------------------------------  ---------------
        <S>                                                             <C>
        Stifel, Nicolaus & Company, Incorporated .....................     2,010,868
        Montgomery Securities ........................................     2,010,868
        Bear, Stearns & Co. Inc. .....................................       108,696
        BT Alex. Brown Incorporated ..................................       108,696
        PaineWebber Incorporated .....................................       108,696
        Robertson, Stephens & Company LLC ............................       108,696
        Advest, Inc. .................................................        54,348
        George K. Baum & Company .....................................        54,348
        EVEREN Securities, Inc. ......................................        54,348
        Friedman, Billings, Ramsey & Co., Inc. .......................        54,348
        Furman Selz LLC ..............................................        54,348
        Morgan Keegan & Company, Inc. ................................        54,348
        Principal Financial Securities, Inc. .........................        54,348
        Stephens Inc. ................................................        54,348
        Sutro & Co. Incorporated .....................................        54,348
        The Robinson-Humphrey Company, Inc. ..........................        54,348
                                                                           ---------
                  Total...............................................     5,000,000
                                                                           =========
</TABLE>

 
     In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Units being sold pursuant to the Underwriting Agreement (other than those
covered by the over-allotment option described below). In the event of a default
by any Underwriter, the Underwriting Agreement provides that, in certain
circumstances, the purchase commitments of the nondefaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
 
     The Company has been advised by the Representatives that the Underwriters
propose to offer the Units in part to the public at the initial public offering
price set forth on the cover page of this Prospectus, and in part to certain
securities dealers (who may include Underwriters) at such price less a
concession not in excess of $.58 per Unit, and that the Underwriters and such
dealers may reallow to certain dealers a discount not in excess of $.10 per
Unit. After commencement of the public offering, the initial public offering
price, concessions to selected dealers and the discount to other dealers may be
changed by the Representatives.
 
     The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase, at the initial
public offering price less the underwriting discount set forth on the cover page
of this Prospectus, up to 750,000 additional Units. The Underwriters may
exercise such option only to cover over-allotments, if any, made in connection
with the Offering of the Units offered hereby. To the extent the Underwriters
exercise such option, each of the Underwriters will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such option
Units as it was obligated to purchase pursuant to the Underwriting Agreement.
 
     The Company and certain of its affiliates have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Federal securities laws, or to contribute to payments which the Underwriters may
be required to make in respect thereof.
 
     The Company and the Principals have agreed with the Underwriters that, for
a period of one year following the closing of the Offering, they will not offer,
sell, contract to sell or otherwise dispose of any shares
 
                                       98

<PAGE>   99
 
of Common Stock or rights to acquire such shares without the prior written
consent of the Representatives. See "Shares Eligible For Future Sale."
 
     The Company has agreed to grant to the Representatives warrants to purchase
150,000 (172,500 if the over-allotment option is exercised) shares of Common
Stock at an exercise price equal to the initial public offering price of the
Units (the "Representatives' Warrants"). The Representatives' Warrants are
exercisable for a period of three years beginning six months after the initial
closing of the Offering. The Representatives' Warrants and, if exercised, the
underlying securities, may not be sold, transferred, assigned, pledged or
hypothecated for a period of one year following the date of this Prospectus
except to any officer or partner of a Representative or by operation of law. The
Representatives' Warrants contain anti-dilution provisions providing for
appropriate adjustment upon the occurrence of certain events. See "Description
of Securities."
 
     The Representatives have informed the Company that they do not expect the
Underwriters to confirm sales of Units offered by this Prospectus to any
accounts over which they exercise discretionary authority.
 
     The Units, the Warrants and the Common Stock have been approved for
quotation on the American Stock Exchange. See "The Offering."
 
     The Company has been advised by the Representatives that the
Representatives presently intend to make a market in the Units and, when
detached, the Warrants and Common Stock offered hereby; however, the
Representatives are not obligated to do so, and any market making activity may
be discontinued at any time. Until the Representatives' participation in the
distribution of the Units is completed, any such passive market making will be
conducted in accordance with Rule 103 of Regulation M under the Securities
Exchange Act of 1934. There can be no assurance that an active public market for
the Common Stock or the Units, Warrants or Common Stock will develop or continue
after the closing of the Offering.
 
     Prior to the closing of the Offering, there has been no public market for
the Units. Accordingly, the initial public offering price for the Units has been
determined by negotiations between the Company and the Representatives. Among
the factors which were considered in determining the initial public offering
price were the Company's future prospects, the experience of its management, the
economic condition of the financial services industry in general, the general
condition of the equity securities market, the demand for similar securities of
companies considered comparable to Company and other relevant factors.
 
     The initial public offering price set forth on the cover page of the
Prospectus should not be considered an indication of the actual value of the
Units. Such price is subject to change as a result of market conditions and
other factors and no assurance can be given that the Units can be resold at the
initial public offering price of the Units after the closing of the Offering.
 
     Certain of the Underwriters, including the Representatives, may from time
to time in the future enter into reverse repurchase agreements or other
financing arrangements with the Company to finance the purchase of Mortgage
Assets.
 
     Until the distribution of the Units is completed, rules of the Commission
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the Units. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the prices of the Units. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of such
securities. If the Underwriters create a short position in the Units in
connection with the Offering, i.e., if they sell a greater number of Units than
is set forth in the cover page of this Prospectus, then the Representatives may
reduce that short position by purchasing Units in the open market. The
Representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described herein. The Representatives may also
impose a penalty bid on certain Underwriters and selling group members. This
means that if the Representatives purchase Units in the open market to reduce
the Underwriters' short position or to stabilize the price of the Units, it may
reclaim the amount of the selling concession from the Underwriters and selling
group members who sold those securities as part of the Offering. In general,
purchases of a security for the purpose of stabilization or to reduce a short
position could cause the price of the security to be higher than it might be in
the absence of such purchases. The imposition of a penalty bid might also have
an effect on the price of a security to the extent that it were to discourage
resales
 
                                       99

<PAGE>   100
 
of the security. These transactions may be effected on the American Stock
Exchange or otherwise. Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the prices of the Units. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions, or
that such transactions, once commenced, will not be discontinued without notice.
 
                                 LEGAL MATTERS
 
     Certain legal matter in connection with the Securities offered hereby will
be passed on for the Company by Morse, Barnes-Brown & Pendleton, P.C., Waltham,
Massachusetts. Certain legal matters will be passed upon by Piper & Marbury
L.L.P., Baltimore, Maryland, with respect to Maryland law. Certain legal matters
will be passed on for the Underwriters by O'Melveny & Myers LLP, San Francisco,
California. O'Melveny & Myers LLP will rely upon the opinion of Piper & Marbury
L.L.P. as to matters of Maryland law.
 
                                    EXPERTS
 
     The balance sheet as of June 30, 1997 and consolidated financial statements
as of December 31, 1996 and 1995 and for each of the three years in the period
ended December 31, 1996 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and have been so included in reliance upon the reports of such
firm given their authority as experts in accounting and auditing.
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the Units offered
hereby. Copies of the Registration Statement and the exhibits thereto are on
file at the offices of the Commission in Washington, DC and may be obtained at
rates prescribed by the Commission upon request to the Commission and inspected,
without charge, at the offices of the Commission. Prior to the Offering, the
Company has not been required to file reports under the Exchange Act. However,
following the closing of the Offering, the Company will be required to file
reports and other information with the Commission pursuant to the Exchange Act.
Such reports and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, NW,
Washington, DC 20549, and at the Commission's regional offices at Northwestern
Atrium Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661 and
7 World Trade Center, New York, New York 10048. Copies of such material can also
be obtained from the Commission at prescribed rates through its Public Reference
Section at 450 Fifth Street, NW, Washington, DC 20549. The Commission maintains
a Web site that contains reports, proxy, and information statements and other
information regarding registrants that file electronically with the Commission.
The Web site is located at http://www.sec.gov. Statements contained in this
Prospectus as to the contents of any contract or any contract or other document
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
 
                                       100

<PAGE>   101
 
                                    GLOSSARY
 
     As used in this Prospectus, the capitalized and other terms listed below
have the meanings indicated.
 
     "Agency" means FNMA, FHLMC or GNMA.
 
     "Agency Certificates" means Pass-Through Certificates guaranteed by FNMA,
FHLMC or GNMA.
 
     "ARM" means a Mortgage Loan, or any Mortgage Loan underlying a Mortgage
Security, that features adjustments of the underlying interest rate at
predetermined times based on an agreed margin to an established index. An ARM is
usually subject to periodic interest rate and/or payment caps and a lifetime
interest rate cap.
 
     "Average Net Worth" means the arithmetic average of the sum of the gross
proceeds from any sale of equity securities by the Company, before deducting any
underwriting discounts and commissions and other expenses and costs relating to
the Offering, plus the Company's retained earnings (without taking into account
any losses incurred in prior periods) computed by taking the daily average of
such values during such period.
 
     "Bankruptcy Code" means Title 11, United States Code, as amended.
 
     "CAG" means the Company's capital allocation guidelines.
 
     "CMO" means an adjustable or fixed-rate debt obligation (bond) that is
collateralized by Mortgage Loans or mortgage certificates and issued by private
institutions or issued or guaranteed by FNMA, FHLMC or GNMA.
 
     "CMT Index" means constant maturity Treasury index.
 
     "Code" means the Internal Revenue Code of 1986, as amended.
 
     "Commission" means the Securities and Exchange Commission.
 
     "Company" means either (i) HCHI or (ii) HCHI, HCP, HCMC and HCS
collectively, as the context may require.
 
     "Commercial Mortgage Assets" means Commercial Mortgage Loans and Commercial
Mortgage Securities.
 
     "Commercial Mortgage Loans" means Mortgage Loans secured by commercial
property.
 
     "Commercial Mortgage Securities" means Mortgage Securities representing an
interest in, or secured by, Commercial Mortgage Loans.
 
     "Due Diligence Operations" means the due diligence operations conducted by
the Company.
 
     "Earn-Out" means 216,667 additional shares of Common Stock that will be
issued to the Principals if (i) as of any Earn-Out Measuring Date, the return on
a Unit is at least equal to the initial public offering price of the Unit or
(ii) as of any three Earn-Out Measuring Dates, the total return on a Unit is at
least equal to a 20% annualized return on the public offering price of the Unit.
One-third of the Earn-Out will vest as of any Earn-Out Measuring Date through
which the return on a Unit is at least equal to a 20% annualized return on the
initial public offering price of the Unit. The return on a Unit is determined by
adding (a) the appreciation in the value of the Unit since the closing of the
Offering and (b) the amount of distributions made by the Company on the share of
Common Stock included in the Unit since the closing of the Offering. The
appreciation in the value of a Unit as of any Earn-Out Measuring Date is two
times the average difference, during the 30 day period that ends on the Earn-Out
Measuring Date, between the market price of the share of Common Stock included
in the Unit and the initial public offering price of the Unit.
 
     "Earn-Out Measuring Date" means each September 30, beginning with September
30, 1998 and ending with September 30, 2002.
 
     "ERISA" means the Employee Retirement Income Security Act of 1974.
 
                                       101

<PAGE>   102
 
     "ERISA Plan" or "Plan" means a pension, profit-sharing, retirement or other
employee benefit plan which is subject to ERISA.
 
     "Exchange Act" means the Securities Exchange Act of 1934, as amended.
 
     "FHA" means the United States Federal Housing Administration.
 
     "FHLMC" means the Federal Home Loan Mortgage Corporation.
 
     "FNMA" means the Federal National Mortgage Association.
 
     "GAAP" means Generally Accepted Accounting Principles.
 
     "GNMA" means Government National Mortgage Association.
 
     "HCHI" means Hanover Capital Mortgage Holdings, Inc., a Maryland
corporation.
 
     "HCMC" means Hanover Capital Mortgage Corporation, a Missouri corporation.
 
     "HCP" means Hanover Capital Partners Ltd., a New York corporation.
 
     "HCP Common" means voting common stock of HCP.
 
     "HCP Preferred" means nonvoting preferred stock of HCP.
 
     "HCS" means Hanover Capital Securities, Inc., a New York corporation.
 
     "HJV" means Hanover Joint Ventures, Inc., a New York corporation.
 
     "HOME" means Hanover Online Mortgage Edge, LLC, a Delaware limited
liability company.
 
     "HUD" means the Department of Housing and Urban Development.
 
     "Investment Company Act" means the Investment Company Act of 1940, as
amended.
 
     "IRAs" means Individual Retirement Accounts.
 
     "IRS" means the United States Internal Revenue Service.
 
     "ISOs" means qualified incentive stock options granted under the Company's
1997 Stock Option Plan, which meet the requirements of Section 422 of the Code.
 
     "LIBOR" means the London interbank offered rate.
 
     "MGCL" means the Maryland General Corporation Law, as amended from time to
time.
 
     "Mortgage Assets" means Single-Family Mortgage Assets, Multifamily Mortgage
Assets and Commercial Mortgage Assets.
 
     "Mortgage Loans" means Single-Family Mortgage Loans, Multifamily Mortgage
Loans and Commercial Mortgage Loans.
 
     "Mortgage Securities" means (1) Pass-Through Certificates, (2) CMOs and (3)
REMICs.
 
     "Multifamily Mortgage Assets" means Multifamily Mortgage Loans and
Multifamily Mortgage Securities.
 
     "Multifamily Mortgage Loans" means Mortgage Loans secured by multifamily
(in excess of four units) residential property.
 
     "Multifamily Mortgage Securities" means Mortgage Securities representing an
interest in, or secured by, Multifamily Mortgage Loans.
 
     "Net Income" means the net income of the Company determined in accordance
with GAAP before the deduction for dividends paid, and any net operating loss
deductions arising from losses in prior periods. The Company's interest expenses
for borrowed money shall be deducted in calculating Net Income.
 
                                       102

<PAGE>   103
 
     "Ownership Limit" means, with respect to all stockholders other than John
A. Burchett for which such Ownership Limit shall be 11.99%, 9.5% (in value or in
number of shares, whichever is more restrictive) of the aggregate of the
outstanding shares of Common Stock, as may be increased or reduced by the Board
of Directors of HCHI.
 
     "Pass-Through Certificates" means securities (or interests therein) which
are Qualified REIT Assets evidencing undivided ownership interests in a pool of
Single-Family Mortgage Loans, the holders of which receive a "pass-through" of
the principal and interest paid in connection with the underlying Single-Family
Mortgage Loans in accordance with the holders' respective, undivided interests
in the pool.
 
     "Principals" mean John A. Burchett, Joyce S. Mizerak, Irma N. Tavares and
George J. Ostendorf.
 
     "Privately-Issued Certificates" means privately-issued Pass-Through
Certificates issued by the Company or an affiliate of the Company or other
non-Agency third party issuer.
 
     "Qualified Hedge" means an interest rate swap or cap agreement, option,
futures contract, forward rate agreement or similar financial instrument entered
into to reduce the interest rate risks with respect to indebtedness incurred or
to be incurred to acquire or carry Real Estate Assets and the payments on (or
gain on the disposition of) which qualify under Section 856(c)(2) of the Code.
 
     "Qualified REIT Assets" means Pass-Through Certificates, Mortgage Loans,
Agency Certificates and other assets qualifying as "real estate assets" under
Code Section 856(c)(6)(B) (or Code Section 856(c)(5)(B) for taxable years
beginning after the enactment of the Taxpayer Relief Act of 1997).
 
     "Qualified REIT Subsidiary" means a corporation whose stock is entirely
owned by the REIT at all times during such corporation's existence.
 
     "Qualifying Interests" means "mortgages and other liens on and interests in
real estate," as defined in Section 3(c)(5)(c) under the Investment Company Act.
 
     "Real Estate Assets" means interests in real property, interests in
mortgages on real property, regular and residual interests in REMICs and stock
in qualifying REITs.
 
     "REIT" means Real Estate Investment Trust as defined under Section 856 of
the Code.
 
     "REMIC" means serially maturing debt securities secured by a pool of
Mortgage Loans, the payments on which bear a relationship to the debt securities
and the issuer of which qualifies as a Real Estate Mortgage Investment Conduit
as defined under section 860D of the Code.
 
     "Representatives" means Stifel, Nicolaus & Company, Incorporated and
Montgomery Securities.
 
     "Representatives' Warrants" means the Warrants to be issued to the
Representatives to purchase 150,000 (172,500 shares if the Underwriters'
over-allotment option is exercised) shares of Common Stock at an exercise price
equal to the initial public offering price.
 
     "Reverse Repurchase Agreement" means a borrowing device by an agreement to
sell securities or other assets to a third party and a simultaneous agreement to
repurchase them at a specified future date and price, the price difference
constituting the interest on the borrowing.
 
     "RTC" means Resolution Trust Corporation.
 
     "Securities Act" means the Securities Act of 1933, as amended.
 
     "Single-Family Mortgage Assets" means Single-Family Mortgage Loans and
Single-Family Mortgage Securities.
 
     "Single-Family Mortgage Loans" means Mortgage Loans secured by
single-family (one to four unit) residential property.
 
     "Single-Family Mortgage Securities" means Mortgage Securities representing
an interest in, or secured by, Single-Family Mortgage Loans.
 
                                       103

<PAGE>   104
 
     "Tax-Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plan, Keogh Plan, bank commingled trust fund for
such plans, and IRA or other similar entity intended to be exempt from Federal
income taxation.
 
     "Ten Year U.S. Treasury Rate" means the average of the weekly average yield
to maturity for U.S. Treasury securities (adjusted to a constant maturity of 10
years) as published weekly by the Federal Reserve Board during a quarter.
 
     "UBTI" means "unrelated trade or business taxable income" as defined in
Section 512 of the Code.
 
                                       104

<PAGE>   105
 
                   TABLE OF CONTENTS TO FINANCIAL STATEMENTS
 

<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
Independent Auditors' Report..........................................................   F-2
  Balance Sheet as of June 30, 1997...................................................   F-3
  Note to Balance Sheet...............................................................   F-4
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
Independent Auditors' Report..........................................................   F-5
Consolidated Financial Statements as of June 30, 1997 (unaudited), December 31, 1996
  and 1995
and for Each of the Three Years in the Period Ended December 31, 1996 and for the Six
Month Periods Ended June 30, 1997 and 1996 (unaudited):
  Balance Sheets......................................................................   F-6
  Statements of Operations............................................................   F-7
  Statements of Stockholders' Equity..................................................   F-8
  Statements of Cash Flows............................................................   F-9
  Notes to Consolidated Financial Statements..........................................  F-10
</TABLE>

 
                                       F-1

<PAGE>   106
 

                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors of
Hanover Capital Mortgage Holdings, Inc.
 
     We have audited the accompanying balance sheet of Hanover Capital Mortgage
Holdings, Inc. (In Organization) (the "Company") as of June 30, 1997. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Hanover Capital Mortgage Holdings, Inc. (In
Organization) as of June 30, 1997 in conformity with generally accepted
accounting principles.
 
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
August 8, 1997

 
                                       F-2

<PAGE>   107
 
                    HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
                               (IN ORGANIZATION)
 
                                 BALANCE SHEET
                                 JUNE 30, 1997
 

<TABLE>
          <S>                                                                 <C>
                                           ASSETS
          Cash..............................................................  $150
                                                                              ----
          TOTAL ASSETS......................................................  $150
                                                                              ====
                                 TOTAL STOCKHOLDER'S EQUITY
          Preferred stock, par value $.01 -- authorized, 10 million shares;
            issued and outstanding, -0- shares..............................   --
          Common Stock, par value $.01 -- authorized, 90 million shares;
            issued and outstanding 10 shares................................   --
          Additional paid-in capital........................................  $150
                                                                              ----
          TOTAL STOCKHOLDER'S EQUITY........................................  $150
                                                                              ====
</TABLE>

 
                           See note to balance sheet
 
                                       F-3

<PAGE>   108
 
                    HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
                               (IN ORGANIZATION)
 
                             NOTE TO BALANCE SHEET
                                 JUNE 30, 1997
 
BUSINESS DESCRIPTION
 
     Hanover Capital Mortgage Holdings, Inc. (the "Company") was incorporated in
the state of Maryland on June 10, 1997. The Company's business activities will
consist of (i) investing in Mortgage Loans and Mortgage Assets and (ii) owning
an equity investment in Hanover Capital Partners Ltd., a New York corporation.
The Company will operate in a manner that permits it to elect, and intends to
elect, to be a REIT for Federal income tax purposes. The Company intends to
distribute 95% or more of its taxable income to its holders of common stock on a
quarterly basis each year so as to comply with the REIT provisions of the
Internal Revenue Code.
 
     In connection with its formation, the Company has filed a registration
statement for the sale of 5,000,000 units. Each unit consists of one share of
Common Stock, par value $.01 per share, and one Common Stock Purchase Warrant.
There has been no public market for the Units and the Company has not yet
commenced operations. Upon the closing of the Offering of the Units, the Company
will use substantially all of the net proceeds of the Offering to provide
funding for investing in Mortgage Loans and Mortgage Assets.
 
                                       F-4

<PAGE>   109
 

                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors of
Hanover Capital Partners Ltd.
 
     We have audited the accompanying consolidated balance sheets of Hanover
Capital Partners Ltd. and Subsidiaries (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Hanover Capital Partners Ltd.
and Subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
 
     As discussed in Note 2 to the consolidated financial statements, the
Company adopted, effective January 1, 1995, Statement of Financial Accounting
Standards No. 122, Accounting for Mortgage Servicing Rights, an amendment of
FASB Statement No. 65.
 
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
June 11, 1997

 
                                       F-5

<PAGE>   110
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
            DECEMBER 31, 1996 AND 1995 AND JUNE 30, 1997 (UNAUDITED)
 

<TABLE>
<CAPTION>
                                                                    JUNE 30,
                                                                      1997           1996           1995
                                                                   ----------     ----------     ----------
                                                                   (UNAUDITED)
<S>                                                                <C>            <C>            <C>
                                           ASSETS
CURRENT ASSETS:
  Cash...........................................................  $   93,495     $  161,546     $  912,196
  Investment in marketable securities............................      16,967         16,443         42,465
  Accounts receivable............................................     988,346      3,683,865      1,533,748
  Receivables from related parties...............................   1,317,645        521,539        229,804
  Accrued revenue on contracts in progress.......................     357,420        549,781        164,901
  Deferred income taxes..........................................       6,906             --             --
  Prepaid expenses and other current assets......................      65,906        143,026         93,155
                                                                   ----------     ----------     ----------
         Total current assets....................................   2,846,685      5,076,200      2,976,269
PROPERTY AND EQUIPMENT -- Net....................................     274,174        316,057        301,217
MORTGAGE SERVICING RIGHTS........................................      29,016         30,587         46,904
OTHER ASSETS.....................................................     192,813        227,548        204,634
DUE FROM OFFICER.................................................     107,532        107,532             --
                                                                   ----------     ----------     ----------
TOTAL ASSETS.....................................................  $3,450,220     $5,757,924     $3,529,024
                                                                   ==========     ==========     ==========
                            LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accrued appraisal and subcontractor costs......................  $   94,850     $2,807,172     $   66,158
  Accounts payable and accrued expenses..........................     296,709        678,390        574,372
  Note payable to bank...........................................          --             --      1,375,000
  Income taxes payable...........................................      37,207         89,477        179,967
  Deferred revenue...............................................      55,300        194,334        209,280
  Notes payable to related parties...............................      40,745        133,018             --

  Deferred income taxes..........................................          --         12,993         30,215
  Other liabilities..............................................     100,000        122,400             --
                                                                   ----------     ----------     ----------
         Total current liabilities...............................     624,811      4,037,784      2,434,992
                                                                   ----------     ----------     ----------
LONG-TERM LIABILITIES
  Note payable to bank...........................................   2,115,000      1,045,000             --
  Minority interest..............................................         250            250         27,185
  Other liabilities..............................................          --             --        400,000
                                                                   ----------     ----------     ----------
         Total long-term liabilities.............................   2,115,250      1,045,250        427,185
                                                                   ----------     ----------     ----------
         Total liabilities.......................................   2,740,061      5,083,034      2,862,177
                                                                   ----------     ----------     ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Preferred stock: par value $.01 -- authorized, 1,000 shares;
    outstanding, 0 shares:
  Common stock:
    Class A: par value $.01 -- authorized, 1,000 shares;
      outstanding, 166.424 shares in 1997 and 1996 and 165.800
      shares in 1995.............................................           2              2              1
    Class B: par value $.01 -- authorized, 1,000 shares;
      outstanding, 0 shares in 1997 and 1996 and 41.460 shares in
      1995.......................................................          --             --              1
  Additional paid-in capital.....................................      57,440         57,440        165,999
  Retained earnings..............................................     652,717        617,448        500,846
                                                                   ----------     ----------     ----------
         Total stockholders' equity..............................     710,159        674,890        666,847
                                                                   ----------     ----------     ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................  $3,450,220     $5,757,924     $3,529,024
                                                                   ==========     ==========     ==========
</TABLE>

 
                See notes to consolidated financial statements.
 
                                       F-6

<PAGE>   111
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
        AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
 

<TABLE>
<CAPTION>
                                       SIX MONTHS ENDED
                                           JUNE 30,
                                    -----------------------
                                       1997         1996         1996          1995          1994
                                    ----------   ----------   -----------   -----------   -----------
                                          (UNAUDITED)
<S>                                 <C>          <C>          <C>           <C>           <C>
REVENUES:
  Due diligence fees..............  $2,363,328   $2,723,276   $ 8,323,789   $ 7,525,620   $10,194,293
  Loan brokering/asset management
     fees.........................   1,073,845    1,469,843     2,469,378     1,770,665       658,922
  Mortgage sales and servicing....     537,387      656,129       970,757     2,289,440     2,527,183
  Other income....................     259,298      335,083       355,715       295,944       188,162
                                    -----------  -----------  -----------   -----------   -----------
          Total revenues..........   4,233,858    5,184,331    12,119,639    11,881,669    13,568,560
                                    -----------  -----------  -----------   -----------   -----------
EXPENSES:
  Personnel expense...............   2,116,267    2,002,153     4,227,226     3,831,426     4,002,179
  Appraisal, inspection and other
     professional fees............     526,574      580,335     3,128,225     2,593,001     5,244,176
  Subcontractor expense...........     852,785    1,205,592     2,919,509     2,738,903     2,170,514
  Travel and subsistence..........     112,662      518,486       616,795       860,253       315,496
  Occupancy expense...............     250,533      276,081       536,520       437,830       414,894
  General and administrative
     expense......................     193,124      299,998       525,143     1,066,220     1,161,752
  Reversal of reserve for IRS
     assessment...................     (22,400)          --      (277,600)           --            --
  Interest expense................      66,967       56,127       134,393       160,439       101,764
  Depreciation and amortization...      64,686       43,753       125,928       114,174        84,023
                                    -----------  -----------  -----------   -----------   -----------
          Total expenses..........   4,161,198    4,982,525    11,936,139    11,802,246    13,494,798
                                    -----------  -----------  -----------   -----------   -----------
INCOME BEFORE INCOME TAX
  PROVISION.......................      72,660      201,806       183,500        79,423        73,762
INCOME TAX PROVISION..............      37,391       91,886        73,870        51,165       127,681
                                    -----------  -----------  -----------   -----------   -----------
NET INCOME (LOSS).................  $   35,269   $  109,920   $   109,630   $    28,258   $   (53,919)
                                    ===========  ===========  ===========   ===========   ===========
NET INCOME (LOSS) PER SHARE.......  $   211.92   $   660.48   $    658.74   $    169.80   $   (323.99)
                                    ===========  ===========  ===========   ===========   ===========
</TABLE>

 
                See notes to consolidated financial statements.
 
                                       F-7

<PAGE>   112
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
               FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
 

<TABLE>
<CAPTION>
                                           COMMON STOCK
                                -----------------------------------
                                    CLASS A            CLASS B        ADDITIONAL
                                ----------------   ----------------    PAID-IN     RETAINED
                                SHARES    AMOUNT   SHARES    AMOUNT    CAPITAL     EARNINGS    TOTAL
                                -------   ------   -------   ------   ----------   --------   --------
<S>                             <C>       <C>      <C>       <C>      <C>          <C>        <C>
BALANCE, DECEMBER 31, 1993....  165.800    $ 1      41.460    $  1    $  165,999   $526,507   $692,508
Net loss......................       --     --          --      --            --    (53,919)   (53,919)
                                -------    ---     -------    ----    ----------   --------   --------
BALANCE, DECEMBER 31, 1994....  165.800      1      41.460       1       165,999    472,588    638,589
  Net income..................       --     --          --      --            --     28,258     28,258
                                -------    ---     -------    ----    ----------   --------   --------
BALANCE, DECEMBER 31, 1995....  165.800      1      41.460       1       165,999    500,846    666,847
  Net income..................       --     --          --      --            --    109,630    109,630
  Distribution of subsidiary
     to stockholders..........       --     --          --      --            --      6,972      6,972
  Stockholders' Exchange
     Agreement:
     Redemption of Class A
       shares.................  (40.836)    --          --      --      (108,559)        --   (108,559)
     Exchange of Class B
       shares for Class A
       shares.................   41.460      1     (41.460)     (1)           --         --         --
                                -------    ---     -------    ----    ----------   --------   --------
BALANCE, DECEMBER 31, 1996....  166.424      2          --      --        57,440    617,448    674,890
  Net income -- six months
     ended June 30, 1997
     (unaudited)..............       --     --          --      --            --     35,269     35,269
                                -------    ---     -------    ----    ----------   --------   --------
BALANCE, JUNE 30, 1997
  (unaudited).................  166.424    $ 2          --    $ --    $   57,440   $652,717   $710,159
                                =======    ===     =======    ====    ==========   ========   ========
</TABLE>

 
                See notes to consolidated financial statements.
 
                                       F-8

<PAGE>   113
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
          FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
 

<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                                  JUNE 30,
                                                           ----------------------
                                                              1997         1996        1996          1995          1994
                                                           -----------   --------   -----------   -----------   -----------
                                                                (UNAUDITED)
<S>                                                        <C>           <C>        <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)......................................  $    35,269   $109,920   $   109,630   $    28,258   $   (53,919)
  Adjustments to reconcile net income (loss) to net cash
    (used in) provided by operating activities:
    Depreciation and amortization........................       64,686     43,753       125,928       114,174        84,023
    Gain on sale of mortgage servicing rights............           --    (15,887)      (52,318)     (232,587)     (523,793)
    Reversal of reserve for IRS assessment...............      (22,400)        --      (277,600)           --            --
    Loss on disposal of property and equipment...........           --         --            --        10,261            --
    (Gain) loss on sale of trading securities............          (51)       485         1,360           753         3,366
    Purchase of trading securities.......................         (473)      (936)       (1,931)      (29,951)     (116,649)
    Sale of trading securities...........................           --     26,993        26,593       100,016            --
    Distribution of subsidiary to stockholders...........           --      6,972         6,972            --            --
    Changes in assets -- (increase) decrease:
      Accounts receivable................................    2,695,519    109,485    (2,150,117)      862,364    (1,442,160)
      Receivables from related parties...................     (845,820)  (120,225)     (308,808)       22,582       939,955
      Accrued revenue on contracts in progress...........      192,361     52,914      (384,880)    1,011,785      (928,743)
      Prepaid expenses and other current assets..........       77,120    (48,860)      (49,871)      (39,169)      (26,523)
      Other assets.......................................       34,732    (51,707)      (22,914)     (154,108)      (16,500)
    Changes in liabilities -- increase (decrease):
      Accrued appraisal and subcontractor costs..........   (2,712,322)     8,584     2,741,014        21,931        44,227
      Accounts payable and accrued expenses..............     (381,678)  (210,663)      104,018      (913,692)      523,422
      Income taxes payable...............................      (52,270)   (15,168)      (90,490)       15,634       (20,283)
      Deferred income taxes..............................      (19,899)   (63,263)      (17,222)     (114,326)       36,315
      Deferred revenue...................................     (139,034)    14,674       (14,946)      113,855      (514,043)
      Other liabilities..................................           --     48,138            --            --            --
      Minority interest..................................           --    (26,935)      (26,935)     (147,057)      174,242
                                                           -----------   --------   -----------   -----------   -----------
        Net cash (used in) provided by operating
          activities.....................................   (1,074,260)  (131,726)     (282,517)      670,723    (1,837,063)
                                                           -----------   --------   -----------   -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment....................      (17,348)   (40,691)     (133,317)      (43,421)     (144,971)
  Sale of property and equipment.........................           --         --         4,592         1,704            --
  Proceeds from sale of mortgage servicing rights........           --     54,078        94,043       423,563       523,793
  Capitalization of mortgage servicing rights............       (3,884)   (32,586)      (37,451)     (264,141)           --
                                                           -----------   --------   -----------   -----------   -----------
        Net cash (used in) provided by investing
          activities.....................................      (21,232)   (19,199)      (72,133)      117,705       378,822
                                                           -----------   --------   -----------   -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of note payable to bank......................           --   (190,000)     (330,000)     (125,000)     (250,000)
  Redemption of Class A common stock.....................      (42,559)   (66,000)      (66,000)           --            --
  Proceeds from note payable to bank.....................    1,070,000         --            --            --       800,000
  Repayment of subordinated debt.........................           --         --            --       (51,299)     (100,000)
                                                           -----------   --------   -----------   -----------   -----------
        Net cash (used in) provided by financing
          activities.....................................    1,027,441   (256,000)     (396,000)     (176,299)      450,000
                                                           -----------   --------   -----------   -----------   -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.....      (68,051)  (406,925)     (750,650)      612,129    (1,008,241)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...........      161,546    912,196       912,196       300,067     1,308,308
                                                           -----------   --------   -----------   -----------   -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................  $    93,495   $505,271   $   161,546   $   912,196   $   300,067
                                                           ===========   ========   ===========   ===========   ===========
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING ACTIVITIES:
  Loans of $35,831,617, $84,319,600 and $98,655,558 were
  originated by HCMC and funded by investors in 1996,
  1995 and 1994, respectively, and $15,750,478 and
  $26,930,617 for the six months ended June 30, 1997 and
  1996, respectively
SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the
  period for:
    Income taxes.........................................  $   116,045   $170,948   $   205,075   $   176,119   $   189,458
                                                           ===========   ========   ===========   ===========   ===========
    Interest.............................................  $    59,557   $ 62,760   $   125,748   $   164,420   $   101,754
                                                           ===========   ========   ===========   ===========   ===========
</TABLE>

 
                See notes to consolidated financial statements.
 
                                       F-9

<PAGE>   114
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
          FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
 
1.  BUSINESS DESCRIPTION
 
     Hanover Capital Partners Ltd. ("HCP") and its subsidiaries operate as a
specialty finance company which is principally engaged in performing due
diligence services, mortgage and investment banking services and asset
management services. A wholly-owned subsidiary of HCP, Hanover Capital Mortgage
Corporation ("HCMC"), is an originator and servicer of multifamily mortgage
loans. During 1995, HCMC discontinued its single family mortgage origination and
servicing operations. HCMC's operations are conducted from multiple branches
located throughout the United States. 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.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     a.  Principles of Consolidation -- The consolidated financial statements
include the accounts of HCP and its majority and wholly-owned subsidiaries (the
"Company"). The wholly owned subsidiaries include HCMC, HCS, Hanover Capital
Advisors, Inc., Hanover Capital Mortgage Fund, Inc. and Hanover Mortgage Capital
Corporation (through December 31, 1995) (see Note 9). Majority owned
subsidiaries include Hanover Joint Ventures, Inc. (75% owned) and Hanover
On-Line Mortgage Edge, LLC (50% owned). All significant intercompany accounts
and transactions have been eliminated.
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the required amounts of revenues and
expenses during the reporting period.
 
     b.  Investments in Limited Liability Companies -- Minority ownership
interests in limited liability companies are accounted for by the equity method
of accounting. HCP's investment in limited liability companies (AGR Financial,
L.L.C. -- 25.0%, Alpine/Hanover LLC -- 1.0%, ABH-I LLC -- 1.0% and
Alpine/Hanover II, L.L.C. -- 1.0%) are classified as other assets in the
accompanying consolidated balance sheets.
 
     c.  Minority Interests -- Minority interests, representing other
stockholders' interests in majority-owned companies are consolidated in the
accompanying balance sheets.
 
     d.  Revenue Recognition -- Revenues from due diligence contracts in
progress are recognized for the services provided as they are earned and billed.
 
     e.  Loan Origination Fees and Costs -- Loan origination fees and costs are
accounted for in accordance with Statement of Financial Accounting Standards No.
91, Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases ("SFAS 91"). Loan origination
fees and costs are deferred until the sale of the loan. The Company sells all
originated loans to investors at the time of origination, and accordingly,
recognizes loan origination fees at that time. In accordance with SFAS 91,
direct loan origination costs and loan origination fees are offset and included
in mortgage sales revenue.
 
     f.  Loan Servicing Fees -- Loan servicing fees consist of fees paid by
investors for the collection of monthly mortgage payments, maintenance of
required escrow accounts, remittance to investors, and ancillary income
associated with those activities. The Company recognizes loan servicing fees as
payments are collected.
 
                                      F-10

<PAGE>   115
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
          FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
 
     g.  Deferred Revenue -- Cash advances received for certain service
contracts are recorded in the accompanying consolidated balance sheets as
deferred revenue and are recognized during the period the services are provided
and the related revenue is earned.
 
     h.  Income Taxes -- The Company records deferred taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS 109"). Under SFAS 109 a current or deferred tax liability or asset is
recognized for the current or deferred tax effects of all events recognized in
the financial statements. Those effects are measured based on provisions of
current tax law to determine the amount of taxes payable or refundable currently
or in future years. The tax effects of earning income or incurring expenses in
future years or the future enactment of a change in tax laws or rates are not
anticipated in determining deferred tax assets or liabilities.
 
     The Company files a consolidated Federal income tax return. The Company has
not been subject to an examination of their income tax returns by the Internal
Revenue Service.
 
     i.  Property and Equipment -- Property and equipment is stated at cost less
accumulated depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the assets, generally three to seven years.
Leasehold improvements are depreciated over the terms of the respective leases
or their estimated useful lives, whichever is shorter.
 
     j.  Investment in Marketable Securities -- Investment in marketable
securities which the Company has classified as trading securities, pursuant to
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), are reported in the
accompanying consolidated balance sheets at market value at December 31, 1996
and 1995.
 
     k.  Cash and Cash Equivalents -- For cash flow purposes, the Company
considers highly liquid investments, purchased with an original maturity of
three months or less, to be cash equivalents. There were no cash equivalents at
June 30, 1997, December 31, 1996 and 1995.
 
     l.  Mortgage Servicing Rights -- The Company adopted Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights, an
amendment of FASB Statement No. 65, ("SFAS 122"), effective January 1, 1995. The
effect of adopting SFAS 122 was to increase income before income taxes for the
year ended December 31, 1995, by $46,904. For purposes of assessing impairment,
the lower of carrying value or fair value of servicing rights is determined on
an individual loan basis. Capitalized servicing rights are amortized in
proportion to projected net servicing revenue. The fair value of the Company's
capitalized servicing rights as of December 31, 1996 and 1995 was $46,606 and
$54,029, respectively. The fair value of servicing rights is determined using a
discounted cash flow method utilizing current market assumptions.
 
     m.  Earnings Per Share -- Earnings per share are based on the weighted
average shares of Class A common stock outstanding after giving retroactive
effect to the shareholder exchange agreement (see Note 9).
 
     n.  Reclassifications -- Certain 1995 and 1994 amounts have been
reclassified to conform with the 1996 presentation.
 
     o.  Accounting Standards -- In June 1996, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. The statement modifies SFAS 122 to eliminate the concept of
"normal" service fee rates and provides guidance on the appropriate accounting
for contractual service fee rates and those rates which exceed the contractual
level. Specifically, contractual service fee rates will continue to be accounted
for under SFAS 122 and the portion of service fee rates which exceed the
contractual level will be accounted for under SFAS 115. The Company has analyzed
the impact of adopting this statement and determined that it
 
                                      F-11

<PAGE>   116
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
          FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
 
will not have a material impact on its operations. The Company will adopt this
statement effective January 1, 1997.
 
     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. This statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The Company has analyzed the impact of adopting this
statement and determined that it will not have a material impact on its EPS
calculation.
 
3.  PAYROLL TAX SETTLEMENT
 
     In 1994, the Internal Revenue Service ("IRS") began an examination of the
Company's payroll tax withholding practices with respect to independent
contractors who provided services to HCP's due diligence business.
 
     Pursuant to the IRS Classification Settlement Program ("CSP"), HCP received
an offer to settle all disputed payroll taxes relating to the IRS examination of
HCP's payroll withholding practices with respect to independent contractors.
Management of HCP intends to agree to the terms of the CSP which require HCP to
pay the United States Government $122,400 in full discharge of any federal
employment tax liability and to further treat the workers as employees (rather
than independent contractors) on a prospective basis.
 
     At December 31, 1995, HCP had recorded an accrual of $400,000 for payroll
withholding tax for independent contractors in the accompanying consolidated
balance sheet. HCP recorded a reversal of reserve of $277,600 for the payroll
tax matter in the accompanying consolidated statement of operations for the year
ended December 31, 1996 to adjust the previously established reserve to the
expected settlement amount.
 
     Subsequent to December 31, 1996, HCP received a revised settlement offer
from the IRS and will agree to pay the United States Government $100,000 rather
than $122,400. Accordingly, HCP recorded an additional reversal of reserve of
$22,400 for the payroll tax matter in the accompanying consolidated statement of
operations for the six months ended June 30, 1997.
 
4.  CONCENTRATION RISK
 
     For the six month periods ended June 30, 1997 and 1996 and for the years
ended December 31, 1996, 1995 and 1994 the Company received revenues from
certain customers which exceeded 10% of total revenues as follows:
 

<TABLE>
<CAPTION>
  SIX MONTHS
     ENDED
    JUNE 30           YEAR ENDED DECEMBER 31
- ---------------     --------------------------
1997       1996     1996       1995       1994
- ----       ----     ----       ----       ----
(UNAUDITED)
<S>        <C>      <C>        <C>        <C>
 40%        53%      46%        32%        44%
 11%       --        26%        16%        12%
</TABLE>

 
5.  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
 
                                      F-12

<PAGE>   117
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
          FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
 
accounts for the payment of principal and interest to investors and property
taxes and insurance premiums on behalf of borrowers. As of June 30, 1997 and
December 31, 1996 and 1995, HCMC was servicing 44, 46 and 96 loans, respectively
with unpaid principal balances of $121,695,190, $129,315,400 and $285,790,700,
including loans subserviced for others of $42,871,500 $44,241,919 and
$176,705,450, respectively. Escrow balances maintained by HCMC were $3,802,300,
$4,352,400 and $11,543,200 at June 30, 1997, December 31, 1996 and 1995,
respectively. The aforementioned servicing portfolio and related escrow accounts
are not included in the accompanying consolidated balance sheets as of June 30,
1997, December 31, 1996 and 1995.
 
     The Company adopted SFAS 122 effective January 1, 1995. Activity in
mortgage servicing rights for the, six months ended June 30, 1997 and for the
years ended December 31, 1996 and 1995 was as follows:
 

<TABLE>
<CAPTION>
                                                          1997           1996         1995
                                                       -----------     --------     ---------
                                                       (UNAUDITED)
    <S>                                                <C>             <C>          <C>
    Beginning balance..............................     $  30,587      $ 46,904     $      --
    Capitalization.................................         3,884        37,451       264,141
    Sales..........................................            --       (41,725)     (190,976)
    Scheduled amortization.........................        (5,455)      (12,043)      (26,261)
                                                        ---------      --------     ---------
                                                        $  29,106      $ 30,587     $  46,904
                                                        =========      ========     =========
</TABLE>

 
     The fair value of the Company's servicing rights at December 31, 1996 and
1995 was $46,606 and $54,029, respectively.
 
6.  RELATED PARTY TRANSACTIONS
 
     Receivables from related parties at June 30, 1997, December 31, 1996 and
1995 consist of the following:
 

<TABLE>
<CAPTION>
                                                           1997          1996         1995
                                                        ----------     --------     --------
                                                        (UNAUDITED)
    <S>                                                 <C>            <C>          <C>
    Due from ABH-I LLC (includes $1,213,051, $431,118
      and -0- of asset management fees at June 30,
      1997, December 31, 1996 and 1995,
      respectively)...................................  $1,260,018     $451,604     $ 49,660
    Due from Hanover Asset Services, Inc..............       7,676        6,420        5,144
    Due from (to) Alpine/Hanover LLC..................      13,449        4,361         (838)
    Due from Alpine/Hanover II, LLC...................       2,000           --           --
                                                        ----------     --------     --------
    Due from related entities.........................   1,283,143      462,385       53,966
    Due from officers.................................     142,034      166,686      175,838
                                                        ----------     --------     --------
    Receivables from related parties..................  $1,425,177     $629,071     $229,804
                                                        ==========     ========     ========
</TABLE>

 
     The amounts due from related entities, ABH-I LLC, Hanover Asset Services,
Inc., Alpine/Hanover LLC, and Alpine/Hanover II, LLC represent amounts due from
entities in which the Company has a minority interest (49% or less). Such
receivables resulted primarily from fees generated from asset management
services and out-of-pocket expenses.
 
     The Company provides asset management services and receives reimbursement
for out-of-pocket expenses incurred in connection with providing such services
to certain affiliates. Revenues for such services are recognized in the period
earned and amounted to approximately $850,000, $1,370,000, $1,362,000 and
$304,000 for the six month period ended June 30, 1997 and for the years ended
December 31, 1996, 1995 and 1994, respectively.
 
                                      F-13

<PAGE>   118
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
          FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
 
     Amounts due from officers as of June 30, 1997 and December 31, 1996 include
$161,298 from the Company's President which will be repaid in three annual
amounts of $53,766 each August 1, beginning August 1, 1997.
 
     Notes payable to related parties at June 30, 1997, December 31, 1996 and
1995 consist of the following:
 

<TABLE>
<CAPTION>
                                                                         1996          1995
                                                          1997         --------     -----------
                                                       -----------
                                                       (UNAUDITED)
    <S>                                                <C>             <C>          <C>
    Note payable to officer..........................    $    --       $ 42,559      $       --
    Notes payable to ABH-I, LLC......................     40,745         90,459              --
                                                         -------       --------      ----------
    Notes payable to related parties.................    $40,745       $133,018      $       --
                                                         =======       ========      ==========
</TABLE>

 
     On January 1, 1996, HCP and its stockholders entered into an Exchange
Agreement (see Note 9) whereby HCP redeemed 40.836 shares of Class A common
stock from one of its stockholders in exchange for cash ($66,000) and a term
note in the amount of $42,559. The note was payable in full, with interest at
the prime rate plus 2.0% on December 31, 1996. The note and interest were paid
in full in January 1997.
 
     Notes payable to ABH-I LLC at June 30, 1997 and December 31, 1996 consisted
of three (3) promissory notes totaling $40,745 and $90,459, respectively. In
lieu of making certain capital contributions to ABH-I LLC, HCP executed
promissory notes. The capital contributions to ABH-I LLC were used to purchase
various mortgage pools. HCP is obligated to repay the promissory notes from time
to time on the date that HCP receives distributions from ABH-I LLC relating to
the specific mortgage pools. Any unpaid balance of the promissory note and any
accrued interest is due and payable on the date the "Last Specified Asset" (as
defined in the promissory note) is sold, transferred or disposed of. All of the
promissory notes bear interest at the prime rate (8.50% at June 30, 1997 and
8.25% at December 31, 1996).
 
     During 1995, the Company paid the remaining principal and interest balance,
in full, due on notes payable to certain officers of the Company. Such notes
were due on demand and bore interest at the rate of 1% in excess of the prime
rate from September 30, 1992 to the date of payment.
 
7.  PROPERTY AND EQUIPMENT
 
     Property and equipment at June 30, 1997, December 31, 1996 and 1995
consists of the following:
 

<TABLE>
<CAPTION>
                                                             1997         1996        1995
                                                          -----------   ---------   ---------
                                                          (UNAUDITED)
    <S>                                                   <C>           <C>         <C>
    Office machinery and equipment......................   $  405,471   $ 388,123   $ 265,136
    Furniture and fixtures..............................      111,246     111,246     106,501
    Leasehold improvements..............................       68,553      68,553      68,553
                                                           ----------   ---------   ---------
                                                              585,270     567,922     440,190
    Less accumulated depreciation and amortization......     (311,096)   (251,865)   (138,973)
                                                           ----------   ---------   ---------
    Property and equipment -- net.......................   $  274,174   $ 316,057   $ 301,217
                                                           ==========   =========   =========
</TABLE>

 
     Depreciation expense for the six months ended June 30, 1997 and for the
years ended December 31, 1996, 1995 and 1994 was $59,231, $113,885, $87,913 and
$84,023, respectively.
 
                                      F-14

<PAGE>   119
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
          FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
 
8.  INCOME TAXES
 
     The components of deferred income taxes as of June 30, 1997, December 31,
1996 and 1995 are as follows:
 

<TABLE>
<CAPTION>
                                                          1997           1996         1995
                                                       -----------     --------     ---------
                                                       (UNAUDITED)
    <S>                                                <C>             <C>          <C>
    Deferred tax assets..............................   $  82,860      $ 52,409     $ 160,000
    Deferred tax (liabilities).......................     (75,954)      (65,402)     (190,215)
                                                        ---------      ---------    ---------
    Net deferred tax asset (liability)...............   $   6,906      $(12,993)    $ (30,215)
                                                        =========      =========    =========
</TABLE>

 
     The items resulting in significant temporary differences for the six months
ended June 30, 1997 and for the years ended December 31, 1996 and 1995 that
generate deferred tax assets relate primarily to the recognition of deferred
revenue, accounts payable and accrued liabilities for financial reporting
purposes. Temporary differences that generate deferred tax liabilities relate
primarily to the Company's change from the cash method to the accrual method of
accounting for income tax reporting purposes.
 
The components of the income tax provision (benefit) for the six months ended
June 30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and 1994
consist of the following:
 

<TABLE>
<CAPTION>
                                                SIX MONTHS                     YEAR ENDED
                                              ENDED JUNE 30,                  DECEMBER 31,
                                          ----------------------     -------------------------------
                                             1997         1996         1996       1995        1994
                                          -----------   --------     --------   ---------   --------
                                               (UNAUDITED)
<S>                                       <C>           <C>          <C>        <C>         <C>
Current -- Federal, state and local.....   $  57,290    $155,149     $ 91,092   $ 165,491   $169,122
Deferred -- Federal, state and local....     (19,899)    (63,263)     (17,222)   (114,326)   (41,441)
                                           ---------    --------     --------   ---------   --------
Total...................................   $  37,391    $ 91,886     $ 73,870   $  51,165   $127,681
                                           =========    ========     ========   =========   ========
</TABLE>

 
     The income tax provision differs from amounts computed at statutory rates,
as follows:
 

<TABLE>
<CAPTION>
                                                  SIX MONTHS                   YEAR ENDED
                                                ENDED JUNE 30,                DECEMBER 31,
                                             ---------------------   -------------------------------
                                              1997        1996         1996        1995       1994
                                             -------   -----------   --------     -------   --------
                                                  (UNAUDITED)
<S>                                          <C>       <C>           <C>          <C>       <C>
Federal income taxes at statutory rate.....  $23,519     $68,461     $ 56,518     $27,006   $ 25,079
State and local income taxes net of Federal
  benefit..................................    7,244      16,815       14,836       9,417      5,163
Differences resulting primarily from the
  Company's recognition of accounts
  receivable, accounts payable and deferred
  revenue on the cash basis for income tax
  purposes.................................       --          --           --          --     97,439
Unconsolidated subsidiary's net income.....       --          --      (12,793)         --         --
Meals and entertainment....................    2,121       1,651        3,719       6,291         --
Officers' life insurance...................    4,507       4,723        8,576       9,114         --
Other, net.................................       --         236        3,014        (663)        --
                                             -------     -------     --------     -------   --------
Total......................................  $37,391     $91,886     $ 73,870     $51,165   $127,681
                                             =======     =======     ========     =======   ========
</TABLE>

 
9.  STOCKHOLDERS' EQUITY
 
     On January 1, 1996, HCP entered into an exchange agreement ("Exchange
Agreement") with its stockholders in order to restructure the ownership of HCP
so that HCP had only 166.424 Class A shares of
 
                                      F-15

<PAGE>   120
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
          FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
 
common stock outstanding. The terms of the Exchange Agreement required HCP to:
(1) redeem 40.836 shares of Class A common stock; (2) exchange 41.460 shares of
Class B common stock for Class A common stock; (3) effect an exchange of 8.468
shares of Class A common stock among certain stockholders; and (4) transfer the
ownership of Hanover Mortgage Capital Corporation (formerly a wholly-owned
subsidiary of HCP) to HCP's stockholders.
 
     On January 1, 1996, pursuant to the Exchange Agreement, HCP transferred its
total ownership interests in its wholly-owned subsidiary, Hanover Mortgage
Capital Corporation to HCP's stockholders. Hanover Mortgage Capital Corporation
had a retained earnings deficiency at the time of transfer.
 
10.  NOTE PAYABLE TO BANK
 
     Note payable to bank at June 30, 1997, December 31, 1996 and 1995 consists
of a short-term note of $2,115,000, $1,045,000 and $1,375,000, respectively,
with an annual interest rate at the prime rate plus 1 1/2% payable monthly. The
interest rate in effect at June 30, 1997, December 31, 1996 and 1995 was 10.0%,
9.75% and 10%, respectively. In December 1996, HCP entered into a $2.0 million
Line of Credit Facility Agreement ("Line") with a bank that extends through
December 31, 1999. The maximum borrowing capacity under the terms of the Line
reduce every six (6) months, beginning at June 30, 1997, by $150,000. The line
is collateralized by all of the assets of HCP and guaranteed by the President
and all of the wholly-owned subsidiaries of HCP.
 
     In June 1997, HCP entered into a Modification Agreement with the bank to
temporarily increase the borrowing capacity on the Line from $2.0 million to
$2.3 million. The Line reverts to the original $1.85 million borrowing capacity
at September 1, 1997.
 
11.  COMMITMENTS AND CONTINGENCIES
 
     The Company is involved in ongoing litigation with unspecified damage
amounts regarding a mortgage loan with an original principal balance of $1.76
million and a related repair reserve agreement. As of the date of this report,
an evaluation of the likelihood of success or an unfavorable outcome could not
be performed. As such, no amount has been provided for in the accompanying
consolidated financial statements. The Company has retained the services of
outside counsel and intends to respond vigorously and does not expect the
ultimate resolution of this matter will have a material adverse impact on the
operating results or financial position of the Company.
 
     The Company has noncancelable operating lease agreements for office space.
Future minimum rental payments for such leases are as follows:
 

<TABLE>
<CAPTION>
                                       YEAR                              AMOUNT
            ----------------------------------------------------------  --------
            <S>                                                         <C>
            1997......................................................  $269,258
            1998......................................................   175,609
            1999......................................................   103,819
            2000......................................................    66,896
                                                                        --------
            Total.....................................................  $615,582
                                                                        ========
</TABLE>

 
     Rent expense for the six months ended June 30, 1997 and for the years ended
December 31, 1996, 1995 and 1994 amounted to $154,454, $339,421, $345,716 and
$363,806, respectively.
 
     The Company entered into noncancelable employment contracts with certain
officers which expire December 31, 1997. At December 31, 1996, the aggregate
commitment for future salaries and incentive
 
                                      F-16

<PAGE>   121
 
                 HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
          FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
 
compensation under these employment contracts was $302,789 and $25,295,
respectively. Incentive compensation has been accrued for in the accompanying
consolidated balance sheet at December 31, 1996.
 
12.  SUBSEQUENT EVENT
 
     The stockholders of the Company have tentatively approved a plan to
exchange substantially all of their ownership interest in the Company for shares
of capital stock of a Maryland corporation, Hanover Capital Mortgage Holdings,
Inc. ("HCHI"). In connection with such exchange and HCHI's initial public
offering, the stockholders of the Company will exchange non-voting preferred
stock in the Company for 12.54% of HCHI's outstanding common shares and will
retain ownership of all voting common stock of the Company. The nonvoting
preferred stock will have certain priorities in the event of liquidation and
will have the right to receive 97% of dividend distributions from the Company.
HCHI will be established to comply with the REIT provisions of the Internal
Revenue Code.
 
                                      F-17

<PAGE>   122
 
================================================================================
 
 
                              TABLE OF CONTENTS
 

<TABLE>
<CAPTION>
                                         PAGE
                                         ----
<S>                                      <C>
Prospectus Summary.....................     4
Risk Factors...........................    14
The Company............................    28
Use of Proceeds........................    28
Dividend Policy and Distributions......    28
Dividend Reinvestment Plan.............    29
Dilution...............................    30
Capitalization.........................    31
Pro Forma Financial Data...............    32
Selected Financial Data................    34
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...........................    35
Business...............................    42
Management.............................    63
Structure and Formation Transactions...    71
Certain Transactions...................    77
Principal Stockholders.................    78
Description of Securities..............    78
Shares Eligible for Future Sale........    82
Certain Provisions of Maryland Law and
  the Company's Charter and By-Laws....    83
Federal Income Tax Considerations......    86
ERISA Investors........................    97
Underwriting...........................    98
Legal Matters..........................   100
Experts................................   100
Additional Information.................   100
Glossary...............................   101
Index to Financial Statements..........   F-1
</TABLE>

 
                            ------------------------
 
  NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
 
  UNTIL OCTOBER 10, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE UNITS,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

================================================================================

================================================================================
 
                                5,000,000 UNITS
 
                                HANOVER CAPITAL
                                    MORTGAGE
                                 HOLDINGS, INC.
 
                           CONSISTING OF ONE SHARE OF
                                COMMON STOCK AND
                           ONE STOCK PURCHASE WARRANT
 
                           --------------------------
 
                                   Prospectus
 
                               September 15, 1997
 
                           --------------------------
 
                           STIFEL, NICOLAUS & COMPANY
                                  INCORPORATED
 
                             MONTGOMERY SECURITIES

================================================================================