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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1997
REGISTRATION NO. 333-29261
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
------------------------
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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90 WEST STREET, SUITE 1508
NEW YORK, NEW YORK 10006
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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JOHN A. BURCHETT
CHIEF EXECUTIVE OFFICER
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
90 WEST STREET, SUITE 1508
NEW YORK, NEW YORK 10006
(212) 732-5086
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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CHARLES A. WRY, JR., ESQ. PETER T. HEALY, ESQ.
MORSE, BARNES-BROWN & PENDLETON, P.C. O'MELVENY & MYERS LLP
1601 TRAPELO ROAD EMBARCADERO CENTER WEST
WALTHAM, MA 02154 275 BATTERY STREET
TELEPHONE: (617) 622-5930 SAN FRANCISCO, CA 94111
FACSIMILE: (617) 622-5933 TELEPHONE: (415) 984-8833
FACSIMILE: (415) 984-8701
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST , 1997
PROSPECTUS
4,600,000 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. It is currently anticipated that the initial public offering
price will be between $14.00 and $16.00 per Unit. See "Underwriting" for
information relating to the factors considered in determining the initial public
offering price. The Company has applied to have the Units approved for quotation
on the American Stock Exchange under the symbols "HCM.U." The Company has also
applied to have the Common Stock and Warrants approved for quotation on the
American Stock Exchange effective on the date the Warrants are detachable from
the Common Stock.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 14 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS. THESE RISKS INCLUDE:
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- - 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.
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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.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Unit.................................... $ $ $
- -----------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $
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(1) Excludes the value of the Warrants to be issued to Stifel, Nicolaus &
Company, Incorporated and Montgomery Securities to purchase 138,000 shares
of Common Stock (158,700 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 690,000 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
$ , $ and $ , 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 , 1997.
STIFEL, NICOLAUS & COMPANY MONTGOMERY SECURITIES
INCORPORATED
, 1997
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TABLE OF CONTENTS
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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................... 7
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
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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
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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
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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
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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
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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
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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
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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.
6
<PAGE> 8
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 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 716,667 shares of Common Stock,
representing 13.48% 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 16.87%, 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 716,667 shares of Common Stock of HCHI,
or 13.48% 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
7
<PAGE> 9
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 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 an assumed 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
8
<PAGE> 10
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 "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
13.48% 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 16.37%
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.
9
<PAGE> 11
- --------------------------------------------------------------------------------
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.
- 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 4,600,000 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 16.87%, 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 86.52% of the outstanding Common
Stock (and all of the Warrants, except for the Representatives' Warrants), (iii)
the Principals will own 13.48% 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 16.87%,
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
- --------------------------------------------------------------------------------
10
<PAGE> 12
- --------------------------------------------------------------------------------
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 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)
13.48% of the initially outstanding Common Stock of HCHI (with a
total value of $10,750,005 based on an assumed 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 16.87%, 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 an assumed 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."
- --------------------------------------------------------------------------------
11
<PAGE> 13
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."
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.
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<PAGE> 14
- 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.
- 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)................................................. 4,600,000
Units to be outstanding after the closing of the Offering(2)....................... 4,600,000
Common Stock to be outstanding after the closing of the Offering(2)(3)(4).......... 5,316,677
Common Stock Purchase Warrants to be outstanding after the closing of the
Offering(2)(5)................................................................... 4,738,000
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>
Proposed 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 690,000 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) 138,000
shares (158,700 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.
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<PAGE> 15
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, 13.48% of the initially outstanding shares of Common
Stock of HCHI (with a total value of $10,750,005 based on an assumed initial
public offering price of the Common Stock in the Offering of $15.00 per share)
and (ii) subject to lender approval, John A.
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Burchett will 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 an assumed 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 an assumed public offering price of $15.00 per Unit, will
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have a 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 an initial public offering
price of $15.00 per Unit and no value for or exercise of the Warrants,
purchasers of the Units in the Offering will experience immediate dilution of
approximately $2.97 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 $.79 per share of Common Stock. 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
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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
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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
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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.
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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
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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
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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
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<PAGE> 24
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> 25
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> 26
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 will be 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 applied to 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> 27
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 4,600,000 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
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<PAGE> 28
Option Plan, (ii) 4,600,000 shares of Common Stock may be issued upon the
exercise of the Warrants, and (iii) up to 158,700 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> 29
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
$63,270,000 (or $72,895,500 if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $15.00 per
Unit. 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> 30
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.
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<PAGE> 31
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 a public offering price of
$15.00 per Unit and 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 $2.97 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 $.79 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. See
"Structure and Formation Transactions -- HCHI."
<TABLE>
<CAPTION>
OFFERING
---------------
<S> <C> <C>
Assumed 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........... (1.25)
Dilution per share of Common Stock attributable to the Formation
Transactions(1)............................................................ (1.72)
Potential additional dilution per share of Common Stock attributable to the
Formation Transactions(2).................................................. (.79)
------
Fully diluted value per Unit............................................ $11.24
======
</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 a public offering price of $15.00 per Unit), assuming
no 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 13.48% $ 688,854 .99% $ 0.96
216,667(1) 3.39% 0 0% $0.00
--------- ------ ---------- ---- --
933,334 16.87% 688,854 .99%
New Investors... 4,600,000 83.13% 69,000,000 99.01% $ 15.00
--------- ------ ---------- ---- --
Total... 5,533,334 100.00% $69,688,854 100.00%
========= ====== ========== ======
</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 ($69,000,000) is used.
30
<PAGE> 32
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 assumed 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, 5,316,677 and 5,858,677 shares as
adjusted, respectively.......................... -0- $ 53 $ 59
-- -- --
Additional paid-in capital......................... -0- $ 63,906 $67,030
-- -- --
Total capitalization............................... $-0- $ 63,959 $67,089
== == ==
</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 690,000 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; (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; and (iii) 325,333 shares reserved for
issuance to the Principals and other employees of the Company pursuant to
the Company's 1997 Stock Option Plan for an assumed per share price of
$15.00;. See "Structure and Formation Transactions -- The Formation of
HCHI." See "Management -- 1997 Stock Option Plan."
31
<PAGE> 33
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> 34
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 $63,270,000 $(1,750,000) -- $61,520,150
Investment in Hanover Capital
Partners Ltd. .................... -- 688,854 -- -- 688,854
Loans to Principals................. -- -- 1,750,000 (1,750,000) --
---- ----------- ----------- ----------- -----------
TOTAL ASSETS........................ $150 $63,958,854 $ -0- $(1,750,000) $62,209,004
==== =========== =========== =========== ===========
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 5,533,344
shares, historical, and proforma,
respectively...................... -- $ 53,167 2,166 $ 55,333
Additional paid-in capital.......... $150 63,905,687 -- (1,752,166) 62,153,671
---- ----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY.......... $150 $63,958,854 $ -0- $(1,750,000) $62,209,004
==== =========== =========== =========== ===========
</TABLE>
- ---------------
(1) Reflects the estimated net proceeds ($63,270,000) from the Offering assuming
no exercise of the Underwriters' overallotment option at an assumed 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> 35
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> 36
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> 37
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> 38
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> 39
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
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<PAGE> 40
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.
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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
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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.
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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;
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- 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
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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.
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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.
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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.
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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."
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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
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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
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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.
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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.
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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.
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<PAGE> 64
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
TBD.................................. Director Elect
TBD.................................. Director Elect
TBD.................................. Director Elect
</TABLE>
- ---------------
(1) To be 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
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<PAGE> 65
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
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<PAGE> 66
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.
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 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
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<PAGE> 67
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.
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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 fiscal year (or prorated fiscal
year). This Bonus Incentive Compensation Plan will award bonuses annually to
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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 activity, bona fide illness, disability,
death or other reason expressly authorized by the Board of Directors in
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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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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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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 716,667 shares of Common Stock of HCHI,
or 13.48% 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 16.87% 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> 73
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 an assumed 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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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 4,600,000 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 16.87%, 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 86.52% 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> 75
outstanding Common Stock owned by the purchasers of Units in the
Offering may decrease to 83.13% if the Earn-Out vests.
- The Principals will own 13.48% of the outstanding Common Stock. The
percentage of the outstanding Common Stock owned by the Principals may
increase to up to 16.87%, 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 4,600,000 Units in the Offering, the Principals will
initially hold 13.48% 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 16.87%) 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 11.93% 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 an assumed 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
13.48% 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 16.37% 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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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 13.48% of the initially outstanding
Common Stock of HCHI (with a total value of $10,750,005 based on an
assumed 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 16.87%, 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 an assumed 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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- 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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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.
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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% 7.42%
Irma N. Tavares(5)............................. 107,500 15.00% 2.02%
Joyce S. Mizerak(5)............................ 107,500 15.00% 2.02%
George J. Ostendorf(6)......................... 107,500 15.00% 2.02%
---------------- ------- ------
All Directors and executive officers as a group
(7 persons).................................. 716,667 100.00% 13.48%
============= =========== ============
</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
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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"). 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.
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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.
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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
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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
5,316,667 shares of Common Stock (including 716,667 shares issued to the
Principals), 4,600,000 shares of Common Stock reserved for the Warrants, 138,000
shares of Common Stock (158,700 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."
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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
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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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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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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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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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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 HCHI's share of
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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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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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." Such
distributions 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 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."
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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 nonetheless maintained
its qualification as a REIT because certain other requirements have been met, it
will
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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.
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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.
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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).
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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
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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.
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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.
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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......................
Montgomery Securities.........................................
---------------
Total............................................... 4,600,000
</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 $ per Unit, and that the Underwriters and such
dealers may reallow to certain dealers a discount not in excess of $ 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 690,000 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 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
138,000 (158,700 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 are not transferable 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
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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.
Application has been made to have the Units, the Warrants and the Common
Stock 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 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.
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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> 102
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> 103
"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> 104
"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 138,000 (158,700 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> 105
"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> 106
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> 107
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> 108
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> 109
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 4,600,000 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> 110
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> 111
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> 112
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> 113
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> 114
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> 115
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 122
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 13.48% 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> 123
- ------------------------------------------------------
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 Consolidating 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 , 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.
======================================================
4,600,000 UNITS
HANOVER CAPITAL
MORTGAGE
HOLDINGS, INC.
CONSISTING OF ONE SHARE OF
COMMON STOCK AND
ONE STOCK PURCHASE WARRANT
--------------------------
Prospectus
, 1997
--------------------------
STIFEL, NICOLAUS & COMPANY
INCORPORATED
MONTGOMERY SECURITIES
------------------------------------------------------
<PAGE> 124
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Units being registered hereby. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
Securities and Exchange Commission registration fee.......... $ 52,066.91
NASD filing fee.............................................. 17,682.00
American Stock Exchange filing fee........................... 50,000.00
Printing and engraving expenses.............................. 250,000.00
Legal fees and expenses...................................... 250,000.00
Accounting fees and expenses................................. 240,000.00
Transfer agent and custodian fees............................ 10,000.00
Miscellaneous................................................ 30,251.09
-----------------
Total.............................................. $900,000.00
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES.
Not applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
On or about June 11, 1997, the Company sold 10 shares of Common Stock to
John A. Burchett in a private placement.
In connection with the Structure and Formation Transactions, the Principals
will sell the HCP Preferred to HCHI.
Upon the closing of the Offering, the Company will issue Warrants to
purchase an aggregate of 138,000 (158,700 shares if the Underwriters'
over-allotment option is exercised) shares of Common Stock of HCHI, at an
exercise price equal to the initial public offering price, to Stifel, Nicolaus &
Company, Incorporated and Montgomery Securities. See "Underwriting."
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
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 from (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 charter of the
Company contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
The charter of the Company authorizes it, to the maximum extent permitted
by Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (1) any
present or former Director or officer or (2) any individual who, while a
Director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise from and against any claims or liability to which such
person may become subject or which such person may incur by reason of his status
as a present or former Director or officer of the Company. The Bylaws of the
Company obligate it, 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 (1) any present or former Director or officer who
is made a party to the proceeding by reason of
II-1
<PAGE> 125
his service in that capacity or (2) any individual who, while a Director of the
Company and at the request of the Company, serves or has served another
corporation, partnership, director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his service in
that capacity. The charter and Bylaws also permit 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 (1) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (2) the director or officer actually received an improper personal
benefit in money, property or services or (3) 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 (1) 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 (2) a written statement 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.
ITEM 36.L FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements, all of which are in the Prospectus:
<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>
(b) Exhibits.
II-2
<PAGE> 126
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
**3.1 Articles of Incorporation of HCHI, as amended
**3.2 Form of By-Laws of HCHI
*4.1 Specimen Common Stock Certificate
4.2 Form of Warrant Agreement pursuant to which Warrants are to be issued
(including form of Warrant)
4.3 Form of Representatives' Warrant Agreement pursuant to which the
Representatives' Warrants are to be issued
*5.1 Opinion of Morse, Barnes-Brown & Pendleton, P.C. with respect to legality
of the Securities being registered
*8.1 Opinion of Morse, Barnes-Brown & Pendleton, P.C. with respect to certain
Federal income tax matters
**10.3 Form of Registration Rights Agreement
10.4 Form of Shareholders' Agreement of HCP
**10.5 Form of Agreement and Plan of Recapitalization
10.6 Form of Bonus Incentive Compensation Plan
10.7 Form of 1997 Executive and Non-Employee Director Stock Option Plan
10.8 Form of Employment Agreement by and between HCHI and John A. Burchett
*10.9 Form of Employment Agreement by and between HCHI and Irma N. Tavares
*10.10 Form of Employment Agreement by and between HCHI and Joyce S. Mizerak
*10.11 Form of Employment Agreement by and between HCHI and George J. Ostendorf
**10.12 Standard Form of Office Lease, dated as of May 6, 1991, by and between
Irwin Kahn and HCP, as amended by the First Amendment of Lease, dated as
of July 1, 1996
**10.13 Office Lease Agreement, dated as of March 1, 1994, by and between Metroplex
Associates and HCMC, as amended by the First Modification and Extension
of Lease Agreement, dated as of February 28, 1997
**10.14 Indenture, dated as of June 28, 1993, by and between LaSalle National Bank,
N.A., as Trustee, and HCP, as amended by the Lease Amendment dated as of
August 23, 1995
**10.15 Office building space, dated as of February 5, 1993, by and between
Bonhomme Place Associates, Inc. and HCMC, as amended by Lease Amendment
#1, dated as of December 1, 1993 and as further amended by Second
Amendment and Extension of Lease, dated as of March 1, 1996
**10.16 Office Lease and Service Agreement, dated as of August 28, 1995 by and
between Federal Deposit Insurance Receiver for Merchants Bank and HCP
**10.17 Agreement of Lease, dated as of January 8, 1997 by and between Saint Paul
Executive Office Suites, Inc., d.b.a. LesWork Inc. and HCP
**10.18 Revolving Credit Agreement, dated as of December 10, 1996 between Fleet
National Bank and HCP
**10.19 Guaranty, dated as of December 10, 1996, by John A. Burchett to Fleet
National Bank
**10.20 Guaranty, dated as of December 10, 1996, by HCMC to Fleet National Bank
**10.21 Guaranty, dated as of December 10, 1996, by HCMF to Fleet National Bank
**10.22 Guaranty, dated as of December 10, 1996, by HCA to Fleet National Bank
**10.23 Guaranty, dated as of December 10, 1996, by HCS to Fleet National Bank
10.24 Modification Agreement, dated as of June , 1997, between Fleet National
Bank, HCP, HCMC, HCMF, HCS, HCA and John A. Burchett
</TABLE>
II-3
<PAGE> 127
<TABLE>
<C> <S>
10.25 Form of Contribution Agreement
10.26 Form of Participation Agreement
10.27 Form of Loan Agreement
**21 Subsidiaries of HCHI
23.1 Consents of Deloitte & Touche, LLP
23.2 Consent of Morse, Barnes-Brown & Pendleton, P.C. (included in Exhibit 5.1
hereof)
**24 Power of Attorney (included on signature page)
99.1 Consent of Director-Elect
99.2 Consent of Director-Elect
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
ITEM 37. UNDERTAKING
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act of 1933, as amended may be permitted to directors, officers
and controlling persons of the registrant pursuant to the provisions described
in Item 34 above or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person against the registrant in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1993, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be initial bona fide offering thereof.
II-4
<PAGE> 128
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this Amendment
No. 3 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York City, State of New York, on
the 26th day of August, 1997.
HANOVER CAPITAL MORTGAGE HOLDINGS,
INC.
By: /s/ JOHN A. BURCHETT
------------------------------------
John A. Burchett
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------- ----------------
<C> <S> <C>
/s/ JOHN A. BURCHETT Chairman of the Board, August 26, 1997
- ------------------------------------- Chief Executive Officer, and
John A. Burchett President (Principal Executive
Officer)
/s/ IRMA N. TAVARES Managing Director and Director August 26, 1997
- -------------------------------------
Irma N. Tavares
/s/ JOYCE S. MIZERAK Managing Director, Secretary August 26, 1997
- ------------------------------------- and Director
Joyce S. Mizerak
/s/ GEORGE J. OSTENDORF Managing Director and Director August 26, 1997
- -------------------------------------
George J. Ostendorf
/s/ RALPH F. LAUGHLIN Senior Vice President, Chief August 26, 1997
- ------------------------------------- Financial Officer, Treasurer
Ralph F. Laughlin and Assistant Secretary
(Principal Financial and
Accounting Officer)
</TABLE>
II-5
<PAGE> 1
EXHIBIT 1.1
4,600,000 UNITS
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
EACH UNIT TO CONSIST OF
ONE SHARE OF COMMON STOCK AND
ONE STOCK PURCHASE WARRANT
UNDERWRITING AGREEMENT
DATED SEPTEMBER __, 1997
STIFEL, NICOLAUS & COMPANY, INCORPORATED
MONTGOMERY SECURITIES
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................................... 3
(a) Compliance with Registration Requirements........................................ 3
(b) Offering Materials Furnished to Underwriters..................................... 3
(c) Distribution of Offering Material By the Company................................. 4
(d) The Underwriting Agreement....................................................... 4
(e) Formation Agreements............................................................. 4
(f) Authorization of the Units, Warrants, Unit Shares and Warrant Shares............. 4
(g) Reservation for Issuance of a Sufficient Number of Warrant Shares................ 4
(h) No Applicable Registration or Other Similar Rights............................... 4
(i) No Material Adverse Change....................................................... 4
(j) Independent Accountants.......................................................... 5
(k) Preparation of the Financial Statements.......................................... 5
(l) Incorporation and Good Standing of the Company and its Subsidiaries.............. 5
(m) [reserved]....................................................................... 6
(n) Capitalization and Other Capital Stock Matters................................... 6
(o) Stock Exchange Listing........................................................... 6
(p) No Current Material Defaults..................................................... 6
(q) Authorization and Non-Contravention of Existing Instruments...................... 7
(r) No Further Authorizations or Approvals Required.................................. 7
(s) Formation Transactions Not a Roll-Up; Partnership Interests and Stock of
HCP Exempt....................................................................... 7
(t) No Material Actions or Proceedings............................................... 8
(u) Intellectual Property Rights..................................................... 8
(v) Compliance with All Applicable Laws.............................................. 8
(w) All Necessary Permits, Licenses, etc............................................. 8
(x) Title to Properties.............................................................. 8
(y) Tax Law Compliance............................................................... 9
(z) REIT Status...................................................................... 9
(aa) Company Not an "Investment Company". ............................................ 9
(bb) Insurance........................................................................ 9
(cc) No Price Stabilization or Manipulation........................................... 10
(dd) No Broker or Finder Fees......................................................... 10
(ee) Related Party Transactions....................................................... 10
(ff) No Unlawful Contributions or Other Payments...................................... 10
(gg) Company's Accounting System...................................................... 10
(hh) Compliance with Environmental Laws............................................... 10
(ii) Periodic Review of Costs of Environmental Compliance............................. 11
(jj) ERISA Compliance................................................................. 11
(kk) Material Contracts............................................................... 12
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE UNITS............................................ 12
(a) The Firm Units................................................................... 12
(b) The First Closing Date........................................................... 12
(c) The Optional Units; the Second Closing Date...................................... 12
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
(d) Public Offering of the Units..................................................... 13
(e) Payment for the Units............................................................ 13
(f) Delivery of the Units............................................................ 13
(g) Time of the Essence.............................................................. 14
(h) Delivery of Prospectus to the Underwriters....................................... 14
SECTION 3. ADDITIONAL COVENANTS OF COMPANY..................................................... 14
(a) Representatives' Review of Proposed Amendments and Supplements................... 14
(b) Securities Act Compliance........................................................ 14
(c) Amendments and Supplements to the Prospectus and Other Securities Act
Matters.......................................................................... 15
(d) Copies of any Amendments and Supplements to the Prospectus....................... 15
(e) Press Releases................................................................... 15
(f) Blue Sky Compliance.............................................................. 16
(g) Uncertificated Shares............................................................ 16
(h) Consummation of Formation Transactions........................................... 16
(i) Use of Proceeds.................................................................. 16
(j) Transfer Agent................................................................... 16
(k) Continuing Listing on the American Stock Exchange................................ 16
(l) Earnings Statement............................................................... 16
(m) Periodic Reporting Obligations................................................... 17
(n) Agreement Not To Offer or Sell Additional Securities............................. 17
(o) Future Reports to the Representatives............................................ 17
(p) REIT Status...................................................................... 18
(q) Accounting and Tax Advice........................................................ 18
(r) Commodities Exchange Act......................................................... 18
(s) Investment Advisors Act.......................................................... 18
(t) Agreements with Management....................................................... 18
(u) SEC Compliance Program and Insider Trading Compliance Policy..................... 18
SECTION 4. PAYMENT OF EXPENSES................................................................. 19
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS................................... 19
(a) Accountants' Comfort Letter...................................................... 19
(b) Compliance with Registration Requirements; No Stop Order; No Objection
from NASD........................................................................ 20
(c) No Material Adverse Change or Ratings Agency Change.............................. 20
(d) Opinion of Counsel for the Company............................................... 20
(e) Opinion of Counsel for the Underwriters.......................................... 20
(f) Officers' Certificates........................................................... 21
(g) Bring-down Comfort Letter........................................................ 21
(i) Written Consents................................................................. 21
(j) Additional Documents............................................................. 21
(k) American Stock Exchange Listing.................................................. 22
(l) Consummation of Formation Transactions and Charter Amendments.................... 22
(m) Employment Agreements............................................................ 22
(n) Representatives Warrants......................................................... 22
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES............................................. 22
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT..................................................... 23
SECTION 8. INDEMNIFICATION..................................................................... 23
(a) Indemnification of the Underwriters by the Company............................... 23
(b) Indemnification of the Company, its Directors and Officers....................... 24
(c) Notifications and Other Indemnification Procedures............................... 25
(d) Settlements...................................................................... 26
SECTION 9. CONTRIBUTION........................................................................ 26
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS................................. 27
SECTION 11. TERMINATION OF THIS AGREEMENT...................................................... 28
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY................................ 28
SECTION 13. NOTICES............................................................................ 29
SECTION 14. SUCCESSORS......................................................................... 30
SECTION 15. PARTIAL UNENFORCEABILITY........................................................... 30
SECTION 16. (a) Governing Law Provisions....................................................... 30
(b) Consent to Jurisdiction............................................................ 30
SECTION 17. GENERAL PROVISIONS................................................................. 31
</TABLE>
iii
<PAGE> 5
UNDERWRITING AGREEMENT
September __, 1997
STIFEL, NICOLAUS & COMPANY, INCORPORATED
MONTGOMERY SECURITIES
As Representatives of the several Underwriters
c/o STIFEL, NICOLAUS & COMPANY, INCORPORATED
500 North Broadway, Suite 1500
St. Louis, Missouri 63102
Ladies and Gentlemen:
INTRODUCTORY. Hanover Capital Mortgage Holdings, Inc. (the "Company"),
a Maryland corporation intending to qualify for federal income tax purposes as a
real estate investment trust ("REIT") pursuant to Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended, and the rules and regulations
thereunder, as may be amended from time to time (the "Tax Code"), proposes to
issue and sell to the several underwriters named in Schedule 1 (the
"Underwriters") an aggregate of 4,600,000 Units (the "Firm Units"), each Unit to
consist of one share of the Company's Common Stock, par value $0.01 per share
(the "Common Stock"), and one Stock Purchase Warrant (a "Warrant"). In addition,
the Company has granted to the Underwriters an option to purchase up to an
additional 690,000 Units (the "Optional Units"), as provided in Section 2. The
Firm Units and, if and to the extent such option is exercised, the Optional
Units are collectively called the "Units." Stifel, Nicolaus & Company,
Incorporated and Montgomery Securities have agreed to act as representatives of
the several Underwriters (in such capacity, the "Representatives") in connection
with the offering and sale of the Units.
The terms of the Warrants shall be as set forth in the warrant
agreement (the "Warrant Agreement") to be entered into by the Company and the
warrant agent on the First Closing Date (as hereinafter defined) in
substantially the form filed as exhibit 4.2 to the Registration Statement (as
hereinafter defined). Each Warrant entitles the holders thereof for __________
Dollars ($________) to purchase one share (subject to antidilution provisions)
of the Company's Common Stock. The Warrants will become exercisable six months
after the First Closing Date and will remain exercisable until 5:00 p.m., New
York time, on the third anniversary of the date of the Prospectus (as
hereinafter defined).
The shares of Common Stock which in part comprise the Units are herein
referred to as the "Unit Shares." The shares of Common Stock issuable upon
exercise of the Warrants and the Representatives Warrants (as hereinafter
defined) are herein referred to as the "Warrant Shares." The Unit Shares and the
Warrant Shares are herein collectively referred to as the "Shares."
1
<PAGE> 6
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-11 (File No.
333-29261), which contains a form of prospectus to be used in connection with
the public offering and sale of the Units. Such registration statement, as
amended, including the financial statements, exhibits and schedules thereto, in
the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement." Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement," and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Units, is called the "Prospectus"; provided, however, if
the Company has, with the consent of Stifel, Nicolaus & Company, Incorporated,
elected to rely upon Rule 434 under the Securities Act, the term "Prospectus"
shall mean the Company's prospectus subject to completion (each, a "preliminary
prospectus") dated [___] (such preliminary prospectus is called the "Rule 434
preliminary prospectus"), together with the applicable term sheet (the "Term
Sheet") prepared and filed by the Company with the Commission under Rules 434
and 424(b) under the Securities Act and all references in this Agreement to the
date of the Prospectus shall mean the date of the Term Sheet. All references in
this Agreement to the Registration Statement, the Rule 462(b) Registration
Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
On or before the First Closing Date (as hereinafter defined), (a)
John A. Burchett, an individual ("Burchett"), Joyce S. Mizerak, an individual
("Mizerak"), George J. Ostendorf, an individual ("Ostendorf"), and Irma N.
Tavares, an individual ("Tavares"), (each a "Principal" and collectively, the
"Principals") will contribute all of the outstanding shares of preferred stock
(the "HCP Preferred Stock") in Hanover Capital Partners, Ltd., a New York
corporation ("HCP"), to the Company in exchange for Common Stock and (b) the
other transactions to be consummated on or before the First Closing Date as set
forth in the Prospectus under the caption "Structure and Formation
Transactions-- The Formation of HCHI--Formation Transactions" (all of the
foregoing, collectively, the "Formation Transactions") shall be consummated. The
documents required to be executed and delivered in order to consummate the
Formation Transactions, including, without limitation, the documents listed on
Schedule 2 hereto, are hereinafter collectively referred to as the "Formation
Documents," and each Formation Document constituting an agreement is hereinafter
referred to as a "Formation Agreement."
For purposes of this Agreement, "Subsidiary" means, with respect to the
Company, any corporation, partnership, association, limited liability company,
joint venture or other business entity of which more than 50% of the total
voting power of shares of stock or other ownership interest entitled (without
regard to the occurrence of any contingency) to vote in the election of the
person or persons (whether directors, managers, partners, trustees or other
persons performing similar functions) having the power to direct or cause the
direction of the management and policies thereof is at the time owned or
controlled, directly or indirectly, by the Company or one or more of the other
Subsidiaries of the Company or a combination thereof, including
2
<PAGE> 7
without limitation, each of HCP, Hanover Capital Mortgage Corporation, a
Missouri corporation ("HCMC"), and Hanover Capital Securities, Inc., a New York
corporation ("HCS").
The Company hereby confirms its agreements with the Underwriter as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents, warrants and covenants to each
Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of
the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation
S-T under the Securities Act), was identical to the copy thereof delivered
to the Underwriters for use in connection with the offer and sale of the
Units. Each of the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendment thereto, at the time it became
effective and at all subsequent times, complied and will comply in all
material respects with the Securities Act and did not and will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. The Prospectus, as amended or supplemented, as of its date
and at all subsequent times, did not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The representations and
warranties set forth in the two immediately preceding sentences do not
apply to statements in or omissions from the Registration Statement, any
Rule 462(b) Registration Statement, or any post-effective amendment
thereto, or the Prospectus, or any amendments or supplements thereto, made
in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives
expressly for use therein. There are no contracts or other documents
required to be described in the Prospectus or to be filed as exhibits to
the Registration Statement which have not been described or filed as
required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives two complete manually signed copy of the
Registration Statement and of each consent and certificate of experts filed
as a part thereof, and conformed copies of the Registration Statement
(without exhibits) and preliminary prospectuses and the Prospectus, as
amended or supplemented, in such quantities and at such places as the
Representatives have reasonably requested for each of the Underwriters.
3
<PAGE> 8
(c) Distribution of Offering Material By the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as hereinafter defined) and the completion of the
Underwriters' distribution of the Units, any offering material in
connection with the offering and sale of the Units other than a preliminary
prospectus, the Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of the Company enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
(e) Formation Agreements. Each Formation Agreement to which the Company
or any Subsidiary of the Company is a party has been, or will be upon
execution and delivery thereof, duly authorized, executed and delivered by
the Company and each Subsidiary of the Company party thereto. The Company,
each Subsidiary, and, to the knowledge of the Company, each other party to
each Formation Agreement has full legal right, power and authority to enter
into each such agreement and to consummate the transactions contemplated
therein. Each Formation Agreement does or will, as applicable, constitute a
valid and binding agreement of the Company and each Subsidiary of the
Company which is a party thereto enforceable in accordance with its terms,
except as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
None of the Company, any Subsidiary or, to the knowledge of the Company,
any other party is or upon completion of the offering and all related
transactions will be in breach of or default under any Formation Agreement.
(f) Authorization of the Units, Warrants, Unit Shares and Warrant
Shares. The Units, the Warrants, the Representatives Warrants and the
Shares have been duly authorized for issuance and sale pursuant to this
Agreement, the Warrant Agreement or the Representatives Warrant Agreement
(as hereinafter defined), as applicable, and, when issued and delivered by
the Company pursuant to this Agreement, the Warrant Agreement or the
Representatives Warrant Agreement, as applicable, will be validly issued,
fully paid and nonassessable.
(g) Reservation for Issuance of a Sufficient Number of Warrant Shares.
The Company has reserved for issuance a sufficient number of shares of
Common Stock to permit the issuance of all Warrant Shares issuable in
accordance with the terms of the Warrants and the Warrant Agreement and the
Representatives Warrants and the Representatives Warrant Agreement.
(h) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or
included in the offering contemplated by this Agreement, except for such
rights as have been duly waived.
(i) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus,
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<PAGE> 9
subsequent to the respective dates as of which information is given in the
Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material
adverse change, in the condition, financial or otherwise, or in the
earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
Subsidiaries, considered as one entity (any such change is called a
"Material Adverse Change"); (ii) the Company and its Subsidiaries,
considered as one entity, have not incurred any material liability or
obligation, indirect, direct or contingent, not in the ordinary course of
business nor entered into any material transaction or agreement not in the
ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or, except
for dividends paid to the Company or other Subsidiaries, any of its
Subsidiaries on any class of capital stock or repurchase or redemption by
the Company or any of its Subsidiaries of any class of capital stock.
(j) Independent Accountants. Deloitte & Touche LLP, who have expressed
their opinion with respect to the financial statements (which term as used
in this Agreement includes the related notes thereto) and supporting
schedules filed with the Commission as a part of the Registration Statement
and included in the Prospectus, are independent public or certified public
accountants as required by the Securities Act.
(k) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the consolidated financial
position of the Company and its Subsidiaries as of and at the dates
indicated and the results of their operations and cash flows for the
periods specified. The supporting schedules included in the Registration
Statement present fairly the information required to be stated therein.
Such financial statements and supporting schedules have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved, except as may be
expressly stated in the related notes thereto. No other financial
statements or supporting schedules are required to be included in the
Registration Statement. The financial data set forth in the Prospectus
under the captions "Prospectus Summary--Summary Selected Financial Data,"
"Selected Financial Data" and "Capitalization" fairly present the
information set forth therein on a basis consistent with that of the
audited financial statements contained in the Registration Statement. The
pro forma consolidated financial statement of the Company and its
Subsidiaries and the related notes thereto included under the caption [to
come] and elsewhere in the Prospectus and in the Registration Statement
present fairly the information contained therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly presented on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(l) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its Subsidiaries has been duly
incorporated or formed, as the case may be, and is validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
formation and has all requisite power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and, in the case of the Company, to enter into and perform its
obligations under this Agreement; and no proceeding has been
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<PAGE> 10
instituted or, to the knowledge of the Company, threatened in any such
jurisdiction seeking to revoke, limit or curtail such power and authority.
Each of the Company and each Subsidiary is duly qualified as a foreign
corporation, partnership or limited liability company, as applicable, to
transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Change; and no proceeding has been instituted or, to the knowledge of the
Company, threatened in any such jurisdiction seeking to revoke, limit or
curtail such qualification. Except as otherwise disclosed in the
Prospectus, all of the issued and outstanding capital stock, partnership
interests or membership interests of each Subsidiary have been duly
authorized and validly issued, are fully paid and nonassessable and are
owned by the Company, directly or through Subsidiaries, free and clear of
any security interest, mortgage, pledge, lien, encumbrance or claim. The
Company does not own or control, directly or indirectly, any corporation,
association or other entity other than the Subsidiaries listed in Exhibit
21 to the Registration Statement.
(m) [reserved]
(n) Capitalization and Other Capital Stock Matters. On the First
Closing Date, the authorized, issued and outstanding capital stock of the
Company will be as set forth in the Prospectus under the caption
"Capitalization" (other than for subsequent issuances, if any, pursuant to
employee benefit plans described in the Prospectus or upon exercise of
outstanding options or warrants described in the Prospectus). The Units
(including the Unit Shares, the Warrants and the Warrant Shares) conform in
all material respects to the description thereof contained in the
Prospectus. All of the issued and outstanding shares of Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable
and have been issued in compliance with federal and state securities laws.
No further approval or authority of the shareholders or the Board of
Directors is required for the issuance and sale of the Units as
contemplated herein. Neither the issuance of the Units nor any Shares will
violate any preemptive rights, rights of first refusal or other similar
rights to subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of
the Company or any of its Subsidiaries other than those accurately
described in the Prospectus. The description of the Company's stock option,
stock bonus and other stock plans or arrangements, and the options or other
rights granted thereunder, set forth in the Prospectus accurately and
fairly presents the information required to be shown with respect to such
plans, arrangements, options and rights.
(o) Stock Exchange Listing. Each of the Unit Shares and the Warrants
have been approved for listing on the American Stock Exchange, subject only
to official notice of issuance.
(p) No Current Material Defaults. Neither the Company nor any of its
Subsidiaries is (i) in violation of its charter, bylaws, partnership
agreement, certificate of partnership or other organizational documents, as
applicable, or (ii) is in default (or, with the giving of
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notice or lapse of time, would be in default) ("Default") under any
indenture, mortgage, loan or credit agreement, note, contract, franchise,
lease or other instrument to which the Company or any of its Subsidiaries
is a party or by which it or any of them may be bound, or to which any of
the property or assets of the Company or any of its Subsidiaries is subject
(each of the instruments or agreements listed in clauses (i) and (ii), an
"Existing Instrument"), including, without limitation, the Existing
Instruments listed in Schedule 3 hereto, except, in the case of clause
(ii), for such Defaults as would not, individually or in the aggregate,
result in a Material Adverse Change.
(q) Authorization and Non-Contravention of Existing Instruments. The
execution, delivery and performance by the Company and each Subsidiary, as
applicable, of this Agreement and each Formation Agreement and consummation
of the transactions contemplated hereby and thereby and by the Prospectus
(i) have been duly authorized by all necessary corporate or partnership or
member action, as applicable, and will not result in any violation of the
provisions of the charter, bylaws, partnership agreement, partnership
certificate or other organizational documents, as applicable, of the
Company or any Subsidiary, (ii) will not conflict with or constitute a
breach of, a Default or a Debt Repayment Triggering Event (as defined
below) under, or result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or any of its
Subsidiaries pursuant to, any Existing Instrument, except for such
conflicts, breaches, Defaults, liens, charges or encumbrances as would not,
individually or in the aggregate, result in a Material Adverse Change,
(iii) will not require the consent of any other party to any Existing
Instrument except for such consents which have been obtained in writing by
the Company or a Subsidiary, as applicable (the "Written Consents") and
except for such consents as the failure of which to obtain would not,
individually or in the aggregate, result in a Material Adverse Change, and
(iv) will not result in any violation of any law, administrative regulation
or administrative or court decree applicable to the Company or any
Subsidiary. As used herein, a "Debt Repayment Triggering Event" means any
event or condition which gives, or with the giving of notice or lapse of
time would give, the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder's behalf) the right to
require the repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any of its Subsidiaries.
(r) No Further Authorizations or Approvals Required. No consent,
approval, authorization or other order of, or registration or filing with,
any court or other governmental or regulatory authority or agency, is
required for the execution, delivery and performance by the Company and
each Subsidiary, as applicable, of this Agreement and each Formation
Agreement and for consummation of the transactions contemplated hereby and
thereby and by the Prospectus, except such as have been obtained or made
and are in full force and effect under the Securities Act, applicable state
securities or blue sky laws and from the National Association of Securities
Dealers, Inc. (the "NASD").
(s) Formation Transactions Not a Roll-Up; Partnership Interests and
Stock of HCP Exempt. The consummation of the Formation Transactions
constitutes neither a "roll-up transaction", as such term is defined in
Item 901(c) of Regulation S-K of the Securities Act, nor a "limited
partnership roll-up transaction", as such term is defined in Rule
2810(a)(10) of the Conduct Rule of the NASD. All of the capital stock of
HCP to issued in connection
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with the Formation Transactions is exempt from registration under the
Securities Act.
(t) No Material Actions or Proceedings. Except as otherwise disclosed
in the Prospectus, there is no legal or governmental action, suit or
proceeding pending or, to the best of the Company's knowledge, threatened
(i) against or affecting the Company or any of its Subsidiaries, (ii) which
has as the subject thereof any officer or director of, or property owned or
leased by, the Company or any of its Subsidiaries or (iii) relating to
environmental or discrimination matters, where in any such case (1) there
is a reasonable possibility that such action, suit or proceeding might be
determined adversely to the Company or such Subsidiary and (2) any such
action, suit or proceeding, if so determined adversely, would reasonably be
expected to result in a Material Adverse Change or adversely affect the
consummation of the transactions contemplated by this Agreement or the
Formation Agreements. No material labor dispute with the employees of the
Company or any of its Subsidiaries exists or, to the best knowledge of the
Company, is threatened or imminent.
(u) Intellectual Property Rights. The Company and its Subsidiaries own
or possess all material trademarks, trade names, patent rights, copyrights,
licenses, approvals, trade secrets, service marks and other similar rights
including, without limitation, rights to the names "Hanover Capital
Mortgage Holdings, Inc.," "Hanover Capital Mortgage Holdings, L.P.,"
"Hanover Capital Mortgage Corporation," "Hanover Capital Partners, Ltd."
and "Hanover Capital Securities, Inc." (collectively, "Intellectual
Property Rights") reasonably necessary to conduct their businesses as now
conducted; and the expected expiration of any of such Intellectual Property
Rights would not result in a Material Adverse Change. Neither the Company
nor any of its Subsidiaries has received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, would
result in a Material Adverse Change. The Company has no knowledge of any
material infringement by it of any Intellectual Property Rights of others.
(v) Compliance with All Applicable Laws. Each of the Company and each
Subsidiary is conducting business in compliance with all applicable state,
federal and foreign laws, rules and regulations, except where failure to be
in compliance, if the subject of an unfavorable decision, ruling or
finding, would not singly or in the aggregate result in a Material Adverse
Change. The description of the laws and regulations affecting the Company's
and the Subsidiaries' investment operations in the Prospectus under the
caption "Business Regulation" is a true and accurate description thereof in
all material respects.
(w) All Necessary Permits, Licenses, etc. The Company and each
Subsidiary possess all certificates, authorizations, licenses or permits
issued by the appropriate state, federal or foreign regulatory agencies or
bodies necessary to conduct their respective businesses, and neither the
Company nor any Subsidiary has received any notice of proceedings relating
to the revocation or modification of, or non-compliance with, any such
certificate, authorization, license or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
could result in a Material Adverse Change.
(x) Title to Properties. The Company and each of its Subsidiaries has
good and marketable title to all the properties and assets reflected as
owned in the financial statements referred to in Section 1(k) above (or
elsewhere in the Prospectus), in each case free and clear
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of any security interests, mortgages, liens, encumbrances, equities, claims
and other defects, except such as do not materially and adversely affect
the value of such property and do not materially interfere with the use
made or proposed to be made of such property by the Company or such
Subsidiary. The real property, improvements, equipment and personal
property held under lease by the Company or any Subsidiary are held under
valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of
such real property, improvements, equipment or personal property by the
Company or such Subsidiary. Each of the Company and its Subsidiaries owns
or leases all such real and personal property as is reasonably necessary to
its operations as now conducted and as proposed to be conducted.
(y) Tax Law Compliance. The Company and its Subsidiaries have filed all
material federal, state and foreign income and franchise tax returns and
have paid all taxes required to be paid by any of them and, if due and
payable, any related or similar assessment, fine or penalty levied against
any of them, except those being contested in good faith and for which
adequate reserves have been taken in conformity with generally accepted
accounting principles and the nonpayment of which will not in any way
jeopardize the Company's status as a REIT. The Company has made adequate
charges, accruals and reserves in the applicable financial statements
referred to in Section 1(k) above in respect of all federal, state and
foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its Subsidiaries has not been finally
determined.
(z) REIT Status. The Company intends to operate and will operate in
such a manner as to qualify as a REIT under Sections 856 through 860 of the
Tax Code and pursuant to any applicable state tax laws; and the Company
intends to elect to and will elect to be taxed as a REIT under the Tax Code
and any applicable state tax laws beginning with its taxable year ending
December 31, 1997. The Company knows of no event or condition which would
cause or is likely to cause the Company to fail to qualify as a REIT at any
time.
(aa) Company Not an "Investment Company". The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). Neither the Company nor any
Subsidiary is, or after receipt of payment for the Units and consummation
of the Formation Transactions will be, an "investment company" within the
meaning of Investment Company Act. The Company and each Subsidiary will
conduct its business in a manner so that it will not become subject to the
Investment Company Act.
(bb) Insurance. Except as otherwise disclosed in the Prospectus, each
of the Company and its Subsidiaries are insured by recognized, financially
sound and reputable institutions with policies in such amounts and with
such deductibles and covering such risks as are generally deemed adequate
and customary for their businesses including, but not limited to, policies
covering the Company and its Subsidiaries against business interruptions
and policies covering real and personal property owned or leased by the
Company and its Subsidiaries against theft, damage, destruction, acts of
vandalism and earthquakes. The Company has no reason to believe that it or
any Subsidiary will not be able (i) to renew its existing insurance
coverage as and when such policies expire or (ii) to obtain comparable
coverage from similar institutions as may be necessary or appropriate to
conduct its business as now conducted and
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at a cost that would not result in a Material Adverse Change. Neither of
the Company nor any Subsidiary has been denied any insurance coverage which
it has sought or for which it has applied.
(cc) No Price Stabilization or Manipulation. None of the Company or any
Subsidiary has taken or will take, directly or indirectly, any action
designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Units, the Unit Shares, the
Warrants or the Warrant Shares.
(dd) No Broker or Finder Fees. Except as otherwise disclosed in the
Prospectus, neither the Company nor any affiliate of the Company has
incurred any liability for a fee, commission or other compensation on
account of the employment or engagement of a broker or finder in connection
with the transactions contemplated by this Agreement.
(ee) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any Subsidiary or any
other person required to be described in the Prospectus which have not been
described as required.
(ff) No Unlawful Contributions or Other Payments. Neither the Company
nor any of its Subsidiaries nor, to the Company's knowledge, any employee
or agent of the Company or any Subsidiary, has (i) made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus or (ii) made any payment to any federal or
state governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(gg) Company's Accounting System. The Company and its Subsidiaries
maintain and will continue to maintain a system of accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(hh) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its Subsidiaries is in violation of any
federal, state, local or foreign law or regulation relating to pollution or
protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including without limitation, laws and
regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products (collectively,
"Materials of Environmental Concern"), or otherwise relating to the
manufacture, processing, distribution,
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use, treatment, storage, disposal, transport or handling of Materials of
Environment Concern (collectively, "Environmental Laws"), which violation
includes, but is not limited to, noncompliance with any permits or other
governmental authorizations required for the operation of the business of
the Company or its Subsidiaries under applicable Environmental Laws, or
noncompliance with the terms and conditions thereof, nor has the Company or
any of its Subsidiaries received any written communication, whether from a
governmental authority, citizens group, employee or otherwise, that alleges
that the Company or any of its Subsidiaries is in violation of any
Environmental Law; (ii) there is no claim, action or cause of action filed
with a court or governmental authority, no investigation with respect to
which the Company has received written notice, and no written notice by any
person or entity alleging potential liability for investigatory costs,
cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising
out of, based on or resulting from the presence, or release into the
environment, of any Material of Environmental Concern at any location
owned, leased or operated by the Company or any of its Subsidiaries, now or
in the past (collectively, "Environmental Claims"), pending or, to the
Company's knowledge, threatened against the Company or any of its
Subsidiaries or any person or entity whose liability for any Environmental
Claim the Company or any of its Subsidiaries has retained or assumed either
contractually or by operation of law; and (iii) to the Company's knowledge,
there are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the
release, emission, discharge, presence or disposal of any Material of
Environmental Concern, that reasonably could result in a violation of any
Environmental Law or form the basis of a potential Environmental Claim
against the Company or any of its Subsidiaries or against any person or
entity whose liability for any Environmental Claim the Company or any of
its Subsidiaries has retained or assumed either contractually or by
operation of law.
(ii) Periodic Review of Costs of Environmental Compliance. Prior to
originating any commercial mortgage or foreclosing or taking a deed in lieu
with respect to any property, the Company conducts, or causes to be
conducted, a Phase I environmental site assessment and takes such actions
based upon the results of such assessment as it reasonable believes are
necessary to prevent the Company from suffering a Material Adverse Change
as a result of originating such commercial mortgage or foreclosing upon or
taking a deed in lieu with respect to such property.
(jj) ERISA Compliance. The Company and its Subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or
maintained by the Company, its Subsidiaries or their "ERISA Affiliates" (as
defined below) are in compliance in all material respects with ERISA.
"ERISA Affiliate" means, with respect to the Company or a Subsidiary, any
member of any group of organizations described in Sections 414(b),(c),(m)
or (o) of the Internal Revenue Code of 1986, as amended, and the
regulations and published interpretations thereunder (the "Code") of which
the Company or such Subsidiary is a member. No "reportable event" (as
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the
Company, its Subsidiaries or any of their ERISA Affiliates. No "employee
benefit plan" established or maintained by the Company,
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its Subsidiaries or any of their ERISA Affiliates, if such "employee
benefit plan" were terminated, would have any "amount of unfunded benefit
liabilities" (as defined under ERISA). Neither the Company, its
Subsidiaries nor any of their ERISA Affiliates has incurred or reasonably
expects to incur any liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "employee benefit plan" or (ii)
Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its Subsidiaries or any of their
ERISA Affiliates that is intended to be qualified under Section 401(a) of
the Code is so qualified and nothing has occurred, whether by action or
failure to act, which would cause the loss of such qualification.
(kk) Material Contracts. There are no contracts or other documents
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement by the Securities Act which have not
been described or filed as required. Neither the Company nor any of its
Subsidiaries is subject to any collective bargaining agreements.
Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE UNITS.
(a) The Firm Units. The Company agrees to issue and sell to the several
Underwriters the Firm Units upon the terms herein set forth. On the basis of the
representations, warranties and agreements herein contained, and upon the terms
but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company the respective number of
Firm Units set forth opposite their names on Schedule 1. The purchase price per
Firm Unit to be paid by the several Underwriters to the Company shall be $[___]
per Unit.
(b) The First Closing Date. Delivery of the Firm Units to be purchased
by the Underwriters and payment therefor shall be made at the offices of Stifel,
Nicolaus & Company, Incorporated, 500 North Broadway, Suite 1500, St. Louis,
Missouri (or such other place as may be agreed to by the Company and the
Representatives) at 9:00 a.m. New York City time, on [___], or such other time
and date not later than 1:30 p.m. New York City time, as the Representatives
shall designate by notice to the Company (the time and date of such closing are
called the "First Closing Date"). The Company hereby acknowledges that
circumstances under which the Representatives may provide notice to postpone the
First Closing Date as originally scheduled include, but are in no way limited
to, any determination by the Company or the Representatives to recirculate to
the public copies of an amended or supplemented Prospectus or a delay as
contemplated by the provisions of Section 10.
(c) The Optional Units; the Second Closing Date. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 690,000 Optional Units from the Company at
the purchase price per Unit to be paid by the Underwriters for the Firm Units.
The
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option granted hereunder is for use by the Underwriters solely in covering any
over-allotments in connection with the sale and distribution of the Firm Units.
The option granted hereunder may be exercised at any time (but not more than
once) upon notice by the Representatives to the Company, which notice may be
given at any time within 30 days from the date of this Agreement. Such notice
shall set forth (i) the aggregate number of Optional Units as to which the
Underwriters are exercising the option, (ii) the names and denominations in
which the Optional Units are to be registered and (iii) the time, date and place
at which such securities will be delivered (which time and date may be
simultaneous with, but not earlier than, the First Closing Date; and in such
case the term "First Closing Date" shall refer to the time and date of delivery
of the Firm Units and the Optional Units). Such time and date of delivery, if
subsequent to the First Closing Date, is called the "Second Closing Date" and
shall be determined by the Representatives and, unless the Company otherwise
consents, shall not be earlier than three nor later than five full business days
after delivery of such notice of exercise. If any Optional Units are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase the
number of Optional Units (subject to such adjustments to eliminate fractional
Units as the Representatives may determine) that bears the same proportion to
the total number of Optional Units to be purchased as the number of Firm Units
set forth on Schedule 1 opposite the name of such Underwriter bears to the total
number of Firm Units. The Representatives may cancel the option at any time
prior to its expiration by giving written notice of such cancellation to the
Company.
(d) Public Offering of the Units. The Representatives hereby advise the
Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Units as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their sole judgment, has
determined is advisable and practicable.
(e) Payment for the Units. Payment for the Units shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer of immediately available funds to the order of the Company or to such
account as the Company may designate.
It is understood that the Representatives have been authorized, for
their own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Units and any Optional Units the Underwriters have agreed to purchase.
Stifel, Nicolaus & Company, Incorporated and Montgomery Securities, individually
and not as the Representatives of the Underwriters, may (but shall not be
obligated to) make payment for any Units to be purchased by any Underwriter
whose funds shall not have been received by the Representatives by the First
Closing Date or the Second Closing Date, as the case may be, for the account of
such Underwriter, but any such payment shall not relieve such Underwriter from
any of its obligations under this Agreement.
(f) Delivery of the Units.
(i) The Company shall deliver, or cause to be delivered, to the
Representatives for the accounts of the several Underwriters certificates
for the Firm Units at the First Closing Date, against the irrevocable
release of a wire transfer of immediately available funds for the amount of
the purchase price therefor. The Company shall also deliver, or cause to be
delivered, to the Representatives for the accounts of the several
Underwriters, certificates for
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<PAGE> 18
the Optional Units the Underwriters have agreed to purchase at the First
Closing Date or the Second Closing Date, as the case may be, against the
irrevocable release of a wire transfer of immediately available funds for
the amount of the purchase price therefor. The certificates for the Units
shall be in definitive form and registered in such names and denominations
as the Representatives shall have requested at least two full business days
prior to the First Closing Date (or the Second Closing Date, as the case
may be) and shall be made available for inspection on the business day
preceding the First Closing Date (or the Second Closing Date, as the case
may be) at a location in New York City as the Representatives may
designate.
(ii) Notwithstanding the terms of the preceding subsection 2(f)(i) or
elsewhere in this Agreement that contemplate physical certificates for the
Units, upon the Company's request but only with the consent of the
Representatives the Units may be issued without certificates and
constructive delivery of such uncertificated Units to the Underwriters may
be accomplished through the FAST system of The Depository Trust Company by
the Company causing the transfer agent and registrar of the Units, on the
applicable Closing Date, to issue one or more Depository Trust Company Book
Entry Positions, representing in the aggregate the number of Units to be
delivered to the Representatives on such Closing Date, to such account or
accounts as shall be specified by the Representatives in an instruction
letter or other communication to the Company or such transfer agent.
(g) Time of the Essence. Time shall be of the essence, and delivery at
the time and in the manner specified in this Agreement is a further condition to
the obligations of the Underwriters.
(h) Delivery of Prospectus to the Underwriters. Not later than 12:00
noon on the second business day following the date the Units are released by the
Underwriters for sale to the public, the Company shall deliver or cause to be
delivered copies of the Prospectus in such quantities and at such places as the
Representatives shall request.
SECTION 3. ADDITIONAL COVENANTS OF COMPANY.
The Company further covenants and agrees with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and Supplements.
During such period beginning on the date hereof and ending on the later of
the First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered
in connection with sales by an Underwriter or dealer (the "Prospectus
Delivery Period"), prior to amending or supplementing the Registration
Statement (including any registration statement filed under Rule 462(b)
under the Securities Act) or the Prospectus, the Company shall furnish to
the Representatives for review a copy of each such proposed amendment or
supplement, and the Company shall not file any such proposed amendment or
supplement to which the Representatives reasonably object.
(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or
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<PAGE> 19
requests for additional or supplemental information from, the Commission,
(ii) of the time and date of any filing of any post-effective amendment to
the Registration Statement or any amendment or supplement to any
preliminary prospectus or the Prospectus, (iii) of the time and date that
any post-effective amendment to the Registration Statement becomes
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto or of any order preventing or suspending
the use of any preliminary prospectus or the Prospectus, or of any
proceedings to remove, suspend or terminate from listing or quotation the
Units, Warrants or Common Stock from any securities exchange upon which any
of such securities is listed for trading or included or designated for
quotation, or of the threatening or initiation of any proceedings for any
of such purposes. If the Commission shall enter any such stop order at any
time, the Company will use its best efforts to obtain the lifting of such
order at the earliest possible moment. Additionally, the Company agrees
that it shall comply with the provisions of Rules 424(b), 430A and 434, as
applicable, under the Securities Act and will use its reasonable efforts to
confirm that any filings made by the Company under such Rule 424(b) were
received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. If, during the Prospectus Delivery Period, any event shall
occur or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a purchaser,
not misleading, or if in the opinion of the Representatives or counsel for
the Underwriters it is otherwise necessary to amend or supplement the
Prospectus to comply with law, the Company agrees promptly to prepare
(subject to Section 3(a) hereof), file with the Commission and furnish at
its own expense to the Underwriters and to dealers, amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may reasonably
request.
(e) Press Releases. If at any time during the ninety (90) day period
after the Registration Statement becomes effective, any rumor, publication
or event relating to or affecting the Company or its Subsidiaries shall
occur as a result of which in the Representatives' opinion the market price
of the Units has been or is likely materially to be affected (regardless of
whether such rumor, publication or event necessitates a supplement or
amendment to the Prospectus), the Company will, after written notice from
the Representatives advising the Company to the effect set forth above,
promptly prepare, consult with the Representatives concerning the content
of, and disseminate a press release or other public statement, reasonably
satisfactory to the Representatives, responding to or commenting on such
rumor, publication or event.
(f) Blue Sky Compliance. The Company shall cooperate with the
Representatives and
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<PAGE> 20
counsel for the Underwriters to qualify or register the Units for sale
under (or obtain exemptions from the application of) the Blue Sky or state
or provincial or Canadian securities laws of those jurisdictions designated
by the Representatives, shall comply with such laws and shall continue such
qualifications, registrations and exemptions in effect so long as required
for the distribution of the Units. The Company shall not be required to
qualify as a foreign corporation or to take any action that would subject
it to general service of process in any such jurisdiction where it is not
presently qualified or where it would be subject to taxation as a foreign
corporation. The Company will advise the Representatives promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Units for offering, sale or trading in any jurisdiction or
any initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain
the withdrawal thereof at the earliest possible moment.
(g) Uncertificated Shares. In the event that any portion of the Shares
is issued without certificates pursuant to section 2-210 of the Maryland
General Corporation Law (the "MGCL") and as may be permitted under Section
2(f) above, at the time of issue of such Shares and at the time of every
subsequent transfer of such Shares the Company shall send, or cause to be
sent, to the shareholder a written statement of the information required on
certificates by section 2-211 of the MGCL, and shall otherwise maintain
full compliance with sections 2-210 and 2-211 of the MGCL.
(h) Consummation of Formation Transactions. Each of the Company and its
Subsidiaries shall complete the Formation Transactions as described in the
Prospectus.
(i) Use of Proceeds. The Company and its Subsidiaries shall apply the
net proceeds from the sale of the Units sold by it in the manner described
under the caption "Use of Proceeds" in the Prospectus. The Company will not
use the proceeds of the sale of the Units in such a manner as to require
the Company or any Subsidiary to be registered under the Investment Company
Act.
(j) Transfer Agent. The Company shall engage and maintain, at its
expense, a transfer agent and registrar for the Units, Warrants and Common
Stock.
(k) Continuing Listing on the American Stock Exchange. The Company will
use its reasonable best efforts to continue the listing of the Units and,
when they are first detachable, to initiate and continue the listing of the
Unit Shares and the Warrants, on the American Stock Exchange and will
continue to comply in all material respects with all of the rules and
regulations thereof applicable to the Company and the listing of such
securities.
(l) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month
period ending on the final day of the Company's first quarter that ends at
least one year after "the effective date of the Registration Statement" (as
defined in Rule 158(c) under the Securities Act) that satisfies the
provisions of Section 11(a) of the Securities Act.
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<PAGE> 21
(m) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and
the Nasdaq National Market all reports and documents required to be filed
under the Securities Exchange Act of 1934 (the "Exchange Act").
Additionally, the Company shall file with the Commission all reports on
Form SR as may be required under Rule 463 under the Securities Act.
(n) Agreement Not To Offer or Sell Additional Securities. During the
period of 365 days following the date of the Prospectus, the Company will
not, without the prior written consent of Stifel, Nicolaus & Company,
Incorporated (which consent may be withheld at the sole discretion of
Stifel, Nicolaus & Company, Incorporated), directly or indirectly, sell,
offer, contract or grant any option to sell, pledge, transfer or establish
an open "put equivalent position" within the meaning of Rule 16a-1(h) under
the Exchange Act, or otherwise dispose of or transfer, or announce the
offering of, or file any registration statement under the Securities Act in
respect of, any Units, shares of Common Stock, options or warrants to
acquire shares of the Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock (other than as
contemplated by this Agreement with respect to the Units and other than a
registration statement on Form S-8 with respect to any stock option plan,
stock bonus or other stock plan or arrangement described in the
Prospectus); provided, however, that the Company may issue the Warrant
Shares; and provided, further, that pursuant to any stock option, stock
bonus or other stock plan or arrangement described in the Prospectus, the
Company may issue shares of its Common Stock or options to purchase its
Common Stock, or Common Stock upon exercise of options, but only if the
holders of such shares, options, or shares issued upon exercise of such
options, agree in writing not to sell, offer, dispose of or otherwise
transfer any such shares or options during such 365 day period without the
prior written consent of Stifel, Nicolaus & Company, Incorporated (which
consent may be withheld at the sole discretion of Stifel, Nicolaus &
Company, Incorporated).
(o) Future Reports to the Representatives. During the period of three
years hereafter the Company will furnish to the Stifel, Nicolaus & Company,
Incorporated at 500 North Broadway, Suite 1500, St. Louis, Missouri 63102,
Attention: Mr. Rick E. Maples, to Montgomery Securities at 600 Montgomery
Street, San Francisco, California 94111, Attention: Jeff Wishner and to
O'Melveny & Myers LLP at the address set forth in Section 13: (i) as soon
as practicable after the end of each fiscal year, copies of the Annual
Report of the Company containing the balance sheet of the Company as of the
close of such fiscal year and statements of income, shareholders' equity
and cash flows for the year then ended and the opinion thereon of the
Company's independent public or certified public accountants; (ii) as soon
as practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report
on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of
any report or communication of the Company mailed generally to holders of
its capital stock.
(p) REIT Status. The Company shall operate so as to qualify as a REIT
in accordance with the requirements of Sections 856-860 of the Tax Code and
any applicable state tax laws, and shall elect to be taxed as a REIT
beginning with the taxable year ending December 31, 1997. The Company shall
thereafter not revoke such REIT election and shall not conduct
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<PAGE> 22
their business and operations in a manner that would cause them to fail to
qualify as a REIT. The Company will use its best efforts to comply with the
representations made as support for the opinion letter rendered by the
Company's tax counsel under the REIT provisions of the Code, the form of
which opinion is filed as exhibit 8.1 to the Registration Statement.
(q) Accounting and Tax Advice. The Company will engage and retain a
"Big 6" Accounting Firm as its qualified accountants and such tax experts
at such accounting firm with experience in advising REITs as are reasonably
acceptable to the Representatives for a period of not less than two years
beginning on the First Closing Date to assist the Company in developing
appropriate accounting systems and testing procedures and to conduct
quarterly compliance reviews designed to determine compliance with the REIT
provisions of the Tax Code and the maintenance of Company's exempt status
under the Investment Company Act. Any written reports of such compliance
reviews shall be made available to the Representatives.
(r) Commodities Exchange Act. The Company will not, and will not permit
any of its Subsidiaries to, invest in futures contracts, options on futures
contracts or options on commodities unless such entities are exempt from
the registration requirements of the Commodity Exchange Act, as amended, or
otherwise comply with the Commodity Exchange Act, as amended.
(s) Investment Advisors Act. The Company will not, and will not permit
any of its Subsidiaries to, engage in any activity which would cause or
require such entity to register as an investment advisor under the
Investment Advisors Act of 1940. Without limiting the generality of the
foregoing, the Company will not, and will not permit any Subsidiary to, (i)
render investment advice to more than fifteen clients, (ii) hold itself out
generally to the public as an investment advisor, or (iii) act as an
investment advisor to any investment company that is registered under the
Investment Company Act.
(t) Agreements with Management. The Company will, and will cause each
Subsidiary, in good faith to expend reasonable efforts to enforce the terms
of any of the Formation Agreements or any agreements with the Principals.
(u) SEC Compliance Program and Insider Trading Compliance Policy.
Promptly after the First Closing Date, the Company shall adopt and
implement (i) a compliance program, reasonably acceptable to counsel for
the Underwriters, to ensure compliance with the reporting requirements
under the Exchange Act and the securities laws generally and (ii) an
insider trading compliance policy, reasonably acceptable to counsel for the
Underwriters, to govern their employees' and directors' trading in
securities of the Company and all Company affiliates in accordance with
federal law and all applicable state and Canadian blue sky laws.
Stifel, Nicolaus & Company, Incorporated, on behalf of the several
Underwriters, may, in its sole discretion, waive in writing the performance by
the Company of any one or more of the foregoing covenants or extend the time for
their performance.
SECTION 4. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated herein are consummated or this Agreement becomes effective or is
terminated, the Company agrees to
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<PAGE> 23
pay all costs, fees and expenses incurred in connection with the performance of
its obligations hereunder and in connection with the transactions contemplated
hereby, including without limitation (i) all expenses incident to the issuance
and delivery of the Units (including all printing and engraving costs), (ii) all
fees and expenses of the registrar and transfer agent, (iii) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Units to the Underwriters, (iv) all fees and expenses of the Company's
counsel, independent public or certified public accountants and other advisors,
(v) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement
(including financial statements, exhibits, schedules, consents and certificates
of experts), each preliminary prospectus and the Prospectus, and all amendments
and supplements thereto, and this Agreement, (vi) all filing fees, attorneys'
fees and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Units for offer and sale under the Blue
Sky laws, and, if requested by the Representatives, preparing and printing a
"Blue Sky Survey" or memorandum, and any supplements thereto, advising the
Underwriters of such qualifications, registrations and exemptions, (vii) the
filing fees incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the NASD's review and approval of the
Underwriters' participation in the offering and distribution of the Units,
(viii) the fees and expenses associated with including the Units, Warrants and
Common Stock in the Nasdaq National Market, and (ix) all other fees, costs and
expenses referred to in Item 14 of Part II of the Registration Statement. Except
as provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the
Underwriters shall pay their own expenses, including the fees and disbursements
of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Units as
provided herein on the First Closing Date and, with respect to the Optional
Units, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Optional Units, as of the Second Closing Date as
though then made, to the timely performance by the Company of the covenants and
other obligations hereunder, and to each of the following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from Deloitte & Touch LLP, independent
public or certified public accountants for the Company, a letter dated the
date hereof addressed to the Underwriters, in form and substance
satisfactory to the Representatives, containing statements and information
of the type ordinarily included in accountant's "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards No. 72
(or any successor bulletin), with respect to the audited and unaudited
financial statements and certain financial information contained in the
Registration Statement and the Prospectus (and the Representatives shall
have received such additional conformed copies of such accountants' letter
as Representatives' counsel shall reasonably request).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Units, the Second Closing Date:
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<PAGE> 24
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed a
post-effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in
effect and no proceedings for such purpose shall have been instituted
or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For the period
from and after the date of this Agreement and prior to the First Closing
Date and, with respect to the Optional Units, the Second Closing Date:
(i) in the judgment of the Representatives there shall not
have occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any securities of the
Company or any of its Subsidiaries by any "nationally recognized
statistical rating organization" as such term is defined for purposes
of Rule 436(g)(2) under the Securities Act.
(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date, the Representatives shall have received
the favorable opinion of Morse, Barnes-Brown & Pendleton, P.C., counsel for
the Company, dated as of such Closing Date, the form of which is attached
as Exhibit A, which opinion may rely, as to matters of Maryland corporate
law, on the opinion of Piper & Marbury L.L.P., a copy of which shall be
attached to such opinion (and the Representatives shall have received such
additional conformed copies of such counsel's legal opinions as
Representatives' counsel shall reasonably request).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date, the Representatives shall have
received the favorable opinion of O'Melveny & Myers LLP, counsel for the
Underwriters, dated as of such Closing Date, with respect to such matters
as the Representatives shall have reasonably requested.
(f) Officers' Certificates. On each of the First Closing Date and the
Second Closing
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<PAGE> 25
Date, the Representatives shall have received written certificates executed
on behalf of the Company by its Chief Executive Officer or President and
its Chief Financial Officer or Chief Accounting Officer, dated as of such
Closing Date, certifying as to such matters as the Representatives shall
have reasonably requested, including, without limitation, the matters set
forth in subsections (b)(ii) and (c)(ii) of this Section 5, and further to
the effect that:
(i) for the period from and after the date of this Agreement and
prior to such Closing Date, there has not occurred any Material Adverse
Change;
(ii) the representations, warranties and covenants of the Company
set forth in Section 1 of this Agreement are true and correct with the
same force and effect as though expressly made on and as of such
Closing Date; and
(iii) the Company and its Subsidiaries have complied with all the
agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to such Closing Date under this Agreement and
all Formation Agreements.
(g) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date, the Representatives shall have received from
Deloitte & Touche L.L.P., independent public or certified public
accountants for the Company, a letter dated as of such Closing Date, in
form and substance satisfactory to the Representatives, to the effect that
they reaffirm the statements made in the letter furnished by them pursuant
to subsection (a) of this Section 5, except that the specified date
referred to therein for the carrying out of procedures shall be no more
than three business days prior to the First Closing Date or Second Closing
Date, as the case may be (and the Representatives shall have received such
additional conformed copies of such accountants' letter as Representatives'
counsel shall reasonably request).
(h) Lock-Up Agreement from Certain Persons. On the date hereof, the
Company shall have furnished to the Representatives a lock-up for 365 days
following the date of the Prospectus in the form of Exhibit B hereto from
each Principal, director, officer and each beneficial owner of Units or
Common Stock (as defined and determined according to Rule 13d-3 under the
Exchange Act, except that a 365 day period shall be used rather than the
sixty day period set forth therein), and such agreement shall be in full
force and effect on each of the First Closing Date and the Second Closing
Date.
(i) Written Consents. On or before the First Closing Date, the Company
shall have furnished to the Representatives copies of the Written Consents
(referred to in Section 1(q)) under certain Existing Instruments.
(j) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such additional certificates, information,
documents and opinions as they may reasonably require for the purposes of
enabling them to pass upon the issuance and sale of the Units as
contemplated herein, or in order to evidence the accuracy of any of the
representations and warranties, or the satisfaction of any of the
conditions or agreements, herein contained.
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(k) American Stock Exchange Listing. The Unit Shares and the Warrants
shall have been approved for listing on the American Stock Exchange,
subject only to official notice of issuance.
(l) Consummation of Formation Transactions and Charter Amendments. The
Formation Transactions to be consummated on or prior to the First Closing
Date as set forth in the Prospectus shall have been consummated. The
certificates or articles of incorporation of each of the Company's
corporate Subsidiaries shall have been amended as set forth in the
Prospectus.
(m) Employment Agreements. On or before the First Closing Date, each of
the Principals shall have entered into an Employment Agreement with the
Company, in form filed as Exhibits 10.6, 10.7, 10.8, and 10.9 to the
Registration Statement.
(n) Representatives Warrants. On or before the First Closing Date, the
Company shall have executed and delivered to the Representatives a Warrant
Agreement (the "Representatives Warrant Agreement") pursuant to which the
Company shall issue to the Representatives (for their own account and not
as Representatives of the Underwriters) warrants (the "Representatives
Warrants") to purchase up to 138,000 shares (158,700 shares if all of the
Optional Units are purchased) of Common Stock at an exercise price per
share equal to the initial public offering price of the Units and upon the
terms and conditions set forth in the Representatives Warrant Agreement,
the form of which is filed as Exhibit 4.2 to the Registration Statement. On
the First Closing Date and Second Closing Date, respectively, the Company
shall have delivered to the Representatives, duly executed Warrant
Certificates countersigned by the Warrant Agent in accordance with the
Representatives Warrant Agreement representing warrants to purchase 138,000
shares of Common Stock on the First Closing Date and 20,700 shares of
Common Stock on the Second Closing Date (assuming full exercise of the
overallotment option), such Warrant Certificates to be in such
denominations and registered in such names as may be designated by the
Representatives.
If any condition specified in this Section 5 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Units, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 4, Section 6, Section 8 and
Section 9 shall at all times be effective and shall survive such termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement
is terminated by the Representatives pursuant to Section 5, Section 7, Section
10 or Section 11, or if the sale to the Underwriters of the Units on the First
Closing Date is not consummated because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or to comply with any
provision hereof, the Company agrees to reimburse the Representatives and the
other Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Representatives and the
Underwriters in connection with the proposed purchase and the offering and sale
of the Units, including but not limited to fees and
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disbursements of counsel, printing expenses, travel expenses, postage, facsimile
and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representatives of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part (a) of the Company to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of
any Underwriter to the Company, or (c) of any party hereto to any other party
except that the provisions of Section 8 and Section 9 shall at all times be
effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters by the Company. The Company,
agrees to indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter within the
meaning of the Securities Act and the Exchange Act against any loss, claim,
damage, liability or expense, as incurred, to which such Underwriter or
such controlling person may become subject, under the Securities Act, the
Exchange Act or other federal, state or Canadian statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company, insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based
(i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule 430A
or Rule 434 under the Securities Act, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading; or (ii) upon any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in whole
or in part upon any inaccuracy in the representations and warranties of the
Company contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; or (v) any
act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Units,
the Warrants, the Shares or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage, liability or
action arising out of or based upon any matter covered by clause (i) or
(ii) above, provided that the Company shall not be liable under this clause
(v) to the extent that a court of competent jurisdiction shall have
determined by a final
23
<PAGE> 28
judgment that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be
taken by such Underwriter through its gross negligence or willful
misconduct; and to reimburse each Underwriter and each such controlling
person for any and all expenses (including the fees and disbursements of
counsel chosen by the Representatives) as such expenses are reasonably
incurred by such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that the
foregoing indemnity agreement shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out of
or based upon any untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for
use in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); and provided, further,
that with respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the
person asserting any loss, claim, damage, liability or expense purchased
Units, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to Section 2
and a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not
sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Units to such person, and if the Prospectus
(as so amended or supplemented) would have cured the defect giving rise to
such loss, claim, damage, liability or expense. The indemnity agreement set
forth in this Section 8(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, and each person, if any, who controls
the Company, within the meaning of the Securities Act or the Exchange Act,
against any loss, claim, damage, liability or expense, as incurred, to
which the Company, any such director or officer, or any such controlling
person may become subject, under the Securities Act, the Exchange Act, or
other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged
untrue statement of a material fact contained in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto), or arises out of or is based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any preliminary prospectus, the Prospectus (or any
amendment or supplement thereto), in reliance upon and in conformity with
written information furnished to the Company by the Representatives
expressly for use therein; and to reimburse the Company, any such director
or officer, or any such controlling person for any legal and other expense
reasonably incurred by the Company, any such director or officer, or any
such controlling person in connection with investigating, defending,
settling, compromising or
24
<PAGE> 29
paying any such loss, claim, damage, liability, expense or action. The
Company hereby acknowledges that the only information that the Underwriters
have furnished to the Company expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto) are the statements set forth (1) as the last two
paragraphs on the inside front cover page of the Prospectus concerning
stabilization and passive market making by the Underwriters and (2) in the
table in the first paragraph and in the third paragraph under the caption
"Underwriting" in the Prospectus; and the Underwriters confirm that such
statements are correct. The indemnity agreement set forth in this Section
8(b) shall be in addition to any liabilities that each Underwriter may
otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
for contribution or otherwise than under the indemnity agreement contained
in this Section 8 or to the extent it is not prejudiced as a proximate
result of such failure. In case any such action is brought against any
indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be
entitled to participate in, and, to the extent that it shall elect, jointly
with all other indemnifying parties similarly notified, by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that a conflict may arise between the positions of the
indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall
have the right to select separate counsel to assume such legal defenses and
to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for
the expenses of more than one separate counsel (together with local
counsel), approved by the indemnifying party (Stifel, Nicolaus & Company,
Incorporated in the case of Section 8(b) and Section 9), representing the
indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, in each of which cases the
fees and expenses of counsel shall be at the expense of the indemnifying
party.
(d) Settlements. The indemnifying party under this Section 8 shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such
25
<PAGE> 30
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim,
damage, liability or expense by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified
party for fees and expenses of counsel as contemplated by Section 8(c)
hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i)
such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying
party shall not have reimbursed the indemnified party in accordance with
such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect
any settlement, compromise or consent to the entry of judgment in any
pending or threatened action, suit or proceeding in respect of which any
indemnified party is or could have been a party and indemnity was or could
have been sought hereunder by such indemnified party, unless such
settlement, compromise or consent includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any reason held
to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute
to the aggregate amount paid or payable by such indemnified party, as
incurred, as a result of any losses, claims, damages, liabilities or
expenses referred to therein (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company, on the one hand, and
the Underwriters, on the other hand, from the offering of the Units
pursuant to this Agreement or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company, on the one hand, and
the Underwriters, on the other hand, in connection with the statements or
omissions or inaccuracies in the representations and warranties herein
which resulted in such losses, claims, damages, liabilities or expenses, as
well as any other relevant equitable considerations. The relative benefits
received by the Company, on the one hand, and the Underwriters, on the
other hand, in connection with the offering of the Units pursuant to this
Agreement shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Units pursuant to this
Agreement (before deducting expenses) received by the Company, and the
total underwriting discount received by the Underwriters, in each case as
set forth on the front cover page of the Prospectus (or, if Rule 434 under
the Securities Act is used, the corresponding location on the Term Sheet)
bear to the aggregate initial public offering price of the Units as set
forth on such cover. The relative fault of the Company, on the one hand,
and the Underwriters, on the other hand, shall be determined by reference
to, among other things, whether any such untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact
or any such inaccurate or alleged inaccurate representation or warranty
relates to information supplied by the Company, on the one hand, or the
Underwriters, on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement
26
<PAGE> 31
or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed
to include, subject to the limitations set forth in Section 8(c), any legal
or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. The provisions set
forth in Section 8(c) with respect to notice of commencement of any action
shall apply if a claim for contribution is to be made under this Section 9;
provided, however, that no additional notice shall be required with respect
to any action for which notice has been given under Section 8(c) for
purposes of indemnification.
The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 9 were determined by
pro rata allocation (even if for such purpose the Underwriters were treated
as one entity or by any other method of allocation which does not take
account of the equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Units underwritten by it and
distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several, and not joint, in proportion to their respective
underwriting commitments as set forth opposite their names in Schedule 1. For
purposes of this Section 9, each officer and employee of an Underwriter and each
person, if any, who controls an Underwriter within the meaning of the Securities
Act and the Exchange Act shall have the same rights to contribution as such
Underwriter; and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of the Securities Act and the Exchange Act shall have
the same rights to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Units that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Units which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase does not exceed 10% of the aggregate number of the
Units to be purchased on such date, the other Underwriters shall be obligated,
severally, in the proportions that the number of Firm Units set forth opposite
their respective names on Schedule 1 bears to the aggregate number of Firm Units
set forth opposite the names of all such non-defaulting Underwriters, or in such
other proportions as may be specified by the Representatives with the consent of
the non-defaulting Underwriters, to purchase the Units which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Second Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Units
and the aggregate number of Units with respect to which such default occurs
exceeds 10% of the aggregate number of Units to be
27
<PAGE> 32
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Units are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 4, Section 6, Section 8
and Section 9 shall at all times be effective and shall survive such
termination. In any such case either the Representatives or the Company shall
have the right to postpone the First Closing Date or the Second Closing Date, as
the case may be, but in no event for longer than seven days in order that the
required changes, if any, to the Registration Statement and the Prospectus or
any other documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date this Agreement maybe terminated by the Representatives by notice given to
the Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
American Stock Exchange, or trading in securities generally on either the
American Stock Exchange or the New York Stock Exchange shall have been suspended
or limited, or minimum or maximum prices shall have been generally established
on any of such stock exchanges by the Commission or the NASD; (ii) a general
banking moratorium shall have been declared by any of federal, California,
Missouri or New York authorities; (iii) there shall have occurred any outbreak
or escalation of national or international hostilities or any crisis or
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective substantial
change in United States' or international political, financial or economic
conditions, in each case which in the judgment of the Representatives is
material and adverse and makes it impracticable to market the Units in the
manner and on the terms described in the Prospectus or to enforce contracts for
the sale of securities; (iv) in the judgment of the Representatives there shall
have occurred any Material Adverse Change; or (v) the Company or its
Subsidiaries shall have sustained a loss by strike, fire, flood, earthquake,
accident or other calamity of such character as in the judgment of the
Representatives may interfere materially with the conduct of the business and
operations of such entity regardless of whether or not such loss shall have been
insured. Any termination pursuant to this Section 11 shall be without liability
on the part of (a) the Company to any Underwriter, except that the Company shall
be obligated to reimburse the expenses of the Representatives and the
Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the
Company, or (c) of any party hereto to any other party except that the
provisions of Section 8 and Section 9 shall at all times be effective and shall
survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company and its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Units
28
<PAGE> 33
sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
Stifel, Nicolaus & Company, Incorporated
500 North Broadway, Suite 1500
St. Louis, Missouri 63102
Facsimile: 314-342-2775
Attention: Mr. Rick E. Maples
and
Montgomery Securities
600 Market Street
San Francisco, California 94111
Facsimile: ________________
Attention: ________________
with a copy to:
O'Melveny & Myers LLP
Embarcadero Center West
275 Battery Street, Suite 2600
San Francisco, California 94111-3305
Facsimile: (415) 984-8701
Attention: Peter T. Healy, Esq.
If to the Company:
Hanover Capital Mortgage Holdings, Inc.
90 West Street, Suite 1508
New York, New York 10006
Facsimile: 212-732-4728
Attention: Mr. John A. Burchett
with a copy to:
Morse, Barnes-Brown & Pendleton, P.C.
1601 Trapelo Road
Waltham, Massachusetts 02154
Facsimile: (617) 622-5933
Attention: Charles A. Wry, Jr., Esq.
29
<PAGE> 34
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and no other person will have any right
or obligation hereunder. The term "successors" shall not include any purchaser
of the Units as such from any of the Underwriters merely by reason of such
purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 16. (a) GOVERNING LAW PROVISIONS. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of New York or the
courts of the State of New York in each case located in the City and County of
New York (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum.
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This
30
<PAGE> 35
Agreement may not be amended or modified unless in writing by all of the parties
hereto, and no condition herein (express or implied) may be waived unless waived
in writing by each party whom the condition is meant to benefit. The Table of
Contents and the Section headings herein are for the convenience of the parties
only and shall not affect the construction or interpretation of this Agreement.
In this Agreement unless the context otherwise requires, (i) singular words
shall connote the plural number as well as the singular and vice versa, and the
masculine shall include the feminine and the neuter, and (ii) all references to
particular articles, sections, subsections, clauses or exhibits are references
to articles, sections, subsections, clauses or exhibits of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By: ________________________________________
Name:
Title:
31
<PAGE> 36
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives in St. Louis, Missouri as of the date first above
written.
STIFEL, NICOLAUS & COMPANY, INCORPORATED
MONTGOMERY SECURITIES
Acting as Representatives of the several
Underwriters named in the attached Schedule 1.
By: STIFEL, NICOLAUS & COMPANY, INCORPORATED
By: _____________________________________
Name:
Title:
<PAGE> 37
SCHEDULE 1
<TABLE>
<CAPTION>
NUMBER OF
FIRM UNITS
UNDERWRITERS TO BE PURCHASED
<S> <C>
Stifel, Nicolaus & Company, Incorporated ........................ [___]
Montgomery Securities............................................ [___]
[___]............................................................ [___]
[___]............................................................ [___]
[___]............................................................ [___]
Total .................................................. 4,600,000
=========
</TABLE>
Schedule 1 - page 1
<PAGE> 38
SCHEDULE 2
CERTAIN FORMATION DOCUMENTS
1. Certificate of Incorporation and Bylaws of Hanover Capital Partners, Ltd.
2. Amended and Restated Certificates of Incorporation of HCP (including
Certificate of Designation of Preferred Stock).
3. Employment Agreement by and between HCHI and John A. Burchett.
4. Employment Agreement by and between HCHI and Irma N. Tavares.
5. Employment Agreement by and between HCHI and Joyce S. Mizerak.
6. Employment Agreement by and between HCHI and George J. Ostendorf.
7. Registration Rights Agreement by and among [HCHI] and the Principals.
8. Agreement and Plan of Recapitalization.
9. Shareholders Agreement.
[Completed Descriptions and Additional Documents to Come]
Schedule 2 - page 1
<PAGE> 39
SCHEDULE 3
CERTAIN EXISTING INSTRUMENTS
[To be completed by HCHI and its counsel]
Schedule 3 - page 1
<PAGE> 40
EXHIBIT A
OPINION OF COUNSEL FOR THE COMPANY
(TO BE DELIVERED PURSUANT TO SECTION 5(d))
The opinion of counsel for the Company (this "Opinion") shall be
addressed to Stifel, Nicolaus & Company, Incorporated and Montgomery Securities,
as representatives of the several underwriters listed in Schedule 1 to the
Underwriting Agreement, shall be dated as of the First Closing Date or the
Second Closing Date, as applicable, shall expressly authorize O'Melveny & Myers
LLP, as counsel for the Underwriters, to rely upon this Opinion in connection
with such firm's opinion to be rendered pursuant to Section 5(e) of the
Underwriting Agreement and shall include as an exhibit any representation
certificate(s) relied upon by counsel for the Company.
In rendering this Opinion, counsel for the Company may rely (1)
as to matters involving the application of laws of any jurisdiction other than
the General Corporation Law of the State of Delaware, the law of the State of
New York or the federal law of the United States, to the extent they deem proper
and specified in such opinion, upon the opinion (which shall be dated the First
Closing Date or the Second Closing Date, as the case may be, shall be attached
to the opinion, shall be satisfactory in form and substance to the Underwriters,
and shall expressly state that the Underwriters and O'Melveny & Myers LLP, as
counsel for the Underwriters, may rely on such opinion) of Piper & Marbury
L.L.P.; provided, however, that such counsel shall further state that they
believe that they and the Underwriters and counsel for the Underwriters are
justified in relying upon such opinion of other counsel, and (2) as to matters
of fact, to the extent they deem proper, on certificates of responsible officers
of the Company and public officials.
All capitalized terms used herein without definitions shall have
the meaning given such terms in the Underwriting Agreement to which this Exhibit
A is attached (the "Underwriting Agreement").
* * * *
(a) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Maryland.
(b) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in the State of New York and in each other
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing would
not, individually or in the aggregate, result in a Material Adverse Change.
(c) The Company has all requisite corporate power and authority (i) to
own, lease and operate its properties and to conduct its business as described
in the Prospectus both currently and after giving effect to the Formation
Transactions, (ii) to enter into and perform its obligations
A-2
<PAGE> 41
under the Underwriting Agreement, the Warrant Agreement and the Representatives
Warrant Agreement, (iii) to issue, sell and deliver the Units to the
Underwriters pursuant to the Underwriting Agreement, (iv) to enter into each
Formation Agreement to which it is a party, to perform its obligations
thereunder and otherwise to consummate the transactions contemplated thereby,
and (v) to issue, sell and deliver the Representatives Warrants to the
Representatives.
(d) Each Subsidiary of the Company (which term, for purposes of this
Opinion, shall be deemed to include, without limitation, HCP, HCS and HCMC) is a
corporation, limited partnership or limited liability company, as the case may
be, duly organized or formed, as the case may be, validly existing and in good
standing under the laws of its jurisdiction of its incorporation or formation.
(e) Each Subsidiary is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except for such jurisdictions where the
failure to so qualify or to be in good standing would not, individually or in
the aggregate, result in a Material Adverse Change.
(f) Each Subsidiary has all requisite power and authority (i) to own,
lease and operate its properties and to conduct its business as described in the
Prospectus both currently and after giving effect to the Formation Transactions
and (ii) to enter into each Formation Agreement to which it is a party, to
perform its obligations thereunder and otherwise to consummate the transactions
contemplated thereby.
(g) To such counsel's knowledge, the Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
the Subsidiaries listed in Exhibit 21 to the Registration Statement.
(h) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization." The issued
and outstanding shares of Common Stock have been, and the Units (including the
Common Stock and Warrants comprising the Units) and the Representatives
Warrants, upon issuance and delivery against payment therefor in the manner
described in the Underwriting Agreement or Representatives Warrant Agreement, as
applicable, will be duly authorized and validly issued, fully paid and
nonassessable, and were not or, upon issuance, will not be, issued (i) in
violation of or subject to any preemptive rights, or other rights to subscribe
for or purchase any securities of the Company arising from the charter or bylaws
of the Company, the Maryland General Corporation Law or, to the best knowledge
of such counsel, otherwise or (ii) in violation of any federal or state
securities laws. The terms and provisions of the Units (including the Common
Stock and the Warrants comprising the Units) conform in all material respects to
the descriptions thereof contained in the Prospectus.
(i) No stockholder of the Company or any other person has any preemptive
right, right of first refusal or other similar right to subscribe for or
purchase securities of the Company arising by operation of the charter or bylaws
of the Company, the Maryland General Corporation Law or, to the best knowledge
of such counsel, otherwise. To the best knowledge of such counsel, there are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering
A-3
<PAGE> 42
contemplated by the Underwriting Agreement, except for such rights as have been
duly waived.
(j) The forms of certificates used to evidence the Units, the Common Stock
and the Warrants are in due and proper form and comply with all applicable
requirements of the charter and bylaws of the Company and the Maryland General
Corporation Law. In connection with any sale of securities to the Underwriters
without certificates under the Underwriting Agreement, the Company has fully
complied with sections 2-210 and 2-211 of the Maryland General Corporation Law.
(k) The Company has reserved for issuance a sufficient number of shares of
Common Stock to permit the issuance of all shares of Common Stock issuable upon
the exercise of the Warrants in accordance with the terms of the Warrant
Agreement and the Representatives Warrants in accordance with the terms of the
Representatives Warrant Agreement. The shares of Common Stock to be issued upon
the exercise of the Warrants and the Representatives Warrants have been duly
authorized for issuance and sale pursuant to the Warrant Agreement or the
Representatives Warrant Agreement, as applicable, and, when issued and delivered
by the Company pursuant to such agreement, will be validly issued, fully paid
and nonassessable. No further approval or authority of the shareholders or the
Board of Directors of the Company is required for the issuance and sale of the
shares of Common Stock pursuant to the terms of the Warrant Agreement or the
Representatives Warrant Agreement.
(l) The description of the Company's stock option, stock bonus and other
stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans, arrangements,
options and rights.
(m) The authorized capital stock of HCP consists of 90,000,000 shares of
common stock (the "HCP Common") and 10,000,000 shares of preferred stock (the
"HCP Preferred"). After giving effect to the Formation Transactions to be
consummated on the First Closing Date, the HCP Common will be owned by the
Principals and the HCP Preferred will be owned by the Company in the manner and
in the percentage interests set forth in the Prospectus. All of the shares of
HCP Common and HCP Preferred issued to the Principals and the Company,
respectively, will upon issuance and payment therefor in accordance with the
Formation Agreements, be duly authorized and validly issued, fully paid and
nonassessable and will have been issued as a valid private placement exempt from
the registration requirements of the Securities Act and will not be integrated
with the public sale of the securities subject to the Registration Statement and
will otherwise have been issued in accordance with all state and federal
securities laws.
(n) All of the issued and outstanding capital stock, membership interests
or other equity interests of each other Subsidiary (exclusive of HCP) (i) has
been duly authorized and validly issued and is fully paid and non-assessable,
(ii) except as otherwise disclosed in the Prospectus, is owned by the Company,
directly or through Subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance or, to the best knowledge of such counsel,
any pending or threatened claim, and (iii) has been issued in compliance with
all state and federal securities laws.
A-4
<PAGE> 43
(o) Each of the Underwriting Agreement, the Warrant Agreement, the
Representatives Warrant Agreement and each other Formation Agreement to which
the Company is a party (collectively, the "COMPANY DOCUMENTS") has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws related to or affecting creditors' rights generally or by
general equitable principles and, with respect to the Underwriting Agreement,
except as rights to indemnification thereunder may be limited by applicable law.
(p) Each Formation Agreement which any Subsidiary of the Company is a
party has been (i) duly authorized by all requisite partnership, corporate or
other action, (ii) duly executed and delivered by such Subsidiary and (iii)
constitutes a valid and binding agreement of such Subsidiary and, to such
Counsel's knowledge, each of the other parties thereto, and is enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(q) The execution, delivery and performance of each of the Company
Documents and the Formation Documents by the Company and its Subsidiaries and
the consummation of the transaction contemplated thereby will not (i) result in
any violation of the provisions of the charter, bylaws, partnership agreement or
other similar organization document of the Company or any of its Subsidiaries;
(ii) result in a breach of, or constitute, either immediately or upon notice or
the passage of time or both, a Default or a Debt Repayment Triggering Event
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any Subsidiary
pursuant to any Existing Instrument listed on Schedule 3 to the Underwriting
Agreement; (iii) not require the consent of any other party to any such Existing
Instrument, or, to such counsel's knowledge, any other agreement or relationship
by which any of the foregoing entities is bound except for such consents which
have been obtained in writing by such entity and except for such consents as the
failure of which to obtain would not, individually or in the aggregate, result
in a Material Adverse Change and (iv) result in any violation of any law,
administrative regulation or administrative or court decree applicable to the
Company or any of it Subsidiaries.
(r) Each of the Registration Statement and the Rule 462(b) Registration
Statement, if any, has been declared effective by the Commission under the
Securities Act. To the best knowledge of such counsel, no stop order suspending
the effectiveness of either of the Registration Statement or the Rule 462(b)
Registration Statement, if any, has been issued under the Securities Act and no
proceedings for such purpose have been instituted or are pending or are
contemplated or threatened by the Commission. Any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time period required
by such Rule 424(b).
(s) The Registration Statement, including any Rule 462(b) Registration
Statement, the Prospectus, and each amendment or supplement to the Registration
Statement and the Prospectus, as of their respective effective or issue dates
(other than the financial statements and supporting schedules included therein
or in exhibits to the Registration Statement, as to which no opinion
A-5
<PAGE> 44
need be rendered) comply as to form in all material respects with the applicable
requirements of the Securities Act.
(t) The Units have been approved for listing on the American Stock
Exchange.
(u) The statements (i) in the Prospectus under the captions "Risk
Factors," "Description of Securities," "Management's Discussion and Analysis and
Results of Operations," "Business," "Certain Relationships and Related
Transactions," "Shares Eligible for Future Sale," "Certain Provisions of
Maryland Law and the Company's Charter and Bylaws," "Federal Income Tax
Considerations," "ERISA Investors" and "Underwriting" and (ii) in Item 33
(Recent Sales of Unregistered Securities) and Item 34 (Indemnification of
Directors and Officers) of the Registration Statement, insofar as such
statements constitute matters of law, summaries of legal matters, the Company's
charter or bylaw provisions, documents or legal proceedings, or legal
conclusions, has been reviewed by such counsel and fairly present and summarize,
in all material respects, the matters referred to therein.
(v) To the best knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto; and the descriptions thereof
and references thereto are correct in all material respects.
(w) No consent, approval, authorization or other order of, or registration
or filing with, any court or other governmental authority or agency, is required
for the execution, delivery and performance of the Company Documents and the
Formation Documents or the consummation of the transactions contemplated thereby
and by the Prospectus by the Company and its Subsidiaries, except, in the case
of the Company, as required under the Securities Act, applicable state
securities or blue sky laws and from the NASD.
(x) To the best knowledge of such counsel, neither the Company nor any of
its Subsidiaries (i) is in violation of its charter or bylaws, partnership
agreement, partnership certificate or other organization document, as
applicable, or any law, administrative regulation or administrative or court
decree applicable to such entity or (ii) is in Default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
material agreement, except in the case of clause (ii) for such Defaults as would
not, individually or in the aggregate, result in a Material Adverse Change.
(y) The consummation of the Formation Transactions constitutes neither a
"roll-up transaction," as such term is defined in Item 901(c) of Regulation S-K
of the Securities Act, nor a "limited partnership roll-up transaction," as such
term is defined in Rule 2810(a)(10) of the Conduct Rules of the NASD.
(z) The Company is organized in conformity with the requirements for
qualification as a real estate investment trust ("REIT") under Sections 856
through 860 of the Tax Code and pursuant to any applicable state tax laws; and
the Company's method of operations enables it to meet the requirements for
qualification and taxation as a REIT under the Tax Code beginning with the
taxable year ending December 31, 1997. To the best of such counsel's knowledge,
there is no event or condition which would cause or is likely to cause the
Company to fail to qualify
A-6
<PAGE> 45
as a REIT at any time after the First Closing Date.
(aa) The descriptions of the law and the legal conclusions contained in
the Prospectus under the caption "Federal Income Tax Considerations" are correct
in all material respects, and the discussion thereunder fairly summarizes the
federal income tax considerations that are likely to be material to a holder of
the Units, Common Stock and Warrants.
(ab) The descriptions of the law and the legal conclusions contained in
the Prospectus under the caption "ERISA Investors" are correct in all material
respects, and the discussion thereunder fairly summarizes the considerations
that are likely to be material to a fiduciary of a Plan (as defined in the
Prospectus).
(ac) Each of the Company and each Company affiliate is not and, after
receipt of payment for the Units, use of the proceeds of the offering as
described in the Prospectus and consummation of the Formation Transactions, will
not be an "investment company" within the meaning of Investment Company Act of
1940 or otherwise subject to regulation under the Investment Company Act of
1940..
(ad) The proposed methods of operations of the Company and its
Subsidiaries, as described in the Prospectus, will not cause or require any such
entity to register as an investment advisor under the Investment Advisors Act of
1940.
(ae) The legal opinion of Piper & Marbury L.L.P. attached hereto as
Exhibit A is satisfactory in form to such counsel, and such counsel believes the
Underwriters and counsel for the Underwriters are justified in relying on it.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), and
any supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief as to
the financial statements or schedules or other financial or statistical data
derived therefrom, included in the Registration Statement or the Prospectus or
any amendments or supplements thereto).
A-7
<PAGE> 46
EXHIBIT B
FORM OF DIRECTORS' AND OFFICERS' LOCK-UP AGREEMENT
(TO BE DELIVERED PURSUANT TO SECTION 5(i))
[Pricing Date]
Stifel, Nicolaus & Company, Incorporated
Montgomery Securities
As Representatives of the Several Underwriters
c/o Stifel, Nicolaus & Company, Incorporated
500 North Broadway, Suite 1500
St. Louis, Missouri 63102
RE: Hanover Capital Mortgage Holdings, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Units (the "Offering"), with each Unit to consist of one
share of Common Stock and one Stock Purchase Warrant, for which you will act as
the Representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Stifel, Nicolaus &
Company, Incorporated (which consent may be withheld in its sole discretion),
directly or indirectly, sell, offer, contract or grant any option to sell
(including without limitation any short sale), pledge, transfer, establish an
open "put equivalent position" within the meaning of Rule 16a-1(h) under the
Securities Exchange Act of 1934, or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock, or securities
exchangeable or exercisable for or convertible into shares of Common Stock
currently or hereafter owned either of record or beneficially (as defined in
Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date 365 days after the date of the Prospectus. The
undersigned also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent and registrar against the transfer of shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock held by the undersigned except in compliance with the foregoing
restrictions.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially
B-1
<PAGE> 47
by the undersigned, including any rights to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
- ------------------------------
Printed Name of Holder
By:
---------------------------
(Signature)
- ------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
B-2
<PAGE> 1
EXHIBIT 4.2
WARRANT AGREEMENT
DATED AS OF ________, 1997
BETWEEN
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
AND
[--------------------------]
AS
WARRANT AGENT
<PAGE> 2
TABLE OF CONTENTS
PAGE
----
Section 1. Appointment of Warrant Agent............................. 1
Section 2. Limitation on Issue...................................... 1
Section 3. Date, Denomination and Execution of Warrant Certificates. 2
Section 4. Issue of Warrant Certificate............................. 2
Section 5. Split-up, Combination and Exchange of Warrant Certificates. 3
Section 6. Mutilated, Destroyed, Lost or Stolen Warrant Certificates. 3
Section 7. Exercise of Warrant Certificates and Exercise Price...... 3
Section 8. Adjustments of Exercise Price............................ 6
Section 9. Reorganization, Consolidation, Merger, Sale of Assets. .. 8
Section 10. Fractional Interests..................................... 9
Section 11. Warrant Certificate Holder Not Deemed a Stockholder...... 9
Section 12. Rights of Action......................................... 9
Section 13. Agreement of Warrant Certificate Holders................. 9
Section 14. Cancellation of Warrant Certificates..................... 10
Section 15. Concerning the Warrant Agent............................. 10
Section 16. Merger or Consolidation or Change of Name of Warrant Agent 10
Section 17. Duties of Warrant Agent.................................. 11
Section 18. Change of Warrant Agent.................................. 12
Section 19. Issuance of New Warrant Certificates..................... 13
Section 20. Notices.................................................. 13
Section 21. Modification of Agreement................................ 14
<PAGE> 3
Section 22. Successors............................................... 14
Section 23. Governing Law............................................ 14
Section 24. Benefits of This Agreement............................... 14
Section 25. Descriptive Headings..................................... 14
Section 26. Counterparts............................................. 15
EXHIBIT A............................................................ A-1
<PAGE> 4
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (this "AGREEMENT"), dated as of ______, 1997, is
made and entered into by and between HANOVER CAPITAL MORTGAGE HOLDINGS, INC., a
Maryland corporation (hereinafter called the "COMPANY"), and
[__________________], as warrant agent (hereinafter called the "WARRANT AGENT").
WITNESSETH THAT:
WHEREAS this Agreement is made with reference to the following facts:
A. The Company has authorized the issuance of up to 5,290,000 units
("Units") of its securities, consisting of 5,290,000 shares of its Common Stock,
par value $0.01 per share, (hereinafter called the "COMMON STOCK"), and
5,290,000 Common Stock Purchase Warrants (hereinafter called the "WARRANTS"),
initially entitling the holders thereof to purchase 5,290,000 additional shares
of its Common Stock, which Warrants are to be attached initially to the shares
of Common Stock issued as provided in Paragraph B below;
B. Such Units are to be purchased from the Company by the Underwriters
named in that certain Underwriting Agreement of even date herewith and
thereafter, subject to the terms thereof, offered to the public pursuant to the
Registration Statement referred to in Section 7;
C. In accordance with the provisions of Section 3 hereof, Warrants will
not be detachable until six months after issuance. After six months, the
Warrants may be detached and transferred separately from the shares of Common
Stock to which they were attached upon issuance of the Units; and
D. The Company desires the Warrant Agent to act on behalf of the Company,
and the Warrant Agent is willing so to act, in connection with the issuance,
transfer, exchange, replacement and exercise of the Warrants;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent for the Company in accordance with the terms and
conditions hereinafter set forth in this Agreement, and the Warrant Agent hereby
accepts such appointment.
Section 2. Limitation on Issue. Subject to Sections 4, 6 and 8 hereof, the
Company may execute and deliver to the Warrant Agent for countersignature, and
the Warrant Agent shall, upon written order of the Company signed by its
President or a Vice President, thereupon countersign and deliver certificates
evidencing the Warrants
1
<PAGE> 5
("WARRANT CERTIFICATES") to the Company. Such Warrant Certificates initially
shall evidence up to 5,290,000 Warrants entitling the holder or holders thereof
to purchase, subject to the provisions of Section 8 hereof, 5,290,000 shares of
Common Stock.
Section 3. Date, Denomination and Execution of Warrant Certificates. The
Warrant Certificates (and the forms of election to purchase shares and of
assignment to be printed on the reverse thereof) shall be substantially in the
form of Exhibit A hereto and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The Warrant Certificates (a)
upon initial issuance, shall be dated by the Warrant Agent as of the issue date
of the Units, and (b) upon transfer, exchange or an issuance of Warrants other
than pursuant to the issuance of the Units, the Warrants shall be dated as of
the date of issuance thereof. The Warrants shall entitle the holders thereof to
purchase only whole shares of Common Stock at the price per share set forth
therein, subject to adjustments as provided herein, and to be paid the value of
any fractional shares as provided in Section 10 hereof.
The Warrant Certificates shall be executed on behalf of the Company by its
President or a Vice President, by the Secretary or an Assistant Secretary, by
manual or facsimile signature, and shall have affixed thereto a facsimile of the
Company's seal. The Warrant Certificates shall be mutually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned. In
the event any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer of the Company, whether before or
after countersignature by the Warrant Agent and issue and delivery thereof by
the Company, such Warrant Certificates, nevertheless, may be countersigned by
the Warrant Agent, issued and delivered with the same force and effect as though
the person who signed such Warrant Certificate had not ceased to be such officer
of the Company.
The Warrants issued on the issue date of the Units shall be attached to
the corresponding shares of Common Stock comprising the Units. However, on the
date six months after the date of issuance of the Units (the "DETACHMENT DATE"),
the Warrants may be detached and transferred separately from the Common Stock.
Section 4. Issue of Warrant Certificate. Subsequent to their original
issuance, no Warrant Certificates shall be issued except (a) Warrant
Certificates based upon transfers thereof in accordance with Section 13 hereof,
(b) Warrant Certificates issued upon the partial exercise of any Warrant to
evidence the unsubscribed portion of such Warrant, (c) Warrant Certificates
issued upon any combination, split-up or exchange of Warrant Certificates
pursuant to Section 5 hereof, (d) Warrant Certificates issued in replacement of
mutilated, destroyed, lost or stolen Warrant Certificates pursuant to Section 6
hereof, and (e) Warrant Certificates to reflect any change in the Exercise Price
2
<PAGE> 6
(as hereinafter defined) and the number of shares of Common Stock purchasable
thereunder and issued pursuant to Section 19 hereof.
The Warrant Agent will keep or cause to be kept, at its principal office,
books for registration and transfer of the Warrants issued hereunder. Such
registers shall show the names and addresses of the respective holders of the
Warrant Certificates and the numbers of shares of Common Stock which may be
purchased by each issued Warrant.
Section 5. Split-up, Combination and Exchange of Warrant Certificates.
After the Detachment Date, a Warrant Certificate or Warrant Certificates, may be
split-up, combined or exchanged for another Warrant Certificate or Warrant
Certificates entitling the registered holder thereof to purchase a like
aggregate number of shares of Common Stock as the Warrant Certificate or Warrant
Certificates surrendered then entitled him to purchase. Any registered holder of
a Warrant Certificate desiring to split-up, combine or exchange Warrant
Certificates shall make such request in writing delivered to the Warrant Agent,
and shall surrender the Warrant Certificate or Warrant Certificates to be so
split-up, combined or exchanged. Thereupon the Warrant Agent shall countersign
and deliver to the person entitled thereto a Warrant Certificate or Warrant
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any such split-up, combination or exchange of Warrant
Certificates.
Section 6. Mutilated, Destroyed, Lost or Stolen Warrant Certificates. Upon
receipt by the Company and the Warrant Agent of evidence reasonably satisfactory
to them of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in the event of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and reimbursement to them of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrant Certificate, if mutilated, the Company will issue and the Warrant
Agent shall countersign and deliver a new Warrant Certificate of like tenor for
the same number of shares of Common Stock. Applicants for such substitute
Warrant Certificates shall comply with such other reasonable regulations and pay
such other reasonable charges as the Company or the Warrant Agent may prescribe.
Any such new Warrant Certificate shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen, destroyed
or mutilated Warrant Certificate shall be at any time enforceable by anyone.
Section 7. Exercise of Warrant Certificates and Exercise Price. Each
Warrant Certificate shall, when countersigned by the Warrant Agent, entitle the
holder thereof, subject to the provisions of this Agreement, to purchase from
the Company the number of whole shares of Common Stock stated therein, as such
shares are constituted on the date of its exercise. The registered holder of any
Warrant Certificate may exercise the Warrants in whole at any time, or in part
from time to time (but not as to fractional shares of Common Stock), upon (a)
surrender of said Warrant Certificate, with the form of election to purchase on
the reverse side thereof duly executed, to the Warrant Agent at the principal
office of the Warrant Agent in the City of [New York], State of [New
3
<PAGE> 7
York], only after the opening of business on the Detachment Date and on or prior
to the close of business on [Insert date which is three years after the date of
the Prospectus], at which time the Warrants shall be and become wholly void and
of no value and all rights of the registered holders thereunder and under this
Agreement shall cease, and (b) payment of the Exercise Price for each share of
Common Stock as to which the Warrants are exercised. No adjustment shall be made
for any cash dividends on any shares of Common Stock issuable on exercise of
Warrants.
A Warrant initially shall evidence the right to purchase one share of
Common Stock subject to adjustment as provided in Section 8 hereof. The Exercise
Price for each whole share of Common Stock purchasable pursuant to the exercise
of the Warrants shall be [insert initial public offering price of the Units] per
whole share in lawful money of the United States of America, subject to
adjustment as provided in Section 8 hereof. Except as the context otherwise
requires, the term "Exercise Price" as used in this Agreement shall mean the
Exercise Price for each whole share of Common Stock purchasable upon exercise of
the Warrants in effect as of any date and shall reflect all adjustments made in
accordance with the provisions of Section 8 through and at such date. Each
Exercise Price shall continue in effect until further adjusted pursuant to the
provisions of said Section 8.
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 (ii) by
surrendering additional Warrants or shares of Common Stock for cancellation to
the extent the Company may lawfully accept shares of Common Stock in the
Company, with the value per share of such Common Stock for such purpose being
equal to the current market price per share of Common Stock determined in
accordance with Section 8(e) hereof as on the business day next preceding the
date the Warrant Certificates are surrendered for exercise and the value of a
Warrant being equal to the difference between such current market price per
share of Common Stock and the Exercise Price.
Upon receipt of a Warrant Certificate, with the form of election to
purchase duly executed, accompanied by payment of the Exercise Price for the
shares to be purchased and an amount equal to any applicable transfer tax, the
Warrant Agent shall thereupon promptly (i) requisition from any transfer agent
of the Common Stock of the Company, certificates for the number of whole shares
of Common Stock to be purchased, and (ii) promptly after receipt of such
certificates cause the same to be delivered to or upon the order of the
registered holder of such Warrant Certificate, registered in such name or names
as may be properly designated by such holder.
If a Certificate is exercised with respect to less than all of the shares
of Common Stock that may be subscribed for by the Warrants evidenced thereby, a
new Warrant Certificate for the unexercised Warrants shall be issued by the
Warrant Agent to the registered holder of such Warrant Certificate or to his
duly authorized assigns.
4
<PAGE> 8
The Company covenants and agrees that it will cause to be reserved, out of
its authorized and unissued shares of Common Stock, a number of shares of Common
Stock that will be sufficient to permit the exercise in full of all outstanding
Warrants. As a condition precedent to the taking of any action which would
result in the Exercise Price for each share of Common Stock issuable upon the
exercise of Warrants being less than the par value per share of Common Stock,
the Company will take such corporate action as may, in the opinion of its
counsel, be necessary in order that the Company may comply with all of its
obligations under this Agreement with respect to the exercise of the Warrants.
The Company covenants and agrees that all the shares of Common Stock
delivered upon exercise of the Warrants shall, at the time of delivery of the
certificates for such shares (subject to payment of the Exercise Price), be
validly authorized and issued and fully paid and non-assessable shares. The
Company further covenants and agrees that it will pay when due and payable any
and all federal and state taxes and charges which may be payable in respect of
the issue or delivery of the Warrants or any shares of Common Stock upon the
exercise of the Warrants. The Company shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the transfer or
delivery of the Warrants or the issuance or delivery of certificates for Common
Stock in a name other than that of the registered holder of the Warrant
Certificate surrendered for exercise of the Warrants evidenced thereby or to
issue or deliver any certificate for shares of Common Stock upon the exercise of
any Warrant until any such tax shall have been paid (all such tax being payable
by the holder of such Warrant Certificate at the time of surrender) or until it
has been established to the Company's satisfaction that no such tax is due.
The Company has filed a Registration Statement (File No. 333-29261) with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "SECURITIES ACT") for the purpose of registering the sale of the
Common Stock and the Warrants included in the Units and the Common Stock
issuable upon exercise of the Warrants. The Company covenants and agrees that it
will take all action which may be necessary to keep effective the registration
under the Securities Act of the shares of Common Stock issuable upon exercise of
the Warrants and that it will use its best efforts to qualify such Common Stock
for sale under the securities laws of such of the States of the United States as
may be necessary to permit the free exercise of the Warrants in all of the
States of the United States in which the Common Stock and the Warrants included
in the Units are qualified, and to maintain such qualifications during the
entire period in which the Warrants are exercisable; provided, however, that the
Company shall not be required in connection with any such qualification to file
a general consent to service of process or qualify to do business as a foreign
corporation of any jurisdiction where it is not now so subject or qualified.
The Company covenants and agrees that it will take all action which may be
necessary to cause the shares of Common Stock issuable upon exercise of the
Warrants
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<PAGE> 9
to be duly listed on the securities exchange in which the other shares of Common
Stock of the Company are listed at the dates of exercise of the Warrants.
Each person in whose name any certificate for shares of Common Stock is
issued upon the exercise of the Warrants shall for all purposes be deemed to
have become the holder of record of the Common Stock represented thereby on, and
such certificate shall be dated, the date upon which the Warrant Certificate was
duly surrendered and payment of the Exercise Price (and any applicable transfer
taxes) was made, provided, however, that if the date of such surrender and
payment is a date upon which the Common Stock transfer books of the Company are
closed, such person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding business day
on which the Common Stock transfer books of the Company are open.
Section 8. Adjustments of Exercise Price. (a) In the event the Company
after the date hereof shall (i) pay a dividend or make a distribution in shares
of capital stock of the Company, or (ii) subdivide its outstanding shares of
Common Stock, or (iii) combine its outstanding shares of Common Stock into a
smaller number of shares, or (iv) issue by reclassification of its shares of
Common Stock any shares of capital stock of the Company, the exercise right and
the Exercise Price in effect immediately prior to such action shall be adjusted
so that the holder of any Warrant thereafter surrendering such Warrant for
exercise shall be entitled to receive the number of shares of capital stock of
the Company which he would have owned immediately following such action had such
Warrant been exercised immediately prior to the record date for such action or
to such action, as appropriate. An adjustment made pursuant to this Section 8(a)
shall, in the case of a subdivision, combination or reclassification become
effective retroactively immediately after the record date thereof. If, as a
result of an adjustment made pursuant to this Section 8(a), the holder of any
Warrant thereafter surrendered for exercise shall become entitled to receive
shares of two or more classes of capital stock of the Company, the Board of
Directors of the Company (whose determination shall be described in a
certificate filed with the Warrant Agent) shall in good faith determine the
allocation of the adjusted Exercise Price between or among shares of such
classes of capital stock.
(b) In the event the Company after the date hereof shall distribute to all
the holders of Common Stock any dividend or other distribution (other than a
cash distribution made as a dividend payable out of earnings or out of any
earned surplus legally available for dividends under the laws of the
jurisdiction of incorporation of the Company) or any evidence of indebtedness or
any assets in respect of the Common Stock, or rights to subscribe or purchase
shares of Common Stock at a price per share less than the current market price
per share of Common Stock (as defined in Section 8(e)) at the record date
referenced below, then, and thereafter successively upon each such distribution,
the Exercise Price in effect immediately prior to such distribution shall
forthwith be reduced to a price determined by multiplying the Exercise Price in
effect immediately prior to such distribution by a fraction the numerator of
which shall be the
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<PAGE> 10
current market price per share of Common Stock (as defined in Section 8(e)) at
the record date referenced below, less then fair market value (as determined in
good faith by the Board of Directors of the Company, whose determination shall
be described in a certificate filed with the Warrant Agent) of the portion of
such evidences of indebtedness or such assets so distributed, or of such
subscription or purchase rights, applicable to one share of Common Stock and the
denominator of which shall be such current market price per share of Common
Stock. An adjustment made pursuant to Section 8(b) shall become effective
retroactively immediately after the record date for the determination of
stockholders entitled to receive such distribution.
(c) After each adjustment of the Exercise Price pursuant to Section 8(a)
and 8(b), the total number off shares of Common Stock or fractional part thereof
purchasable upon the exercise of each Warrant shall be proportionately adjusted
to such number of shares or fractional part thereof as the total Exercise Price
of the number of shares or fractional part thereof purchasable immediately prior
to such adjustment will buy at the adjusted Exercise Price.
(d) The certificate of any independent firm of public accountants of
recognized national standing selected by the Board of Directors of the Company
shall be conclusive evidence of the correctness of any computations under
Sections 8(a) and 8(b).
(e) For the purposes of Sections 7, 8(a) and 8(b) hereof, the current
market price per share of Common Stock as of any date of determination shall be
deemed to be the average of the daily closing prices for the consecutive 20
trading days preceding the day of determination. The closing price for the day
shall be the last reported sale price regular way or, in case no such reported
sale takes place on that day, the average of the reported closing bid and asked
pries regular way, in either case as officially reported by the principal stock
exchange on which the Common Stock is listed or admitted to trading, or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange, the average of closing bid and asked prices as furnished by the
National Association of Securities Dealers, Inc. through the national
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or
similar organization if NASDAQ is no longer reporting such information.
(f) No adjustment of the Exercise Price shall be required under Sections
8(a) and 8(b) hereof if the amount of such adjustment is less than 1%; provided,
however, that any adjustments which by reason of the foregoing are not required
at the time to be made shall be carried forward and taken into account and
included in determining the amount of any subsequent adjustment. If the Company
shall take a record of holders of Common Stock for the purpose of entitling them
to receive any dividend or distribution and thereafter and before the
distribution to stockholders of any such dividend or distribution, legally
abandon its plan to pay or deliver such dividend or distribution, then no
adjustment of the Exercise Price shall be required by reason of the taking of
such record. All calculations under this Section 8 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be.
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<PAGE> 11
(g) Whenever the Exercise Price is adjusted pursuant to this Section 8,
the Company shall promptly file with the Warrant Agent and with each transfer
agent for the Common Stock a certificate signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Company setting forth in reasonable detail the events
requiring the adjustment, the method by which such adjustment was calculated,
and specifying the Exercise Price and the number or kind or class of shares or
other securities or property purchasable upon exercise of the Warrants after
giving effect to such adjustment, and will cause to be mailed, first class,
postage prepaid a summary thereof to the registered holders of the Warrant
Certificates at their last addressees as they appear on the registry books of
the Warrant Agent.
(h) For the purposes of this Section 8, the term "Common Stock" shall mean
(i) the class of stock designated as the common stock, par value .01 per share,
of the Company, at the date of this Agreement, (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value. In the event that at any time, as a result of an
adjustment made pursuant to Section 8(a), shares of capital stock of the Company
other than shares of Common Stock are issuable upon exercise of the Warrants,
thereafter the number of such other shares so issuable shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in this
Section 8, and all other provisions of this Agreement with respect to Common
Stock shall apply on like terms to any such other shares. Subject to the
foregoing, and unless the context requires otherwise, all references to Common
Stock in this Agreement and in the Warrant Certificates shall, in the event of
an adjustment pursuant to this Section 8, be deemed to refer also to any other
securities or property then issuable upon exercise of the Warrants as a result
of such adjustments.
Unless and to the extent that the Company shall exercise the option to
issue new warrant certificates as provided in Section 19, irrespective of the
fact that the Warrant Certificates theretofore and thereafter issued shall
continue to express the Exercise Price per share and the number of shares
purchasable thereunder as the Exercise Price per share and the number of shares
purchasable were expressed in the Warrant Certificates when initially issued,
such Warrant Certificates shall be deemed to refer to the Exercise Price and the
number of shares purchasable as adjusted or changed pursuant to this Section 8.
Section 9. Reorganization, Consolidation, Merger, Sale of Assets. In the
event, after the date hereof, as a result of the Company effecting a
reorganization or as a result of a merger or consolidation of the Company into
or with another corporation, or the sale or other transfer of the Company's
property, assets and business substantially as an entirety to a successor
corporation, the Common Stock is in effect changed, in whole or in part, into a
different kind or class of stock or other securities or property (including
cash), the Company, or the successor corporation, as the case may be, shall
execute and
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<PAGE> 12
deliver to the Warrant Agent a supplemental agreement providing that the holder
of each Warrant then outstanding shall have the right thereafter (until the
expiration of the right of exercise of such Warrant) to receive upon exercise of
such Warrant the kind and amount of shares of stock or other securities or
property (including cash) receivable upon such reorganization, merger or
consolidation, or upon the dissolution following such sale or other transfer, by
a holder of the number of shares of Common Stock of the Company issuable upon
exercise of which shall be as nearly equivalent as practicable to the
adjustments provided for in this Agreement. The provisions of this Section 9
shall similarly apply to successive reorganizations, mergers or consolidations
or sales or other transfers.
Section 10. Fractional Interests. The Company shall not be required to
issue fractional shares of Common Stock upon any exercise of Warrants, but in
respect of any final fraction of a share it will make a payment in cash based on
the current market price of the Common Stock as determined by the Warrant Agent
in accordance with Section 8(e) hereof on the business day next preceding the
date the Warrant Certificates are surrendered for exercise.
Section 11. Warrant Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Warrant Certificate or Warrant shall be entitled to vote
or receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable upon the exercise of
such Warrant for any purpose whatever, nor shall anything contained herein or in
any Warrant Certificate be construed to confer upon the holder of any Warrant
Certificate or Warrants, as such, any of the rights of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action (whether upon any recapitalization, issue of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance or otherwise), or to receive notice of
meetings, or to receive dividends or subscription rights, or otherwise, until
such Warrant shall have been exercised in accordance with the provisions hereof
and the receipt of the Exercise Price payable upon such exercise by the Warrant
Agent.
Section 12. Rights of Action. All rights of action in respect to this
Agreement are vested in the respective registered holders of the Warrant
Certificates and any registered holder of any Warrant Certificate, without the
consent of the Warrant Agent or of the holder of any other Warrant Certificate,
may, on his own behalf and for his own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company to enforce, or
otherwise in respect of, his right to exercise his Warrant for the purchase of
shares of Common Stock in the manner provided in the Warrant Certificate and in
this Agreement.
Section 13. Agreement of Warrant Certificate Holders. Every holder of a
Warrant Certificate by accepting the same consents and agrees with the Company
and the Warrant Agent and with every other holder of Warrant Certificates that:
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<PAGE> 13
(a) the Warrants are transferable only on the registry books of the
Warrant Agent by the registered holder thereof in person or by his
attorney duly authorized in writing, and only if surrendered at the
principal office of the Warrant Agent, duly endorsed, or accompanied by a
proper instrument of transfer satisfactory to the Warrant Agent and the
Company in their sole discretion; and
(b) the Company and the Warrant Agent may deem and treat the person
in whose name the Warrant Certificate is registered as the absolute owner
for all purposes whatever and neither the Company nor the Warrant Agent
shall be affected by any notice to the contrary.
Section 14. Cancellation of Warrant Certificates. In the event the Company
shall purchase or acquire upon exercise thereof or otherwise any Warrant
Certificate or Warrant after the issuance thereof, such Warrant Certificate or
Warrant shall thereupon be delivered to the Warrant Agent and be cancelled by it
and retired. The Warrant Agent also shall cancel any Warrant Certificate
delivered to it for exercise of the Warrants evidenced thereby, in whole or in
part, or delivered to it for transfer, redemption, split-up, combination, or
exchange of such Warrants.
Section 15. Concerning the Warrant Agent. The Company agrees to pay to the
Warrant Agent from time to time, on demand of the Warrant Agent, reasonable
compensation for all services rendered by it hereunder and also its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Warrant Agent for, and to
hold it harmless against, any loss, liability, or expense, arising out of or in
connection with the acceptance and administration of this Agreement, including
the costs and expenses of defending against any claim of liability in connection
with this Agreement, except to the extent such loss liability or expense results
from the gross negligence, willful misconduct or bad faith of the Warrant Agent
as determined by a court of competent jurisdiction.
Section 16. Merger or Consolidation or Change of Name of Warrant Agent.
Any Corporation into which the Warrant Agent or any successor Warrant Agent may
be merged or with which it may be consolidated, or any corporation resulting
from any merger or consolidation to which the Warrant Agent or any successor
Warrant Agent shall be a party, or any corporation succeeding to the corporate
trust business of the Warrant Agent or any successor Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, provided that
such corporation would be eligible for appointment as a successor Warrant Agent
under the provisions of Section 17. In the event at the time such successor
Warrant Agent shall succeed to the agency created by this Agreement any of the
Warrant Certificates shall have been countersigned but not delivered, any such
successor Warrant Agent may adopt the countersignature of the predecessor
Warrant Agent and deliver such Warrant Certificates so countersigned; and in the
event at that time any of the Warrant Certificates shall not have been
10
<PAGE> 14
countersigned, any successor Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Agreement.
In the event at any time the name of the Warrant Agent shall be changed
and at such time any of the Warrant Certificates shall have been countersigned
but not delivered, the Warrant Agent may adopt the countersignature under its
prior name and deliver Warrant Certificates so countersigned; and in the event
at that time any of the Warrant Certificates shall not have been countersigned,
the Warrant Agent may countersign such Warrant Certificates either in its prior
name or in its changed name; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Agreement.
Section 17. Duties of Warrant Agent. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, and the Company and the holders of the Warrants, by their acceptance
thereof, hereby agree to be bound by such terms and conditions:
(a) The Warrant Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection to the Warrant Agent as to
any action taken or omitted by it in good faith in accordance with such
opinion.
(b) Whenever in the performance of its duties under this Agreement,
the Warrant Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or
suffering any action hereunder, such fact or matter (unless other evidence
in respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the
President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Company and
delivered to the Warrant Agent; and such certificate shall be full
authorization to the Warrant Agent for any action taken or suffered in
good faith by it under the provisions of this Agreement in reliance upon
such certificate.
(c) The Warrant Agent shall be liable hereunder only for its own
gross negligence, wilful misconduct or bad faith.
(d) The Warrant Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the
Warrant Certificates (except its countersignature thereof) or be required
to verify the same, but all such statements and recitals are and shall be
deemed to have been made by the Company only.
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<PAGE> 15
(e) The Warrant Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery
hereof (except the due execution hereof by the Warrant Agent) or in
respect of the validity or execution of any Warrant Certificate (except
its countersignature thereof); nor shall it be responsible for any breach
by the Company of any covenant or condition contained in this Agreement or
in any Warrant Certificate; nor shall it be responsible for the adjustment
of the Exercise Price or the making of any change in the number of shares
of Common Stock required under the provisions of Section 8 or responsible
for the manner, method or amount of any such change or the ascertaining of
the existence of facts that would require any such adjustment or change
(except with respect to the exercise of Warrant Certificates after actual
notice of any adjustment of the Exercise Price); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock to be issued
pursuant to this Agreement or any Warrant Certificate or as to whether any
shares of Common Stock will when issued be validly authorized and issued,
fully paid and non-assessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered
all such further and other acts, instruments and assurances as may
reasonably be required by the Warrant Agent for the carrying out or
performing by the Warrant Agent of the provisions of this Agreement.
(g) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from
the President or a Vice President or the Secretary or the Treasurer of the
Company, and to apply to such officers for advice or instructions in
connection with its duties, and they shall not be liable for any action
taken or suffered to be taken by them in good faith in accordance with
instructions of any such officer.
Section 18. Change of Warrant Agent. The Warrant Agent may resign and be
discharged from its duties under this Agreement upon thirty (30) days' notice in
writing mailed to the Company by registered or certified mail, and to the
registered holders of the Warrant Certificates by first class mail. The Company
may remove the Warrant Agent or any successor Warrant Agent upon thirty (30)
days' notice in writing, mailed to the Warrant Agent or successor Warrant Agent,
as the case may be, and to each transfer agent of the Common Stock by registered
or certified mail, and to the registered holders of the Warrant Certificates by
first class mail. If the Warrant Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Warrant Agent. If the Company shall fail to make such appointment within a
period of thirty (30) days after such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Warrant Agent or by the holder of the Warrant Certificate (who shall, with such
notice, submit his Warrant Certificate for inspection by the Company), then the
registered holder of any
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<PAGE> 16
Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new Warrant Agent. Any successor Warrant Agent, whether
appointed by the Company or by such a court, shall be a corporation organized
and doing business under the laws of the United States or of the State of [New
York], in good standing, having its principal office in the City of New York,
State of [New York], which is authorized under such laws to exercise corporate
trust powers and is subject to supervision or examination by Federal or state
authority and which has at the time of its appointment as Warrant Agent a
combined capital and surplus of at least [100,000,000]. After appointment the
successor Warrant Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Warrant Agent without
further act or deed; but the predecessor Warrant Agent shall deliver and
transfer to the successor Warrant Agent any property at the time held by it
hereunder, and execute and deliver any further assurance, conveyance, act or
deed necessary for the purpose. Not later than the effective date of any such
appointment the Company shall file notice thereof in writing with the
predecessor Warrant Agent and each transfer agent of the Common Stock, and mail
a notice thereof in writing to the registered holders of the Warrant
Certificates. Failure to give any notice provided in this Section 18, however,
or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of successor
Warrant Agent, as the case may be.
Section 19. Issuance of New Warrant Certificates. Notwithstanding any of
the provisions of this Agreement or of the several Warrant Certificates to the
contrary, the Company may, at its option, issue new Warrant Certificates in such
form as may be approved by its Board of Directors to reflect any adjustment or
change in the Exercise Price per share and the number of shares of Common Stock
purchasable under the Warrant Certificates made in accordance with the
provisions of this Agreement.
Section 20. Notices. Notice or demand authorized by this Agreement to be
given or made by the Warrant Agent or by the holder of any Warrant Certificate
to or on the Company shall be sufficiently given or made if sent by first class
mail, postage prepaid, addressed (until another address is filed in writing by
the Company with the Warrant Agent) as follows:
Hanover Capital Mortgage Holdings, Inc.
90 West Street, Suite 1508
New York, New York 10006
Subject to the provisions of Section 18, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Warrant
Certificate to or on the Warrant Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing by the Warrant Agent with the Company) as follows:
[To come]
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<PAGE> 17
Section 21. Modification of Agreement. The Warrant Agent may, without the
consent or concurrence of the holders of the Warrants, by supplemental agreement
or otherwise join with the Company in taking any changes or corrections in this
Agreement that they shall have been advised by counsel (who may be counsel for
the Company) (a) are required to cure any ambiguity or to correct any defective
or consistent provision or clerical omission or mistake or manifest error herein
contained, (b) add to the covenants and agreements of the Company in this
Agreement further covenants and agreements thereafter to be observed, or
surrender any right or power reserved to or conferred upon the Company in this
Agreement, or (c) do not adversely affect, alter or change the rights,
privileges or immunities of the holders of the Warrants.
Section 22. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Warrant Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.
Section 23. Governing Law. This Agreement and each Warrant Certificate
issued hereunder shall be governed by, and construed in accordance with, the
laws of the State of New York.
Section 24. Benefits of This Agreement. Nothing in this Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the Company, the Warrant Agent and the holders of the
Warrants any right, remedy or claim under or by reason of this Agreement or of
any covenant, condition, stipulation, promise or agreement hereof; and all
covenants, conditions, stipulations, promises and agreements in this Agreement
contained shall be for the sole and exclusive benefit of the Company and the
Warrant Agent and their respective successors and of the Holders of the
Warrants.
Section 25. Descriptive Headings. The descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
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<PAGE> 18
Section 26. Counterparts. This Agreement may be executed in any number of
counterparts and each such counterpart shall for all purposes be deemed to be an
original, and all such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
HANOVER CAPITAL MORTGAGE
HOLDINGS, INC.
By:______________________________
President
Title:___________________________
[ ______________________________ ]
By:______________________________
Title:___________________________
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<PAGE> 19
EXHIBIT A
(Form of Warrant Certificate)
No. W- Number of Warrants
One Warrant is required to purchase one share of Common Stock
[VOID AFTER _____________]
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
WARRANT TO PURCHASE COMMON STOCK
THIS CERTIFIES THAT for value received or registered assigns is entitled,
subject to the terms and conditions hereinafter set forth, to purchase from
Hanover Capital Mortgage Holdings, Inc., a corporation incorporated under the
laws of the State of Maryland (hereinafter called the "Company"),
shares of fully paid and non-assessable Common Stock, $.01 par
value, of the Company (hereinafter called the "Common Stock"), upon presentation
and surrender of this Warrant Certificate with the Form of Election to Purchase
duly executed, at any time after the opening of business on the Detachment Date
(as defined below) and on or prior to the close of business on [Insert date
three years after the date of the Prospectus] at the principal office of
_________________________________, Warrant Agent of the Company (hereinafter
called the "Warrant Agent"), or its successor as Warrant Agent, in the City of
New York and upon payment therefor of the exercise price of $[Insert initial
public offering price] per whole share (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 per share of such
Common Stock for such purpose being equal to current market price per share of
Common Stock determined in accordance with Section 8(e) of the Warrant Agreement
and the value of a Warrant being equal to the difference between such current
market price per share of Common Stock and the Exercise Price.
This Warrant Certificate is subject to all of the terms, provisions and
conditions of a Warrant Agreement, dated as of ________________, 1997, between
the Company and the Warrant Agent, which Warrant Agreement is hereby
incorporated herein by reference and made a part hereof and to which Warrant
Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Warrant Agent, the Company and the holders of the Warrant Certificates.
Capitalized terms used herein without definitions shall have the meanings given
such terms in the Warrant Agreement. Copies of the Warrant Agreement are on file
at the above-mentioned office of the Warrant Agent. Certain terms of the Warrant
Agreement are summarized on the reverse side hereof.
As provided in the Warrant Agreement, the Exercise Price and the number of
shares of Common Stock purchasable upon the exercise of this Warrant Certificate
are, upon the happening of certain events, subject to modification and
adjustment.
The Warrants shall be detachable from the share of Common Stock to which
they were attached and may be transferred separately six months after the date
of issuance (the "Detachment Date").
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<PAGE> 20
This Warrant Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Warrant Agent.
Witness the facsimile signatures of the proper officers of the Company and
its corporate seal. Dated as of , .
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By..................................
President
and
By..................................
Secretary
Countersigned:
- ---------------------------------,
Warrant Agent
By ....................................
AUTHORIZED SIGNATURE
A-2
<PAGE> 21
(FORM OF REVERSE SIDE OF WARRANT CERTIFICATE)
The Warrant Agreement provides for adjustments to the Exercise Price set
forth on the facing side of this Warrant Certificate as follows: (a) In the
event the Company after the date hereof shall (i) pay a dividend, or make a
distribution, in shares of capital stock of the Company, or (ii) subdivide its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
Common Stock into a smaller number of shares, or (iv) issue by reclassification
of its shares of Common Stock any shares of capital stock of the Company, the
exercise right and the Exercise Price in effect immediately prior to such action
shall be adjusted so that the holder of any Warrant thereafter surrendering such
Warrant for exercise shall be entitled to receive the number of shares of
capital stock of the Company which he would have owned immediately following
such action had such Warrant been exercised immediately prior to the record date
for such action or to such action, as appropriate. An adjustment made pursuant
to this paragraph (a) shall, in the case of a subdivision, combination or
reclassification become effective retroactively immediately after the effective
date thereof and shall, in case of a dividend or distribution, become effective
retroactively immediately after the record date thereof. If, as a result of an
adjustment made pursuant to this paragraph (a), the holder of any Warrant
thereafter surrendered for exercise shall become entitled to receive shares of
two or more classes of capital stock of the Company, the Board of Directors of
the Company (whose determination shall be described in a certificate filed with
the Warrant Agent) shall in good faith determine the allocation of the adjusted
Exercise Price between or among shares of such classes of capital stock.
(b) In the event the Company after the date hereof shall distribute to all
the holders of Common Stock any dividend or other distribution (other than a
cash distribution made as a dividend payable out of earnings or out of any
earned surplus legally available for dividends under the laws of the
jurisdiction of incorporation of the Company) or any evidence of indebtedness or
any assets with respect to the Common Stock, or rights to subscribe or purchase
shares of Common Stock at a price per share less then the current market price
per share of Common Stock (as defined in paragraph (e) below) at the record date
referenced below, then, and thereafter successively upon each such distribution,
the Exercise Price in effect immediately prior to such distribution shall
forthwith be reduced to a price determined by multiplying the Exercise Price in
effect immediately prior to such distribution by a fraction the numerator of
which shall be the current market price per share of Common Stock (as defined in
paragraph (e) below) at the record date referenced below, less the then fair
market value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a certificate filed with the
Warrant Agent) of the portion of such evidences of indebtedness or such assets
so distributed, or of such subscription or purchase rights, applicable to one
share of Common Stock and the denominator of which shall be such current market
price per share of Common Stock. An adjustment made pursuant to this paragraph
(b) shall become effective retroactively immediately after the record date for
the determination of stockholders entitled to receive such distribution.
(c) After each adjustment of the Exercise Price pursuant to paragraphs (a)
and (b) above, the total number of shares of Common Stock or fractional part
thereof purchasable upon the exercise of each Warrant shall be proportionately
adjusted to such number of shares or fractional part thereof as the total
Exercise Price of the number of shares or fractional part thereof purchasable
immediately prior to such adjustment will buy at the adjusted Exercise Price.
(d) The certificate of any independent firm of public accountants of
recognized standing selected by the Board of Directors of the Company shall be
conclusive evidence of the correctness of any computation made under paragraphs
(a) and (b) above.
(e) For the purposes of any computation under paragraphs (a) and (b)
above, the current market price per share of Common Stock as of any date of
determination shall be deemed to be the average of the daily closing prices for
the 20 consecutive trading days preceding the date of determination. The closing
price for each day shall be the last reported sale price regular way or, in case
no such reported sale takes place on such day, the average of the reported
closing bid and asked prices regular way, in either case as officially reported
A-3
<PAGE> 22
by the principal stock exchange on which the Common Stock is listed or admitted
to trading, or, the Common Stock is not listed or admitted to trading on any
national securities exchange, the average of the closing bid and asked prices as
furnished by the National Association of Securities Dealers, Inc. through NASDAQ
or similar organization if NASDAQ is no longer reporting such information.
(f) No adjustment of the Exercise Price shall be required under paragraphs
(a) and (b) above if the amount of such adjustment is less than 1%; provided,
however, that any adjustments which by reason of the foregoing are not required
at the time to be made shall be carried forward and taken into account and
included in determining the amount of any subsequent adjustment. If the Company
shall take a record of the holders of Common Stock for the purpose of entitling
them to receive any dividend or distribution and shall, thereafter and before
the distribution to stockholders of any such dividend or distribution, legally
abandon its plan to pay or deliver such dividend or distribution, then no
adjustment of the Exercise Price shall be required by reason of the taking of
such record. All calculations under these provisions shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to these provisions,
the Company shall promptly file with the Warrant Agent and with each transfer
agent for the Common Stock a certificate signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Company setting forth in reasonable detail the events
requiring the adjustment and the method by which such adjustment was calculated,
and specifying the Exercise Price and the number or kind or class of shares or
other securities or property purchasable upon exercise of the several Warrants
after giving effect to such adjustment, and will cause to be mailed, first
class, postage prepaid, a brief summary thereof to the registered holders of the
Warrant Certificates at their last addresses as they appear on the registry
books of the Warrant Agent.
(h) For the purposes of these provisions, the term "Common Stock" shall
mean (i) the class of stock designated as the common stock, par value $.01 per
share, of the Company, at the date of the Warrant Agreement or (ii) any other
class of stock resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to paragraph (a), shares of capital
stock of the Company other than shares of Common Stock are issuable upon
exercise of the Warrants, thereafter the number of such other shares so issuable
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the Common
Stock contained in these provisions, and all other provisions of the Warrant
Agreement with respect to Common Stock shall apply on like terms to any such
other shares. Subject to the foregoing, and unless the context requires
otherwise, all references to Common Stock in the Warrant Agreement and in the
Warrant Certificates shall, in the event of an adjustment pursuant to these
provisions, be deemed to refer also to any other securities or property then
issuable upon exercise of the Warrants as a result of such adjustments.
Unless and to the extent that the Company shall exercise the option to
issue new Warrant Certificates as provided in the Warrant Agreement,
irrespective of the fact that the Warrant Certificates theretofore and
thereafter issued shall continue to express the Exercise Price per share and the
number of shares purchasable thereunder as the Exercise Price per share and the
number of shares purchasable were expressed in the Warrant Certificates when
initially issued, such Warrant Certificates shall be deemed to refer to the
Exercise Price and the number of shares purchasable as adjusted or changed
pursuant to these provisions.
This Warrant Certificate, with our without other Warrant Certificates,
upon surrender at the principal office of the Warrant Agent may be exchanged for
another Warrant Certificate or Warrant Certificates entitling the holder to
purchase a like aggregate number of shares of Common Stock as the Warrant
Certificate or Warrant Certificates surrendered entitled him to purchase. If
this Warrant Certificate shall be exercised in part, the holder hereof shall be
entitled to receive upon surrender hereof, another Warrant Certificate or
Warrant Certificates for the number of shares not purchased upon such exercise.
A-4
<PAGE> 23
No fractional shares will be issued upon the exercise of rights to
purchase hereunder. As to any final fraction of a share which the same holder of
one or more Warrant Certificates, the rights to purchase under which are
exercised in the same transaction, would otherwise be entitled to purchase on
such exercise, the Company shall pay the cash value thereof determined as
provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained in the Warrant Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise, until the Warrants evidenced by this Warrant Certificate shall have
been exercised and the Common Stock purchasable upon the exercise hereof shall
have become deliverable as provided in the Warrant Agreement.
Every holder of this Warrant Certificate by accepting the same consents
and agrees with the Company, the Warrant Agent, and with every other holder of a
Warrant Certificate that:
(a) this Warrant Certificate is transferable only by the registered
holder hereof in person or by his attorney duly authorized in writing, and
only at the principal office of the Warrant Agent duly endorsed, or
accompanied by a proper instrument of transfer satisfactory to the Warrant
Agent and the Company in their sole discretion; and
(b) the Company and the Warrant Agent may deem and treat the person
in whose name this Warrant Certificate is registered as the absolute owner
for all purposes whatsoever, and neither the Company nor the Warrant Agent
shall be affected by any notice to the contrary.
A-5
<PAGE> 24
[FORM OF]
ELECTION TO PURCHASE
- ----------------------------------
The Warrant Agent
Attention: ______________________
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant(s) for, and to purchase thereunder,
............... shares of the stock provided for therein, and requests that
certificates for such shares and a certified check in payment of any fractional
share interest be issued in the name of and sent to:
................................................................................
(Please Print Name and Address)
................................................................................
................................................................................
and, if said number of shares shall not be all the shares purchasable
thereunder, that a new Warrant Certificate for the balance remaining of the
shares purchasable under the within Warrant Certificate be registered in the
name of the undersigned warrantholder or his assignee as below indicated and
delivered to the address stated below.
In payment of the Exercise Price, the undersigned hereby and together
herewith tenders payment in accordance with Section 7 of the Warrant Agreement.
Dates: _________________, 199___
Name of Warrantholder or Assignee: .............................................
(Please Print)
Address: ....................................................................
....................................................................
Signature: ....................................................................
(Note: The above signature must correspond with the name as written
upon the face of this Warrant Certificate in every particular,
without alteration or enlargement or any change whatever unless
this Warrant Certificate has been assigned.)
Signature
Guaranteed: ........................
A-6
<PAGE> 25
[FORM OF]
ASSIGNMENT
For value received .......................................................
hereby sell, assign, and transfer unto .........................................
(Please Print Name and Address)
................................................................................
................................................................................
....................................... of the Warrants represented by the
within Certificate, together with all right, title and interest therein, and do
hereby irrevocably constitute and appoint
................................................................................
................................................................................
attorney, to transfer said Warrant(s) on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated: ______________, 199_
Signature
................................................................................
(Note: The above signature must correspond
with the name as written upon the face
of this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever
unless this Warrant Certificate has
been assigned.)
Signature
Guaranteed: ..............................
A-7
<PAGE> 1
EXHIBIT 4.3
REPRESENTATIVES WARRANT AGREEMENT
DATED AS OF ________, 1997
BETWEEN
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
AND
[--------------------------]
AS
WARRANT AGENT
<PAGE> 2
TABLE OF CONTENTS
PAGE
----
Section 1. Appointment of Warrant Agent............................. 1
Section 2. Limitation on Issue...................................... 1
Section 3. Date, Denomination and Execution of Warrant Certificates. 2
Section 4. Issue of Warrant Certificate............................. 2
Section 5. Split-up, Combination and Exchange of Warrant Certificates. 3
Section 6. Mutilated, Destroyed, Lost or Stolen Warrant Certificates. 3
Section 7. Exercise of Warrant Certificates and Exercise Price...... 3
Section 8. Adjustments of Exercise Price............................ 6
Section 9. Reorganization, Consolidation, Merger, Sale of Assets. .. 8
Section 10. Fractional Interests..................................... 9
Section 11. Warrant Certificate Holder Not Deemed a Stockholder...... 9
Section 12. Rights of Action......................................... 9
Section 13. Agreement of Warrant Certificate Holders................. 9
Section 14. Cancellation of Warrant Certificates..................... 10
Section 15. Concerning the Warrant Agent............................. 10
Section 16. Merger or Consolidation or Change of Name of Warrant Agent 10
Section 17. Duties of Warrant Agent.................................. 11
Section 18. Change of Warrant Agent.................................. 12
Section 19. Issuance of New Warrant Certificates..................... 13
Section 20. Notices.................................................. 13
Section 21. Modification of Agreement................................ 14
<PAGE> 3
Section 22. Successors............................................... 14
Section 23. Governing Law............................................ 14
Section 24. Benefits of This Agreement............................... 14
Section 25. Descriptive Headings..................................... 14
Section 26. Counterparts............................................. 15
EXHIBIT A............................................................ A-1
<PAGE> 4
REPRESENTATIVES WARRANT AGREEMENT
THIS WARRANT AGREEMENT (this "AGREEMENT"), dated as of ______, 1997, is
made and entered into by and between HANOVER CAPITAL MORTGAGE HOLDINGS, INC., a
Maryland corporation (hereinafter called the "COMPANY"), and
[__________________], as warrant agent (hereinafter called the "WARRANT AGENT").
WITNESSETH THAT:
WHEREAS this Agreement is made with reference to the following facts:
A. The Company has entered into an Underwriting Agreement, dated as of
August __, 1997 (the "UNDERWRITING AGREEMENT"), with Stifel, Nicolaus & Company,
Incorporated ("STIFEL") and Montgomery Securities ("MONTGOMERY"; Stifel and
Montgomery, collectively, referred to as the "REPRESENTATIVES"), as
representatives of the several underwriters;
B. The Company has agreed to issue Common Stock Purchase Warrants
(hereinafter called the "WARRANTS") to the Representatives, initially entitling
the Representatives to purchase either (a) 138,000 shares of its Common Stock,
par value $.01 per share (hereinafter called the "COMMON STOCK") if the Optional
Units (as defined in the Underwriting Agreement) are not purchased or (b)
158,700 shares of its Common Stock if the Optional Units (as defined in the
Underwriting Agreement) are purchased;
C. In accordance with the provisions of Section 7 hereof, the Warrants
will not be exerciseable until six months after issuance; and
D. The Company desires the Warrant Agent to act on behalf of the Company,
and the Warrant Agent is willing so to act, in connection with the issuance,
transfer, exchange, replacement and exercise of the Warrants;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent for the Company in accordance with the terms and
conditions hereinafter set forth in this Agreement, and the Warrant Agent hereby
accepts such appointment.
Section 2. Limitation on Issue. Subject to Sections 4, 6 and 8 hereof, the
Company may execute and deliver to the Warrant Agent for countersignature, and
the Warrant Agent shall, upon written order of the Company signed by its
President or a Vice President, thereupon countersign and deliver certificates
evidencing the Warrants (the "WARRANT CERTIFICATES") to the Company. Such
Warrant Certificates initially shall evidence 138,000 (or 158,700 if the
Optional Units under the Underwriting Agreement
1
<PAGE> 5
are purchased) Warrants entitling the Representatives to purchase, subject to
the provisions of Section 8 hereof, 138,000 (or 158,700 if the Optional Units
under the Underwriting Agreement are purchased) shares of Common Stock.
Section 3. Date, Denomination and Execution of Warrant Certificates. The
Warrant Certificates (and the forms of election to purchase shares and of
assignment to be printed on the reverse thereof) shall be substantially in the
form of Exhibit A hereto and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The Warrant Certificates (a)
upon initial issuance, shall be dated by the Warrant Agent as of the issue date
of the Warrants, and (b) upon transfer, exchange or an issuance of Warrants
other than the initial issuance of the Warrants, the Warrants shall be dated as
of the date of issuance thereof. The Warrants shall entitle the holders thereof
to purchase only whole shares of Common Stock at the price per share set forth
therein, subject to adjustments as provided herein, and to be paid the value of
any fractional shares as provided in Section 10 hereof.
The Warrant Certificates shall be executed on behalf of the Company by its
President or a Vice President, by the Secretary or an Assistant Secretary, by
manual or facsimile signature, and shall have affixed thereto a facsimile of the
Company's seal. The Warrant Certificates shall be mutually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned. In
the event any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer of the Company, whether before or
after countersignature by the Warrant Agent and issue and delivery thereof by
the Company, such Warrant Certificates, nevertheless, may be countersigned by
the Warrant Agent, issued and delivered with the same force and effect as though
the person who signed such Warrant Certificate had not ceased to be such officer
of the Company.
Section 4. Issue of Warrant Certificate. Subsequent to their original
issuance, no Warrant Certificates shall be issued except (a) Warrant
Certificates based upon transfers thereof in accordance with Section 13 hereof,
(b) Warrant Certificates issued upon the partial exercise of any Warrant to
evidence the unsubscribed portion of such Warrant, (c) Warrant Certificates
issued upon any combination, split-up or exchange of Warrant Certificates
pursuant to Section 5 hereof, (d) Warrant Certificates issued in replacement of
mutilated, destroyed, lost or stolen Warrant Certificates pursuant to Section 6
hereof, and (e) Warrant Certificates to reflect any change in the Exercise Price
(as hereinafter defined) and the number of shares of Common Stock purchasable
thereunder and issued pursuant to Section 19 hereof.
2
<PAGE> 6
The Warrant Agent will keep or cause to be kept, at its principal office,
books for registration and transfer of the Warrants issued hereunder. Such
registers shall show the names and addresses of the respective holders of the
Warrant Certificates and the numbers of shares of Common Stock which may be
purchased by each issued Warrant.
Section 5. Split-up, Combination and Exchange of Warrant Certificates. A
Warrant Certificate or Warrant Certificates, may be split-up, combined or
exchanged for another Warrant Certificate or Warrant Certificates entitling the
registered holder thereof to purchase a like aggregate number of shares of
Common Stock as the Warrant Certificate or Warrant Certificates surrendered then
entitled him to purchase. Any registered holder of a Warrant Certificate
desiring to split-up, combine or exchange Warrant Certificates shall make such
request in writing delivered to the Warrant Agent, and shall surrender the
Warrant Certificate or Warrant Certificates to be so split-up, combined or
exchanged. Thereupon the Warrant Agent shall countersign and deliver to the
person entitled thereto a Warrant Certificate or Warrant Certificates, as the
case may be, as so requested. The Company may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any such split-up, combination or exchange of Warrant
Certificates.
Section 6. Mutilated, Destroyed, Lost or Stolen Warrant Certificates. Upon
receipt by the Company and the Warrant Agent of evidence reasonably satisfactory
to them of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in the event of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and reimbursement to them of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrant Certificate, if mutilated, the Company will issue and the Warrant
Agent shall countersign and deliver a new Warrant Certificate of like tenor for
the same number of shares of Common Stock. Applicants for such substitute
Warrant Certificates shall comply with such other reasonable regulations and pay
such other reasonable charges as the Company or the Warrant Agent may prescribe.
Any such new Warrant Certificate shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen, destroyed
or mutilated Warrant Certificate shall be at any time enforceable by anyone.
Section 7. Exercise of Warrant Certificates and Exercise Price. Each
Warrant Certificate shall, when countersigned by the Warrant Agent, entitle the
holder thereof, subject to the provisions of this Agreement, to purchase from
the Company the number of whole shares of Common Stock stated therein, as such
shares are constituted on the date of its exercise. The registered holder of any
Warrant Certificate may exercise the Warrants in whole at any time, or in part
from time to time (but not as to fractional shares of Common Stock), upon (a)
surrender of said Warrant Certificate, with the form of election to purchase on
the reverse side thereof duly executed, to the Warrant Agent at the principal
office of the Warrant Agent in the City of [New York], State of [New York], only
after the opening of business on [Insert date which is six months after the
initial closing of the offering] and on or prior to the close of business on
[Insert date which is three years after the date of the Prospectus], at which
time the Warrants shall
3
<PAGE> 7
be and become wholly void and of no value and all rights of the registered
holders thereunder and under this Agreement shall cease, and (b) payment of the
Exercise Price for each share of Common Stock as to which the Warrants are
exercised. No adjustment shall be made for any cash dividends on any shares of
Common Stock issuable on exercise of Warrants.
A Warrant initially shall evidence the right to purchase one share of
Common Stock subject to adjustment as provided in Section 8 hereof. The Exercise
Price for each whole share of Common Stock purchasable pursuant to the exercise
of the Warrants shall be [insert initial public offering price of the Units] per
whole share in lawful money of the United States of America, subject to
adjustment as provided in Section 8 hereof. Except as the context otherwise
requires, the term "Exercise Price" as used in this Agreement shall mean the
Exercise Price for each whole share of Common Stock purchasable upon exercise of
the Warrants in effect as of any date and shall reflect all adjustments made in
accordance with the provisions of Section 8 through and at such date. Each
Exercise Price shall continue in effect until further adjusted pursuant to the
provisions of said Section 8.
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 (ii) by
surrendering additional Warrants or shares of Common Stock for cancellation to
the extent the Company may lawfully accept shares of Common Stock in the
Company, with the value per share of such Common Stock for such purpose being
equal to the current market price per share of Common Stock determined in
accordance with Section 8(e) hereof as on the business day next preceding the
date the Warrant Certificates are surrendered for exercise and the value of a
Warrant being equal to the difference between such current market price per
share of Common Stock and the Exercise Price.
Upon receipt of a Warrant Certificate, with the form of election to
purchase duly executed, accompanied by payment of the Exercise Price for the
shares to be purchased and an amount equal to any applicable transfer tax, the
Warrant Agent shall thereupon promptly (i) requisition from any transfer agent
of the Common Stock of the Company, certificates for the number of whole shares
of Common Stock to be purchased, and (ii) promptly after receipt of such
certificates cause the same to be delivered to or upon the order of the
registered holder of such Warrant Certificate, registered in such name or names
as may be properly designated by such holder.
If a Certificate is exercised with respect to less than all of the shares
of Common Stock that may be subscribed for by the Warrants evidenced thereby, a
new Warrant Certificate for the unexercised Warrants shall be issued by the
Warrant Agent to the registered holder of such Warrant Certificate or to his
duly authorized assigns.
The Company covenants and agrees that it will cause to be reserved, out of
its authorized and unissued shares of Common Stock, a number of shares of Common
Stock that will be sufficient to permit the exercise in full of all outstanding
Warrants. As a
4
<PAGE> 8
condition precedent to the taking of any action which would result in the
Exercise Price for each share of Common Stock issuable upon the exercise of
Warrants being less than the par value per share of Common Stock, the Company
will take such corporate action as may, in the opinion of its counsel, be
necessary in order that the Company may comply with all of its obligations under
this Agreement with respect to the exercise of the Warrants.
The Company covenants and agrees that all the shares of Common Stock
delivered upon exercise of the Warrants shall, at the time of delivery of the
certificates for such shares (subject to payment of the Exercise Price), be
validly authorized and issued and fully paid and non-assessable shares. The
Company further covenants and agrees that it will pay when due and payable any
and all federal and state taxes and charges which may be payable in respect of
the issue or delivery of the Warrants or any shares of Common Stock upon the
exercise of the Warrants. The Company shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the transfer or
delivery of the Warrants or the issuance or delivery of certificates for Common
Stock in a name other than that of the registered holder of the Warrant
Certificate surrendered for exercise of the Warrants evidenced thereby or to
issue or deliver any certificate for shares of Common Stock upon the exercise of
any Warrant until any such tax shall have been paid (all such tax being payable
by the holder of such Warrant Certificate at the time of surrender) or until it
has been established to the Company's satisfaction that no such tax is due.
The Company has filed a Registration Statement (File No. 333-29261) with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "SECURITIES ACT") registering the sale of the Warrants and the
Common Stock issuable upon exercise of the Warrants. The Company covenants and
agrees that it will take all action which may be necessary to keep effective the
registration under the Securities Act of the shares of Common Stock issuable
upon exercise of the Warrants and that it will use its best efforts to qualify
such Common Stock for sale under the securities laws of such of the States of
the United States as may be necessary to permit the free exercise of the
Warrants in all of the States of the United States in which the Common Stock is
qualified, and to maintain such qualifications during the entire period in which
the Warrants are exercisable; provided, however, that the Company shall not be
required in connection with any such qualification to file a general consent to
service of process or qualify to do business as a foreign corporation of any
jurisdiction where it is not now so subject or qualified.
The Company covenants and agrees that it will take all action which may be
necessary to cause the shares of Common Stock issuable upon exercise of the
Warrants to be duly listed on the securities exchange in which the other shares
of Common Stock of the Company are listed at the dates of exercise of the
Warrants.
Each person in whose name any certificate for shares of Common Stock is
issued upon the exercise of the Warrants shall for all purposes be deemed to
have become the
5
<PAGE> 9
holder of record of the Common Stock represented thereby on, and such
certificate shall be dated, the date upon which the Warrant Certificate was duly
surrendered and payment of the Exercise Price (and any applicable transfer
taxes) was made, provided, however, that if the date of such surrender and
payment is a date upon which the Common Stock transfer books of the Company are
closed, such person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding business day
on which the Common Stock transfer books of the Company are open.
Section 8. Adjustments of Exercise Price. (a) In the event the Company
after the date hereof shall (i) pay a dividend or make a distribution in shares
of capital stock of the Company, or (ii) subdivide its outstanding shares of
Common Stock, or (iii) combine its outstanding shares of Common Stock into a
smaller number of shares, or (iv) issue by reclassification of its shares of
Common Stock any shares of capital stock of the Company, the exercise right and
the Exercise Price in effect immediately prior to such action shall be adjusted
so that the holder of any Warrant thereafter surrendering such Warrant for
exercise shall be entitled to receive the number of shares of capital stock of
the Company which he would have owned immediately following such action had such
Warrant been exercised immediately prior to the record date for such action or
to such action, as appropriate. An adjustment made pursuant to this Section 8(a)
shall, in the case of a subdivision, combination or reclassification become
effective retroactively immediately after the record date thereof. If, as a
result of an adjustment made pursuant to this Section 8(a), the holder of any
Warrant thereafter surrendered for exercise shall become entitled to receive
shares of two or more classes of capital stock of the Company, the Board of
Directors of the Company (whose determination shall be described in a
certificate filed with the Warrant Agent) shall in good faith determine the
allocation of the adjusted Exercise Price between or among shares of such
classes of capital stock.
(b) In the event the Company after the date hereof shall distribute to all
the holders of Common Stock any dividend or other distribution (other than a
cash distribution made as a dividend payable out of earnings or out of any
earned surplus legally available for dividends under the laws of the
jurisdiction of incorporation of the Company) or any evidence of indebtedness or
any assets in respect of the Common Stock, or rights to subscribe or purchase
shares of Common Stock at a price per share less than the current market price
per share of Common Stock (as defined in Section 8(e)) at the record date
referenced below, then, and thereafter successively upon each such distribution,
the Exercise Price in effect immediately prior to such distribution shall
forthwith be reduced to a price determined by multiplying the Exercise Price in
effect immediately prior to such distribution by a fraction the numerator of
which shall be the current market price per share of Common Stock (as defined in
Section 8(e)) at the record date referenced below, less then fair market value
(as determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a certificate filed with the Warrant Agent)
of the portion of such evidences of indebtedness or such assets so distributed,
or of such subscription or purchase rights, applicable to one
6
<PAGE> 10
share of Common Stock and the denominator of which shall be such current market
price per share of Common Stock. An adjustment made pursuant to Section 8(b)
shall become effective retroactively immediately after the record date for the
determination of stockholders entitled to receive such distribution.
(c) After each adjustment of the Exercise Price pursuant to Section 8(a)
and 8(b), the total number off shares of Common Stock or fractional part thereof
purchasable upon the exercise of each Warrant shall be proportionately adjusted
to such number of shares or fractional part thereof as the total Exercise Price
of the number of shares or fractional part thereof purchasable immediately prior
to such adjustment will buy at the adjusted Exercise Price.
(d) The certificate of any independent firm of public accountants of
recognized national standing selected by the Board of Directors of the Company
shall be conclusive evidence of the correctness of any computations under
Sections 8(a) and 8(b).
(e) For the purposes of Sections 7, 8(a) and 8(b) hereof, the current
market price per share of Common Stock as of any date of determination shall be
deemed to be the average of the daily closing prices for the consecutive 20
trading days preceding the day of determination. The closing price for the day
shall be the last reported sale price regular way or, in case no such reported
sale takes place on that day, the average of the reported closing bid and asked
pries regular way, in either case as officially reported by the principal stock
exchange on which the Common Stock is listed or admitted to trading, or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange, the average of closing bid and asked prices as furnished by the
National Association of Securities Dealers, Inc. through the national
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or
similar organization if NASDAQ is no longer reporting such information.
(f) No adjustment of the Exercise Price shall be required under Sections
8(a) and 8(b) hereof if the amount of such adjustment is less than 1%; provided,
however, that any adjustments which by reason of the foregoing are not required
at the time to be made shall be carried forward and taken into account and
included in determining the amount of any subsequent adjustment. If the Company
shall take a record of holders of Common Stock for the purpose of entitling them
to receive any dividend or distribution and thereafter and before the
distribution to stockholders of any such dividend or distribution, legally
abandon its plan to pay or deliver such dividend or distribution, then no
adjustment of the Exercise Price shall be required by reason of the taking of
such record. All calculations under this Section 8 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to this Section 8,
the Company shall promptly file with the Warrant Agent and with each transfer
agent for the Common Stock a certificate signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the
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<PAGE> 11
Company setting forth in reasonable detail the events requiring the adjustment,
the method by which such adjustment was calculated, and specifying the Exercise
Price and the number or kind or class of shares or other securities or property
purchasable upon exercise of the Warrants after giving effect to such
adjustment, and will cause to be mailed, first class, postage prepaid a summary
thereof to the registered holders of the Warrant Certificates at their last
addressees as they appear on the registry books of the Warrant Agent.
(h) For the purposes of this Section 8, the term "Common Stock" shall mean
(i) the class of stock designated as the common stock, par value .01 per share,
of the Company, at the date of this Agreement, (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value. In the event that at any time, as a result of an
adjustment made pursuant to Section 8(a), shares of capital stock of the Company
other than shares of Common Stock are issuable upon exercise of the Warrants,
thereafter the number of such other shares so issuable shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in this
Section 8, and all other provisions of this Agreement with respect to Common
Stock shall apply on like terms to any such other shares. Subject to the
foregoing, and unless the context requires otherwise, all references to Common
Stock in this Agreement and in the Warrant Certificates shall, in the event of
an adjustment pursuant to this Section 8, be deemed to refer also to any other
securities or property then issuable upon exercise of the Warrants as a result
of such adjustments.
Unless and to the extent that the Company shall exercise the option to
issue new warrant certificates as provided in Section 19, irrespective of the
fact that the Warrant Certificates theretofore and thereafter issued shall
continue to express the Exercise Price per share and the number of shares
purchasable thereunder as the Exercise Price per share and the number of shares
purchasable were expressed in the Warrant Certificates when initially issued,
such Warrant Certificates shall be deemed to refer to the Exercise Price and the
number of shares purchasable as adjusted or changed pursuant to this Section 8.
Section 9. Reorganization, Consolidation, Merger, Sale of Assets. In the
event, after the date hereof, as a result of the Company effecting a
reorganization or as a result of a merger or consolidation of the Company into
or with another corporation, or the sale or other transfer of the Company's
property, assets and business substantially as an entirety to a successor
corporation, the Common Stock is in effect changed, in whole or in part, into a
different kind or class of stock or other securities or property (including
cash), the Company, or the successor corporation, as the case may be, shall
execute and deliver to the Warrant Agent a supplemental agreement providing that
the holder of each Warrant then outstanding shall have the right thereafter
(until the expiration of the right of exercise of such Warrant) to receive upon
exercise of such Warrant the kind and amount of shares of stock or other
securities or property (including cash) receivable
8
<PAGE> 12
upon such reorganization, merger or consolidation, or upon the dissolution
following such sale or other transfer, by a holder of the number of shares of
Common Stock of the Company issuable upon exercise of which shall be as nearly
equivalent as practicable to the adjustments provided for in this Agreement. The
provisions of this Section 9 shall similarly apply to successive
reorganizations, mergers or consolidations or sales or other transfers.
Section 10. Fractional Interests. The Company shall not be required to
issue fractional shares of Common Stock upon any exercise of Warrants, but in
respect of any final fraction of a share it will make a payment in cash based on
the current market price of the Common Stock as determined by the Warrant Agent
in accordance with Section 8(e) hereof on the business day next preceding the
date the Warrant Certificates are surrendered for exercise.
Section 11. Warrant Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Warrant Certificate or Warrant shall be entitled to vote
or receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable upon the exercise of
such Warrant for any purpose whatever, nor shall anything contained herein or in
any Warrant Certificate be construed to confer upon the holder of any Warrant
Certificate or Warrants, as such, any of the rights of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action (whether upon any recapitalization, issue of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance or otherwise), or to receive notice of
meetings, or to receive dividends or subscription rights, or otherwise, until
such Warrant shall have been exercised in accordance with the provisions hereof
and the receipt of the Exercise Price payable upon such exercise by the Warrant
Agent.
Section 12. Rights of Action. All rights of action in respect to this
Agreement are vested in the respective registered holders of the Warrant
Certificates and any registered holder of any Warrant Certificate, without the
consent of the Warrant Agent or of the holder of any other Warrant Certificate,
may, on his own behalf and for his own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company to enforce, or
otherwise in respect of, his right to exercise his Warrant for the purchase of
shares of Common Stock in the manner provided in the Warrant Certificate and in
this Agreement.
Section 13. Agreement of Warrant Certificate Holders.
Every holder of a Warrant Certificate by accepting the same consents and
agrees with the Company and the Warrant Agent and with every other holder of
Warrant Certificates that:
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<PAGE> 13
(a) the Warrants are transferable only on the registry books of the
Warrant Agent by the registered holder thereof in person or by his
attorney duly authorized in writing, and only if surrendered at the
principal office of the Warrant Agent, duly endorsed, or accompanied by a
proper instrument of transfer satisfactory to the Warrant Agent and the
Company in their sole discretion; and
(b) the Company and the Warrant Agent may deem and treat the person
in whose name the Warrant Certificate is registered as the absolute owner
for all purposes whatever and neither the Company nor the Warrant Agent
shall be affected by any notice to the contrary.
(c) for a period of one year from [insert effective date of the
offering], no holder of a Warrant Certificate or any shares of Common
Stock received upon the exercise of the Warrants shall sell, transfer,
assign, pledge, or hypothecate such Warrant Certificate, or such shares of
Common Stock, except (i) transfers to officers of such holder, (ii) if
such holder is a partnership transfers to partners thereof, or (iii)
transfers by operation of law; provided the transferees in each case shall
be subject to the transfer restrictions set forth in this Section 13(iii).
Section 14. Cancellation of Warrant Certificates. In the event the Company
shall purchase or acquire upon exercise thereof or otherwise any Warrant
Certificate or Warrant after the issuance thereof, such Warrant Certificate or
Warrant shall thereupon be delivered to the Warrant Agent and be cancelled by it
and retired. The Warrant Agent also shall cancel any Warrant Certificate
delivered to it for exercise of the Warrants evidenced thereby, in whole or in
part, or delivered to it for transfer, redemption, split-up, combination, or
exchange of such Warrants.
Section 15. Concerning the Warrant Agent. The Company agrees to pay to the
Warrant Agent from time to time, on demand of the Warrant Agent, reasonable
compensation for all services rendered by it hereunder and also its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Warrant Agent for, and to
hold it harmless against, any loss, liability, or expense, arising out of or in
connection with the acceptance and administration of this Agreement, including
the costs and expenses of defending against any claim of liability in connection
with this Agreement, except to the extent such loss liability or expense results
from the gross negligence, willful misconduct or bad faith of the Warrant Agent
as determined by a court of competent jurisdiction.
Section 16. Merger or Consolidation or Change of Name of Warrant Agent.
Any Corporation into which the Warrant Agent or any successor Warrant Agent may
be merged or with which it may be consolidated, or any corporation resulting
from any merger or consolidation to which the Warrant Agent or any successor
Warrant Agent shall be a party, or any corporation succeeding to the corporate
trust business of the Warrant Agent or any successor Warrant Agent, shall be the
successor to the Warrant
10
<PAGE> 14
Agent hereunder without the execution or filing of any paper or any further act
on the part of any of the parties hereto, provided that such corporation would
be eligible for appointment as a successor Warrant Agent under the provisions of
Section 17. In the event at the time such successor Warrant Agent shall succeed
to the agency created by this Agreement any of the Warrant Certificates shall
have been countersigned but not delivered, any such successor Warrant Agent may
adopt the countersignature of the predecessor Warrant Agent and deliver such
Warrant Certificates so countersigned; and in the event at that time any of the
Warrant Certificates shall not have been countersigned, any successor Warrant
Agent may countersign such Warrant Certificates either in the name of the
predecessor Warrant Agent or in the name of the successor Warrant Agent; and in
all such cases such Warrant Certificates shall have the full force provided in
the Warrant Certificates and in this Agreement.
In the event at any time the name of the Warrant Agent shall be changed
and at such time any of the Warrant Certificates shall have been countersigned
but not delivered, the Warrant Agent may adopt the countersignature under its
prior name and deliver Warrant Certificates so countersigned; and in the event
at that time any of the Warrant Certificates shall not have been countersigned,
the Warrant Agent may countersign such Warrant Certificates either in its prior
name or in its changed name; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Agreement.
Section 17. Duties of Warrant Agent. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, and the Company and the holders of the Warrants, by their acceptance
thereof, hereby agree to be bound by such terms and conditions:
(a) The Warrant Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection to the Warrant Agent as to
any action taken or omitted by it in good faith in accordance with such
opinion.
(b) Whenever in the performance of its duties under this Agreement,
the Warrant Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or
suffering any action hereunder, such fact or matter (unless other evidence
in respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the
President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Company and
delivered to the Warrant Agent; and such certificate shall be full
authorization to the Warrant Agent for any action taken or suffered in
good faith by it under the provisions of this Agreement in reliance upon
such certificate.
(c) The Warrant Agent shall be liable hereunder only for its own
gross negligence, wilful misconduct or bad faith.
11
<PAGE> 15
(d) The Warrant Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the
Warrant Certificates (except its countersignature thereof) or be required
to verify the same, but all such statements and recitals are and shall be
deemed to have been made by the Company only.
(e) The Warrant Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery
hereof (except the due execution hereof by the Warrant Agent) or in
respect of the validity or execution of any Warrant Certificate (except
its countersignature thereof); nor shall it be responsible for any breach
by the Company of any covenant or condition contained in this Agreement or
in any Warrant Certificate; nor shall it be responsible for the adjustment
of the Exercise Price or the making of any change in the number of shares
of Common Stock required under the provisions of Section 8 or responsible
for the manner, method or amount of any such change or the ascertaining of
the existence of facts that would require any such adjustment or change
(except with respect to the exercise of Warrant Certificates after actual
notice of any adjustment of the Exercise Price); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock to be issued
pursuant to this Agreement or any Warrant Certificate or as to whether any
shares of Common Stock will when issued be validly authorized and issued,
fully paid and non-assessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered
all such further and other acts, instruments and assurances as may
reasonably be required by the Warrant Agent for the carrying out or
performing by the Warrant Agent of the provisions of this Agreement.
(g) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from
the President or a Vice President or the Secretary or the Treasurer of the
Company, and to apply to such officers for advice or instructions in
connection with its duties, and they shall not be liable for any action
taken or suffered to be taken by them in good faith in accordance with
instructions of any such officer.
Section 18. Change of Warrant Agent. The Warrant Agent may resign and be
discharged from its duties under this Agreement upon thirty (30) days' notice in
writing mailed to the Company by registered or certified mail, and to the
registered holders of the Warrant Certificates by first class mail. The Company
may remove the Warrant Agent or any successor Warrant Agent upon thirty (30)
days' notice in writing, mailed to the Warrant Agent or successor Warrant Agent,
as the case may be, and to each transfer agent of the Common Stock by registered
or certified mail, and to the registered holders of the Warrant Certificates by
first class mail. If the Warrant Agent shall resign or be
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<PAGE> 16
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Warrant Agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after such removal or after it
has been notified in writing of such resignation or incapacity by the resigning
or incapacitated Warrant Agent or by the holder of the Warrant Certificate (who
shall, with such notice, submit his Warrant Certificate for inspection by the
Company), then the registered holder of any Warrant Certificate may apply to any
court of competent jurisdiction for the appointment of a new Warrant Agent. Any
successor Warrant Agent, whether appointed by the Company or by such a court,
shall be a corporation organized and doing business under the laws of the United
States or of the State of [New York], in good standing, having its principal
office in the City of New York, State of [New York], which is authorized under
such laws to exercise corporate trust powers and is subject to supervision or
examination by Federal or state authority and which has at the time of its
appointment as Warrant Agent a combined capital and surplus of at least
[100,000,000]. After appointment the successor Warrant Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Warrant Agent without further act or deed; but the
predecessor Warrant Agent shall deliver and transfer to the successor Warrant
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment the Company shall file notice
thereof in writing with the predecessor Warrant Agent and each transfer agent of
the Common Stock, and mail a notice thereof in writing to the registered holders
of the Warrant Certificates. Failure to give any notice provided in this Section
18, however, or any defect therein, shall not affect the legality or validity of
the resignation or removal of the Warrant Agent or the appointment of successor
Warrant Agent, as the case may be.
Section 19. Issuance of New Warrant Certificates. Notwithstanding any of
the provisions of this Agreement or of the several Warrant Certificates to the
contrary, the Company may, at its option, issue new Warrant Certificates in such
form as may be approved by its Board of Directors to reflect any adjustment or
change in the Exercise Price per share and the number of shares of Common Stock
purchasable under the Warrant Certificates made in accordance with the
provisions of this Agreement.
Section 20. Notices. Notice or demand authorized by this Agreement to be
given or made by the Warrant Agent or by the holder of any Warrant Certificate
to or on the Company shall be sufficiently given or made if sent by first class
mail, postage prepaid, addressed (until another address is filed in writing by
the Company with the Warrant Agent) as follows:
Hanover Capital Mortgage Holdings, Inc.
90 West Street, Suite 1508
New York, New York 10006
Subject to the provisions of Section 18, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Warrant
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<PAGE> 17
Certificate to or on the Warrant Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing by the Warrant Agent with the Company) as follows:
[To come]
Section 21. Modification of Agreement. The Warrant Agent may, without the
consent or concurrence of the holders of the Warrants, by supplemental agreement
or otherwise join with the Company in taking any changes or corrections in this
Agreement that they shall have been advised by counsel (who may be counsel for
the Company) (a) are required to cure any ambiguity or to correct any defective
or consistent provision or clerical omission or mistake or manifest error herein
contained, (b) add to the covenants and agreements of the Company in this
Agreement further covenants and agreements thereafter to be observed, or
surrender any right or power reserved to or conferred upon the Company in this
Agreement, or (c) do not adversely affect, alter or change the rights,
privileges or immunities of the holders of the Warrants.
Section 22. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Warrant Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.
Section 23. Governing Law. This Agreement and each Warrant Certificate
issued hereunder shall be governed by, and construed in accordance with, the
laws of the State of New York.
Section 24. Benefits of This Agreement. Nothing in this Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the Company, the Warrant Agent and the holders of the
Warrants any right, remedy or claim under or by reason of this Agreement or of
any covenant, condition, stipulation, promise or agreement hereof; and all
covenants, conditions, stipulations, promises and agreements in this Agreement
contained shall be for the sole and exclusive benefit of the Company and the
Warrant Agent and their respective successors and of the Holders of the
Warrants.
Section 25. Descriptive Headings. The descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
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<PAGE> 18
Section 26. Counterparts. This Agreement may be executed in any number of
counterparts and each such counterpart shall for all purposes be deemed to be an
original, and all such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
HANOVER CAPITAL MORTGAGE
HOLDINGS, INC.
By:_____________________________
President
Title:__________________________
[ ______________________________ ]
By:_____________________________
Title:__________________________
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<PAGE> 19
EXHIBIT A
(Form of Representatives Warrant Certificate)
No. W- Number of Warrants
One Warrant is required to purchase one share of Common Stock
[VOID AFTER _____________]
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
WARRANT TO PURCHASE COMMON STOCK
THIS CERTIFIES THAT for value received or registered assigns is entitled,
subject to the terms and conditions hereinafter set forth, to purchase from
Hanover Capital Mortgage Holdings, Inc., a corporation incorporated under the
laws of the State of Maryland (hereinafter called the "Company"),
shares of fully paid and non-assessable Common Stock, $.01 par
value, of the Company (hereinafter called the "Common Stock"), upon presentation
and surrender of this Warrant Certificate with the Form of Election to Purchase
duly executed, at any time after the opening of business on [Insert date which
is six months after the initial closing of the offering] and on or prior to the
close of business on [Insert date three years after the date of the Prospectus]
at the principal office of _________________________________, Warrant Agent of
the Company (hereinafter called the "Warrant Agent"), or its successor as
Warrant Agent, in the City of New York and upon payment therefor of the exercise
price of $[Insert initial public offering price] per whole share (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 per share of such Common Stock for such purpose being equal to current
market price per share of Common Stock determined in accordance with Section
8(e) of the Warrant Agreement and the value of a Warrant being equal to the
difference between such current market price per share of Common Stock and the
Exercise Price.
This Warrant Certificate is subject to all of the terms, provisions and
conditions of that certain Representatives Warrant Agreement, dated as of
________________, 1997, between the Company and the Warrant Agent, which Warrant
Agreement is hereby incorporated herein by reference and made a part hereof and
to which Warrant Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties and immunities hereunder
of the Warrant Agent, the Company and the holders of the Warrant Certificates.
Capitalized terms used herein without definitions shall have the meanings given
such terms in the Warrant Agreement. Copies of the Warrant Agreement are on file
at the above-mentioned office of the Warrant Agent. Certain terms of the Warrant
Agreement are summarized on the reverse side hereof.
FOR A PERIOD OF ONE YEAR FROM [INSERT EFFECTIVE DATE OF THE OFFERING],
SALES, TRANSFERS, ASSIGNMENTS, PLEDGES AND HYPOTHECATIONS OF THIS WARRANT
CERTIFICATE ARE PROHIBITED BY THE HOLDER HEREOF, EXCEPT (i) TRANSFERS TO
OFFICERS OF SUCH HOLDER, (ii) IF SUCH HOLDER IS A PARTNERSHIP TRANSFERS TO
PARTNERS THEREOF, OR (iii) TRANSFERS BY OPERATION OF LAW; PROVIDED THE
TRANSFEREES IN EACH CASE SHALL BE SUBJECT TO THE TRANSFER RESTRICTIONS SET FORTH
IN THIS PARAGRAPH.
A-1
<PAGE> 20
As provided in the Warrant Agreement, the Exercise Price and the number of
shares of Common Stock purchasable upon the exercise of this Warrant Certificate
are, upon the happening of certain events, subject to modification and
adjustment.
This Warrant Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Warrant Agent.
Witness the facsimile signatures of the proper officers of the Company and
its corporate seal. Dated as of , .
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By..................................
President
and
By..................................
Secretary
Countersigned:
- ---------------------------------,
Warrant Agent
By ..................................
AUTHORIZED SIGNATURE
A-2
<PAGE> 21
(FORM OF REVERSE SIDE OF WARRANT CERTIFICATE)
The Warrant Agreement provides for adjustments to the Exercise Price set
forth on the facing side of this Warrant Certificate as follows: (a) In the
event the Company after the date hereof shall (i) pay a dividend, or make a
distribution, in shares of capital stock of the Company, or (ii) subdivide its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
Common Stock into a smaller number of shares, or (iv) issue by reclassification
of its shares of Common Stock any shares of capital stock of the Company, the
exercise right and the Exercise Price in effect immediately prior to such action
shall be adjusted so that the holder of any Warrant thereafter surrendering such
Warrant for exercise shall be entitled to receive the number of shares of
capital stock of the Company which he would have owned immediately following
such action had such Warrant been exercised immediately prior to the record date
for such action or to such action, as appropriate. An adjustment made pursuant
to this paragraph (a) shall, in the case of a subdivision, combination or
reclassification become effective retroactively immediately after the effective
date thereof and shall, in case of a dividend or distribution, become effective
retroactively immediately after the record date thereof. If, as a result of an
adjustment made pursuant to this paragraph (a), the holder of any Warrant
thereafter surrendered for exercise shall become entitled to receive shares of
two or more classes of capital stock of the Company, the Board of Directors of
the Company (whose determination shall be described in a certificate filed with
the Warrant Agent) shall in good faith determine the allocation of the adjusted
Exercise Price between or among shares of such classes of capital stock.
(b) In the event the Company after the date hereof shall distribute to all
the holders of Common Stock any dividend or other distribution (other than a
cash distribution made as a dividend payable out of earnings or out of any
earned surplus legally available for dividends under the laws of the
jurisdiction of incorporation of the Company) or any evidence of indebtedness or
any assets with respect to the Common Stock, or rights to subscribe or purchase
shares of Common Stock at a price per share less then the current market price
per share of Common Stock (as defined in paragraph (e) below) at the record date
referenced below, then, and thereafter successively upon each such distribution,
the Exercise Price in effect immediately prior to such distribution shall
forthwith be reduced to a price determined by multiplying the Exercise Price in
effect immediately prior to such distribution by a fraction the numerator of
which shall be the current market price per share of Common Stock (as defined in
paragraph (e) below) at the record date referenced below, less the then fair
market value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a certificate filed with the
Warrant Agent) of the portion of such evidences of indebtedness or such assets
so distributed, or of such subscription or purchase rights, applicable to one
share of Common Stock and the denominator of which shall be such current market
price per share of Common Stock. An adjustment made pursuant to this paragraph
(b) shall become effective retroactively immediately after the record date for
the determination of stockholders entitled to receive such distribution.
(c) After each adjustment of the Exercise Price pursuant to paragraphs (a)
and (b) above, the total number of shares of Common Stock or fractional part
thereof purchasable upon the exercise of each Warrant shall be proportionately
adjusted to such number of shares or fractional part thereof as the total
Exercise Price of the number of shares or fractional part thereof purchasable
immediately prior to such adjustment will buy at the adjusted Exercise Price.
(d) The certificate of any independent firm of public accountants of
recognized standing selected by the Board of Directors of the Company shall be
conclusive evidence of the correctness of any computation made under paragraphs
(a) and (b) above.
(e) For the purposes of any computation under paragraphs (a) and (b)
above, the current market price per share of Common Stock as of any date of
determination shall be deemed to be the average of the daily closing prices for
the 20 consecutive trading days preceding the date of determination. The closing
price for each day shall be the last reported sale price regular way or, in case
no such reported sale takes place on such day, the average of the reported
closing bid and asked prices regular way, in either case as officially reported
A-3
<PAGE> 22
by the principal stock exchange on which the Common Stock is listed or admitted
to trading, or, the Common Stock is not listed or admitted to trading on any
national securities exchange, the average of the closing bid and asked prices as
furnished by the National Association of Securities Dealers, Inc. through NASDAQ
or similar organization if NASDAQ is no longer reporting such information.
(f) No adjustment of the Exercise Price shall be required under paragraphs
(a) and (b) above if the amount of such adjustment is less than 1%; provided,
however, that any adjustments which by reason of the foregoing are not required
at the time to be made shall be carried forward and taken into account and
included in determining the amount of any subsequent adjustment. If the Company
shall take a record of the holders of Common Stock for the purpose of entitling
them to receive any dividend or distribution and shall, thereafter and before
the distribution to stockholders of any such dividend or distribution, legally
abandon its plan to pay or deliver such dividend or distribution, then no
adjustment of the Exercise Price shall be required by reason of the taking of
such record. All calculations under these provisions shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to these provisions,
the Company shall promptly file with the Warrant Agent and with each transfer
agent for the Common Stock a certificate signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Company setting forth in reasonable detail the events
requiring the adjustment and the method by which such adjustment was calculated,
and specifying the Exercise Price and the number or kind or class of shares or
other securities or property purchasable upon exercise of the several Warrants
after giving effect to such adjustment, and will cause to be mailed, first
class, postage prepaid, a brief summary thereof to the registered holders of the
Warrant Certificates at their last addresses as they appear on the registry
books of the Warrant Agent.
(h) For the purposes of these provisions, the term "Common Stock" shall
mean (i) the class of stock designated as the common stock, par value $.01 per
share, of the Company, at the date of the Warrant Agreement or (ii) any other
class of stock resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to paragraph (a), shares of capital
stock of the Company other than shares of Common Stock are issuable upon
exercise of the Warrants, thereafter the number of such other shares so issuable
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the Common
Stock contained in these provisions, and all other provisions of the Warrant
Agreement with respect to Common Stock shall apply on like terms to any such
other shares. Subject to the foregoing, and unless the context requires
otherwise, all references to Common Stock in the Warrant Agreement and in the
Warrant Certificates shall, in the event of an adjustment pursuant to these
provisions, be deemed to refer also to any other securities or property then
issuable upon exercise of the Warrants as a result of such adjustments.
Unless and to the extent that the Company shall exercise the option to
issue new Warrant Certificates as provided in the Warrant Agreement,
irrespective of the fact that the Warrant Certificates theretofore and
thereafter issued shall continue to express the Exercise Price per share and the
number of shares purchasable thereunder as the Exercise Price per share and the
number of shares purchasable were expressed in the Warrant Certificates when
initially issued, such Warrant Certificates shall be deemed to refer to the
Exercise Price and the number of shares purchasable as adjusted or changed
pursuant to these provisions.
This Warrant Certificate, with our without other Warrant Certificates,
upon surrender at the principal office of the Warrant Agent may be exchanged for
another Warrant Certificate or Warrant Certificates entitling the holder to
purchase a like aggregate number of shares of Common Stock as the Warrant
Certificate or Warrant Certificates surrendered entitled him to purchase. If
this Warrant Certificate shall be exercised in part, the holder hereof shall be
entitled to receive upon surrender hereof, another Warrant Certificate or
Warrant Certificates for the number of shares not purchased upon such exercise.
A-4
<PAGE> 23
No fractional shares will be issued upon the exercise of rights to
purchase hereunder. As to any final fraction of a share which the same holder of
one or more Warrant Certificates, the rights to purchase under which are
exercised in the same transaction, would otherwise be entitled to purchase on
such exercise, the Company shall pay the cash value thereof determined as
provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained in the Warrant Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise, until the Warrants evidenced by this Warrant Certificate shall have
been exercised and the Common Stock purchasable upon the exercise hereof shall
have become deliverable as provided in the Warrant Agreement.
Every holder of this Warrant Certificate by accepting the same consents
and agrees with the Company, the Warrant Agent, and with every other holder of a
Warrant Certificate that:
(a) this Warrant Certificate is transferable only by the registered
holder hereof in person or by his attorney duly authorized in writing, and
only at the principal office of the Warrant Agent duly endorsed, or
accompanied by a proper instrument of transfer satisfactory to the Warrant
Agent and the Company in their sole discretion; and
(b) the Company and the Warrant Agent may deem and treat the person
in whose name this Warrant Certificate is registered as the absolute owner
for all purposes whatsoever, and neither the Company nor the Warrant Agent
shall be affected by any notice to the contrary.
(c) for a period of one year from [insert effective date of the
offering], no holder of a Warrant Certificate or any shares of Common
Stock received upon the exercise of the Warrants shall sell, transfer,
assign, pledge, or hypothecate such Warrant Certificate, or such shares of
Common Stock, except (i) transfers to officers of such holder, (ii) if
such holder is a partnership transfers to partners thereof, or (iii)
transfers by operation of law; provided the transferees in each case shall
be subject to the transfer restrictions set forth in this paragraph (c).
A-5
<PAGE> 24
[FORM OF]
ELECTION TO PURCHASE
- ----------------------------------
The Warrant Agent
Attention: ______________________
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant(s) for, and to purchase thereunder,
............... shares of the stock provided for therein, and requests that
certificates for such shares and a certified check in payment of any fractional
share interest be issued in the name of and sent to:
................................................................................
(Please Print Name and Address)
................................................................................
................................................................................
and, if said number of shares shall not be all the shares purchasable
thereunder, that a new Warrant Certificate for the balance remaining of the
shares purchasable under the within Warrant Certificate be registered in the
name of the undersigned warrantholder or his assignee as below indicated and
delivered to the address stated below.
In payment of the Exercise Price, the undersigned hereby and together
herewith tenders payment in accordance with Section 7 of the Warrant Agreement.
Dates: _________________, 199___
Name of Warrantholder or Assignee: .............................................
(Please Print)
Address: ....................................................................
....................................................................
Signature: ....................................................................
(Note: The above signature must correspond with the name as written
upon the face of this Warrant Certificate in every particular,
without alteration or enlargement or any change whatever
unless this Warrant Certificate has been assigned.)
Signature
Guaranteed: ........................
A-6
<PAGE> 25
[FORM OF]
ASSIGNMENT
For value received .......................................................
hereby sell, assign, and transfer unto .........................................
(Please Print Name and Address)
................................................................................
................................................................................
....................................... of the Warrants represented by the
within Certificate, together with all right, title and interest therein, and do
hereby irrevocably constitute and appoint
................................................................................
................................................................................
attorney, to transfer said Warrant(s) on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated: ______________, 199_
Signature
................................................................................
(Note: The above signature must correspond with the name as
written upon the face of this Warrant Certificate in
every particular, without alteration or enlargement or
any change whatever unless this Warrant Certificate has
been assigned.)
Signature
Guaranteed: ..............................
A-7
<PAGE> 1
SHAREHOLDERS' AGREEMENT OF
HANOVER CAPITAL PARTNERS LTD.
THIS SHAREHOLDERS' AGREEMENT OF HANOVER CAPITAL PARTNERS LTD. (the
"Agreement"), dated as of the ___ day of ___________, 1997 (the "Effective
Date"), is entered into by and among (i) Hanover Capital Partners Ltd., a New
York corporation having its principal place of business at 90 West Street, Suite
1508, New York, New York 10006 (the "Company"), (ii) Hanover Capital Mortgage
Holdings, Inc., a Maryland corporation having its principal place of business at
90 West Street, Suite 1508, New York, New York 10006 ("HCHI"), (iii) John A.
Burchett ("Burchett"), (iv) Joyce S. Mizerak ("Mizerak"), (v) George J.
Ostendorf ("Ostendorf") and (vi) Irma N. Tavares ("Tavares"). Burchett, Mizerak,
Ostendorf and Tavares are collectively referred to as the "Initial
Shareholders."
RECITALS
A. The Company and the Initial Shareholders entered into an
Agreement of Shareholders, dated as of May 26, 1992 (the "Original Agreement"),
which they amended and restated pursuant to an Amended and Restated
Shareholders' Agreement of Hanover Capital Partners Ltd. dated as of January 1,
1996 (the "First Amended Agreement").
B. Pursuant to an Agreement and Plan of Recapitalization dated as of
__________, 1997 (the "Plan of Recapitalization"), the Initial Shareholders
exchanged 166.424 shares of the Company's Class A Common Stock, $.01 par value
per share, constituting all of the issued and outstanding shares of the
Company's Class A Common Stock, for 3,000 shares of the Company's Class A Common
Stock, $.01 par value per share (the "Common Shares"), and 97,000 shares of the
Company's Series A Preferred Stock, $.01 par value per share (the "Preferred
Shares").
C. Pursuant to the Contribution Agreement, dated as of the date hereof,
among the Initial Shareholders and HCHI (the "Contribution Agreement"), the
Initial Shareholders contributed all of the Preferred Shares to HCHI in exchange
for (i) 716,667 shares of common stock, $.01 par value per share, of HCHI, (ii)
loans by HCHI to the Initial Shareholders in an aggregate principal amount not
to exceed $1,750,000 and (iii) if certain conditions related to the financial
performance of HCHI are satisfied, (a) up to 216,667 additional shares of common
stock, $.01 par value per share, of HCHI and (b) the forgiveness of the loans of
up to $1,750,000 made by HCHI to the Initial Shareholders.
D. The Initial Shareholders and HCHI hold the Common Shares and
Preferred Shares, respectively, set forth opposite their names on the attached
SCHEDULE 1.
E. The Company, HCHI and the Initial Shareholders desire to amend and
restate the First Amended Agreement in its entirety in an effort to ensure that
(i) HCHI maintains its qualification as a real estate estate investment trust
("REIT") for Federal income tax purposes, and (ii) the Common Shares continue to
be owned by persons whose interests coincide with the interests of
<PAGE> 2
HCHI to the extent provided in this Agreement. The Original Agreement and the
First Amended Agreement have been superseded in every respect by this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement and for other valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties to this Agreement hereby agree
that the Original Agreement and the First Amended Agreement shall be amended and
restated as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms
shall be defined as follows:
AFFILIATE. "Affiliate" shall mean, with respect to any Person, any
other Person directly or indirectly controlling, controlled by or under common
control with such Person.
BUSINESS DAY. "Business Day" means any day except a Saturday, Sunday or
other day on which commercial banks in New York, New York are authorized or
required by law to be closed.
CLASS B SHAREHOLDER. "Class B Shareholder" shall mean any holder of
Class B Shares.
CLASS B SHARES. "Class B Shares" shall mean shares of the Company's
Class B Common Stock, $.01 par value, that the Company may be authorized to
issue from time to time and any other securities of the Company for which such
Class B Shares may be exchanged (by way of reorganization, recapitalization,
merger, consolidation or otherwise).
COMMON SHAREHOLDER. "Common Shareholder" shall mean any holder of
Common Shares.
COMMON SHARES. "Common Shares" shall mean shares of the Company's Class
A Common Stock, $.01 par value, that the Company may be authorized to issue from
time to time, any other securities of the Company for which such Common Shares
may be exchanged (by way of reorganization, recapitalization, merger,
consolidation or otherwise) and shall also include any shares of common stock of
the Company (other than Class B Shares) hereafter authorized and of any capital
stock of the Company of any other class (except Class B Shares) hereafter
authorized which is not preferred as to dividends or distribution of assets in
liquidation over any other class of capital stock of the Company or which has
ordinary voting power for the election of directors of the Company.
CONTRIBUTION AGREEMENT PRICE. "Contribution Agreement Price" shall
mean, as of any time of determination, (a) the aggregate Fair Market Value of
the shares of capital stock of HCHI that have been issued to the Initial
Shareholders pursuant to the Contribution Agreement (measured, in the case of
each such issuance, as of the date of such issuance) plus (b) the aggregate
principal amount of any indebtedness of the Initial Shareholders to HCHI that
has been forgiven pursuant to the Contribution Agreement.
2
<PAGE> 3
CONTRIBUTION AGREEMENT VALUE. "Contribution Agreement Value" shall mean
(a) the Contribution Agreement Price divided by (b) ninety-seven percent (97%).
CONTROL. "Control" (including the terms "controlling," "controlled by,"
and "under common control with") shall mean the direct or indirect possession of
the power to direct or cause the direction of the management and policies of a
Person, corporation, partnership, limited liability company or other entity,
whether through the ownership of voting securities, by contract, or otherwise.
EVENT OF BANKRUPTCY. With respect to any Person, "Event of Bankruptcy"
shall mean any of the following events:
(a) the making by such Person of an assignment for the
benefit of creditors;
(b) the filing by such Person of a voluntary petition under
any bankruptcy, insolvency or similar law which is not dismissed within ninety
(90) days after the filing thereof;
(c) the adjudication of such Person by a court of competent
jurisdiction as a bankrupt or insolvent, or the entry against such Person of an
order for relief under any bankruptcy, insolvency or similar proceeding within
ninety (90) days after the filing thereof;
(d) the filing by such Person of a petition or answer
seeking for himself or herself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any bankruptcy or
insolvency statute, law or regulation;
(e) the filing by such Person of an answer or other
pleading admitting or failing to contest the material allegations of a petition
filed against him or her in any bankruptcy or insolvency proceeding;
(f) such Person's written request for, consent to or
acquiescence in the appointment of a trustee, receiver or liquidator of such
Person or of all or any substantial part of such Person's properties; or
(g) the passage of (i) one hundred twenty (120) days after
the commencement of any proceeding against such Person seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any bankruptcy or insolvency statute, law or regulation without
such proceeding having been dismissed, (ii) ninety (90) days after the
appointment, without such Person's consent or acquiescence, of a trustee,
receiver or liquidator of such Person or of all or any substantial portion of
such Person's properties without such appointment having been vacated or stayed,
or (iii) ninety (90) days after the expiration of any stay of an appointment
referred to in the foregoing clause (ii) without such appointment having been
vacated.
3
<PAGE> 4
FAIR MARKET VALUE. "Fair Market Value" means, with respect to any share
of capital stock of HCHI issued to an Initial Shareholder pursuant to the
Contribution Agreement, (a) if such share was issued to such Initial Shareholder
upon the closing of HCHI's initial underwritten public offering, the IPO Price,
or (b) if such share was issued to such Initial Shareholder on or after
September 30, 1998, the average of the daily market price for the ten (10)
consecutive trading days immediately preceding the date on which such share was
issued or, if such date was not a Business Day, the immediately preceding
Business Day. The market price for each such trading day shall be: (i) if such
shares are listed or admitted to trading on any securities exchange or the
Nasdaq National Market, the closing price, regular way, on such day, or if no
such sale takes place on such day, the average of the closing bid and asked
prices on such day, (ii) if such shares are not listed or admitted to trading on
any securities exchange or the Nasdaq National Market, the last reported sale
price on such day or, if no sale takes place on such day, the average of the
closing bid and asked prices on such day, as reported by a reliable quotation
source designated by HCHI, or (iii) if such shares are not listed or admitted to
trading on any securities exchange or the Nasdaq National Market and no such
last reported sale price or closing bid and asked prices are available, the
average of the reported high bid and low asked prices on such day, as reported
by a reliable quotation source designated by HCHI, or if there shall be no bid
and asked prices on such day, the average of the high bid and low asked prices,
as so reported, on the most recent day (not more than ten (10) days prior to the
date in question) for which prices have been so reported; provided that, if
there are no bid and asked prices reported during the ten (10) days prior to the
date in question, the Fair Market Value of such shares shall be determined by
HCHI acting on the basis of such quotations and other information as it
considers appropriate.
IMMEDIATE FAMILY. "Immediate Family" shall mean, with respect to any
natural Person, (a) such Person's current or former spouse, descendants (by
blood or adoption), parents, parents-in-law, siblings and descendants of
siblings (by blood or adoption) and (b) any trust all of the beneficiaries of
which consist of such Person and/or Persons included in (a) immediately above.
IPO PRICE. "IPO Price" means the initial public offering price of a
Unit in HCHI's initial underwritten public offering.
OPTION EVENT. "Option Event" shall mean, with respect to any Common
Shareholder (other than HCHI or any Affiliate or Subsidiary of HCHI), any of the
following events:
(a) in the case of an Initial Shareholder, any event
following which (i) such Initial Shareholder is not employed by at least one of
HCHI, the Company and their respective Affiliates and Subsidiaries (in the case
of disability, for a period of at least two (2) consecutive months or a total of
sixty (60) days during any twelve-month period due to a condition that, in the
opinion of a physician who is mutually acceptable to the Company, HCHI and such
Initial Shareholder or his or her legal representatives, is likely to continue
for at least one year from the time of inception) or (ii) neither such Initial
Shareholder nor a member of the Immediate Family or an Affiliate of such Initial
Shareholder owns an equity interest in HCHI;
(b) an Event of Bankruptcy with respect to such Common
Shareholder;
4
<PAGE> 5
(c) the death of such Common Shareholder;
(d) the agreement by, or requirement of, such Common
Shareholder to transfer all or any portion of his or her Common Shares to a
spouse or former spouse in connection with a legal separation or dissolution of
marriage;
(e) the Transfer of all or any portion of such Common
Shareholder's Common Shares by operation of law; or
(f) in the case of a Common Shareholder who was a member of
the Immediate Family or an Affiliate of an Initial Shareholder upon acquiring
his, her or its Common Shares, (i) any event described in subparagraph (a)
immediately above with respect to such Initial Shareholder or (ii) any event
that causes such Common Shareholder to no longer be a member of the Immediate
Family or an Affiliate of such Initial Shareholder.
OPTION EVENT VALUE. "Option Event Value" shall mean the amount (per
share) payable hereunder for the Common Shares of a Common Shareholder who
suffers an Option Event, which amount shall be determined by dividing (a) the
Contribution Agreement Value by (b) the number of Shares outstanding as of the
effective date of this Agreement (100,000). In determining the Option Event
Value of the Common Shares of a Common Shareholder hereunder, appropriate
adjustments shall be made for stock dividends and distributions, stock splits
and subdivisions, reverse stock splits and combinations, recapitalizations and
transactions having like effect.
PERMITTED TRANSFER. A "Permitted Transfer" shall mean a Transfer of
Common Shares by a Common Shareholder (a) to (i) a member of such Common
Shareholder's Immediate Family, (ii) an Affiliate of such Common Shareholder, or
(iii) another Shareholder, or (b) with the consent, in writing, of Shareholders
holding a majority of the issued and outstanding Shares (not held by such Person
or Affiliates of such Person).
No Permitted Transfer shall be effective unless and until the Permitted
Transferee of the Common Shares so transferred executes and delivers to the
Company an executed counterpart of this Agreement, which shall evidence such
Permitted Transferee's agreement that the Common Shares intended to be
transferred shall continue to be subject to this Agreement and that as to such
Common Shares the Permitted Transferee shall be bound by the restrictions of
this Agreement.
PERSON. "Person" shall mean any individual or any corporation,
partnership, trust, limited liability company or other entity.
PREFERRED SHAREHOLDER. "Preferred Shareholder" shall mean any holder of
Preferred Shares.
5
<PAGE> 6
PREFERRED SHARES. "Preferred Shares" shall mean shares of the Company's
Series A Preferred Stock, $.01 par value, that the Company may be authorized to
issue from time to time, any other securities of the Company for which such
Preferred Shares may be exchanged (by way of reorganization, recapitalization,
merger, consolidation or otherwise) and shall also include any shares of capital
stock of the Company hereafter authorized which are not Common Shares or Class B
Shares.
SHAREHOLDER. "Shareholder" shall mean any Common Shareholder, Class B
Shareholder or Preferred Shareholder.
SHARES. "Shares" shall mean any Common Shares, Class B Shares or
Preferred Shares.
SUBSIDIARY. "Subsidiary" with respect to any entity (the "parent")
shall mean any corporation, partnership, limited liability company, firm,
association, trust or other entity of which such parent, at the time in respect
of which such term is used, (a) owns directly or indirectly more than 50% of the
equity or beneficial interest, on a consolidated basis, or (b) owns directly or
indirectly more than 50% of the shares of capital stock or beneficial interest
having the power to vote for the election of directors, trustees, managers or
other officials having powers analogous to those of directors of a corporation.
Unless otherwise specifically indicated, when used herein the term Subsidiary
shall refer to a direct or indirect Subsidiary.
TRANSFER. "Transfer" shall mean to transfer, sell, assign, pledge,
hypothecate, give, create a security interest in or lien on, place in trust
(voting or otherwise), assign or in any other way encumber or dispose of,
directly or indirectly and whether or not by operation of law or for value, any
Shares.
2. RESTRICTIONS ON TRANSFER OF COMMON SHARES. Except as otherwise
provided in this Agreement, no Common Shareholder (other than HCHI or any
Affiliate or Subsidiary of HCHI) may Transfer all or any part of the Common
Shares owned by him or her other than by a Permitted Transfer without complying
with the following procedures:
(a) NOTICE TO COMPANY AND OTHER SHAREHOLDERS. If at any
time a Common Shareholder (other than HCHI or any Affiliate or Subsidiary of
HCHI) (the "Offeror") desires or otherwise proposes to Transfer Shares to any
Person other than by a Permitted Transfer (a "Third Party Offeree"), such
Offeror shall give notice of such Transfer (the "Transfer Notice") to the
Company, the other Common Shareholders (the "Common Offerees") and the Preferred
and Class B Shareholders (collectively, the "Preferred Offerees"). The Transfer
Notice shall include the terms and conditions of such Transfer, including the
name of the Third Party Offeree, the proposed purchase price, if any, per share
of such Shares (the "Offer Price"), the payment terms (including a description
of any proposed non-cash consideration), and the type of disposition and the
number of such Shares to be transferred (the "Offered Shares"). The Transfer
Notice shall further state that the Company, the Common Offerees and the
Preferred Offerees may acquire, in accordance with the provisions of this
Agreement, any of the Offered Shares for the Offer Price and upon the other
terms and conditions set forth in the Transfer Notice; PROVIDED, that if such
6
<PAGE> 7
Transfer does not involve a sale, the Offer Price for purposes of this Section 2
shall be the Option Event Value of such Offered Shares.
(b) COMPANY'S RIGHT OF FIRST REFUSAL. For a period of
twenty (20) days from the receipt of the Transfer Notice (the "Company Offer
Period"), the Company may, by written notice to the Offeror, the Common Offerees
and the Preferred Offerees, elect to purchase all or any portion of the Offered
Shares at the Offer Price per share.
(c) COMMON OFFEREES' RIGHT OF FIRST REFUSAL. If the Company
does not elect to purchase all of the Offered Shares, the Common Offerees shall
have a period of ten (10) additional days beyond the Company Offer Period (the
"Common Offer Period") to elect, by written notice to the Offeror, to purchase
the Offered Shares not purchased by the Company (the "Refused Shares") at the
Offer Price per share in such proportions as they may agree upon. If the Common
Offerees are unable to agree within the Common Offer Period on the proportions
in which they will purchase the Refused Shares, each of the Common Offerees
shall be entitled to purchase his or her PRO RATA portion (based on the number
of Common Shares such Common Offeree owns in relation to the total number of
Common Shares owned by all of the Common Offerees) of the Refused Shares not
purchased by the Company by notifying the Offeror in writing, within an
additional ten (10) day period after the close of the Common Offer Period and
with copies to the Company and the other Shareholders, of his or her election to
make such purchase. The Common Offerees shall have a right of oversubscription
such that if any Common Offeree does not elect to purchase his or her PRO RATA
portion of the Refused Shares, the other Common Offerees shall, among them, have
the right to purchase up to the balance of the Refused Shares not so purchased.
Such right of oversubscription may be exercised by a Common Offeree by
specifying in his or her notice to the Offeror his or her election to purchase
more than his or her PRO RATA portion of the Refused Shares. If, as a result
thereof, such oversubscriptions exceed the number of Refused Shares available in
respect of such oversubscription privilege, the oversubscribing Common Offerees
shall be reduced with respect to their oversubscriptions in accordance with
their respective PRO RATA portions of the Refused Shares.
(d) PREFERRED OFFEREES' RIGHT OF FIRST REFUSAL. If the
Company and the Common Offerees do not elect to purchase all of the Offered
Shares, the Preferred Offerees shall have a period of ten (10) additional days
beyond the Common Offer Period (plus any extension thereof) (the "Preferred
Offer Period") to elect, by written notice to the Offeror, to purchase the
Refused Shares not purchased by the Common Offerees (the "Twice Refused Shares")
at the Offer Price per share in such proportions as they may agree upon. If the
Preferred Offerees are unable to agree within the Preferred Offer Period on the
proportions in which they will purchase the Twice Refused Shares, each of the
Preferred Offerees shall be entitled to purchase its PRO RATA portion (based on
the number of Preferred and Class B Shares such Preferred Offeree owns in
relation to the total number of Preferred and Class B Shares owned by all of the
Preferred Offerees) of the Twice Refused Shares by notifying the Offeror in
writing, within an additional ten (10) day period after the close of the
Preferred Offer Period and with copies to the Company and the other
Shareholders, of its election to make such purchase. The Preferred Offerees
shall have a right of oversubscription such that if any Preferred Offeree does
not elect to purchase his or her PRO RATA portion of the Twice Refused Shares,
the other Preferred Offerees shall, among
7
<PAGE> 8
them, have the right to purchase up to the balance of the Twice Refused Shares
not so purchased. Such right of oversubscription may be exercised by a Preferred
Offeree by specifying in its notice to the Offeror its election to purchase more
than its PRO RATA portion of the Twice Refused Shares. If, as a result thereof,
such oversubscriptions exceed the number of Twice Refused Shares available in
respect of such oversubscription privilege, the oversubscribing Preferred
Offerees shall be reduced with respect to their oversubscriptions in accordance
with their respective PRO RATA portions of the Twice Refused Shares.
(e) CLOSING. A closing of the purchase of Offered Shares
pursuant to Sections 2(b), 2(c) or 2(d) immediately above shall take place at
the principal office of the Company within thirty (30) days after the close of
the Preferred Offer Period (plus any extension thereof). At such closing, each
Person purchasing Offered Shares shall deliver to the Offeror against delivery
of certificates duly endorsed and stock powers representing the Offered Shares
being acquired by such Person the Offer Price per share payable in respect of
such Offered Shares; PROVIDED, HOWEVER, that the amount payable by any such
Person shall in no event be payable on terms, or on a schedule, less favorable
to such Person than those specified in the Transfer Notice if such Transfer
involves a sale. All of the foregoing deliveries shall be deemed to be made
simultaneously and none shall be deemed completed until all have been completed.
(f) ADDITIONAL RIGHTS OF PREFERRED OFFEREES.
Notwithstanding any other provision of this Section 2, and in addition to any
and all rights it may have under this Agreement, a Preferred Offeree may (i)
assign its rights under this Section 2 to purchase Offered Shares or cause any
Offered Shares that it may purchase pursuant to this Section 2 to be issued in
the name of any such Person as it may designate, and (ii) require the Company to
issue to it in exchange for any Offered Shares purchased by it pursuant to this
Section 2 an equal number of Class B Shares. The Company shall maintain a number
of authorized but unissued Class B Shares equal to the number of Common Shares
that are issued and outstanding.
(g) NO RIGHTS OF OFFEROR TO PURCHASE. During the period
that a Common Shareholder's Common Shares are subject to repurchase under this
Section 2 as a result of a proposed Transfer by such Common Shareholder, such
Common Shareholder shall have no right to participate in the purchase of the
Common Shares of any other Common Shareholder whose Common Shares are also then
subject to purchase under this Section 2 or Section 3. If the Common Shares of
two or more Common Shareholders are subject to purchase at any time under this
Agreement, the Company, the Common Shareholders whose Common Shares are not then
subject to purchase and the Preferred Optionees may exercise their rights to
purchase the Common Shares of all of such Common Shareholders or any combination
of them in any amounts or proportions.
(h) SHARES NOT PURCHASED BY COMPANY OR OTHER SHAREHOLDERS.
If the Company and/or the Common and Preferred Offerees do not elect to purchase
all of the Offered Shares, then the remaining Offered Shares may be Transferred
to the Third Party Offeree, on the terms and conditions (including for the
price, if any) specified in the Transfer Notice, within thirty (30) days after
the close of the Preferred Offer Period plus any extension thereof pursuant to
Section 2(d), after which, if such Offered Shares have not been Transferred to
such Third
8
<PAGE> 9
Party Offeree, all restrictions contained herein shall again be in full force
and effect. As a condition to the effectiveness of any Transfer of Common Shares
to a Third Party Offeree, such Third Party Offeree shall execute and deliver to
the Company, with copies to each of the Shareholders, a counterpart of this
Agreement (including appropriate amendments to the SCHEDULES attached hereto),
which shall evidence such Third Party Offeree's agreement that the Common Shares
so Transferred to him or her shall continue to be subject to this Agreement and
that as to such Common Shares the Third Party Offeree shall be bound by the
restrictions of this Agreement.
(i) TRANSFERS PURSUANT TO SECTION 3. This Section 2 shall
not apply to any Transfer made pursuant to Section 3 of this Agreement.
3. OPTION EVENTS.
(a) NOTICE. Within thirty (30) days after the occurrence of
an Option Event with respect to any Common Shareholder (other than HCHI or any
Affiliate or Subsidiary of HCHI) (the "Optionor"), such Optionor shall notify
the Company, the other Common Shareholders (the "Common Optionees") and the
Preferred and Class B Shareholders (collectively, the "Preferred Optionees") of
such occurrence. Any notice delivered pursuant to this Section 3(a) shall
specify the number of Common Shares owned by such Optionor.
(b) RIGHT OF COMPANY TO PURCHASE. After the occurrence of
an Option Event with respect to an Optionor, the Company shall have the right to
purchase all or any portion of such Optionor's Common Shares (the "Option
Shares") at a price equal to the Option Event Value per share of such Option
Shares. To exercise its right to purchase Option Shares of an Optionor, the
Company shall provide written notice of its election to make such purchase,
within the ninety (90) day period (the "Company Option Period") after the
occurrence of such Option Event, to such Optionor, the Common Optionees and the
Preferred Optionees.
(c) RIGHT OF COMMON OPTIONEES TO PURCHASE. If the Company
does not elect to purchase all of the Option Shares it may purchase pursuant to
Section 3(b) following the occurrence of an Option Event with respect to an
Optionor, the Common Optionees shall have a period of thirty (30) additional
days beyond the Company Option Period (the "Common Option Period") to elect, by
written notice to the Optionor, to purchase the Option Shares not purchased by
the Company (the "Remaining Shares") at a price equal to the Option Event Value
per share in such proportions as they may agree upon. If the Common Optionees
are unable to agree within the Common Option Period on the proportions in which
they will purchase the Remaining Shares, each of the Common Optionees shall be
entitled to purchase his or her PRO RATA portion (based on the number of Common
Shares such Common Optionee owns in relation to the total number of Common
Shares owned by all of the Common Optionees) of the Remaining Shares by
notifying such Optionor in writing, within an additional ten (10) day period
after the close of the Common Option Period and with copies to the Company and
the other Shareholders, of his or her election to make such purchase. The Common
Optionees shall have a right of oversubscription such that if any Common
Optionee does not elect to purchase his or her PRO RATA portion of the Remaining
Shares, the other Common Optionees shall, among them, have the right
9
<PAGE> 10
to purchase up to the balance of the Remaining Shares not so purchased. Such
right of oversubscription may be exercised by a Common Optionee by specifying in
his or her notice to the Optionor his or her election to purchase more than his
or her PRO RATA portion of the Remaining Shares. If, as a result thereof, such
oversubscriptions exceed the number of Remaining Shares available in respect of
such oversubscription privilege, the oversubscribing Common Optionees shall be
reduced with respect to their oversubscriptions in accordance with their
respective PRO RATA portions of the Remaining Shares.
(d) RIGHT OF PREFERRED OPTIONEES TO PURCHASE. If the
Company and the Common Optionees do not elect to purchase all of the Option
Shares, the Preferred Optionees shall have a period of thirty (30) additional
days beyond the Common Option Period (plus any extensions thereof) (the
"Preferred Option Period") to elect, by written notice to the Optionor, to
purchase the Remaining Shares not purchased by the Common Optionees (the "Twice
Remaining Shares") at a price equal to the Option Event Value per share in such
proportions as they may agree upon. If the Preferred Optionees are unable to
agree within the Preferred Option Period on the proportions in which they will
purchase the Twice Remaining Shares, each of the Preferred Optionees shall be
entitled to purchase its PRO RATA portion (based on the number of Preferred and
Class B Shares such Preferred Optionee owns in relation to the total number of
Preferred and Class B Shares owned by all of the Preferred Optionees) of the
Twice Remaining Shares by notifying such Optionor in writing, within an
additional ten (10) day period after the close of the Preferred Option Period
and with copies to the Company and the other Shareholders, of its election to
make such purchase. The Preferred Optionees shall have a right of
oversubscription such that if any Preferred Optionee does not elect to purchase
its PRO RATA portion of the Twice Remaining Shares, the other Preferred
Optionees shall, among them, have the right to purchase up to the balance of the
Twice Remaining Shares not so purchased. Such right of oversubscription may be
exercised by a Preferred Optionee by specifying in its notice to the Optionor
its election to purchase more than its PRO RATA portion of the Twice Remaining
Shares. If, as a result thereof, such oversubscriptions exceed the number of
Twice Remaining Shares available in respect of such oversubscription privilege,
the oversubscribing Preferred Optionees shall be reduced with respect to their
oversubscriptions in accordance with their respective PRO RATA portions of the
Twice Remaining Shares.
(e) CLOSING AND PAYMENT. A closing of the purchase of
Option Shares to be purchased pursuant to Section 3(b), 3(c) or 3(d) immediately
above as a result of an Option Event shall take place at the principal office of
the Company within thirty (30) days after the close of the Preferred Option
Period (plus any extension thereof). At such closing, each Person purchasing
Option Shares shall deliver to the Optionor against delivery of certificates
duly endorsed and stock powers representing the Option Shares being acquired by
such Person the Option Event Value per share payable in respect of such Option
Shares. All of the foregoing deliveries shall be deemed to be made
simultaneously and none shall be deemed completed until all have been completed.
The price to be paid for any Option Shares purchased pursuant to this Section 3
may be paid, at the option of the purchaser, with a promissory note of the
purchaser that (i) is fully recourse to the purchaser, (ii) is secured by the
purchased Option Shares, (iii) has a term not longer than three (3) years, (iv)
provides for level, annual payments of principal over its term, (v) may be
prepaid in full or part at any time without penalty and (vi) provides for
10
<PAGE> 11
monthly payments of interest on its outstanding principal balance at a rate,
adjusted annually on each anniversary of the date of its issuance, at least
equal to the prime rate of interest as published from time to time in the Wall
Street Journal plus 1%.
(f) ADDITIONAL RIGHTS OF PREFERRED OPTIONEES.
Notwithstanding any other provision of this Section 3, and in addition to any
and all rights it may have under this Agreement, a Preferred Optionee may (i)
assign its rights under this Section 3 to purchase Option Shares or cause any
Option Shares that it may purchase pursuant to this Section 3 to be delivered in
the name of any such Person as it may designate, and (ii) require the Company to
issue to it in exchange for any Option Shares purchased by it pursuant to this
Section 3 an equal number of Class B Shares. The Company shall maintain a number
of authorized but unissued Class B Shares equal to the number of Common Shares
that are issued and outstanding.
(g) NO RIGHTS OF OPTIONOR TO PURCHASE. During the period
that a Common Shareholder's Common Shares are subject to repurchase under this
Section 3 as a result of an Option Event with respect to such Common
Shareholder, such Common Shareholder shall have no right to participate in the
purchase of the Common Shares of any other Common Shareholder whose Common
Shares are also then subject to purchase under Section 2 above or this Section
3. If the Common Shares of two or more Common Shareholders are subject to
purchase at any time under this Agreement, the Company, the Common Shareholders
whose Common Shares are not then subject to purchase and the Preferred Optionees
may exercise their rights to purchase the Common Shares of all of such Common
Shareholders or any combination of them in any amounts or proportions.
(h) SHARES NOT PURCHASED. If all of the Common Shares of an
Optionor are not purchased pursuant to this Section 3 after the occurrence of an
Option Event with respect to such Optionor, then the remaining Common Shares of
such Optionor may be retained by such Optionor or, if such Option Event involves
a Transfer, by the recipient of such Transfer, subject to all of the
restrictions contained herein. As a condition to the effectiveness of any
Transfer that occurs in connection with an Option Event, the recipient of such
Transfer shall execute and deliver to the Company, with copies to each of the
Shareholders, a counterpart of this Agreement (with appropriate amendments to
the SCHEDULES attached hereto), which shall evidence such recipient's agreement
that the Shares so Transferred to him or her shall continue to be subject to
this Agreement and that as to such Common Shares such recipient shall be bound
by the restrictions of this Agreement.
(i) ESTATES AND REPRESENTATIVES. In the case of any
Optionor who has died or become incompetent, any reference in this Section 3 to
such Optionor shall be a reference to such Optionor's estate or other legal
representatives or successors, as the context may require.
4. PREEMPTIVE RIGHTS.
(a) PREEMPTIVE RIGHTS. The Company hereby grants to each
Shareholder so long as he, she or it shall hold any Shares the right to purchase
up to a PRO RATA portion of New Securities (as defined in Section 4(b) below)
which the Company, from time to time, proposes to
11
<PAGE> 12
sell or issue. A Shareholder's PRO RATA portion, for purposes of this Section 4,
is the ratio of the number of Shares then owned by such Shareholder to the total
number of Shares then outstanding on a fully diluted basis after giving effect
to the exercise of all options, warrants and the like and the conversion of all
securities convertible into or exchangeable for Shares. The Shareholders shall
have a right of oversubscription such that if any Shareholder does not elect to
purchase his, her or its PRO RATA portion of any New Securities, the other
Shareholders shall, among them, have the right to purchase up to the balance of
the New Securities not so purchased. Such right of oversubscription may be
exercised by a Shareholder by specifying in its notice pursuant to Section 4(c)
below its election to purchase more than its PRO RATA portion of the New
Securities. If, as a result thereof, such oversubscriptions exceed the number of
New Securities available in respect of such oversubscription privilege, the
oversubscribing Shareholders shall be reduced with respect to their
oversubscriptions in accordance with their respective PRO RATA portions of the
New Securities.
(b) NEW SECURITIES. "New Securities" shall mean any capital
stock of the Company whether now authorized or not, any rights, options or
warrants to purchase capital stock and any indebtedness or preferred stock of
the Company which is convertible into capital stock (or which is convertible
into a security which, in turn, is convertible into capital stock); PROVIDED,
that the term "New Securities" does not include (i) shares of capital stock
issued as a stock dividend to all holders of capital stock PRO RATA or upon any
subdivision or combination of shares of capital stock, or (ii) any employee
stock options approved by the Board of Directors of the Company.
(c) NOTICE FROM THE COMPANY. In the event the Company
proposes to issue New Securities, the Company shall give each Shareholder
written notice of such proposal, describing the type of New Securities and the
price and the terms upon which the Company proposes to issue such New
Securities. For a period of twenty (20) days following the delivery of such
notice by the Company, the Company shall be deemed to have irrevocably offered
to sell to each Shareholder its PRO RATA share of such New Securities for the
price and upon the terms specified in the notice. Each Shareholder may exercise
his, her or its preemptive rights hereunder by giving written notice to the
Company stating therein the quantity of New Securities to be purchased by such
Shareholder. Notwithstanding any other provision of this Section 4, and in
addition to any and all rights it may have hereunder, a Preferred Shareholder
may (i) assign its rights under this Section 4 to purchase New Securities or
cause any New Securities that it may purchase pursuant to this Section 4 to be
delivered in the name of any such Person as it may designate and (ii) require
that any New Securities that it purchases hereunder be nonvoting to the extent
necessary to preserve HCHI's status as a REIT for federal income tax purposes.
(d) SALE BY THE COMPANY. In the event any Shareholder fails
to exercise in full his, her or its preemptive right within the twenty (20) day
period described in Section 4(c) immediately above, the Company shall have sixty
(60) days thereafter to sell the New Securities with respect to which such
preemptive right was not exercised at a price and upon terms no more favorable
to the purchasers thereof than specified in the Company's notice pursuant to
Section 4(c) immediately above.
12
<PAGE> 13
(e) CLOSING. The closing for any issuance under this
Section 4 shall take place as proposed by the Company with respect to the shares
to be issued, at which closing the Company shall deliver certificates for such
shares in the respective names of the purchasing Shareholders against receipt of
payment therefor. All such shares shall be held by such Shareholders subject in
all respects to the terms of this Agreement.
5. CORPORATE GOVERNANCE. No Shareholder shall grant any proxy or
enter into or agree to be bound by any voting trust with respect to his, her or
its Shares nor shall any Shareholder enter into any shareholders agreements or
arrangements of any kind with any person with respect to the Shares on terms
which conflict with the provisions of this Agreement (whether or not such
agreements and arrangements are with other Shareholders), including, but not
limited to, agreements or arrangements with respect to the acquisition,
disposition or voting of Shares inconsistent herewith.
6. TERMINATION. This Agreement shall terminate upon the earlier
to occur of (a) dissolution or complete liquidation of the Company, (b) an
assignment for the benefit of creditors by, or an adjudication of bankruptcy or
appointment of a receiver for the Company or (c) a merger or consolidation of
the Company pursuant to which the Common Shareholders do not Control the
surviving corporation; provided, however, that no such termination shall have
any effect on the obligations herein set forth of the Company or the
Shareholders which have accrued as of such termination and to the extent
applicable to such obligations, this Agreement shall continue in effect until
all such obligations have been satisfied in full.
7. FAILURE TO DELIVER SHARES. If a Shareholder becomes obligated
to sell any Shares to the Company or to other Shareholders under this Agreement
and fails to deliver such Shares in accordance with the terms of this Agreement,
the Company or the other Shareholders (whichever the case may be) may, in
addition to all other remedies it or they may have, send to such Shareholder the
purchase price for such Shares as herein specified. Thereupon, the Company upon
written notice to the obligated Shareholder, (a) shall cancel on its books the
certificate or certificates representing the Shares to be sold and (b) shall
issue, in lieu thereof, in the name of the Company or the other Shareholders
(whichever the case may be) a new certificate or certificates representing such
Shares, and thereupon all of the obligated Shareholder's rights in and to such
Shares shall terminate.
8. REMEDIES; DISPUTES.
(a) SPECIFIC PERFORMANCE. If a Shareholder makes or
attempts to make a Transfer of Shares contrary to the provisions of this
Agreement, the Company and the other Shareholders may enforce their respective
rights under this Agreement by actions for specific performance (to the extent
permitted by law) in addition to pursuing any other legal or equitable remedies
they may have. In addition, the Company may refuse to recognize any Person who
receives shares of stock in the Company contrary to the provisions of this
Agreement as a shareholder for any purpose, including, without limitation, for
purposes of dividend and voting rights, until all applicable provisions of this
Agreement have been complied with.
13
<PAGE> 14
(b) DISPUTE RESOLUTION. All disputes, differences and
controversies arising hereunder shall be settled and finally determined by
arbitration in the City of New York under the then existing rules of the
American Arbitration Association.
9. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement sets forth
the entire understanding of the parties, and supersedes all prior agreements and
all other arrangements and communications, whether oral or written, with respect
to the subject matter of this Agreement, including, without limitation, the
Original Agreement, the First Amended Agreement and the Plan of
Recapitalization. Neither this Agreement nor any provision of this Agreement may
be waived, modified, amended or terminated except by a written agreement signed
by the parties to this Agreement. Waiver by a party to this Agreement of any
breach of or failure to comply with any provision of this Agreement by any other
party shall not be construed as, or constitute, a continuing waiver of such
provision, or a waiver or any other breach of, or failure to comply with, any
other provision of this Agreement.
10. SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions of
this Agreement, and this Agreement shall be construed in all respects as if the
invalid or unenforceable provision were omitted.
11. NOTICES. All notices and other communications necessary or
contemplated under this Agreement shall be in writing and shall be deemed to
have been duly given or made if personally delivered or sent by United States
mail or express mail service or by telegram confirmed by letter or telecopy to
the respective addresses set forth below:
(a) THE COMPANY. For notices and communications to the
Company:
Hanover Capital Partners Ltd.
90 West Street, Suite 1508
New York, New York 10006
Attention: President
(b) THE SHAREHOLDERS. For notices and communications to the
Shareholders, to the respective addresses set forth on SCHEDULE 1 attached
hereto.
All notices and other communications will be deemed to have been duly given,
unless earlier received, (i) if sent by certified or registered mail, return
receipt requested, or by first-class mail, five (5) calendar days after being
deposited in the United States mails, postage prepaid, (ii) if sent by United
States Express Mail or other express mail service, two calendar days (other than
Sundays and federal holidays) after being deposited therein, (iii) if sent by
telegram or telecopy, on the date sent provided confirmatory notice is sent by
first-class mail, postage prepaid, and (iv) if delivered by hand, on the date of
receipt.
By notice complying with the foregoing provisions of this Section 11, each party
shall have the right to change the mailing address for future notices and
communications to such party.
14
<PAGE> 15
12. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and to their
respective heirs, executors, administrators, legal representatives, successors
and permitted assigns; provided, however, that the rights under this Agreement
may not be assigned except as expressly provided herein. This Agreement shall
apply to all stock and equity securities of the Company now or hereafter
acquired by the Shareholders or any of their successors in interest.
13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the principles relating to conflicts of law, as to all matters,
including, but not limited to, matters of validity, construction, effect,
performance and remedies.
14. RECAPITALIZATION, EXCHANGES, ETC. Except upon termination of
this Agreement pursuant to Section 6(c) above, the provisions of this Agreement
shall apply, to the full extent set forth in this Agreement with respect to
Shares, to any and all shares of capital stock of the Company or any successor
or assign of the Company (whether by merger, consolidation, sale of assets or
otherwise) which may be issued in respect of, in exchange for, or in
substitution of the Shares, by reason of a stock dividend, stock split, stock
issuance, reverse stock split, combination, recapitalization, reclassification,
merger, consolidation or otherwise. Upon the occurrence of any such events,
amounts set forth on SCHEDULE 1 shall be appropriately adjusted and this
Agreement shall be amended to reflect the same within ten (10) days.
15. PURCHASE FOR INVESTMENT; LEGEND. Each of the parties to this
Agreement acknowledges that he, she or it holds the Shares shown opposite his,
her or its name on the attached SCHEDULE 1, that all of the Shares held by such
party as shown on SCHEDULE 1 to this Agreement are being (or have been) acquired
for investment and not with a view to the distribution thereof and that no
transfer, hypothecation or assignment of Shares may be made except in compliance
with applicable federal and state securities laws. All the certificates of
Shares of the Company which are now or hereafter owned by the Common
Shareholders and which are subject to the terms of this Agreement shall have
endorsed in writing, stamped or printed, thereon, the following legend:
THESE SECURITIES ARE SUBJECT TO THE TERMS AND
CONDITIONS, INCLUDING RESTRICTIONS ON TRANSFER, OF A
SHAREHOLDERS' AGREEMENT, DATED AS OF ,
1997, A COPY OF WHICH IS ON FILE WITH THE SECRETARY
OF THE COMPANY AND WILL BE MAILED TO ANY PROPERLY
INTERESTED PERSON WITHOUT CHARGE WITHIN FIVE (5)
DAYS AFTER THE COMPANY'S RECEIPT OF A WRITTEN
REQUEST THEREFOR.
All Shares shall also bear all legends required by federal and state
securities laws.
15
<PAGE> 16
16. HEADINGS. All headings and captions in this Agreement are for
purposes of reference only and shall not be construed to limit or affect the
substance of this Agreement.
17. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, and all signatures need
not appear on any one counterpart. The Company agrees that a copy of this
Agreement shall be kept at the principal office of the Company for inspection by
the Shareholders. Any Shareholder shall have the right to inspect said copy of
this Agreement and the books and records of the Company at reasonable times
after reasonable notice.
18. NO EMPLOYMENT RIGHTS; NO DISCLOSURE. Each Shareholder agrees
and acknowledges that (a) neither the holding of Shares by such Shareholder nor
any provision of this Agreement shall give any Shareholder the right to be
retained in the employ of the Company or otherwise affect his or her employment
relationship with the Company, and (b) neither the Company nor any other
Shareholder shall have any duty affirmatively to disclose to a Shareholder, and
no Shareholder shall have any right to be advised of, any material information
regarding the Company or its business or prospects at any time prior to, upon or
in connection with any mandatory transfer of Shares under this Agreement.
19. WAIVER OF CLAIMS; INDEMNIFICATION. Each Shareholder hereby
waives any claims he, she or it might otherwise have had against the Company or
any other Shareholder under the Original Agreement, the First Amended Agreement
or the Plan of Recapitalization. The Initial Shareholders (the "Indemnitors")
shall indemnify the Company and the other Shareholders (the "Indemnitees") for,
and hold them harmless from and against, any losses, expenses or damages the
Indemnitees may suffer or incur as a result of any actions or claims arising
under the Original Agreement, the First Amended Agreement or the Plan of
Recapitalization.
[Remainder of Page Intentionally Left Blank]
<PAGE> 17
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Agreement as of the date first above written.
"COMPANY"
HANOVER CAPITAL PARTNERS LTD.
By:_________________________________
Name:
Title:
"HCHI"
By:_________________________________
Name:
Title:
"BURCHETT"
____________________________________
John A. Burchett
"MIZERAK"
____________________________________
Joyce S. Mizerak
"OSTENDORF"
____________________________________
George J. Ostendorf
"TAVARES"
____________________________________
Irma N. Tavares
17
<PAGE> 18
SCHEDULE 1
<TABLE>
<CAPTION>
Shareholder Number and Class of Shares
----------- --------------------------
<S> <C>
John A. Burchett 1,650 Shares of Class A Common
896 Highland Avenue Stock
Westfield, NJ 07090
Joyce S. Mizerak 450 Shares of Class A Common
11 Foxhill Run Stock
Monmouth Junction, NJ 08852
George J. Ostendorf 450 Shares of Class ACommon
506 E. Marshall Street Stock
Arlington Heights, IL 60004
Irma N. Tavares 450 Shares of Class A Common
1 Kevin Road Stock
Scotch Plains, NJ 07076
Hanover Capital Mortgage Holdings, L.P. 97,000 Shares of Series A Preferred
100 Metroplex Drive Stock
Suite 301
Edison, NJ 08817
</TABLE>
18
<PAGE> 1
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
BONUS INCENTIVE COMPENSATION PLAN
1. PURPOSE AND DURATION
1.1 Purposes. The purposes of the Hanover Capital Mortgage Holdings,
Inc. Bonus Incentive Compensation Plan are to attract, retain and motivate
employees and consultants of the Company, its Parent (if any), and any present
or future Subsidiaries and to enable them to participate in the growth of the
Company by paying cash bonuses based upon profitability to such persons and by
providing for or increasing the proprietary interests of such persons in the
Company.
1.2 Effective Date. The Plan is effective as of the date of its
adoption by the Board.
1.3 Expiration Date. The Plan shall expire one day less than ten years
from the date of the adoption of the Plan by the Board. In no event shall any
Awards be made under the Plan after such expiration date, but Awards previously
granted may extend beyond such date.
2. DEFINITIONS
As used in the Plan, the following capitalized words shall have the
meanings indicated:
"Actual ROE" or "Actual Return on Equity" means, for any fiscal year,
(i) Adjusted Net Income for such fiscal year, divided by (ii) the Average Net
Worth for such fiscal year.
"Adjusted Net Income" means, for any fiscal year, the Company's Net
Income computed without regard to the accrual of any Bonuses for such fiscal
year hereunder.
"Average Net Worth" means, for any fiscal year, the average of the
twelve (12) month-end net worth balances of the Company for such fiscal year,
determined in accordance with GAAP and without regard to earnings and losses in
such fiscal year.
"Award" means, individually or collectively, an award of a Bonus
hereunder.
"Base BROE" means, for any fiscal year, (i) the average weekly Ten-Year
U.S. Treasury Rate for such fiscal year plus (ii) four percent (4%).
"Board" means the Board of Directors of the Company.
"Bonus" means a bonus paid or to be paid in cash and, subject to the
Ownership Limit, Shares hereunder.
"Bonus Base" means, for any fiscal year, (i) the Adjusted Net Income
for such fiscal year minus (ii) (a) the Average Net Worth for such fiscal year
multiplied by (b) the Base BROE for such fiscal year.
"Bonus Percentage" means, for any fiscal year, (i) zero percent (0%) if
the Excess ROE for
<PAGE> 2
such fiscal year is zero (0) or less, (ii) twelve percent (12%) if the Excess
ROE for such fiscal year is greater than zero (0) but not greater than six
percent (6%) or (iii) fifteen percent (15%) if the Excess ROE for such fiscal
year is greater than six percent (6%).
"Bonus Pool" means, for any fiscal year, (i) if the Excess ROE for such
fiscal year is six percent (6%) or less, the Bonus Percentage for such fiscal
year multiplied by the Bonus Base for such fiscal year, and (ii) if the Excess
ROE for such fiscal year is greater than six percent (6%), (a) the Bonus
Percentage for such fiscal year multiplied by the Incremental Bonus Base for
such fiscal year plus (b) the Fixed Minimum Bonus for such fiscal year.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board, which shall
consist of two or more directors, each of whom shall be a Non-Employee Director
and an "outside director" within the meaning of Section 162(m) of the Code, or
any successor provision.
"Company" means Hanover Capital Mortgage Holdings, Inc., a Maryland
corporation, or any successor thereto.
"Director" means any individual who is a member of the Board.
"Excess ROE" means, for any fiscal year, (i) the Actual ROE for such
fiscal year minus (ii) the Base BROE for such fiscal year.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to a Share as of any date of
determination, in the discretion of the Committee, (i) the closing price per
Share on such date, as reported in the Wall Street Journal, on the principal
exchange for the Shares or the Nasdaq National Market, (ii) the average closing
price per Share, as reported in the Wall Street Journal, during the twenty (20)
day period that ends on such date on the principal exchange for the Shares or
the Nasdaq National Market or (iii) if Shares are not publicly traded, the fair
market value of such Share as determined by the Committee in accordance with a
valuation methodology approved by the Committee in good faith.
"Fixed Minimum Bonus" means, for any fiscal year, (i) the Average Net
Worth for such fiscal year multiplied by (ii) 0.72%.
"GAAP" means Generally Accepted Accounting Principles.
"Grant Date" means the effective date of an Award as specified by the
Committee and set forth in the applicable Award Agreement.
"Incremental Bonus Base" means, for any fiscal year, (i) the Bonus Base
for such fiscal year minus (ii) (a) the Average Net Worth for such fiscal year
minus (b) six percent (6%).
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"Non-Employee Director" means a "non-employee director" as that term is
defined in Rule 16b-3 promulgated under the Exchange Act, or any successor
provision.
"Ownership Limit" means the limitation set forth in Article Ninth of
the Company's Articles of Incorporation on the percentage of the outstanding
Shares that any person or group of persons may own, applying certain
constructive ownership rules set forth therein.
"Parent" means any corporation, partnership, limited liability company
or other entity that directly or indirectly owns more than fifty percent (50%)
of the voting or beneficial interest in the Company.
"Participant" means an individual who has been selected by the
Committee to receive an Award under the Plan.
"Plan" means the Hanover Capital Mortgage Holdings, Inc. Bonus
Incentive Compensation Plan set forth in this document and as hereafter amended
from time to time in accordance with Section 7.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's common stock, par value $.01 per
share.
"Subsidiary" means a corporation, partnership, limited liability
company or other entity more than fifty percent (50%) of the voting or
beneficial interest in which is owned, directly or indirectly, by the Company.
3. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee, which shall have the
authority to adopt, alter and repeal such administrative rules, guidelines and
practices governing the operation of the Plan as it shall consider advisable
from time to time, to interpret the provisions of the Plan and any Award and to
decide all disputes arising in connection with the Plan. The Committee's
decisions and interpretations shall be final and binding. In the event that
there is no Committee as provided in the Plan, the Plan shall be administered by
the Board, in which case all references in the Plan to the Committee shall be
references to the Board.
4. ELIGIBILITY OF PARTICIPANTS
The persons eligible to receive Awards under the Plan shall be all
executive officers, directors, employees, independent contractors and
consultants of the Company, its Parent (if any), and any Subsidiaries who, in
the opinion of the Committee, are in a position to make a significant
contribution to the success of the Company, its Parent (if any), and any
Subsidiaries.
5. GRANT OF AWARDS
After the audit of the Company's financial statements has been
completed for any fiscal
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year by the Company's independent public accountants, the Committee shall award
Bonuses out of the Bonus Pool for such year to persons eligible to receive
Awards hereunder. The Committee shall award Bonuses under the Plan on a prorated
basis for any fiscal year consisting of fewer than twelve months, in which case
all of terms of the Plan shall be modified accordingly. Any Bonus awarded
hereunder shall be paid (i) one-half (1/2) in cash and (ii) subject to the
Ownership Limit, one-half (1/2) in Shares having a Fair Market Value as of the
Grant Date equal to one-half (1/2) of the amount of such Bonus.
6. GENERAL PROVISIONS APPLICABLE TO AWARDS
6.1 Legal and Regulatory Matters. The delivery of Shares shall be
subject to compliance with (i) applicable federal and state laws and
regulations, (ii) if the outstanding Shares are listed at the time on any stock
exchange, the listing requirements of such exchange, (iii) the Ownership Limit
and (iii) the Company's counsel's approval of all other legal matters in
connection with the issuance and delivery of the Shares. If the sale of the
Shares has not been registered under the Securities Act, the Company may
require, as a condition to delivery of the Shares, such representations or
agreements as counsel for the Company may consider appropriate to avoid
violation of such Act and may require that the certificates evidencing the
Shares bear an appropriate legend restricting transfer.
6.2 Withholding Requirements and Arrangements. The Participant shall
pay to the Company, or make provision satisfactory to the Committee for payment
of, any taxes required by law to be withheld in respect of Awards under the Plan
no later than the date of the event creating the tax liability. In the
Committee's discretion, such tax obligations may be paid in whole or in part in
Shares, including Shares retained from the Award creating the tax obligation,
valued at Fair Market Value on the date of delivery, provided, however, that
with respect to any Participant subject to Section 16(a) of the Exchange Act,
any such retention of Shares shall be made in compliance with any applicable
requirements of Rule 16b-3(e) or any successor rule under the Exchange Act. The
Company may, to the extent permitted by law, deduct any such tax obligations
from any payment of any kind otherwise due to the Participant.
6.3 No Effect on Employment. The Plan shall not give rise to any right
on the part of any Participant to continue in the employ of the Company, its
Parent (if any) or any Subsidiary. The loss of existing or potential profit in
Awards granted under the Plan shall not constitute an element of damages in the
event of termination of the relationship of a Participant even if the
termination is in violation of an obligation of the Company to the Participant
by contract or otherwise.
6.4 No Rights as Shareholder. Subject to the provisions of the Plan and
the applicable Award, no Participant shall have any rights as a shareholder with
respect to any Shares to be distributed under the Plan until he or she becomes
the holder thereof.
6.5 Fractional Shares. No fractional Shares shall be issued under the
Plan. Any fractional Shares which, but for this Section, would have been issued
shall be deemed to have been issued and immediately sold to the Company for
their Fair Market Value, and the Participant shall receive from the Company cash
in lieu of such fractional Shares.
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<PAGE> 5
6.6 Other Transfer Restrictions. Notwithstanding any other provision of
the Plan, in order to qualify for the exemption provided by Rule 16b-3 under the
Exchange Act, and any successor provision, any Shares offered under the Plan to
a Participant subject to Section 16 of the Exchange Act (a "Section 16
Participant") may not be sold for six (6) months after acquisition. The
Committee shall have no authority to take any action if the authority to take
such action, or the taking of such action, would disqualify the Plan from the
exemption provided by Rule 16b-3 under the Act, and any successor provision.
6.7 Ownership Limit. Notwithstanding any other provision of the Plan,
the rights of any Participant to acquire Shares under the Plan are subject to
the Ownership Limit.
7. AMENDMENT AND TERMINATION
7.1 Amendment, Suspension, Termination of the Plan. The Committee may
modify, amend, suspend or terminate the Plan in whole or in part at any time;
provided, however, that no modification, amendment, suspension or termination of
the Plan shall be made without shareholder approval if such approval is
necessary to comply with any applicable tax or regulatory requirement, including
any requirements for exemptive relief under Section 16(b) of the Exchange Act or
any successor provision; provided, further, that such modification, amendment,
suspension or termination shall not, without a Participant's consent, affect
adversely the rights of such Participant with respect to any Award previously
made.
7.2 Amendment, Suspension, Termination of an Award. The Committee may
modify, amend or terminate any outstanding Award, including, without limitation,
substituting therefor another Award of the same or a different type; provided,
however, that the Participant's consent to such action shall be required unless
the Committee determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
8. LEGAL CONSTRUCTION
8.1 Captions. The captions provided herein are included solely for
convenience of reference and shall not affect the meaning of any of the
provisions of the Plan or serve as a basis for interpretation or construction of
the Plan.
8.2 Severability. In the event any provision of the Plan is held
invalid or illegal for any reason, the illegality or invalidity shall not affect
the remaining provisions of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
8.3 Governing Law. The Plan and all rights under the Plan shall be
construed in accordance with and governed by the internal laws of the State of
Maryland.
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HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
1997 EXECUTIVE AND NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE AND DURATION
1.1 Purposes. The purposes of the Hanover Capital Mortgage Holdings,
Inc. 1997 Executive and Non-Employee Director Stock Option Plan are to attract,
retain and motivate employees and consultants of the Company, its Parent (if
any), and any present or future Subsidiaries and to enable them to participate
in the growth of the Company by providing for or increasing the proprietary
interests of such persons in the Company.
1.2 Effective Date. The Plan is effective as of the date of its
adoption by the Board.
1.3 Expiration Date. The Plan shall expire one day less than ten years
from the date of the adoption of the Plan by the Board. In no event shall any
Awards be made under the Plan after such expiration date, but Awards previously
granted may extend beyond such date.
2. DEFINITIONS
As used in the Plan, the following capitalized words shall have the
meanings indicated:
"Average Spread" means, for any period, (i) the average closing price
per Share, as reported in the Wall Street Journal, on the principal exchange for
the Shares or the Nasdaq National Market minus (ii) the IPO Price.
"Award" means, individually or collectively, a grant under the Plan of
Options, SARs, Performance Units, Restricted Stock or Stock Units.
"Award Agreement" means the written agreement setting forth the terms
and provisions applicable to an Award granted under the Plan.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board, which shall
consist of two or more directors, each of whom shall be a Non-Employee Director
and an "outside director" within the meaning of Section 162(m) of the Code, or
any successor provision.
"Company" means Hanover Capital Mortgage Holdings, Inc., a Maryland
corporation, or any successor thereto.
"Director" means any individual who is a member of the Board.
"Earn-Out Measuring Date" means each September 30, beginning with
September 30, 1998 and ending with September 30, 2002.
<PAGE> 2
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to a Share as of any date of
determination, in the discretion of the Committee, (i) the closing price per
Share on such date, as reported in the Wall Street Journal, on the principal
exchange for the Shares or the Nasdaq National Market, (ii) the average closing
price per Share, as reported in the Wall Street Journal, during the twenty (20)
day period that ends on such date on the principal exchange for the Shares or
the Nasdaq National Market or (iii) if Shares are not publicly traded, the fair
market value of such Share as determined by the Committee in accordance with a
valuation methodology approved by the Committee in good faith.
"Grant Date" means the effective date of an Award as specified by the
Committee and set forth in the applicable Award Agreement.
"Incentive Stock Option" or "ISO" means an option to purchase Shares
awarded to a Participant under Section 6 of the Plan that is intended to meet
the requirements of Section 422 of the Code.
"IPO Price" means the issue price of a unit consisting of a Share and a
warrant to acquire a Share in the Company's initial public offering.
"Non-Employee Director" means a "non-employee director" as that term is
defined in Rule 16b-3 promulgated under the Exchange Act, or any successor
provision.
"Nonqualified Stock Option" or "NQO" means an option to purchase Shares
awarded to a Participant under Section 6 of the Plan that is not intended to be
an ISO.
"Option" means an ISO or an NQO.
"Ownership Limit" means the limitation set forth in Article Ninth of
the Company's Articles of Incorporation on the percentage of the outstanding
Shares that any person or group of persons may own, applying certain
constructive ownership rules set forth therein.
"Parent" means a "parent corporation" as that term is defined in
Section 424 of the Code.
"Participant" means an individual who has been selected by the
Committee to receive an Award under the Plan.
"Performance Cycle" means the period of time selected by the Committee
during which performance is measured for the purpose of determining the extent
to which an Award of Performance Shares has been earned. More than one
Performance Cycle may be in progress at any one time and the duration of
Performance Cycles may differ.
"Performance Unit Award" means an Award to a Participant under Section
8 of the Plan that entitles the Participant to acquire Shares upon the
attainment of specified performance goals.
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<PAGE> 3
"Plan" means the Hanover Capital Mortgage Holdings, Inc. 1997 Executive
and Non-Employee Director Stock Option Plan set forth in this document and as
hereafter amended from time to time in accordance with Section 13.
"Principals" means John A. Burchett, Joyce S. Mizerak, George J.
Ostendorf and Irma N. Tavares.
"Restricted Period" means the period of time selected by the Committee
during which Shares of Restricted Stock are subject to forfeiture and/or
restrictions on transferability.
"Restricted Stock" means Shares awarded to a Participant under Section
9 of the Plan pursuant to an Award that entitles the Participant to acquire
Shares for a purchase price (which may be zero if permissible under applicable
law), subject to such conditions as the Committee may determine to be
appropriate, including a Company right during a specified period or periods to
repurchase the Shares at their original purchase price (or to require forfeiture
of the Shares if the purchase price was zero and if permissible under applicable
law) upon the Participant's termination of employment.
"SAR" or "Stock Appreciation Right" means an Award that is designated
as an SAR pursuant to Section 7 of the Plan, granted alone or in connection with
a related Award, entitling a Participant to receive an amount in cash or Shares
or a combination thereof having a value equal to (or if the Committee shall so
determine at time of grant, less than) the excess of the Fair Market Value of a
Share on the date of exercise over the Fair Market Value of a Share on the Grant
Date (or over the Option exercise price, if the Stock Appreciation Right was
granted in tandem with an Option) multiplied by the number of Shares with
respect to which the Stock Appreciation Right is exercised.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's common stock, par value $.01 per
share.
"Stock Unit" means an Award of a Share or a unit valued in whole or in
part by reference to, or otherwise based on, the value of a Share, granted to a
Participant under Section 10 of the Plan.
"Subsidiary" means a "subsidiary corporation" as that term is defined
in Section 424 of the Code.
"Total Return per Unit" means, as of any Earn-Out Measuring Date, (i)
two times the Average Spread for the thirty (30) day period that ends on such
Earn-Out Measuring Date, plus (ii) the sum of all distributions that have been
made by the Company with respect to a Share issued in the Company's initial
public offering through and including such Earn-Out Measuring Date.
3. ADMINISTRATION OF THE PLAN
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<PAGE> 4
The Plan shall be administered by the Committee, which shall have the
authority to adopt, alter and repeal such administrative rules, guidelines and
practices governing the operation of the Plan as it shall consider advisable
from time to time, to interpret the provisions of the Plan and any Award and to
decide all disputes arising in connection with the Plan. The Committee's
decisions and interpretations shall be final and binding. In the event that
there is no Committee as provided in the Plan, the Plan shall be administered by
the Board, in which case all references in the Plan to the Committee shall be
references to the Board.
4. ELIGIBILITY OF PARTICIPANTS
The persons eligible to receive Awards under the Plan shall be all
executive officers of the Company, its Parent (if any), and any Subsidiaries and
other employees, consultants, advisers and agents who, in the opinion of the
Committee, are in a position to make a significant contribution to the success
of the Company, its Parent (if any), and any Subsidiaries. Directors, including
directors who are not employees, of the Company, its Parent (if any), and any
Subsidiaries shall be eligible to receive Awards under the Plan, provided that
members of the Committee may not be granted ISOs.
5. STOCK AVAILABLE FOR AWARDS
5.1 Number of Shares. Subject to Section 12.12, Awards may be granted
under the Plan in respect of up to 325,333 of the Shares. All of the grants made
under the Plan may be in the form of ISOs. Shares issued under the Plan may
consist in whole or in part of authorized but unissued Shares or treasury
Shares.
5.2 Lapsed, Forfeited or Expired Awards. If any Award in respect of
Shares expires or is terminated before exercise or is forfeited for any reason,
the Shares subject to such Award, to the extent of such expiration, termination
or forfeiture, shall again be available for award under the Plan.
6. STOCK OPTIONS
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
the Committee may award Options and determine the number of shares to be covered
by each Option, the exercise price therefor, the term of the Option, and any
other conditions and limitations applicable to the exercise of the Option. The
Committee may grant ISOs, NQOs or a combination thereof, provided that members
of the Committee may not be granted ISOs.
6.2 Exercise Price. Subject to the provisions of this Section 6 and
Section 14, the exercise price for each Option shall be determined by the
Committee in its sole discretion.
6.3 Restrictions on Option Transferability and Exercisability.
6.3.1 General. No Option shall be transferable by the
Participant other than by will or the laws of descent and distribution, and all
Options shall be exercisable, during the Participant's lifetime, only by the
Participant; provided, however, that the Committee may provide that an Option is
transferable by the Participant and exercisable by persons other than the
Participant upon
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such terms and conditions as the Committee shall determine.
6.3.2 Vesting of Options. In addition to any other vesting
requirements imposed by the Committee and the Plan, all Options granted by the
Committee will be contingent and will vest according to the following schedule.
For each Earn-Out Measuring Date through which the Total Return per Unit equals
at least a 20% annualized return on the IPO Price, one-third (1/3) of an Option
granted hereunder will be vested as of the later of the Grant Date of the Option
or such Earn-Out Measuring Date until the Option has fully vested. In addition,
if the Total Return per Unit is at least equal to the IPO Price as of any
Earn-Out Measuring Date, an Option granted hereunder will be fully vested as of
the later of the Grant Date of such Option or such Earn-Out Measuring Date. In
determining whether any Option granted hereunder has vested, appropriate
adjustments will be made for distributions and transactions described in Section
12.12.1.
6.4 Certain Additional Provisions for Incentive Stock Options
6.4.1 Exercise Price. In the case of an ISO, the exercise
price shall be not less than one hundred percent (100%) of the Fair Market Value
on the Grant Date of the Shares subject to the Option; provided, however, that
if on the Grant Date the Participant (together with persons whose stock
ownership is attributed to the Participant pursuant to Section 424(d) of the
Code) owns stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company, its Parent (if any) or any
Subsidiaries, the exercise price shall be not less than one hundred and ten
percent (110%) of the Fair Market Value on the Grant Date of the Shares subject
to the Option.
6.4.2 Exercisability. Subject to Section 12.3 and Section
12.4, the aggregate Fair Market Value (determined on the Grant Date(s)) of the
Shares with respect to which ISOs are exercisable for the first time by any
Participant during any calendar year (under all plans of the Company, its Parent
(if any) and any Subsidiaries) shall not exceed $100,000.
6.4.3 Eligibility. ISOs may be granted only to persons who are
employees of the Company, its Parent (if any) or any Subsidiaries on the Grant
Date.
6.4.4 Expiration. No ISO may be exercised after the expiration
of one day less than ten (10) years from the Grant Date; provided, however, that
if the Option is granted to a Participant who, together with persons whose stock
ownership is attributed to the Participant pursuant to Section 424(d) of the
Code, owns stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company, its Parent (if any) or any
Subsidiaries, the ISO may not be exercised after the expiration of one day less
than five (5) years from the Grant Date.
6.4.5 Compliance with Section 422 of the Code. The terms and
conditions of ISOs shall be subject to and comply with Section 422 of the Code
or any successor provision.
6.4.6 Notice to Company of Disqualifying Disposition. Each
Participant who receives an ISO agrees to notify the Company in writing
immediately after the Participant makes a Disqualifying Disposition of any
Shares received pursuant to the exercise of an ISO. The term
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<PAGE> 6
"Disqualifying Disposition" means any disposition (including any sale) of Shares
before the later of (a) two years after the Participant was granted the ISO
under which the Participant acquired such Shares, or (b) one year after the
Participant acquired the Shares by exercising the ISO.
6.4.7 Substitute Options. Notwithstanding the provisions of
Section 6.4.1, in the event that the Company, its Parent (if any) or any
Subsidiary consummates a transaction described in Section 424(a) of the Code
(relating to the acquisition of property or stock from an unrelated
corporation), individuals who become employees or consultants of the Company,
its Parent (if any) or any Subsidiary on account of such transaction may be
granted ISOs in substitution for options granted by their former employer. The
Committee, in its sole discretion and consistent with Section 424(a) of the
Code, shall determine the exercise price of such substitute Options.
6.5 NQO Presumption. Options granted pursuant to the Plan shall be
presumed to be NQOs unless expressly designated ISOs in the Award Agreements.
7. GRANT OF SARS
7.1 Awards. Subject to the terms and provisions of the Plan, the
Committee may award SARs in tandem with another Award (at or after the Grant
Date of the other Award), or alone and unrelated to another Award, and may
determine the terms and conditions applicable thereto, including the form of
payment.
7.2 Additional Conditions and Limitations. The Committee may impose
such additional conditions or limitations on the exercise of an SAR as it may
deem necessary or desirable to secure for Participants the benefits of Rule
16b-3 promulgated under Section 16(b) of the Exchange Act, or any successor
provision in effect at the time of grant or exercise of an SAR.
7.3 Exercises of Options. Notwithstanding that an Option at the time of
exercise shall not be accompanied by a related SAR, if the Fair Market Value of
the Shares subject to such Option exceeds the exercise price of such Option at
the time of its exercise, the Committee may, in its discretion, cancel such
Option, in which event the Company shall pay to the person exercising such
Option an amount equal to the difference between the Fair Market Value of the
Shares to have been purchased pursuant to such exercise of such Option
(determined on the date the Option is cancelled) and the aggregate consideration
to have been paid by such person upon such exercise. Such payment shall be by
check, bank draft or in Shares having a Fair Market Value (determined on the
date the payment is to be made) equal to the amount of such payments or any
combination thereof, as determined by the Committee. The Committee may exercise
its discretion under the first sentence of this Section 7.3 only in the event of
a written request of the person exercising the option, which request shall not
be binding on the Committee.
8. PERFORMANCE UNITS
8.1 Grant of Performance Units. The Committee may award Performance
Units to Participants and determine the performance goals applicable to each
such Award, the number of Shares for each Performance Cycle, the duration of
each Performance Cycle and all other limitations and conditions applicable to
the awarded Performance Units. The payment value of each
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Performance Unit shall be equal to the Fair Market Value of one Share on the
date the Performance Unit is earned or, in the discretion of the Committee, on
the date the Committee determines that the Performance Unit has been earned.
8.2 Adjustment of Performance Goals. Except as provided in an Award,
during any Performance Cycle, the Committee may adjust the performance goals for
the Performance Cycle as it deems equitable in recognition of unusual or
non-recurring events affecting the Company or its Shares, changes in applicable
tax laws or accounting principles, or such other factors as the Committee shall
determine.
8.3 Attainment of Goals. As soon as practical after the end of a
Performance Cycle, the Committee will determine the number of Performance Units
which have been earned by each Participant on the basis of performance in
relation to the established performance goals. The payment values of earned
Performance Units will be distributed to the Participant as soon as practicable
thereafter subject to the other provisions of the Plan. The Committee will
determine, at or after the time of an Award, whether payments values will be
settled in whole or in part in cash or other property, including Shares and
Awards.
9. RESTRICTED STOCK
9.1 Grant of Restricted Stock. The Committee may award Shares of
Restricted Stock and determine the purchase price, if any, therefor, the
duration of the Restricted Period, the conditions under which the Shares may be
forfeited to or repurchased by the Company and any other terms and conditions of
the Awards. The Committee may modify or waive any restrictions, terms and
conditions with respect to any Restricted Stock. Shares of Restricted Stock may
be issued for whatever consideration is determined by the Committee, subject to
applicable law.
9.2 Transferability. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered, except as permitted by
the Committee, during the Restricted Period.
9.3 Evidence of Award. Shares of Restricted Stock shall be evidenced in
such manner as the Committee may determine. Any certificates issued in respect
of Shares of Restricted Stock shall be registered in the name of the Participant
and, unless otherwise determined by the Committee, deposited by the Participant,
together with a stock power endorsed in blank, with the Company. At the
expiration of the Restricted Period, the Company shall deliver the certificates
and stock power to the Participant.
9.4 Shareholder Rights. A Participant shall have all the rights of a
shareholder with respect to Restricted Stock awarded, including voting and
dividend rights, unless otherwise provided in the Award Agreement.
10. STOCK UNITS
10.1 Grant of Stock Units. Subject to the terms and provisions of the
Plan, the Committee may award Stock Units subject to such terms, restrictions,
conditions, performance criteria, vesting
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requirements and payment rules as the Committee shall determine.
10.2 Consideration. Shares awarded in connection with a Stock Unit may
be issued for whatever consideration is determined by the Committee, subject to
applicable law.
11. GRANT OF OTHER AWARDS
The Committee shall have the authority to specify the terms and
provisions of other forms of equity-based or equity-related Awards not described
above which the Committee determines to be consistent with the purposes of the
Plan and the interests of the Company, which Awards may provide for cash
payments based in whole or in part on the value or future value of Shares, for
the acquisition or future acquisition of Shares, or any combination thereof.
Other Awards may also include cash payments (including the cash payment of
dividend equivalents) under the Plan which may be based on one or more criteria
determined by the Committee that are unrelated to the value of the Shares and
that may be granted in tandem with, or independent of, other Awards under the
Plan.
12. GENERAL PROVISIONS APPLICABLE TO AWARDS
12.1 Legal and Regulatory Matters. The delivery of Shares shall be
subject to compliance with (i) applicable federal and state laws and
regulations, (ii) if the outstanding Shares are listed at the time on any stock
exchange, the listing requirements of such exchange, (iii) the Ownership Limit
and (iii) the Company's counsel's approval of all other legal matters in
connection with the issuance and delivery of the Shares. If the sale of the
Shares has not been registered under the Securities Act, the Company may
require, as a condition to delivery of the Shares, such representations or
agreements as counsel for the Company may consider appropriate to avoid
violation of such Act and may require that the certificates evidencing the
Shares bear an appropriate legend restricting transfer.
12.2 Written Award Agreement. The terms and provisions of an Award
shall be set forth in an Award Agreement approved by the Committee and delivered
or made available to the Participant as soon as practicable following the Grant
Date. Where the Award is an Option Award, the Award Agreement shall specify
whether the Option is intended to be an ISO or a NQO.
12.3 Determination of Restrictions on the Award. Subject to Section
6.3.2, the vesting, exercisability, payment and other restrictions applicable to
an Award (which may include, without limitation, restrictions on transferability
or provision for mandatory resale to the Company) shall be determined by the
Committee and set forth in the applicable Award Agreement. Notwithstanding the
foregoing, but subject to Section 6.3.2, the Committee may accelerate (i) the
vesting or payment of any Award (including an ISO), (ii) the lapse of
restrictions on any Award (including an Award of Restricted Stock) and (iii) the
date on which any Option or SAR first becomes exercisable.
12.4 Mergers, etc. Notwithstanding any other provision of the Plan, in
the event of a consolidation or merger in which the Company is not the surviving
corporation or which results in the acquisition of substantially all the
Company's outstanding shares by a single person or entity or by a group of
persons and/or entities acting in concert, or in the event of the sale or
transfer of
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substantially all the Company's assets, then if the Committee so determines, all
outstanding Awards shall terminate, provided that at least twenty (20) days
prior to the effective date of any such merger, consolidation or sale of assets,
the Committee shall either (i) make all outstanding Awards exercisable
immediately prior to the consummation of such merger, consolidation or sale of
assets or (ii) if there is a surviving or acquiring corporation, arrange,
subject to consummation of the merger, consolidation or sale of assets, to have
that corporation or an affiliate of that corporation grant to Participants
replacement Awards, which Awards in the case of ISOs shall satisfy, in the
discretion of the Committee, the requirements of section 424(a) of the Code.
12.5 Termination of Employment. For purposes of the Plan, the following
events shall not be deemed a termination of employment of a Participant: (i) a
transfer to the employment of the Company from its Parent (if any) or from a
Subsidiary, or from the Company to its Parent (if any) or to a Subsidiary, or
from one Subsidiary to another, or from the Company's Parent (if any) to a
Subsidiary, or from a Subsidiary to the Company's Parent (if any); or (ii) an
approved leave of absence for military service or sickness, or for any other
purpose approved by the Company, if the Participant's right to employment is
guaranteed either by a statute or by contract or under the policy pursuant to
which the leave of absence was granted or if the Committee otherwise so provides
in writing. For purposes of the Plan, employees of a Subsidiary or Parent (if
any) shall be deemed to have terminated their employment on the date on which
such Subsidiary or Parent ceases to be a Subsidiary or Parent of the Company, as
the case may be.
12.6 Date of and Effect of Termination of Employment. The date of a
Participant's termination of employment for any reason shall be determined in
the sole discretion of the Committee. The Committee shall have full authority to
determine and specify in the applicable Award Agreement the effect, if any, that
a Participant's termination of employment for any reason will have on the
vesting, exercisability, payment or lapse of restrictions applicable to an
outstanding Award.
12.7 Grant of Awards. Each Award may be made alone, in addition to or
in relation to any other Award. The terms of each Award need not be identical,
and the Committee need not treat Participants uniformly.
12.8 Settlement of Awards. No Shares shall be delivered pursuant to any
exercise of an Award until payment in full of the price therefor, if any, is
received by the Company. Such payment may be made in whole or in part in cash or
by certified or bank check or, to the extent permitted by the Committee at or
after the Grant Date, by delivery of a note or Shares, including Restricted
Stock, valued at their Fair Market Value on the date of delivery, or such other
lawful consideration as the Committee shall determine.
12.9 Withholding Requirements and Arrangements. The Participant shall
pay to the Company, or make provision satisfactory to the Committee for payment
of, any taxes required by law to be withheld in respect of Awards under the Plan
no later than the date of the event creating the tax liability. In the
Committee's discretion, such tax obligations may be paid in whole or in part in
Shares, including Shares retained from the Award creating the tax obligation,
valued at Fair Market Value on the date of delivery, provided, however, that
with respect to any Participant subject to Section 16(a) of the Exchange Act,
any such retention of Shares shall be made in
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<PAGE> 10
compliance with any applicable requirements of Rule 16b-3(e) or any successor
rule under the Exchange Act. The Company may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due to
the Participant.
12.10 No Effect on Employment. The Plan shall not give rise to any
right on the part of any Participant to continue in the employ of the Company,
its Parent (if any) or any Subsidiary. The loss of existing or potential profit
in Awards granted under the Plan shall not constitute an element of damages in
the event of termination of the relationship of a Participant even if the
termination is in violation of an obligation of the Company to the Participant
by contract or otherwise.
12.11 No Rights as Shareholder. Subject to the provisions of the Plan
and the applicable Award Agreement, no Participant shall have any rights as a
shareholder with respect to any Shares to be distributed under the Plan until he
or she becomes the holder thereof.
12.12 Adjustments. Upon the happening of any of the following described
events, a Participant's rights with respect to Awards granted hereunder shall be
adjusted as hereinafter provided, unless otherwise specifically provided in the
Award Agreement.
12.12.1 Stock Splits and Recapitalizations. In the event the
Company issues any of its Shares as a stock dividend upon or with respect to the
Shares, or in the event Shares shall be subdivided or combined into a greater or
smaller number of Shares, or if, upon a merger or consolidation (except those
described in Section 12.4), reorganization, split-up, liquidation, combination,
recapitalization or the like of the Company, Shares shall be exchanged for other
securities of the Company, securities of another entity, cash or other property,
each Participant upon exercising an Award (for the purchase price to be paid
under the Award) shall be entitled to purchase such number of Shares, other
securities of the Company, securities of such other entity, cash or other
property as the Participant would have received if the Participant had been the
holder of the Shares with respect to which the Award is exercised at all times
between the Grant Date of the Award and the date of its exercise, and
appropriate adjustments shall be made in the purchase price per Share.
12.12.2 Restricted Stock. If any person owning Restricted Stock
receives new or additional or different shares or securities ("New Securities")
in connection with a corporate transaction described in Section 12.12.1 or a
stock dividend described in Section 12.12.1 as a result of owning such
Restricted Stock, the New Securities shall be subject to all of the conditions
and restrictions applicable to the Restricted Stock with respect to which such
New Securities were issued.
12.12.3 Committee Determination. Notwithstanding any provision to
the contrary, no adjustments shall be made pursuant to this Section 12.12.1 with
respect to ISOs, unless (i) the Committee, after consulting with counsel for the
Company, determines that such adjustments would not constitute a modification,
"extension" or "renewal" of such ISOs as such terms are defined in Section 424
of the Code, (ii) would not cause any adverse tax consequences for the holders
of such ISOs or (iii) the holders of such ISOs consent to the adjustment. No
adjustments to ISOs shall be made for dividends paid in cash or in property
other than securities of the Company.
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<PAGE> 11
12.12.4 Fractional Shares. No fractional Shares shall be issued
under the Plan. Any fractional Shares which, but for this Section, would have
been issued shall be deemed to have been issued and immediately sold to the
Company for their Fair Market Value, and the Participant shall receive from the
Company cash in lieu of such fractional Shares.
12.12.5 Recapitalization. The Committee may adjust the number of
Shares subject to outstanding Awards and the exercise price and the terms of
outstanding Awards to take into consideration material changes in accounting
practices or principles, extraordinary dividends, acquisitions or dispositions
of stock or property, or any other event if it is determined by the Committee
that such adjustment is appropriate to avoid distortion in the operation of the
Plan.
12.12.6 Further Adjustment. Upon the happening of any of the
events described in Sections 12.12.1 or 12.12.5, the class and aggregate number
of Shares set forth in Sections 5.1 and 5.3 hereof that are subject to Awards
which previously have been or subsequently may be granted under the Plan shall
be appropriately adjusted to reflect the events described in such Sections. The
Committee shall determine the specific adjustments to be made under this Section
12.12.6.
12.13 Other Transfer Restrictions. Notwithstanding any other provision
of the Plan, in order to qualify for the exemption provided by Rule 16b-3 under
the Exchange Act, and any successor provision, (i) any Shares or other equity
security offered under the Plan to a Participant subject to Section 16 of the
Exchange Act (a "Section 16 Participant") may not be sold for six (6) months
after acquisition; any Shares or other equity security acquired by a Section 16
Participant upon exercise of an Option may not be sold for six (6) months after
the date of grant of the Option; and any SAR granted to a Section 16 Participant
may not be exercised for six (6) months after the Grant Date; and (ii) any
Option, SAR or other similar right related to an equity security issued under
the Plan shall not be transferable other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined in
the Code or Title I of the Employee Retirement Income Security Act, or the rules
thereunder. The Committee shall have no authority to take any action if the
authority to take such action, or the taking of such action, would disqualify
the Plan from the exemption provided by Rule 16b-3 under the Act, and any
successor provision.
12.14 Ownership Limit. Notwithstanding any other provision of the Plan,
the rights of any Participant to acquire Shares under the Plan are subject to
the Ownership Limit.
13. AMENDMENT AND TERMINATION
13.1 Amendment, Suspension, Termination of the Plan. The Committee may
modify, amend, suspend or terminate the Plan in whole or in part at any time;
provided, however, that no modification, amendment, suspension or termination of
the Plan shall be made without shareholder approval if such approval is
necessary to comply with any applicable tax or regulatory requirement, including
any requirements for exemptive relief under Section 16(b) of the Exchange Act or
any successor provision; provided, further, that such modification, amendment,
suspension or termination shall not, without a Participant's consent, affect
adversely the rights of such Participant with respect to any Award previously
made.
13.2 Amendment, Suspension, Termination of an Award. The Committee may
modify,
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<PAGE> 12
amend or terminate any outstanding Award, including, without limitation,
substituting therefor another Award of the same or a different type, changing
the date of exercise or realization and converting an ISO to a NQO; provided,
however, that the Participant's consent to such action shall be required unless
the Committee determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
14. NONDISCRETIONARY GRANTS OF OPTIONS TO CERTAIN INDIVIDUALS
Notwithstanding any other provision of the Plan, the Principals and the
Non-Employee Directors shall participate in the Plan to the extent set forth in
this Section 14.
14.1 Grant to the Principals. As of the closing of the Company's
initial public offering, the Principals will be granted Options to acquire a
total of 162,664 Shares, with John A. Burchett being granted Options to acquire
89,467 Shares and each of Joyce S. Mizerak, George J. Ostendorf and Irma N.
Tavares being granted Options to acquire 24,399 Shares. The purchase price per
Share of the Shares subject to each Option granted to a Principal pursuant to
this Section 14.1 will be the IPO Price. Subject to Section 6.3.2, the Options
granted to a Principal pursuant to this Section 14.1 will vest on a ratable,
monthly basis over the 48 month period beginning with the month that includes
the Grant Date for so long as such Principal remains an employee of the Company
or any Parent or Subsidiary of the Company. Subject to Section 6.4.4 in the case
of any ISO granted to a Principal, the term of each Option granted to a
Principal pursuant to this Section 14.1 shall be one day less than ten (10)
years from its Grant Date, unless sooner terminated or extended in accordance
with Section 13. The Options granted to the Principals pursuant to this Section
14.1 will be ISOs to the maximum extent possible under the Code and the
provisions of Plan.
14.2 Grant to Non-Employee Directors. On the date upon which a
Non-Employee Director is first elected a member of the Company's Board of
Directors, or as of the closing of the Company's initial public offering if
later, such Non-Employee Director will receive the grant of a NQSO to purchase
Shares. For the purpose of this Section 14.2, each Non-Employee Director
elected at the meeting of shareholders of the Company at which this Plan is
adopted by the shareholders shall be deemed to have been first elected at such
meeting. Non-Employee Directors subsequently re-elected at any meeting of
shareholders shall receive as of the date of each such meeting, commencing with
the annual meeting of shareholders to be held in 1998, the grant of a NQSO to
purchase Shares. The purchase price per Share of the Shares subject to each
Option granted to a Non-Employee Director shall be the Fair Market Value on the
date the Option is granted (or, if the Option is granted as of the closing of
the Company's initial public offering, the IPO Price). Options granted to
Non-Employee Directors shall be immediately exercisable. The term of each Option
granted to a Principal pursuant to this Section 14.2 shall be one day less than
ten (10) years from its Grant Date, unless sooner terminated or extended in
accordance with Section 13. If a Non-Employee Director dies while serving as a
Director, such Non-Employee Director's Options shall be exercisable by either
his or her executor or administrator or, if not so exercised, by the legatees or
the distributees of his or her estate, only during the twelve months following
his or her death. If a Non-Employee Director's membership on the Board
terminates for any reason other than death, such Non-Employee Director's Options
shall be exercisable only during the three months following the date of
termination. Any Option, and the number and nature of Shares subject to any such
Option, held by a Non-Employee Director will be subject to adjustment only to
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<PAGE> 13
the extent set forth in Section 12.12 and not pursuant to any other provision of
the Plan.
14.3 Written Agreement In connection with each grant of Options to a
Principal or Non-Employee Director pursuant to this Section 14, the Company and
such Principal or Non-Employee Director, as the case may be, will execute an
Award Agreement (or an amendment to an existing Award Agreement) specifying the
terms and conditions of such Option and the exercise thereof.
15. LEGAL CONSTRUCTION
15.1 Captions. The captions provided herein are included solely for
convenience of reference and shall not affect the meaning of any of the
provisions of the Plan or serve as a basis for interpretation or construction of
the Plan.
15.2 Severability. In the event any provision of the Plan is held
invalid or illegal for any reason, the illegality or invalidity shall not affect
the remaining provisions of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
15.3 Governing Law. The Plan and all rights under the Plan shall be
construed in accordance with and governed by the internal laws of the State of
Maryland.
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<PAGE> 1
EMPLOYMENT AGREEMENT
(JOHN A. BURCHETT)
THIS EMPLOYMENT AGREEMENT (the "Agreement"), effective as of the
day of , 1997 (the "Effective Date"), is by and between Hanover
Capital Mortgage Holdings, Inc., a Maryland corporation, with its offices
located at 90 West Street, Suite 1508, New York, New York 10006 (the "Company"),
and John A. Burchett (the "Employee"), an individual whose residence is 896
Highland Avenue, Westfield, New Jersey 07090.
The Company acknowledges and recognizes the value of the Employee's
reputation in the business, experience and ability, and based upon the
Employee's representations respecting the Employee's reputation in the business,
experience and ability, the Company desires to provide for the employment and
continuation of the Employee's employment with the Company on the terms set
forth in this Agreement.
1. EMPLOYMENT AND ACCEPTANCE OF EMPLOYMENT; TERM. Upon and subject
to the terms and conditions set forth in this Agreement, the Company hereby
employs the Employee as its Chairman of the Board of Directors, President and
Chief Executive Officer or in such other management position(s) as the Board of
Directors of the Company (the "Board") may determine from time to time, and the
Employee hereby agrees to accept such employment, for a period of five years
(unless sooner terminated as hereinafter set forth) (the "Initial Term")
commencing on the Effective Date and ending five years thereafter (the
"Expiration Date"). Subject to Sections 9(a) and 9(g) of this Agreement, this
Agreement shall be automatically extended upon the Expiration Date for
successive one year terms commencing on the fifth anniversary date of the
Effective Date unless the Employee or the Company gives the other party not less
than three (3) months written notice prior to the Expiration Date, or any
anniversary of the Effective Date thereafter.
2. DUTIES. It is the intention of the Company and the Employee that,
subject to the direction and supervision of the Board, the Employee shall have
full discretionary authority to control the day-to-day operations of the Company
as described in the Registration Statement on Form S-11 filed on June 13, 1997,
and as amended from time to time thereafter (the "Registration Statement") and
to incur such obligations on behalf of the Company as may be necessary or
appropriate in the ordinary course of business as described in the Registration
Statement. The Employee agrees, during the Initial Term and any extension of the
Initial Term, to devote his entire business and professional time, attention,
and energies exclusively to the business of the Company and its subsidiaries
(including, without limitation, Hanover Capital Mortgage Holdings, L.P., Hanover
Capital Partners Ltd., Hanover Capital Mortgage Corporation and Hanover Capital
Securities, Inc.) as shall be necessary, advisable or required to perform the
duties of the Employee's positions specified in Section 1, and to conform to the
rules, regulations, instructions, personnel practices and policies of the
Company, as existing and amended from time to time by the Company or its Board.
Notwithstanding the foregoing, during
<PAGE> 2
the Initial Term and any extension of the Initial Term, the Employee may (i)
serve as an officer, director, trustee or committee member of any religious,
professional, civic, charitable or educational organization, or as a director of
any corporation whose business is not competitive with the Company or any of its
subsidiaries, and (ii) engage in, and devote time and effort to, any and all
personal investments or personal business ventures (which shall in no event
include being an officer or principal shareholder of any public or private
company) unrelated to the business or affairs of the Company and its
subsidiaries, in each case so long as such activities do not materially
interfere with the Employee's obligations to the Company and its subsidiaries or
conflict in any way with the business of the Company.
3. COMPENSATION AND BENEFITS.
(a) BASE SALARY. In consideration of the Employee's performance of
services under this Agreement, the Company will pay to the Employee, during the
first year of the Initial Term of the Employee's employment under this
Agreement, and the Employee agrees to accept from the Company for the Employee's
services under this Agreement, an annual salary (the "Base Salary") of $300,000,
payable on a pro rata basis in accordance with the Company's normal payroll
practices applicable to its executive officers, but not less often than monthly.
The Employee's Base Salary shall be subject to annual review by the non-employee
members of the Board or the Company's Compensation Committee (to be comprised of
non-employee members of the Board) in the event one is then appointed (the
"Committee") and may be adjusted (upwards but not downwards) in such amounts as
the Board or Committee, as applicable, may determine in its sole discretion.
Notwithstanding the foregoing, the Base Salary shall be increased annually by
any cost of living increases, as determined by the Board or the Committee in its
sole discretion, as applicable. To that end, the Employee shall receive a
performance review at least once a year from the Board or the Committee, as
applicable, in connection with which the Employee shall be eligible for such
merit increases and other salary adjustments as the Board may approve or not in
its sole discretion.
(b) BONUS. In addition to the Base Salary, the Employee shall be
entitled during the Initial Term and any extension thereof to participate in the
Company's Bonus Incentive Compensation Plan and any and all other bonus plans
adopted by the Board for the executive officers of the Company and its
subsidiaries. The Employee shall be eligible to receive a bonus each year in
such amount as determined or not by the non-employee members of the Board or the
aforementioned Committee pursuant to the terms of the Bonus Incentive
Compensation Plan.
(c) STOCK OPTIONS. The Employee shall be entitled to participate
in the Company's 1997 Stock Option Plan and any and all other equity
compensation plans adopted by the Board for the employees of the Company and its
subsidiaries. Upon the Effective Date, the Company shall grant to the Employee
an option to purchase 89,467 shares of Common Stock, par value $.01 per share,
of the Company, at an exercise price per share equal to the initial public
offering price per share of the Company's Common Stock in the offering effected
pursuant to the Registration Statement, such option to vest pursuant to the
terms of the 1997 Stock Option Plan. Such option shall be an incentive stock
option within the meaning of Section 422 of the Internal
2
<PAGE> 3
Revenue Code of 1986, as amended, to the extent possible consistent with the
provisions of this Agreement.
(d) BENEFITS; AUTOMOBILE ALLOWANCE. During the Initial Term of this
Agreement and any extension thereof, the Employee shall be entitled to receive
medical, dental and other health benefits no less favorable to the Employee than
those provided to him by Hanover Capital Partners Ltd. during the one year
period preceding the Effective Date (and as described on the attached EXHIBIT A)
and to participate in any other medical, pension, bonus, profit-sharing or
similar plan or program that may be established by the Company and made
available to its executive officers generally. In addition, the Employee shall
be entitled to a car allowance to be applied to the leasing and maintenance of
an automobile of an appropriate age and condition in an amount not to exceed
$8,400 per annum, payable monthly.
(e) LIFE AND DISABILITY INSURANCE. During the Initial Term and any
extension thereof, the Company shall provide to the Employee at the expense of
the Company (i) a term life insurance policy with a death benefit equal to
$2,000,000; and (ii) disability insurance coverage which shall provide the
Employee with a benefit upon total disability equal to seventy-five percent
(75%) of the Base Salary then in effect payable until the Employee is seventy
(70) years old. The Employee shall have the option to pay the premiums for the
disability insurance coverage directly and, in such event, the Base Salary under
this Agreement shall be increased by an amount equal to the amount of such
premiums, plus an additional amount equal to the Employee's additional income
tax resulting from such increase.
(f) PAID VACATIONS. The Employee shall be entitled to annual paid
vacations of six (6) weeks in each year of the Initial Term and any extension of
the Initial Term, at such times and for such periods as may be mutually
acceptable to the Company and the Employee, in accordance with the Company's
policies governing vacations for executive officers of the Company. Unused
vacation in any given year shall not accumulate from year to year and Employee
shall not be entitled to any cash payment for or payment in lieu of unused
vacation time.
(g) PAID HOLIDAYS AND PERSONAL DAYS. The Employee shall be entitled
to all paid holidays and personal days, in accordance with the Company's
policies governing holidays and personal days for executive officers of the
Company.
(h) CLUB DUES. The Company shall pay all membership dues owed to
clubs (as selected by the Employee), not to exceed $2,500 per year.
(i) DEDUCTIONS. The Company shall have the right to deduct from the
Base Salary and all other cash amounts payable by the Company under the
provisions of this Agreement to the Employee or, if applicable, to his estate,
legal representatives or other beneficiary designated in writing by the Employee
(a "Designee"), all social security taxes, all federal, state and municipal
taxes and all other charges and deductions which now or hereafter are imposed by
law as charges on the compensation of the Employee or charges on cash benefits
payable by the Company under this Agreement to his estate, legal representatives
or Designee.
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<PAGE> 4
4. REIMBURSEMENT OF CERTAIN EXPENSES. The Company shall reimburse
the Employee, upon production of accounts and vouchers or other reasonable
evidence of payment by the Employee, all in accordance with the Company's
regular procedures in effect from time to time and in form suitable to establish
the validity and deductibility of such expenses for tax purposes, all
reasonable, ordinary and necessary travel, automobile and other expenses as
shall have been incurred by the Employee in the performance of the Employee's
duties under this Agreement.
5. NON-COMPETITION.
(a) NON-COMPETITION. Through the date on which the Employee's
employment with the Company is terminated (the "Termination Date") and, in the
event that the Employee's employment with the Company is terminated other than
(i) by the Company pursuant to Sections 9(b) (termination by the Company without
Good Cause) or 9(g) (termination by the Company following a Change of Control)
or (ii) by the Employee pursuant to Sections 9(d) (termination by the Employee
following loss of Board seat) or 9(g) (termination by the Employee following a
Change of Control), until the Expiration Date, the Employee will not, directly
or indirectly, engage in the business of, or own or control an interest in
(except as a passive investor owning less than one percent (1%) of the equity
securities of a publicly-owned company), or act as director, officer or employee
of, or consultant to, any individual, partnership, joint venture, corporation or
other business entity directly or indirectly engaged anywhere in the United
States in any Business (as hereinafter defined) competing with the business then
being carried on by the Company or its subsidiaries or contemplated by the
Company or its subsidiaries to the extent included within the definition of
"Business." In the event any of the provisions of this Section 5(a) are
unenforceable by law, then the restrictions shall be for such period and such
geographic area as a court shall find is necessary to protect the Company. The
provisions of this Section 5(a) shall no longer be enforceable in the event the
Company either files for bankruptcy or other protection from creditors (which
filing is not dismissed within 180 days) or advises its shareholders in a press
release and in a filing with the Securities and Exchange Commission that it is
ceasing to operate as an ongoing business.
(b) BUSINESS. The term "Business" as used in this Section 5 shall
mean (i) acquiring and holding single family mortgage loans, (ii) originating,
selling and servicing multifamily and commercial real estate loans, (iii)
offering due diligence services to buyers, sellers and holders of mortgages,
(iv) securitizing the mortgage loans and retaining interests therein, (v)
purchasing mortgage asset investments in the secondary mortgage market, (vi)
managing such portfolios, (vii) any other business in which the Company or any
subsidiary is engaged on the Termination Date, (viii) such other business
contemplated by the Registration Statement or any subsequent filings by the
Company or any subsidiary with the Securities and Exchange Commission prior to
the Termination Date and (ix) any other business in which the Company or any
subsidiary is actively planning to become engaged on the Termination Date, and
in connection with the planning of which the Employee has had significant
involvement.
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<PAGE> 5
(c) EMPLOYEE REPRESENTATION. The Employee represents to the Company
(i) that the Employee is not subject to any employment agreement as of the
Effective Date, nor has the Employee previously, at any time, entered into any
written agreement with any person, firm or corporation, which would or could
preclude or prevent him from entering into this Agreement or which requires the
consent of any other party, and (ii) that as of the Effective Date, neither the
Company nor any of its subsidiaries has any financial or other obligation to the
Employee except as set forth on EXHIBIT B. The Employee agrees to indemnify the
Company and each of its officers, directors and controlling persons against any
claim, loss, liability or expense (including reasonable counsel's fees and
costs) incurred by the Company or its officers, directors and controlling
persons arising out of or in connection with any misrepresentation made by the
Employee under this Agreement.
6. CONFIDENTIALITY.
(a) OBLIGATION TO KEEP CONFIDENTIAL. The Employee acknowledges that
his employment by the Company brings him into close contact with many
confidential affairs of the Company, its subsidiaries and its customers,
including, without limitation, information about costs, profits, markets, sales,
key personnel, pricing policies, operational methods, concepts, and other
business affairs and methods of the Company, its subsidiaries and its customers
and other information not readily available to the public, as well as plans for
future developments (collectively referred to hereinafter as "Proprietary
Information"). The Employee further acknowledges that the relationships between
the Company, its subsidiaries and its officers, employees, agents, and customers
constitute a valuable asset of the Company (the "Other Proprietary Assets"). In
recognition of the foregoing, the Employee covenants and agrees:
(i) That all Proprietary Information and Other
Proprietary Assets shall be the exclusive property of the Company and that the
Employee will keep secret all Proprietary Information and Other Proprietary
Assets and will not use the same for the Employee's own benefit or disclose the
same to, or use the same for the benefit of, anyone outside of the Company,
either during or after the Employee's employment by the Company; and
(ii) That Employee will deliver promptly to the Company
on termination of Employee's employment by the Company, or at any time the Board
may so request, all Proprietary Information and Other Proprietary Assets,
including, without limitation, all memoranda, notes, documentation, data,
records, reports and other tangible manifestations of the Proprietary
Information and Other Proprietary Assets (and all copies thereof), that Employee
may then (or thereafter) possess or have under the Employee's control.
(b) EXCEPTIONS. The Employee's undertakings and obligations under
this Section 6 will not apply to any Proprietary Information or Other
Proprietary Asset which (i) is or becomes generally known to the public through
no action on the part of the Employee, (ii) is generally disclosed to third
parties by the Company without restriction on such third parties, (iii) is
approved for release by written authorization of the Board, or (iv) is the
subject matter of a lawful request or subpoena by and within the authority of a
court or governmental agency or other body, provided, however, no such
information shall be released by Employee without
5
<PAGE> 6
Employee providing to the Company thirty (30) days prior written notice to the
Company and providing the Company the right to seek a protective order or
injunctive relief preventing the release of such information.
7. NON-SOLICITATION. The Employee hereby covenants and agrees that,
if the Employee's employment with the Company is terminated other than (i) by
the Company pursuant to Sections 9(b) or 9(g) or (ii) by the Employee pursuant
to Sections 9(d) or 9(g), the Employee will not, during the period from the
Termination Date through the Expiration Date, induce or attempt to induce any
officer, employee, agent, consultant or customers of the Company or its
subsidiaries to discontinue such affiliation with the Company or its
subsidiaries or to refrain from entering into new business relationships with
the Company or its subsidiaries.
8. SPECIFIC PERFORMANCE. Without intending to limit the remedies
available to the Company, the Employee agrees that damages at law will be an
insufficient remedy to the Company in the event that the Employee violates the
terms of Section 5, 6 or 7 of this Agreement and that the Company may apply for
and obtain immediate injunctive relief in any court of competent jurisdiction or
restrain the breach or threatened breach of, or otherwise to specifically
enforce, any of the agreements and covenants contained in such Sections. The
parties hereto understand that each of the agreements and covenants of the
Employee contained in Sections 5, 6 and 7 of this Agreement is an essential
element of this Agreement and agree that the obligations of the Employee
thereunder will survive the termination of this Agreement.
9. TERMINATION.
(a) TERMINATION BY THE COMPANY FOR GOOD CAUSE. The Company may
terminate this Agreement and its obligations to the Employee under this
Agreement at any time for "Good Cause", which shall mean only (i) the conviction
of the Employee of (or the plea by the Employee of NOLO CONTENDERE to) a felony,
(ii) the good faith determination by the Board that the Employee has willfully
and deliberately failed to perform a material amount of Employee's duties under
this Agreement (other than a failure to perform duties resulting from the
Employee'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 Employee of written notice thereof from the Board 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 activity, bona fide
illness, disability, death or other reason expressly authorized by the Board 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 Employee which HAVE A MATERIAL ADVERSE EFFECT ON THE Company
or any of its subsidiaries. In the event of such termination, the Employee shall
only be entitled to receive any accrued but unpaid sick pay and any properly
incurred unreimbursed expenses. In addition, if the Company terminates this
Agreement due to the conviction of the Employee of (or the plea by the Employee
of NOLO CONTENDERE to) a felony as a result of (iv) above, then Employee will
pay all costs and expenses (including reasonable attorney's fees) incurred by
the Company in connection therewith.
6
<PAGE> 7
(b) TERMINATION BY THE COMPANY WITHOUT GOOD CAUSE. In the event the
Company terminates this Agreement without Good Cause, the Employee shall be
entitled to the following benefits:
(i) The Company shall continue to pay the Employee the
Employee's Base Salary at the rate then in effect (plus any cost of living
adjustments as described above) until the later of (x) one year after the
Termination Date, or (y) the Expiration Date; and
(ii) The Company shall pay the Employee for any accrued but
unpaid sick pay and any properly incurred unreimbursed expenses.
In the event that the Employee shall obtain other full-time or
part-time employment or consulting work during such period, the amount of
payments Employee receives from such employment or work shall be credited
against the amount that the Company is obligated to pay Employee during such
period pursuant to this subparagraph (b). The Employee shall be under no
obligation to obtain such other employment or work, but if the Employee shall,
the Employee shall promptly give written notice to the Company of the salary and
fringe benefits provided to the Employee in connection with such other
employment or work, in order that the amount of such credit may be determined.
(c) TERMINATION BY THE EMPLOYEE WITHOUT CAUSE. Notwithstanding the
provisions of Section 1, the Employee may resign from the Company at any time
upon ninety (90) days prior written notice to the Company. In the event of
resignation by the Employee under this Section 9(c), the Board in its sole
discretion may elect to waive the period of notice, or any portion thereof, and,
in such event, the Company will pay the Employee's salary for the notice period
(or for any remaining portion of the period) provided the Employee continues to
be employed during that period. From and after the effective date of such
termination by the Employee of Employee's employment under this Agreement, the
Company shall have no further liability to the Employee for salary or other
compensation (or benefits, except for any accrued but unpaid sick pay, any
properly incurred unreimbursed expenses and as provided pursuant to the terms of
any compensation or benefit plan of the Company in which the Employee is a
participant) or other matters whatsoever.
(d) TERMINATION BY THE EMPLOYEE FOLLOWING LOSS OF BOARD SEAT.
Notwithstanding Section 9(c) above, if the Employee resigns from the Company
within ninety (90) days after being removed from, or not re-elected to, the
Board despite the Employee's efforts to remain on the Board (unless the Employee
is removed from, or not re-elected to, the Board for Good Cause as defined in
Section 9(a)), such resignation shall be treated as a termination by the
Employee pursuant to this Section 9(d) rather than Section 9(c), and the
Employee shall be entitled to the following benefits:
(i) The Company shall continue to pay the Employee the
Employee's Base Salary at the rate then in effect (plus cost of living
adjustments) until the later of (x) one year after the Termination Date or (y)
the Expiration Date; and
7
<PAGE> 8
(ii) The Company shall pay the Employee for any accrued but
unpaid sick pay and any properly incurred unreimbursed expenses.
In the event that the Employee shall obtain other full-time or
part-time employment or consulting work during such period, the amount of
payments Employee receives from such employment or work shall be credited
against the amount that the Company is obligated to pay Employee during such
period pursuant to this subparagraph (d). The Employee shall be under no
obligation to obtain such other employment or work, but if the Employee shall,
the Employee shall promptly give written notice to the Company of the salary and
fringe benefits provided to the Employee in connection with such other
employment or work, in order that the amount of such credit may be determined.
(e) TERMINATION UPON DISABILITY OF EMPLOYEE. This Agreement shall
terminate upon the disability (resulting from the Employee's inability, due to
an injury, physical or mental illness, disease or infirmity due to age, to
perform his duties under this Agreement on a full-time basis for two consecutive
months or an aggregate of 60 days within a one-year period, as certified by at
least two (2) duly licensed and qualified physicians, one of whom will be
approved by the independent members of the Board) of the Employee, which is
likely to continue for at least one year from the time of inception, in which
event the Employee shall be entitled to receive, in full satisfaction of all
obligations due to the Employee by the Company under this Agreement, (i) his
Base Salary then in effect (plus any cost of living adjustments as described
above) while such disability continues until the date upon which the disability
benefits pursuant to the disability insurance policy provided for in Section
3(e) commence (but in no event more than two months); (ii) the proceeds of such
disability policy; and (iii) any accrued but unpaid sick pay and any properly
incurred unreimbursed expenses.
(f) TERMINATION UPON DEATH OF EMPLOYEE. This Agreement shall
terminate upon the death of the Employee, in which event the Employee's estate,
legal representatives or designee shall be entitled to receive, in full
satisfaction of all obligations due to the Employee by the Company hereunder,
(i) the Employee's Base Salary through the last day of the month of death; (ii)
the proceeds of the insurance policy or policies maintained on the Employee's
life, pursuant to Section 3(e) hereof; and (iii) any accrued by unpaid sick pay
and any properly incurred unreimbursed expenses.
(g) TERMINATION BY THE COMPANY FOLLOWING CHANGE OF CONTROL.
Notwithstanding Sections 9(b), 9(c) and 9(d) above, in the event that, at any
time within 90 days following a Change of Control (as hereinafter defined),
either (i) the Company shall terminate the Employee's employment without Good
Cause as defined in Section 9(a) or (ii) the Employee shall terminate the
Employee's employment without there being a Good Cause termination by the
Company pending, then and in either such event, such termination shall be
treated as a termination pursuant to this Section 9(g) rather than Section 9(b),
9(c) or 9(d), as the case may be, and the Employee shall be entitled to receive
until the later of (A) two (2) years after the Termination Date or (B) the
Expiration Date, his Base Salary at the rate then in effect (plus cost of living
adjustments as provided above). The Employee shall also be paid any accrued
vacation
8
<PAGE> 9
pay to the date of such termination for the applicable year only, and
any sick leave for appropriate sick day absences then accrued but unpaid or
unpaid expense reimbursements that may then be properly due. The amounts payable
to the Employee shall not be subject to any credit or set-off resulting from the
obtaining of any part-time or full-time employment or consulting assignments by
the Employee during such period.
For purposes of this Agreement, a "Change of Control" shall mean and
include any of the following (for which the Employee did not promote the
transaction or vote as a director or as a shareholder):
(i) a merger or consolidation of the Company with or into any
other corporation or other business entity (except one in which the holders of
capital stock of the Company immediately prior to such merger or consolidation
continue to hold at least a majority of the outstanding securities having the
right to vote in an election of the Board of Directors ("Voting Stock") of the
surviving corporation);
(ii) a sale, lease, exchange or other transfer (in one
transaction or a related series of transactions) of all or substantially all of
the Company's assets except in a transaction where the Employee or an Affiliate
of the Employee is the transferee;
(iii) the acquisition by any person or any group of persons
(other than the Company, any of its direct or indirect subsidiaries, or any
director, trustee, fiduciary or other person or entity holding securities under
any employee benefit plan or trust of the Company or any of its direct or
indirect subsidiaries) acting together in any transaction or related series of
transactions, of such number of shares of the Company's Voting Stock as causes
such person, or group of persons, to own beneficially, directly or indirectly,
as of the time immediately after such transaction or series of transactions, 50%
or more of the combined voting power of the Voting Stock of the Company other
than as a result of an acquisition of securities directly from the Company, or
solely as a result of an acquisition of securities by the Company which by
reducing the number of shares of the Voting Stock outstanding increases the
proportionate voting power represented by the Voting Stock owned by any such
person to 50% or more of the combined voting power of such Voting Stock; and
(iv) a change in the composition of the Company's Board of
Directors following a tender offer or proxy contest, as a result of which
persons who, immediately prior to such tender offer or proxy contest,
constituted the Company's Board of Directors shall cease to constitute at least
a majority of the members of the Board of Directors (other than by their
voluntary resignations), but only in the event that the persons elected to the
Board were not supported by the Employee as a director or shareholder.
10. INDEMNIFICATION. To the fullest extent permitted by law and in
addition to any other rights permitted or granted under the Company's articles
of incorporation, by-laws, or any policy of insurance, or by law, the Company
shall indemnify the Employee if the Employee is made a party, or threatened to
be made a party, to any threatened, pending or contemplated action, suit or
proceeding, whether civil, administrative or investigative, by reason of the
fact that
9
<PAGE> 10
the Employee is or was an employee, officer or director of the Company or any
subsidiary of the Company, in which capacity the Employee is or was serving at
the Company's request in accordance with the terms of this Agreement, against
any and all costs, losses, damages, judgments, liabilities and expenses
(including reasonable attorneys' fees) which may be suffered or incurred by him
in connection with any such action, suit or proceeding; provided, however, that,
there shall be no indemnification in relation to matters as to which the
Employee is adjudged to have been guilty of fraud, bad faith, gross negligence,
breach of fiduciary duty or as a result of the Employee's material breach of
this Agreement; and provided, however, that all of such costs shall be paid by
insurance, to the extent such coverage exists.
11. ENTIRE AGREEMENT; AMENDMENT AND WAIVER. This Agreement is the
entire agreement between the parties with respect to the subject matter hereof
and supersedes any and all prior or contemporaneous oral and prior written
agreements and understandings. There are no oral promises, conditions,
representations, understandings, interpretations or terms of any kind as
conditions or inducements to the execution of this Agreement or in effect among
the parties. No custom or trade usage, nor course of conduct among the parties,
shall be relied upon to vary the terms of this Agreement. This Agreement may not
be amended, and no provision of this Agreement shall be waived, except by
writing signed by all the parties to this Agreement, which states that it is
intended to amend or waive a specifically identified provision of this
Agreement. Any waiver of any rights or failure to act in a specific instance
shall relate only to such instance and shall not be construed as an agreement to
waive any rights or fail to act in any other instance, whether or not similar.
All amendments or waivers on behalf of the Company shall have first been
approved by the non-employee members of the Board.
12. SEVERABILITY. Should any provision of this Agreement be
unenforceable or prohibited by any applicable law, this Agreement shall be
considered divisible as to such provision which shall be inoperative, and the
remainder of this Agreement shall be valid and binding as though such provision
were not included in this Agreement.
13. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original. It shall not be
necessary when making proof of this Agreement to account for more than one
counterpart.
14. HEADINGS. All headings in this Agreement are for convenience only
and shall not affect the meaning of any provision in this Agreement.
15. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of, and be binding upon, the Company and any corporation with which the Company
merges or consolidates or to which the Company sells all or substantially all of
its assets, and upon the Employee and his executors, administrators, heirs and
legal representatives. This Agreement may not be assigned by the Employee.
16. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of New York, without reference to the
conflict of laws principles thereof.
10
<PAGE> 11
17. NOTICES. All notices under this Agreement shall be in writing and
shall be sent to the parties at the following addresses:
If to the Employee, to: John A. Burchett
896 Highland Avenue
Westfield, New Jersey 07090
If to the Company, to: Hanover Capital Mortgage Holdings, Inc.
90 West Street
Suite 1508
New York, New York 10006
Attn: Chairman of Compensation Committee of the
Board of Directors
All notices shall be delivered in person or given by registered or certified
mail, postage prepaid, and shall be deemed to have been given when delivered in
person or deposited in the United States mail. Either party may designate any
other address to which notice shall be given, by giving written notice to the
other of such change of address in the manner herein provided.
IN WITNESS WHEREOF, the Employee has executed this Agreement and the
Company has caused this Agreement to be executed by a duly authorized officer as
of the day and year first above written.
COMPANY:
HANOVER CAPITAL MORTGAGE HOLDINGS,
INC.
By:____________________________________
Name:
Title:
EMPLOYEE:
_______________________________________
John A. Burchett
11
<PAGE> 1
MODIFICATION AGREEMENT
THIS MODIFICATION AGREEMENT ("Agreement") is made this __ day of June,
1997, by and between FLEET NATIONAL BANK, a national banking association having
a place of business at 111 Westminster Street, Providence, Rhode Island 02903
(the "Bank"), HANOVER CAPITAL PARTNERS, LTD., a New York corporation
("Hanover"), HANOVER CAPITAL MORTGAGE CORPORATION ("Mortgage"), HANOVER CAPITAL
MORTGAGE FUND, INC. ("Fund"), HANOVER CAPITAL SECURITIES, INC. ("Securities"),
HANOVER CAPITAL PARTNERS, LTD. ("Partners"), HANOVER CAPITAL ADVISORS, INC.
("Advisors") and JOHN A. BURCHETT ("Burchett"), each with an address at 90 West
Street, New York, New York 10006 (Hanover, Mortgage, Fund, Securities,
Partners, Advisors and Burchett are sometimes collectively referred to as the
"Obligors").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Obligors are indebted, either directly or indirectly, to
Bank for that certain facility extended by Bank to Hanover of $2,000,000.00
(the "Loan"), as evidenced by that certain $2,000,000.00 Revolving Credit
Agreement, dated December 10, 1996 by and between Hanover and the Bank (the
"Credit Agreement"); and
Whereas, pursuant to the terms of the Credit Agreement, the Loan is
further evidenced by that certain Reducing Revolver Note in the original
principal amount of $2,000,000.00, dated December 10, 1996 executed by Hanover
(the "Note"); and copies of which are attached hereto as Exhibit A; and
<PAGE> 2
WHEREAS, the Obligors have requested the Bank to provide additional
interim financing and the Bank has agreed to the Obligors' request, subject to
the provisions as referenced herein.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. The Obligors reaffirm the terms and provisions of the documents
executed in connection with the Loan to which they are parties (collectively,
the "Existing Documents") and the parties agree that, except as modified
herein, the Existing Documents shall remain in full force and effect.
2. Simultaneous with the execution hereof, the Executed Documents,
including the Credit Agreement, shall be modified by amending Section 1.01 of
the Credit Agreement to provide that the Revolving Loan Ceiling, as that term
is defined therein, shall be restated to Two Million Three Hundred Thousand
Dollars ($2,300,000.00) through September 1, 1997. In addition, the following
modifications to the existing Documents, including the Credit Agreement shall
be made simultaneously with the execution of this Agreement: (a) subparagraph
(iii) of the definitional section as to 'Revolving Loan Ceiling', as that term
is defined in Section 1.01 of the Credit Agreement, shall be restated to One
Million Eight Hundred Fifty Thousand Dollars ($1,850,000.00); (b) subparagraph
(iv) of the definitional section as to 'Revolving Loan Ceiling', as that term
is defined in Section 1.01 of the
2
<PAGE> 3
Credit Agreement, shall be restated to One Million Seven Hundred Thousand
Dollars ($1,700,000.00); (c) subparagraph (v) of the definitional section as to
'Revolving Loan Ceiling', as that term is defined in Section 1.01 of the Credit
Agreement, shall be restated to One Million Five Hundred Fifty Thousand Dollars
($1,550,000.00); (d) subparagraph (vi) of the definitional section as to
'Revolving Loan Ceiling', as that term is defined in Section 1.01 of the Credit
Agreement, shall be restated to One Million Four Hundred Thousand Dollars
($1,400,00.00); (e) subparagraph (vii) of the definitional section as to
'Revolving Loan Ceiling', as that term is defined in Section 1.01 of the Credit
Agreement, shall be restated to One Million Two Hundred Fifty Thousand Dollars
($1,250,000.00).
3. In order to further secure its obligations under the Loan, Hanover shall
execute and deliver to Bank an assignment of that certain Asset Management
Agreement in form attached hereto as Exhibit A.
4. Each of the Obligors does hereby release Bank, its agents, employees,
attorneys, stockholders, officers and directors from and against any and all
claims, demands, penalties, causes of action, liabilities, damages, costs or
expenses of whatever kind or nature arising out of or in any way related to the
execution of this Agreement and the documents executed in connection therewith.
4. This Agreement represents the entire agreement between the parties with
respect to the matters as set forth herein and supersedes any and all other
prior agreements and understandings,
3
<PAGE> 4
if any. Rhode Island law shall govern this Agreement. The Obligor approves the
terms and conditions herein, and causes this Agreement to be executed by its
duly authorized representative freely and voluntarily, without duress.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by either themselves or their duly authorized representatives on the
day and year first written above.
WITNESS: FLEET NATIONAL BANK
- -------------------------------- By:
--------------------------
Anthony A. Botelho
Its: Vice President
HANOVER CAPITAL PARTNERS, LTD.
- -------------------------------- By:
--------------------------
Its:
-------------------------
- -------------------------------- -----------------------------
JOHN A. BURCHETT
- -------------------------------- HANOVER CAPITAL
MORTGAGE CORPORATION
By:
--------------------------
Its:
-------------------------
4
<PAGE> 5
_____________________________ HANOVER CAPITAL
MORTGAGE FUND, INC.
By: _________________________________
Its: ________________________________
_____________________________ HANOVER CAPITAL
SECURITIES, INC.
By: _________________________________
Its: ________________________________
_____________________________ HANOVER CAPITAL
ADVISORS, INC.
By: _________________________________
Its: ________________________________
STATE OF __________________
COUNTY OF _________________
In ______________, on the ____ day of June, 1997, before me personally
appeared __________, _________ of Hanover Capital Partners, Ltd., to me known
and known by me to be the person executing the foregoing instrument, and he
acknowledged said instrument by him executed to be his free act and deed in said
capacity and the free act and deed of Hanover Capital Partners, Ltd.
_____________________________________
Notary Public
My commission expires: ______________
5
<PAGE> 6
STATE OF __________________
COUNTY OF _________________
In ______________, on the ____ day of June, 1977, before me personally
appeared __________, _________ of Hanover Capital Mortgage Corporation, to me
known and known by me to be the person executing the foregoing instrument, and
he acknowledged said instrument by him executed to be his free act and deed in
said capacity and the free act and deed of Hanover Capital Mortgage Corporation.
_____________________________________
Notary Public
My commission expires: ______________
STATE OF __________________
COUNTY OF _________________
In ______________, on the ____ day of June, 1977, before me personally
appeared __________, _________ of Hanover Capital Mortgage Fund, Inc., to me
known and known by me to be the person executing the foregoing instrument, and
he acknowledged said instrument by him executed to be his free act and deed in
said capacity and the free act and deed of Hanover Capital Mortgage Fund, Inc.
_____________________________________
Notary Public
My commission expires: ______________
STATE OF __________________
COUNTY OF _________________
In ______________, on the ____ day of June, 1977, before me personally
appeared __________, _________ of Hanover Capital Securities, Inc., to me known
and known by me to be the person executing the foregoing instrument, and he
acknowledged said instrument by him executed to be his free act and deed in said
capacity and the free act and deed of Hanover Capital Securities, Inc.
_____________________________________
Notary Public
My commission expires: ______________
6
<PAGE> 7
STATE OF __________________
COUNTY OF _________________
In ______________, on the ____ day of June, 1977, before me personally
appeared __________, _________ of Hanover Capital Advisors, Ltd., to me
known and known by me to be the person executing the foregoing instrument, and
he acknowledged said instrument by him executed to be his free act and deed in
said capacity and the free act and deed of Hanover Capital Advisors, Ltd.
_____________________________________
Notary Public
My commission expires: ______________
STATE OF __________________
COUNTY OF _________________
In ______________, on the ____ day of June, 1977, before me personally
appeared John A. Burchett, to me known and known by me to be the person
executing the foregoing instrument, and he acknowledged said instrument by him
executed to be his free act and deed.
_____________________________________
Notary Public
My commission expires: ______________
7
<PAGE> 8
STATE OF RHODE ISLAND
------------------
COUNTY OF PROVIDENCE
------------------
In Providence, on the ____ day of June, 1977, before me personally appeared
Anthony A. Botelho, Vice President of Fleet National Bank, to me known and known
by me to be the person executing the foregoing instrument, and he acknowledged
said instrument by him executed to be his free act and deed in said capacity and
the free act and deed of Fleet National Bank.
_____________________________________
Notary Public
My commission expires: ______________
8
<PAGE> 9
ASSIGNMENT
HANOVER CAPITAL PARTNERS, LTD., a New York corporation, having a place of
business at 90 West Street, New York, New York ("Assignor"), for good and
valuable consideration, the receipt of which is hereby acknowledged by Fleet
National Bank, a national banking association, with an office located at
111 Westminster Street, Providence, Rhode Island ("Assignee"), and pursuant to
the terms of that certain Modification Agreement of even date among the Assignor
and the Assignee, among others, hereby transfers and assigns to Assignee all of
its rights, title and interest to those instruments and documents further
described on EXHIBIT A attached hereto to Assignee WITH RECOURSE.
IN WITNESS WHEREOF, the Assignor has caused this Assignment to be executed
by its duly authorized representative on this ______ day of June, 1997.
WITNESS: HANOVER CAPITAL PARTNERS, LTD.
________________________ By: __________________________
Its: _________________________
1
<PAGE> 10
STATE OF __________________
COUNTY OF _________________
In ______________, on the ____ day of June, 1977, before me personally
appeared __________, _________ of Hanover Capital Partners, Ltd., to me known
and known by me to be the person executing the foregoing instrument, and he/she
acknowledged said instrument by him/her executed to be his/her free act and deed
and the free act and deed of Hanover Capital Partners, Ltd.
_____________________________________
Notary Public
My commission expires: ______________
2
<PAGE> 1
CONTRIBUTION AGREEMENT
This Contribution Agreement ("Agreement"), dated as of ,
1997, is entered into by and among Hanover Capital Mortgage Holdings, Inc., a
Maryland corporation ("HCHI"), and John A. Burchett ("Burchett"), Joyce S.
Mizerak ("Mizerak"), George J. Ostendorf ("Ostendorf") and Irma N. Tavares
("Tavares"). Burchett, Mizerak, Ostendorf and Tavares are collectively referred
to as the "Principals."
RECITALS
A. The Principals own all of the outstanding capital stock of HCP,
consisting of 3,000 shares of HCP Common and 97,000 shares of HCP Preferred, in
the respective amounts set forth opposite their names on the attached
SCHEDULE 1.
B. The rights, restrictions, privileges and preferences of the HCP
Common and the HCP Preferred are set forth in the Certificate of Amendment
attached hereto as EXHIBIT A (the "Certificate of Amendment").
C. The Principals desire to contribute to HCHI, and HCHI desires to
accept from the Principals, the 97,000 shares of HCP Preferred owned by the
Principals in exchange for (i) 716,667 shares of HCHI Common, (ii) loans to the
Principals in an aggregate principal amount not to exceed the Maximum Loan
Amount and (iii) if certain conditions related to the financial performance of
HCHI are satisfied, (a) up to 216,667 additional shares of HCHI Common and (b)
the forgiveness of up to the Maximum Loan Amount .
AGREEMENT
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms shall be defined as follows:
AVERAGE SPREAD. "Average Spread" means, for any period, (i) the average
Fair Market Value of an IPO Share minus (ii) the IPO Price.
BUSINESS DAY. "Business Day" means any day except a Saturday, Sunday or
other day on which commercial banks in New York, New York are authorized or
required by law to be closed.
EARN-OUT MEASURING DATE. "Earn-Out Measuring Date" means each September
30 beginning with September 30, 1998 and ending with September 30, 2002.
EARN-OUT SHARES. "Earn-Out Shares" means up to 216,667 shares of HCHI
Common that may be issued to the Principals pursuant to Section 2.2.3 (subject
to appropriate adjustment for
<PAGE> 2
stock dividends and distributions, stock splits and subdivisions, reverse stock
splits and combinations, recapitalizations, distributions of rights, warrants or
options, and distributions of evidences of indebtedness or assets relating to
assets not received by HCHI pursuant to a pro rata distribution by HCHI and
transactions having like effect).
FAIR MARKET VALUE. "Fair Market Value" means, with respect to any share
of capital stock of HCHI, the average of the daily market price for the ten (10)
consecutive trading days immediately preceding the date with respect to which
"Fair Market Value" must be determined hereunder or, if such date is not a
Business Day, the immediately preceding Business Day. The market price for each
such trading day shall be: (i) if such shares are listed or admitted to trading
on any securities exchange or the Nasdaq National Market, the closing price,
regular way, on such day, or if no such sale takes place on such day, the
average of the closing bid and asked prices on such day, (ii) if such shares are
not listed or admitted to trading on any securities exchange or the Nasdaq
National Market, the last reported sale price on such day or, if no sale takes
place on such day, the average of the closing bid and asked prices on such day,
as reported by a reliable quotation source designated by HCHI, or (iii) if such
shares are not listed or admitted to trading on any securities exchange or the
Nasdaq National Market and no such last reported sale price or closing bid and
asked prices are available, the average of the reported high bid and low asked
prices on such day, as reported by a reliable quotation source designated by
HCHI, or if there shall be no bid and asked prices on such day, the average of
the high bid and low asked prices, as so reported, on the most recent day (not
more than ten (10) days prior to the date in question) for which prices have
been so reported; provided that, if there are no bid and asked prices reported
during the ten (10) days prior to the date in question, the Fair Market Value of
such shares shall be determined by HCHI acting on the basis of such quotations
and other information as it considers appropriate.
HCHI COMMON. "HCHI Common" means common stock of HCHI, $.01 par value
per share.
HCP. "HCP" means Hanover Capital Partners Ltd., a New York corporation.
HCP COMMON. "HCP Common" means Class A Common Stock of HCP, par value
$.01 per share.
HCP PREFERRED. "HCP Preferred" means Series A Preferred Stock of HCP,
par value $.01 per share.
IPO SHARE. "IPO Share" means a share of HCHI Common issued by HCHI in
its initial underwritten public offering.
IPO PRICE. "IPO Price" means the initial public offering price of a
Unit in HCHI's initial underwritten public offering.
LOAN AGREEMENT. "Loan Agreement" means a Loan Agreement between HCHI
and a Principal substantially in the form attached as EXHIBIT B.
2
<PAGE> 3
MAXIMUM LOAN AMOUNT. "Maximum Loan Amount" means $1,750,000, the
maximum aggregate amount that the Principals may borrow from HCHI pursuant to
Section 2.2.2.
PRO RATA PORTION. "Pro Rata Portion" means, with respect to any
Principal (or his or her representatives, successors or assigns, as the case may
be), a fraction (i) the numerator of which is the number of shares of HCP
Preferred contributed by such Principal to HCHI hereunder, as set forth on the
attached SCHEDULE 1, and (ii) the denominator of which is 97,000.
TOTAL RETURN PER UNIT. "Total Return per Unit" means, as of any
Earn-Out Measuring Date, (i) two times the Average Spread for the thirty (30)
day period that ends on such Earn-Out Measuring Date, plus (ii) the sum of all
distributions that have been made by HCHI with respect to an IPO Share through
and including such Earn-Out Measuring Date.
UNIT. "Unit" means a unit, consisting of one share of HCHI Common and a
warrant to purchase one share of HCHI Common, issued by HCHI in its initial
underwritten public offering.
2. CONTRIBUTION OF HCP PREFERRED.
2.1 CONTRIBUTION OF HCP PREFERRED. Subject to the terms and
conditions of this Agreement, at the Closing, the Principals shall contribute,
assign and transfer to HCHI, and HCHI shall accept from the Principals, all
97,000 outstanding shares of HCP Preferred.
2.2 ISSUANCE OF HCHI COMMON; LOANS; EARN-OUT.
2.2.1 ISSUANCE OF HCHI COMMON AT CLOSING. Subject to the
terms and conditions of this Agreement, at the Closing, HCHI shall issue and
deliver to each of the Principals his or her Pro Rata Portion of 716,667 shares
of HCHI Common.
2.2.2 LOANS TO PRINCIPALS. Subject to the terms and
conditions of this Agreement, at the Closing, HCHI shall execute and deliver a
Loan Agreement to each Principal pursuant to which such Principal shall be
entitled to borrow from HCHI, on the terms set forth in such Loan Agreement, up
to his or her Pro Rata Portion of the Maximum Loan Amount.
2.2.3 EARN-OUT. The parties hereto acknowledge that the
value of the HCP Preferred is not determinable as of the Closing with absolute
certainty and was arrived at based upon discussions between the Principals and
the underwriters for HCHI's initial underwritten public offering. To account for
the possibility that the HCP Preferred may have a value that is greater than the
value of the HCHI Common to be delivered to the Principals at the Closing, the
Principals shall be entitled to receive the Earn-Out Shares, and to have the
outstanding balances of the loans made to them by HCHI pursuant to Section 2.2.2
and their Loan Agreements forgiven, as provided, and subject to the conditions
set forth, in this Section 2.2.3.
(i) If the Total Return per Unit as of any Earn-Out
Measuring Date equals at least a 20% annualized return on the IPO Price through
such Earn-Out Measuring Date,
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<PAGE> 4
HCHI shall (A) issue to each Principal his or her Pro Rata Portion of the lesser
of (1) one-third (1/3) of the total number of Earn-Out Shares or (2) the number
of Earn-Out Shares that have not theretofore been issued pursuant to this
Section 2.2.3, and (B) forgive, and discharge such Principal from liability for,
an amount of indebtedness of such Principal to HCHI under such Principal's Loan
Agreement equal to one-third (1/3) of the principal amount loaned by HCHI to
such Principal pursuant to such Loan Agreement.
(ii) If the Total Return per Unit as of any Earn-Out
Measuring Date is equal to or greater than the IPO Price, HCHI shall (A) issue
to each Principal his or her Pro Rata Portion of the number of Earn-Out Shares
that have not theretofore been issued pursuant to this Section 2.2.3 and (B)
forgive, and discharge such Principal from liability for, an amount of
indebtedness of such Principal to HCHI under such Principal's Loan Agreement
equal to the principal amount loaned by HCHI to such Principal pursuant to such
Loan Agreement.
3. THE CLOSING.
3.1 TIME AND PLACE. The closing ("Closing") of the contribution
of the HCP Preferred to HCHI and the issuance of 716,667 shares of HCHI Common
under this Agreement shall take place at the offices of
simultaneously with the closing of HCHI's initial underwritten public offering.
The date of the Closing is hereinafter referred to as the "Closing Date."
3.2 DELIVERIES BY THE PRINCIPALS. At the Closing, the Principals
shall deliver the following to HCHI as conditions to HCHI's obligations under
Section 2.2:
3.2.1 HCP PREFERRED. Each of the Principals shall deliver
to HCHI one or more stock certificates representing the number of shares of HCP
Preferred set forth opposite his or her name on the attached Schedule 1,
endorsed in blank or accompanied by duly executed assignment documents.
3.2.2 CERTIFICATE OF INCORPORATION. The Principals shall
deliver to HCHI the Certificate of Incorporation of HCP, as amended and in
effect on the Closing Date (including the Certificate of Amendment), certified
by the Secretary of State of the State of New York.
3.2.3 CERTIFICATE OF GOOD STANDING. The Principals shall
deliver to HCHI a certificate as to the corporate good standing of HCP issued by
the Secretary of State of the State of New York not more than ten (10) Business
Days before the Closing Date.
3.2.4 CERTIFICATE OF SECRETARY. The Principals shall
deliver to HCHI a Certificate of the Secretary of HCP attesting as to (i) the
By-laws of HCP, and (ii) resolutions of the Board of Directors of HCP
authorizing and approving the Certificate of Amendment and the issuance of the
shares of HCP Common and HCP Preferred that are outstanding as of the Closing
Date.
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<PAGE> 5
3.2.5 SHAREHOLDERS' AGREEMENT. Each of the Principals shall
execute and deliver to HCHI the Shareholders' Agreement in the form attached
hereto as Exhibit C.
3.2.6 REGISTRATION RIGHTS AGREEMENT. Each of the Principals
shall execute and deliver to HCHI the Registration Rights Agreement in the form
attached hereto as Exhibit D.
3.2.7 LOCK-UP AGREEMENT. Each of the Principals shall
execute and deliver to HCHI the Lock-Up Agreement in the form attached hereto as
Exhibit E.
3.2.8 EMPLOYMENT AGREEMENTS. Each of the Principals shall
execute and deliver to HCHI an Employment Agreement in the form attached hereto
as Exhibit F, Exhibit G, Exhibit H or Exhibit I, as the case may be.
3.3 DELIVERIES BY HCHI. At the Closing, HCHI shall deliver the
following to the Principals as conditions to the Principals' obligations under
Section 2.1:
3.3.1 HCHI COMMON. HCHI shall deliver to each of the
Principals one or more stock certificates representing his or her Pro Rata
Portion of 716,667 shares of HCHI Common.
3.3.2 CERTIFICATE OF INCORPORATION. HCHI shall deliver to
the Principals the Certificate of Incorporation of HCHI, as amended and in
effect on the Closing Date, certified by the Secretary of State of the State of
Maryland.
3.3.3 CERTIFICATE OF GOOD STANDING. HCHI shall deliver to
the Principals a certificate as to the corporate good standing of HCHI issued by
the Secretary of State of the State of Maryland not more than ten (10) Business
Days before the Closing Date.
3.3.4 CERTIFICATE OF SECRETARY. HCHI shall deliver to the
Principals a Certificate of the Secretary of HCHI attesting as to (i) the
By-laws of HCHI, and (ii) resolutions of the Board of Directors of HCHI
authorizing and approving all matters in connection with this Agreement and the
transactions contemplated hereby.
3.3.5 SHAREHOLDERS' AGREEMENT. HCHI shall execute and
deliver to the Principals the Shareholders' Agreement in the form attached
hereto as Exhibit C.
3.3.6 REGISTRATION RIGHTS AGREEMENT. HCHI shall execute and
deliver to the Principals the Registration Rights Agreement in the form attached
hereto as Exhibit D.
3.3.7 EMPLOYMENT AGREEMENTS. HCHI shall execute and deliver
to each of the Principals an Employment Agreement in the form attached hereto as
EXHIBIT F, EXHIBIT G, EXHIBIT H or EXHIBIT I, as the case may be.
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<PAGE> 6
3.3.8 LOAN AGREEMENTS. HCHI shall execute and deliver to
each of the Principals a Loan Agreement entitling such Principal to borrow from
HCHI his or her Pro Rata Portion of the Maximum Loan Amount.
3.4 CROSS-RECEIPT. Upon the completion of the deliveries to be
made by HCHI and the Principals hereunder, HCHI and the Principals shall execute
and deliver to each other a cross-receipt evidencing such completion.
4. REPRESENTATIONS OF THE PRINCIPALS. Subject to and except as
disclosed by the Principals in the Principals' Disclosure Schedule attached
hereto (the "Principals' Disclosure Schedule"), each of the Principals hereby
represents and warrants to HCHI as follows:
4.1 ORGANIZATION AND STANDING. HCP is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York and has full corporate power and authority to conduct its business as
presently conducted and as proposed to be conducted by it. The Principals have
furnished to O'Melveny & Myers, LLP, counsel to the underwriters for HCHI's
initial underwritten public offering, true and complete copies of HCP's
Certificate of Incorporation and By-laws, each as amended to date (including the
Certificate of Amendment) and presently in effect.
4.2 CAPITALIZATION. The authorized capital stock of HCP
immediately prior to the Closing consists (and immediately after the Closing
will consist) of (a) 5,000 shares of HCP Common, of which 3,000 shares are
issued and outstanding, (b) 5,000 shares of HCP's Class B Common Stock, par
value $.01 per share (the "HCP Class B"), none of which are issued and
outstanding and (c) 100,000 shares of HCP Preferred, of which 97,000 are issued
and outstanding. At the Closing, the HCP Common, the HCP Class B and the HCP
Preferred will have the voting powers, designations, preferences, rights and
qualifications, and limitations or restrictions, set forth in the Certificate of
Incorporation of HCP, as amended by the Certificate of Amendment. All of the
issued and outstanding shares of HCP Common and HCP Preferred have been duly
authorized and validly issued and are fully paid and nonassessable. Except as
provided in this Agreement, the Shareholders' Agreement attached as Exhibit C or
the Certificate of Incorporation of HCP (as amended by the Certificate of
Amendment), (i) no subscription, warrant, option, convertible security or other
right (contingent or otherwise) to purchase or acquire any shares of capital
stock of HCP is authorized or outstanding, (ii) HCP has no obligation
(contingent or otherwise) to issue any subscription, warrant, option,
convertible security or other such right or to issue or distribute to holders of
any shares of its capital stock any evidences of indebtedness or assets of HCP,
and (iii) HCP has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any shares of its capital stock or any interest therein or to
pay any dividend or make any other distribution in respect thereof. All of the
issued and outstanding shares of capital stock of HCP have been offered, issued
and sold by HCP in compliance with applicable Federal and state securities laws.
4.3 SUBSIDIARIES, ETC. Except as set forth in Section 4.3 of
the Principals' Disclosure Schedule, HCP has no subsidiaries and does not own or
control, directly or indirectly,
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<PAGE> 7
any shares of capital stock of any other corporation or any interest in any
partnership, limited liability company, joint venture or other non-corporate
business enterprise.
4.4 STOCKHOLDERS AND AGREEMENTS; BENEFICIAL OWNERSHIP. The
Principals are all of the stockholders of HCP. Each of the Principals holds of
record and beneficially the number of shares of HCP Preferred set forth opposite
his or her name on the attached SCHEDULE 1 free and clear of any liens, claims,
security interests or encumbrances. Except as provided in this Agreement, the
Shareholders' Agreement attached as EXHIBIT C or the Certificate of
Incorporation of HCP (as amended by the Certificate of Amendment), there are no
agreements, written or oral, between HCP and any of the Principals, or to which
HCP or any of the Principals is a party, relating to the acquisition (including
without limitation rights of first refusal or pre-emptive rights), disposition,
registration or voting of the capital stock of HCP.
4.5 AUTHORITY. This Agreement and the other agreements required
to be executed by the Principals on or prior to the Closing pursuant to Section
3.2 (the "Principals' Ancillary Agreements") have been duly executed and
delivered by the Principals and constitute valid and binding obligations of the
Principals enforceable in accordance with their respective terms. The execution
of and performance of the transactions contemplated by this Agreement and the
Principals' Ancillary Agreements, and compliance with their provisions by the
Principals, will not violate any provision of law and will not violate or result
in any breach of any of the terms, conditions or provisions of, or constitute a
default under, or require a consent or waiver under, HCP's Certificate of
Incorporation or By-laws (each as amended to date) or any indenture, lease,
agreement or other instrument to which HCP or any of the Principals is a party
or by which HCP's or any of the Principals' properties is bound, or any decree,
judgment, order, statute, rule or regulation applicable to HCP or any of the
Principals.
4.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any governmental authority is required on the part of the
Principals or HCP in connection with the execution and delivery of this
Agreement, the sale and delivery of the HCP Preferred, or the other transactions
to be consummated at the Closing, as contemplated by this Agreement, except such
filings as shall have been made prior to and shall be effective on and as of the
Closing.
4.7 LITIGATION. Except as set forth in Section 4.7 of the
Principals' Disclosure Schedule, there is no action, suit or proceeding, or
governmental inquiry or investigation, pending, or, to the best of the
Principals' knowledge, any basis therefor or threat thereof, against HCP or any
of the Principals, which questions the validity of this Agreement or the right
of any of the Principals to enter into it, or which might result, either
individually or in the aggregate, in any material adverse change in the
business, prospects, assets or condition, financial or otherwise, of HCP.
4.8 BOARD OF DIRECTORS. The Board of Directors is comprised of
four members, and currently consists of the Principals.
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<PAGE> 8
4.9 INVESTMENT. Each Principal represents and warrants to HCHI
that he or she is acquiring the shares of HCHI Common to be delivered to him or
her pursuant to Section 2.2.1 and Section 2.2.3 for his or her own account for
investment and not with a view to, or for sale in connection with, any
distribution thereof, nor with any present intention of distributing or selling
the same; and, except as contemplated by this Agreement and the Schedules and
Exhibits hereto, such Principal has no present or contemplated agreement,
undertaking, arrangement, obligation, indebtedness or commitment providing for
the disposition thereof.
4.10 EXPERIENCE. Each Principal represents and warrants to HCHI
that he or she has carefully reviewed the representations concerning HCHI
contained in this Agreement and has made detailed inquiry concerning HCHI, its
business and its personnel; the officers of HCHI have made available to such
Principal any and all written information which he or she has requested and have
answered to such Principal's satisfaction all inquiries made by such Principal;
and such Principal has sufficient knowledge and experience in investing in
companies similar to HCHI so as to be able to evaluate the risks and merits of
his or her investment in HCHI and is able financially to bear the risks thereof.
5. REPRESENTATIONS OF HCHI. Subject to and except as disclosed by
HCHI in HCHI's Disclosure Schedule attached hereto (the "HCHI Disclosure
Schedule"), HCHI hereby represents and warrants to the Principals as follows:
5.1 ORGANIZATION AND STANDING. HCHI is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland and has full corporate power and authority to conduct its business as
presently conducted and as proposed to be conducted by it.
5.2 CAPITALIZATION. Immediately prior to the Closing, the
authorized capital stock of HCHI consists of (a) 90,000,000 shares of HCHI
Common, of which ten (10) shares are issued and outstanding, and (b) 10,000,000
shares of Preferred Stock, par value $.01 per share (the "HCHI Preferred"), none
of which are issued and outstanding. Immediately after the Closing, the
authorized capital stock of HCHI will consist of (a) 90,000,000 shares of HCHI
Common, of which 5,316,667 shares will be issued and outstanding, and (b)
10,000,000 shares of Preferred Stock, par value $.01 per share (the "HCHI
Preferred"), none of which will be issued and outstanding. At the Closing, HCHI
Common will have the voting powers, designations, preferences, rights and
qualifications, and limitations or restrictions set forth in the Certificate of
Incorporation of HCHI. All of the issued and outstanding shares of HCHI Common
have been duly authorized and validly issued and are fully paid and
nonassessable. All of the issued and outstanding shares of capital stock of HCHI
have been offered, issued and sold by HCHI in compliance with applicable Federal
and state securities laws.
5.3 AUTHORITY FOR AGREEMENT. The execution, delivery and
performance by HCHI of this Agreement, and the other agreements required to be
executed by HCHI on or prior to the Closing pursuant to Section 3.3 ("HCHI's
Ancillary Agreements"), and the consummation by HCHI of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action. This Agreement and HCHI's Ancillary Agreements have been duly
8
<PAGE> 9
executed and delivered by HCHI and constitute valid and binding obligations of
HCHI enforceable in accordance with their respective terms. The execution of and
performance of the transactions contemplated by this Agreement and HCHI's
Ancillary Agreements and compliance with their provisions by HCHI will not
violate any provision of law and will not conflict with or result in any breach
of any of the terms, conditions or provisions of, or constitute a default under,
or require a consent or waiver under, its Certificate of Incorporation or
By-laws (each as amended to date) or any indenture, lease, agreement or other
instrument to which HCHI is a party or by which it or any of its properties is
bound, or any decree, judgment, order, statute, rule or regulation applicable to
HCHI.
5.4 INVESTMENT. HCHI represents and warrants to the Principals
that it is acquiring the HCP Preferred for its own account for investment and
not with a view to, or for sale in connection with, any distribution thereof,
nor with any present intention of distributing or selling the same; and, except
as contemplated by this Agreement and the Schedules and Exhibits hereto, HCHI
has no present or contemplated agreement, undertaking, arrangement, obligation,
indebtedness or commitment providing for the disposition thereof.
5.5 EXPERIENCE. HCHI represents and warrants to the Principals
that it has carefully reviewed the representations concerning HCP and the
Principals contained in this Agreement and has made detailed inquiry concerning
HCP, its business and its personnel; the officers of HCP have made available to
HCHI any and all written information which HCHI has requested and have answered
to HCHI's satisfaction all inquiries made by HCHI; and HCHI has sufficient
financial sophistication so as to be able to evaluate the risks and merits of
its investment in HCP and is able financially to bear the risks.
6. MISCELLANEOUS.
6.1 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement and the
Exhibits and Schedules hereto set forth the entire understanding of the parties,
and supersede all prior agreements and all other arrangements and
communications, whether oral or written, with respect to the subject matter of
this Agreement. Neither this Agreement nor any provision of this Agreement may
be waived, modified, amended or terminated except by a written agreement signed
by the parties to this Agreement. Waiver by a party to this Agreement of any
breach of or failure to comply with any provision of this Agreement by any other
party shall not be construed as, or constitute, a continuing waiver of such
provision, or a waiver or any other breach of, or failure to comply with, any
other provision of this Agreement.
6.2 SUCCESSORS AND ASSIGNS; BINDING EFFECT; ASSIGNMENT. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and to their respective heirs, executors, administrators, legal
representatives, successors and permitted assigns; provided, however, that the
rights under this Agreement may not be assigned except as expressly provided
herein.
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6.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All agreements,
representations and warranties contained herein shall survive the execution and
delivery of this Agreement and the closing of the transactions contemplated
hereby.
6.4 NOTICES. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be delivered
by hand, sent via a reputable nationwide overnight courier service or mailed by
first class certified or registered mail, return receipt requested, postage
prepaid:
If to HCHI, at Hanover Capital Mortgage Holdings, Inc., 90 West
Street, Suite 1508, New York, NY 10006, Attn: President, or at such other
address or addresses as may have been furnished in writing by HCHI to the
Principals; or
If to any Principal, at his or her address as set forth on the
signature page hereto, or at such other address or addresses as may have been
furnished to HCHI in writing by such Principal.
Notices provided in accordance with this Section 6.4 shall be
deemed delivered upon personal delivery, one business day after being sent via a
reputable nationwide overnight courier service, or two business days after
deposit in the mail.
6.5 BROKERS. Each party hereto (i) represents and warrants to the
other parties hereto that he, she or it has retained no finder or broker in
connection with the transactions contemplated by this Agreement, and (ii) shall
indemnify and save the other parties harmless from and against any and all
claims, liabilities or obligations with respect to brokerage or finders' fees or
commissions, or consulting fees in connection with the transactions contemplated
by this Agreement asserted by any person on the basis of any statement or
representation alleged to have been made by such indemnifying party.
6.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
6.7 SECTION HEADINGS. The section headings are for the
convenience of the parties and in no way alter, modify, amend, limit, or
restrict the contractual obligations of the parties.
6.8 SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
6.9 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland.
6.10 INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and
Schedules to this Agreement are incorporated in this Agreement by reference and
made a part hereof.
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Executed as of the date first written above.
"HCHI"
HANOVER CAPITAL MORTGAGE HOLDINGS,
INC.
By:_______________________________
Name:
Title:
"BURCHETT"
__________________________________
John A. Burchett
"MIZERAK"
__________________________________
Joyce S. Mizerak
"OSTENDORF"
__________________________________
George J. Ostendorf
"TAVARES"
__________________________________
Irma N. Tavares
11
<PAGE> 1
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT ("Agreement"), dated as of August ,
1997, is by and among Hanover Capital Mortgage Holdings, Inc., a Maryland
corporation ("HCHI"), and John A. Burchett, Joyce S. Mizerak, George J.
Ostendorf and Irma N. Tavares (collectively, the "Principals").
RECITALS
A. HCHI intends to effect an initial public offering (the
"Offering") of Units comprised of one share of its Common Stock, par value $.01
per share, and one Warrant to acquire one share of its Common Stock, par value
$.01 per share), as described in a Registration Statement substantially in the
form attached hereto as Exhibit 1 (the "Registration Statement").
B. The Principals hold all of the issued and outstanding shares of
capital stock of Hanover Capital Partners Ltd., a New York corporation ("HCP").
C. Pursuant to an Agreement and Plan of Recapitalization (the "Plan
of Recapitalization") to be effected before the closing of the Offering, the
Principals will exchange 166.424 shares of HCP's Class A Common Stock, $.01 par
value per share, constituting all of the issued and outstanding shares of HCP's
capital stock, for shares of HCP's Common Stock, $.01 par value per share,
representing 3% of the economic interest in HCP (the "HCP Common"), and shares
of HCP's Series A Preferred Stock, $.01 par value per share, representing 97% of
the economic interest in HCP (the "HCP Preferred").
D. HCHI and the Principals formed Hanover Capital Mortgage Holdings,
L.P., a Delaware limited partnership (the "Partnership"), pursuant to an
Agreement of Limited Partnership of Hanover Capital Mortgage Holdings, L.P.,
dated as of June 12, 1997 (the "Partnership Agreement"), to which the
Registration Statement in the form initially filed with the United States
Securities and Exchange Commission was attached as an exhibit.
E. By executing the Partnership Agreement, (i) the Principals agreed
to effect the transactions contemplated by the Plan of Recapitalization, (ii)
HCHI and the Principals agreed to execute and deliver an Amended and Restated
Agreement of Limited Partnership for the Partnership, effective upon the closing
of the Offering, pursuant to which HCHI would contribute the net proceeds of the
Offering, and the Principals would contribute the HCP Preferred, to the
Partnership, and (iii) HCHI and the Principals agreed to do other acts and
things required to effect the transactions described in the Registration
Statement.
F. Due to recent changes in the federal income tax laws, HCHI and
the Principals no longer desire to utilize the Partnership in connection with
the formation and operations of HCHI. Instead, the Principals will contribute
the HCP Preferred directly to HCHI in exchange for shares of Common Stock in
HCHI pursuant to a Contribution Agreement substantially in the form attached
hereto as Exhibit 2 (the "Contribution Agreement").
<PAGE> 2
G. Although the Partnership will not be utilized in connection with
the formation and operations of HCHI, HCHI and the Principals nevertheless
desire to affirm in writing their commitments and obligations to proceed with
the transactions contemplated by the Contribution Agreement and the Registration
Statement.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration the receipt and
legal sufficiency of which are hereby acknowledged, the parties hereto confirm
their agreement as follows:
1. Consummation of Certain Transactions.
1.1 Prior to the closing of the Offering, the Principals shall
exchange their shares of capital stock of HCP for the HCP Common and the HCP
Preferred pursuant to the Plan of Recapitalization.
1.2 On or before the closing of the Offering, HCHI and the
Principals shall execute and deliver the Contribution Agreement and perform such
of their obligations thereunder as are required to be performed by the closing
of the Offering. In addition, HCHI and the Principals shall execute and deliver
such other agreements, documents, instruments and other writings (including but
not limited to Employment Agreements, a Registration Rights Agreement and a
Shareholders' Agreement of HCP) as are necessary or appropriate to effect the
transactions described in the Registration Statement to which they are to be
parties.
2. Replacement of Partnership Agreement. This Agreement supersedes
and replaces the Partnership Agreement in all respects.
3. Amendments. This Agreement may not be amended without the express
written consent of each of the parties hereto.
4. Notices.
4.1 Any notice to a party hereto shall be at the address of
such party set forth on the attached Schedule 1 or at such other mailing address
of which such party shall prospectively notify the other parties in writing.
4.2 Any notice shall be deemed to have been duly given if
personally delivered or sent by United States mail or express mail service or by
telecopy or telegram confirmed by letter and will be deemed given, unless
earlier received, (i) if sent by certified or registered mail, return receipt
requested, or by first-class mail, five calendar days after being deposited in
the United States mails, postage prepaid, (ii) if sent by United States Express
Mail or other express mail service, two calendar days (other than Sundays and
federal holidays) after being deposited therein, (iii) if sent by telegram or
telecopy, on the date sent provided
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<PAGE> 3
confirmatory notice is sent by first-class mail, postage prepaid, and (iv) if
delivered by hand, on the date of receipt.
5. BINDING PROVISIONS. The covenants and agreements contained herein
shall be binding upon and inure to the benefit of the heirs, executors,
administrators, successors and assigns of the respective parties hereto, and no
other person shall have any rights or benefits hereunder except to the extent
expressly provided by applicable law.
6. COUNTERPARTS. This Agreement may be executed in several
counterparts, all of which together shall constitute one agreement binding on
all parties hereto notwithstanding that all the parties have not signed the same
counterpart.
7. APPLICABLE LAW. This Agreement shall be governed by, and
construed and enforced in accordance with, the internal laws of the State of
Maryland without regard to principles of conflicts of law. In the event of a
conflict between any provision of this Agreement and any non-mandatory provision
of the Act, the provisions of this Agreement shall control and take precedence.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
HCHI: THE PRINCIPALS:
Hanover Capital Mortgage Holdings, Inc.
_____________________________________ _________________________________
By: John A. Burchett
Its:
_________________________________
Joyce S. Mizerak
_________________________________
George J. Ostendorf
_________________________________
Irma N. Tavares
3
<PAGE> 4
Schedule 1
PARTIES
Hanover Capital Mortgage Holdings, Inc.
90 West Street, Suite 1508
New York, NY 10006
Attn: President
John A. Burchett
896 Highland Avenue
Westfield, NJ 07090
Joyce S. Mizerak
11 Foxhill Run
Monmouth Jct., NJ 08852
George J. Ostendorf
506 Marshall Street
Arlington Heights, IL 60004
Irma N. Tavares
1 Kevin Road
Scotch Plains, NJ 07076
4
<PAGE> 1
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is made as of the day of
, 1997 between Hanover Capital Mortgage Holdings, Inc., a Maryland
corporation (the "Lender"), and (the
"Borrower").
W I T N E S S E T H:
WHEREAS, pursuant to a Contribution Agreement, dated as of ,
1997, to which the Lender and the Borrower are parties and which is incorporated
herein by reference (the "Contribution Agreement"), the Lender has agreed to
make a loan available to the Borrower in a principal amount not to exceed
[$962,500 IN THE CASE OF JOHN A. BURCHETT] [$262,500 IN THE CASE OF EACH OF
JOYCE S. MIZERAK, GEORGE J. OSTENDORF AND IRMA N. TAVARES] (the "Maximum Loan
Amount") subject to the terms and conditions set forth below.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1 - LOAN.
A. AVAILABILITY. Subject to and in accordance with the terms and
conditions of this Agreement, the Lender shall make a term loan available to the
Borrower during the period from the date hereof to and including September 30,
2002 in a principal amount not to exceed the Maximum Loan Amount (the "Loan").
B. NOTICE OF BORROWING.
(i) The Loan shall be made pursuant to a notice (a "Notice
of Borrowing") given by the Borrower to the Lender not later than three (3)
Business Days prior to the date upon which the Lender is requested to make the
Loan (the "Borrowing Date"). As used herein, the term "Business Day" means any
day excluding any Saturday, Sunday or other day on which commercial banks in New
York, New York are authorized or required by law to close. The Notice of
Borrowing, which shall be in the form annexed hereto as Exhibit A, shall specify
the requested Borrowing Date (which shall be a Business Day) and the amount of
the proposed Loan. In lieu of delivering the Notice of Borrowing, the Borrower
may give the Lender a telephonic notice of the requested Loan by the time
required under this Section l(B); provided that such notice shall be confirmed
in writing by delivery to the Lender (x) immediately (i) of a telecopy of a
written Notice of Borrowing which has been signed by the Borrower or (ii) of a
telex containing all information required to be contained in a written Notice of
Borrowing, and (y) promptly of a written Notice of Borrowing containing the
original signature of the Borrower.
(ii) The Lender shall have no duty to verify the authenticity
of the signature appearing on any Notice of Borrowing or other writing delivered
pursuant to Section 1(B)(i) above and, with respect to an oral request for the
Loan, the Lender shall have no duty to verify the identity of any individual
representing himself or herself as the Borrower.
C. NOTE. The Borrower's obligations to the Lender hereunder shall
be evidenced by the promissory note (the "Note") of the Borrower dated as of the
Borrowing Date in the form annexed
<PAGE> 2
hereto as EXHIBIT B. The term "Note" shall include all extensions, renewals and
modifications of the Note and all substitutions therefor. All terms and
provisions of the Note are hereby incorporated herein.
D. MAKING OF LOAN. Not later than 12:00 noon (New York time) on the
Borrowing Date (as specified in the Notice of Borrowing), assuming that all
conditions precedent to borrowing set forth in Section 4(B) hereof have been
satisfied and that the Borrower has delivered the Note required by Section l(C)
hereof and the Pledge Agreement and Pledged Stock required by Section 3(A), the
Lender shall send by facsimile transmission to its custodian bank an instruction
to make the requested Loan available to the Borrower in United States dollars
and in immediately available funds by wiring such funds to or for the account of
the Borrower or his or her designee as specified by the Borrower in the Notice
of Borrowing.
SECTION 2 - REPAYMENT OF PRINCIPAL AND INTEREST ON NOTE.
A. PRINCIPAL. Subject to Sections 2(C), 2(D) and 6 below, all
principal under the Note shall be due and payable on September 30, 2002 (the
"Stated Maturity Date"). The Borrower shall be entitled to prepay the Note,
however, without premium or penalty.
B. INTEREST. The outstanding principal amount of the Note shall bear
interest at a rate equal to the "applicable Federal rate," as defined in Section
1274(d) of the Internal Revenue Code of 1986, as amended, in effect for the
month in which the Loan is made as applicable to debt instruments having terms
beginning on the Borrowing Date and ending on the Stated Maturity Date. Such
interest shall be payable quarterly in arrears on each March 31, June 30,
September 30 and December 31 of each year during which any amounts due under the
Note remain outstanding and at maturity (whether on the stated due date thereof,
upon prepayment, by acceleration or otherwise) or, if any such day is not a
Business Day, then on the next succeeding Business Day.
In addition, subject to Section 2(C) below, the Borrower shall pay to
the Lender, upon demand, (i) interest on any overdue principal and, to the
extent permitted by law, overdue installments of interest on the Note at a rate
of interest equal to two percent (2%) per annum in excess of the rate per annum
which would otherwise be in effect and (ii) any costs of collection as provided
in the Note.
C. NONRECOURSE AGAINST THE BORROWER. Notwithstanding any other
provision of this Agreement or the Note, the Borrower shall have no personal
liability, directly or indirectly, hereunder or under the Note, and the Lender's
sole recourse hereunder and under the Note shall be against the Pledged Stock
and any additional collateral to be provided to the Lender under the Pledge
Agreement executed and delivered pursuant to Section 3.
D. FORGIVENESS UNDER THE CONTRIBUTION AGREEMENT. Notwithstanding any
other provision of this Agreement or the Note, the Borrower's obligations to
repay the principal amount due under this Agreement and the Note shall be
subject to the provisions of Section 2.2.3 of the Contribution Agreement.
2
<PAGE> 3
SECTION 3 - COLLATERAL.
A. PLEDGE OF STOCK. As security for the payment of the Note and for
the performance of all of the Borrower's obligations hereunder, before and as a
condition to being made the Loan hereunder, the Borrower shall (i) execute and
deliver to the Lender a Pledge Agreement in the form annexed hereto as Exhibit C
(the "Pledge Agreement") and (ii) deposit with and pledge to the Lender, to be
held by the Lender pursuant to the Pledge Agreement, a number of shares of
common stock of the Lender, $.01 par value per share, registered in the
Borrower's name equal to (a) [64,167, IN THE CASE OF JOHN A. BURCHETT] [17,500,
IN THE CASE OF EACH OF JOYCE S. MIZERAK, GEORGE J. OSTENDORF AND IRMA N.
TAVARES] multiplied by (b) a fraction, the numerator of which is the principal
amount of the Loan and the denominator of which is the Maximum Loan Amount (such
shares being referred to herein as the "Pledged Stock"). The Pledged Stock shall
be delivered to the Lender in suitable form for transfer by delivery or
accompanied by duly executed instruments of transfer or assignments in blank
(and any required transfer stamps).
B. RETURN AND RELEASE OF COLLATERAL.
(i) Subject to Section 3(B)(ii), at such time as no principal,
interest or other obligations shall be outstanding and unpaid hereunder or under
the Note, the Lender shall release its security interest in the Pledged Stock
and any additional collateral provided to the Lender under the Pledge Agreement,
and shall deliver the Pledged Stock and any such additional collateral to the
Borrower at the Borrower's expense as provided in the Pledge Agreement.
(ii) Notwithstanding Section 3(B)(i), upon any forgiveness of
one-third (1/3) of the initial principal amount of the Loan pursuant to Section
2.2.3(i) of the Contribution Agreement, if there are no accrued but unpaid
amounts of interest or other obligations (other than principal not yet due)
outstanding hereunder or under the Note, the Lender shall release its security
interest in one-third (1/3) of the Pledged Stock and any additional collateral
provided to the Lender under the Pledge Agreement, and shall deliver one-third
(1/3) of the Pledged Stock and any such additional collateral to the Borrower at
the Borrower's expense as provided in the Pledge Agreement
SECTION 4 - CONDITIONS PRECEDENT.
A. WITH RESPECT TO THIS AGREEMENT. This Agreement shall become
effective only upon satisfaction of the following conditions precedent:
(i) All of the deliveries to be made to the Lender pursuant to
Sections 2.1 and 3.2 of the Contribution Agreement shall have been made;
(ii) The Contribution Agreement shall have been executed and
delivered by the Borrower and the Lender; and
(iii) This Agreement shall have been executed and delivered by
the Borrower and the Lender.
3
<PAGE> 4
B. WITH RESPECT TO THE LOAN. The Lender's obligation to make the
Loan shall become effective only upon satisfaction of the following conditions
precedent:
(i) The Borrower shall have delivered a written or telephonic
notice to the Lender as provided in Section 1(B);
(ii) The Borrower shall have delivered the Note to the Lender
executed by the Borrower;
(iii) The Borrower shall have delivered the Pledge Agreement to
the Lender duly executed by the Borrower together with the Pledged Stock as
provided in Section 3(A); and
(iv) The Borrower shall have delivered a written certification
to the Lender to the following effect:
(a) All the representations and warranties of the
Borrower contained in this Agreement and the Contribution Agreement shall be
true and correct in all material respects on and as of the Borrowing Date as
though made on and as of the Borrowing Date; and
(b) No Event of Default as defined in Section 6 hereof
("Event of Default") or event which, with the lapse of time or the giving of
notice or both, would become such an Event of Default (as so described, a
"Default"), shall have occurred and be continuing or would result from the
making of the Loan (excepting, however, such matters existing as of the date
hereof as to which the Lender has been specifically notified in writing).
SECTION 5 - REPRESENTATIONS AND WARRANTIES.
The Borrower hereby represents and warrants as follows:
A. The Borrower has the legal capacity to execute, deliver and
perform this Loan Agreement, the Note and the Pledge Agreement.
B. The execution, delivery and performance by the Borrower of this
Agreement, the Note, the Pledge Agreement and all other documents and
instruments to be executed and delivered by him or her in connection herewith or
therewith do not require the consent or approval of any third party which has
not been obtained on or prior to the date hereof, and do not and will not result
in any violation of, or constitute a default or result in the creation of any
lien upon any of Borrower's assets or properties under, any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to him or her.
C. When executed and delivered, this Agreement, the Note and the
Pledge Agreement will each constitute the legal, valid and binding obligation of
the Borrower enforceable in accordance with its respective terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws at the time in effect affecting the
rights of
4
<PAGE> 5
creditors generally and general principles of equity which may limit the
availability of equitable remedies.
D. There is no action, proceeding or investigation pending or
threatened before any court, governmental or regulatory body, agency,
commission, official or arbitrator (or any basis therefor known to the Borrower)
which questions the validity of this Agreement, the Note or the Pledge Agreement
or any action to be taken or document to be executed and delivered in connection
herewith or therewith.
E. All consents, approvals, orders and authorizations of, or filings
or registrations with, any governmental authority which may be required in
connection with the execution and delivery of this Agreement, the Note and the
Pledge Agreement have been obtained or made as of the date hereof.
F. The Borrower holds the Pledged Stock of record and beneficially
free and clear of any liens, claims, security interests or encumbrances except
for the security interest to be granted to the Lender pursuant to the Pledge
Agreement.
SECTION 6 - EVENTS OF DEFAULT; RIGHTS AND REMEDIES.
Each of the following occurrences shall constitute an Event of Default under
this Agreement:
A. If the Borrower fails to pay when due on the Stated Maturity Date
all principal then outstanding on the Note; or the Borrower fails to pay when
due on any quarterly installment date all interest then due and payable under
the Note and such failure continues for five (5) Business Days after written
notice thereof is delivered to the Borrower by the Lender;
B. If the Borrower fails to perform or comply with any covenants set
forth in this Agreement other than those referred to in paragraph (A) of this
Section 6 and such default is not remedied within ten (10) Business Days after
written notice thereof is delivered to the Borrower by the Lender;
C. If any representation or warranty made or deemed made by the
Borrower to the Lender herein, in the Contribution Agreement or in any
instrument or certificate given by the Borrower to the Lender in connection with
the transactions contemplated hereby is false or misleading in any material
respect on the date as of which made;
D. If the Borrower's employment by the Lender is terminated by the
Lender for "good cause" as defined in the Employment Agreement, dated as of the
date hereof, between the Borrower and the Lender;
E. If the Borrower makes an assignment for the benefit of creditors,
petitions or applies for the appointment of a liquidator, receiver or custodian
(or similar official) of the Borrower or any substantial part of the Borrower's
assets, or commences any proceeding or case relating to the Borrower under any
bankruptcy, reorganization, arrangements, insolvency, readjustment of debt,
dissolution, liquidation or similar law now or hereinafter in effect;
5
<PAGE> 6
F. If the Borrower approves, consents to or acquiesces in the filing
of a petition or application, or the commencement of any proceeding or case,
against the Borrower under any bankruptcy, reorganization, arrangements,
insolvency, readjustment of debt, dissolution, liquidation or similar law now or
hereinafter in effect;
G. If a petition or application is filed against the Borrower under
any bankruptcy, reorganization, arrangements, insolvency, readjustment of debt,
dissolution, liquidation or similar law now or hereinafter in effect, or a
decree or order is entered in any such case appointing a liquidator, receiver or
custodian (or similar official) of the Borrower or any substantial portion of
the Borrower's assets, adjudicating the Borrower to be bankrupt or insolvent,
approving a petition or providing for relief in respect of the Borrower, and
such petition, application, decree or order remains undischarged or in effect
for more than sixty (60) days;
H. If any money judgment, writ, warrant of attachment or similar
process involving in any case an amount in excess of $100,000 is entered or
filed against the Borrower or any subsidiary of the Borrower or any of their
respective assets and remains undischarged, unvacated, unbonded or unstayed for
a period of thirty (30) days;
I. If the Borrower purports to disavow his or her obligations
hereunder or contests the validity or enforceability hereof; or
J. If an "Event of Default," as defined in the Pledge Agreement,
occurs under the Pledge Agreement.
Subject to Section 2(c), upon the occurrence of any Event of Default hereunder,
the Lender may by written notice to the Borrower declare all payments and other
obligations of Borrower hereunder and under the Note to be, and the same shall
thereupon be, immediately due and payable with all additional interest from time
to time accrued thereon and without presentment, demand or protest or other
requirements of any kind (including, without limitation, valuation and
appraisement, diligence, notice of intent to demand or accelerate and of
acceleration), all of which are hereby expressly waived by the Borrower.
SECTION 7 - MISCELLANEOUS.
A. Except as otherwise expressly provided herein, any notice
required or permitted to be delivered hereunder shall be given in writing, and
shall be deemed to have been validly served, given or delivered (i) three (3)
days after deposit in the United States mails, with proper postage prepaid, (ii)
when sent after receipt of confirmation or answerback following telecopy, telex
or other facsimile transmission, (iii) one (1) Business Day after deposit with a
reputable overnight courier with all charges prepaid, or (iv) when delivered, if
hand-delivered by messenger, all of which shall be properly addressed to the
party to be notified and sent to the address indicated as follows:
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<PAGE> 7
(i) if to the Borrower:_____________________________
_____________________________
_____________________________
(ii) if to the Lender: Hanover Capital Mortgage Holdings, Inc.
90 West Street
Suite 1508
New York, NY 10006
Attn: President
or to such other party or to such other address as each party may, from time to
time, designate to the other in the manner herein prescribed.
B. The Note is issuable as a registered note. The Borrower shall
keep at its principal office a register of the Note and of its transfer and
exchange. Upon surrender for registration of transfer of the Note at such
office, the Borrower shall execute and deliver one or more new Notes of like
aggregate principal amount in registered form. At the option of the Lender, the
Note may be exchanged for other Notes, as the case may be, of any authorized
denomination and of a like aggregate principal amount and in registered form,
upon surrender of the Note to be exchanged at the office of the Borrower. No
service charge shall be made for any registration of transfer or exchange.
C. This Agreement shall be binding upon and shall inure to the
benefit of the respective successors and assigns of the parties hereto, except
that the Borrower may not assign or transfer any of its rights or obligations
under this Agreement.
D. This Agreement may be executed in any number of counterparts and
by different parties hereto on separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which taken
together shall constitute one and the same instrument.
E. This Agreement shall be governed by and construed in accordance
with the internal laws and decisions of the State of Maryland without reference
to its conflict of laws provisions.
[Remainder of Page Intentionally Left Blank]
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as an instrument under seal as of the day and year first above written.
"LENDER"
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By:________________________________
John A. Burchett, President
"BORROWER"
______________________________
Name:
8
<PAGE> 9
EXHIBIT A
NOTICE OF BORROWING
[DATE]
Hanover Capital Mortgage Holdings, Inc.
90 West Street
Suite 1508
New York, NY 10006
Attention: President
Ladies and Gentlemen:
The undersigned, (the "Borrower"), hereby
refers to that certain Loan Agreement, dated as of , 1997 (the
"Agreement"), by and between the Borrower and Hanover Capital Mortgage Holdings,
Inc. (the "Lender"), and hereby gives irrevocable notice to the Lender, pursuant
to Section l(B) of the Agreement, and sets forth below the information relating
to an amount to be borrowed by the Borrower from the Lender (the "Loan") as
required by Section l(B) of the Agreement. Unless otherwise defined herein, all
of the capitalized terms used herein shall have the respective meanings set
forth or incorporated by reference in the Agreement.
1. The Business Day on which the Loan is to be made is .
2. The principal amount of the Loan is $ .
3. The amount of the Loan shall be wired as follows:
_______________________________________________________________________
4. The Borrower hereby certifies that:
(i) All the representations and warranties of the Borrower
contained in the Agreement and Contribution Agreement referred to therein are
true and correct in all material respects as of the date hereof and shall be
true and correct in all material respects as of the Borrowing Date; and
(ii) No Default or Event of Default has occurred and is
continuing or would result from the making of the Loan, nor shall any Default or
Event of Default be in existence as of the Borrowing Date.
Very truly yours,
____________________________
Name:
9
<PAGE> 10
EXHIBIT B
PROMISSORY NOTE
(Nonrecourse)
$ Date:
FOR VALUE RECEIVED, subject to the terms and conditions hereof, the
undersigned, (the "Borrower"), hereby promises to
pay to the order of HANOVER CAPITAL MORTGAGE HOLDINGS, INC., a Maryland
corporation (the "Lender"), at its principal address at 90 West Street, Suite
1508, New York, NY 10006 or such other place as the Lender may designate from
time to time, the principal sum of DOLLARS ($ ) or
so much thereof as may be outstanding from time to time pursuant to the Loan
Agreement, dated as of , 1997, between the Borrower and the Lender
(the "Loan Agreement"), and to pay interest on said principal sum or such part
thereof as shall remain unpaid from time to time, from the date of the Loan
until repaid in full, and all other obligations due under the Loan Agreement and
this Note, at the rate and at the times set forth in the Loan Agreement. All
payments hereunder shall be made in lawful money of the United States and in
immediately available funds. Capitalized terms used herein, unless otherwise
defined herein, shall have the meanings given them in the Loan Agreement.
This Note is given to evidence a loan in the above amount and is the
Note referred to in the Loan Agreement, as the Loan Agreement may be amended or
supplemented from time to time, and is entitled to the benefits thereof. The
Borrower's obligations to the Lender hereunder and under the Loan Agreement are
secured by the pledge to the Lender by the Borrower of shares of the Lender's
common stock, $.01 par value per share, registered in the name of the Borrower
pursuant to the Pledge Agreement, dated as of , 199 , between the
Borrower and the Lender (the "Pledge Agreement"), as the Pledge Agreement may be
amended or supplemented from time to time. As provided in the Loan Agreement,
the Borrower shall have no personal liability, directly or indirectly, hereunder
or under the Loan Agreement, and the Lender's sole recourse hereunder and under
the Loan Agreement shall be against the collateral pledged to the Lender under
the Pledge Agreement. In addition, notwithstanding any other provision of this
Note or the Loan Agreement, the Borrower's obligations to repay the principal
amount due under this Note and the Loan Agreement are subject to forgiveness as
provided in Section 2.2.3 of the Contribution Agreement incorporated in the Loan
Agreement by reference. The terms of such Contribution Agreement, as well as the
Loan Agreement and the Pledge Agreement, are incorporated herein by reference as
fully and with the same effect as if set forth herein at length.
This Note may be prepaid in whole or in part at any time without
premium or penalty.
Should this Note be placed in the hands of attorneys for collection,
the Borrower agrees to pay, in addition to principal and interest, fees and
charges due under the Loan Agreement, but subject to the
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<PAGE> 11
provisions of the Loan Agreement and this Note regarding the nonrecourse nature
of this Note, any and all costs of collecting this Note, including reasonable
attorneys' fees and expenses.
The Lender hereby waives demand, presentment, protest and notice of
nonpayment.
This Note shall be construed and enforced in accordance with the
internal laws of the State of Maryland, without reference to its principles of
conflicts of law.
IN WITNESS WHEREOF, the Lender has executed this Note as of the day and
year first above written.
"BORROWER"
___________________________________
Name:
11
<PAGE> 12
EXHIBIT C
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT ("Agreement"), dated as of the day of
, 199 , is by and between (the "Pledgor") and
Hanover Capital Mortgage Holdings, Inc., a Maryland corporation (the "Secured
Party"). Terms used herein and not otherwise defined shall have the same
meanings as defined in the Loan Agreement referred to below.
W I T N E S S E T H:
WHEREAS, the Pledgor and the Secured Party have entered into a Loan
Agreement, dated as of , 1997 (the "Loan Agreement"), pursuant to
which the Secured Party has agreed, subject to the terms and conditions set
forth therein, to make a term loan to the Pledgor in the amount of up to
$ (the "Loan"), such Loan to be evidenced by the promissory note of
the Pledgor in the form attached as Exhibit B to the Loan Agreement (the
"Note"); and
WHEREAS, the obligation of the Secured Party to make the Loan is
subject to the condition, among others, that the Pledgor shall execute and
deliver this Agreement and grant the security interests hereinafter described in
shares of the common stock, $.01 par value per share, of the Secured
Party registered in the name of the Pledgor (the "Pledged Stock");
NOW, THEREFORE, in consideration of the Secured Party's agreement to
make the Loan to the Pledgor, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
it is hereby agreed as follows:
1. PLEDGE. The Pledgor hereby (i) deposits with and pledges the Pledged
Stock to the Pledgor in suitable form for transfer by delivery or accompanied by
duly executed instruments of transfer or assignments in blank (and any required
transfer stamps) and (ii) grants to the Secured Party a prior security interest
in all of the Pledged Stock and any additional collateral provided to the
Secured Party hereunder (the Pledged Stock and such additional collateral being
collectively referred to herein the "Pledged Collateral") as security for the
due and punctual payment and performance of the following obligations and
liabilities (herein called the "Secured Obligations"):
(a) Principal of and interest on the Note; and
(b) Any and all other obligations of the Pledgor to the Secured
Party under the Loan Agreement and the Note.
2. VALIDITY; ADDITIONAL OR SUBSTITUTE COLLATERAL. The Pledgor covenants
that the Pledged Stock is duly and validly pledged with the Secured Party in
accordance with law and that the Pledgor will defend the Secured Party's right,
title and security interest in and to the Pledged Stock against the claims and
demands of all persons whomsoever. The Pledgor represents and warrants to the
Secured Party that the Pledgor has good title to, and is the sole record and
beneficial owner of, the Pledged
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<PAGE> 13
Stock free and clear of all liens, claims, security interests and encumbrances
of every nature whatsoever except for the interest granted to Secured Party
herein, and as otherwise may be set forth and permitted under the Loan
Agreement. The Pledgor covenants and agrees that, if any additional shares of
capital stock of any class of the Secured Party are issued to the Pledgor with
respect to the Pledged Stock as a stock dividend or in connection with any stock
split, subdivision, recapitalization, reclassification or transaction having
similar effect after the date hereof, the same shall constitute Pledged
Collateral and shall be deposited and pledged with the Secured Party as provided
in Section 1 hereof contemporaneously with the acquisition thereof by the
Pledgor.
3. NO OTHER TRANSFERS OR LIENS. The Pledgor hereby covenants and agrees
that the Pledgor will not sell, convey or otherwise dispose of any of the
Pledged Collateral, nor will the Pledgor create, incur or permit to exist any
lien, claim, security interest or encumbrance whatsoever with respect to any of
the Pledged Collateral or the proceeds thereof, other than liens on and security
interests in the Pledged Collateral created hereby.
4. VOTING; DISTRIBUTIONS. So long as there shall exist no Event of
Default (as hereinafter defined) or, if there shall exist an Event of Default,
the Secured Party shall not have notified the Pledgor in writing of its election
to exercise its rights under this Section 4 , the Pledgor shall be entitled (i)
to exercise the voting power with respect to the Pledged Collateral as he or she
shall determine to be appropriate and (ii) to receive cash dividends and other
distributions of cash at any time and from time to time declared or made upon
any of the Pledged Collateral. In case, but only so long as, there shall exist
an Event of Default (as hereinafter defined), but subject to the provisions of
the Uniform Commercial Code or other applicable law, upon the giving of the
written notice to the Pledgor, the Secured Party shall be entitled (a) to cause
all or any of the Pledged Collateral to be transferred into its name or into the
name of its nominee or nominees, (b) to exercise the voting power with respect
to the Pledged Collateral as it shall determine to be appropriate, (c) to
receive and retain, as collateral security for the Secured Obligations, any and
all dividends and other distributions at any time and from time to time declared
or made upon any of the Pledged Collateral, and (d) to exercise any and all
rights of payment, conversion, exchange, subscription or any other rights,
privileges or options pertaining to the Pledged Collateral as if it were the
absolute owner thereof, including without limitation, the right to exchange, at
its discretion, any and all of the Pledged Collateral upon the merger,
consolidation, reorganization, recapitalization or other readjustment of the
Secured Party or, upon the exercise of any such right, privilege or option
pertaining to the Pledged Collateral, and in connection therewith, to deposit
and deliver any and all of the Pledged Collateral with any committee,
depository, transfer agent, registrar or other designated agency upon such terms
and conditions as the Secured Party may determine, all without liability except
to account for property actually received. The Secured Party shall have no duty
to exercise any of the aforesaid rights, privileges or options and shall not be
responsible for any failure to do so or delay in so doing.
5. DISSOLUTION, ETC. OF SECURED PARTY. In case, upon the dissolution,
winding up, liquidation or reorganization of the Secured Party whether in
bankruptcy, insolvency or receivership proceedings or upon an assignment for the
benefit of creditors or any other marshaling of the assets and liabilities of
the Secured Party, any sum shall be paid or any property shall be distributed
upon or with respect to any of the Pledged Collateral, such sum shall be paid
over to the Secured Party, to be held as collateral security for the Secured
Obligations.
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6. EVENTS OF DEFAULT. If any one or more of the following events
(herein called "Events of Default") shall occur:
(a) an "Event of Default," as defined in the Loan Agreement,
occurs under the Loan Agreement; or
(b) the Pledgor fails to perform or comply with any covenant set
forth in this Agreement and such default is not remedied within ten (10)
Business Days after written notice thereof is delivered to the Borrower by the
Lender; or
(c) a representation or warranty made or deemed made by the
Pledgor to the Secured Party herein is false or misleading in any material
respect on the date as of which made;
then upon the occurrence of any such Event of Default, the Secured Party shall
have all of the rights and remedies of a secured party under the Uniform
Commercial Code or other applicable law and shall have the right, subject to any
necessary prior consent of any governmental authority, if any, at any time or
times thereafter to sell, resell, assign and deliver all or any of the Pledged
Collateral in one or more parcels at any exchange or broker's board or at public
or private sale. The Secured Party will give the Pledgor at least ten (10) days'
prior written notice at the respective addresses of the Pledgor provided in
Section 11 hereof, of the time and place of any public sale thereof or of the
time after which any private sale or any other intended disposition thereof is
to be made. Any such notice shall be deemed to meet any requirement hereunder or
under any applicable law (including the Uniform Commercial Code) that reasonable
notification be given of the time and place of such sale or other disposition.
Such notice may be given without any demand of performance or other demand, all
such demands being hereby expressly waived by the Pledgor. All such sales shall
be at such commercially reasonable price or prices as the Secured Party shall
deem best and either for cash or on credit or for future delivery (without
assuming any responsibility for credit risk). At any such sale or sales the
Secured Party may purchase any or all of the Pledged Collateral to be sold
thereat upon such terms as the Secured Party may deem best. Upon any such sale
or sales the Pledged Collateral so purchased shall be held by the purchaser
absolutely free from any claims or rights of whatsoever kind or nature,
including any equity of redemption and any similar rights, all such equity of
redemption and any similar rights being hereby expressly waived and released by
the Pledgor. In the event any consent, approval or authorization of any
governmental agency will be necessary to effectuate any such sale or sales, the
Pledgor shall execute all such applications or other instruments as may be
required. The proceeds of any such sale or sales, together with any other
additional collateral security at the time received and held hereunder, shall be
received and applied: first, to the payment of all costs and expenses of such
sale, including reasonable attorneys' fees; second, to the payment of the
Secured Obligations in such order of priority as the Secured Party shall
determine; and any surplus thereafter remaining shall be paid to the Pledgor or
to whomever may be legally entitled thereto.
Upon the occurrence of any Event of Default, the Secured Party shall
have the right, for and in the name, place and stead of the Pledgor, to execute
endorsements, assignments, or other instruments of conveyance or transfer with
respect to all or any of the Pledged Collateral. The Secured Party is hereby
appointed the attorney-in-fact, with full power of substitution, of the Pledgor
for the purpose,
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upon the occurrence of an Event of Default, of carrying out the provisions of
this Pledge Agreement and taking any action and executing any instruments
(including, without limitation, conveyances, assignments and transfers) which
the Secured Party may deem necessary or advisable to accomplish the purposes
hereof, which appointment as attorney-in-fact is coupled with an interest and is
irrevocable.
The Pledgor recognizes that the Secured Party may be unable to effect a
public sale of all or a part of the Pledged Collateral by reason of certain
prohibitions contained in the Securities Act of 1933, as amended (the
"Securities Act"), but may be compelled to resort to one or more private sales
to a restricted group of purchasers who will be obliged to agree, among other
things, to acquire such Pledged Collateral for their own account, for investment
and not with a view to the distribution or resale thereof. The Pledgor agrees
that private sales so made may be at prices and upon other terms less favorable
to the seller than if such Pledged Collateral were sold at public sales, and
that the Secured Party has no obligation to delay sale of any such Pledged
Collateral for the period of time necessary to permit such Pledged Collateral to
be registered for public sale under the Securities Act. The Pledgor agrees that
any such private sales shall not be deemed to have been made in a commercially
unreasonable manner solely because they shall have been made under the foregoing
circumstances.
7. RIGHTS AGAINST THE PLEDGOR; REMEDIES CUMULATIVE. Upon the occurrence
of any Event of Default, the Secured Party may, but without obligation to do so,
demand, sue for and/or collect any money or property to which it may be
entitled. No course of dealing between the Pledgor and the Secured Party nor any
failure to exercise, nor any delay in exercising, on the part of the Secured
Party, any right, power or privilege hereunder or under any of the Secured
Obligations, shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or thereunder preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided and provided under any of the
Secured Obligations are cumulative and are in addition to, and not exclusive of,
any rights or remedies provided by law, including, without limitation, the
rights and remedies of a secured party under the Uniform Commercial Code.
Notwithstanding any other provision of this Agreement, however, the Pledgor
shall have no personal liability, directly or indirectly, hereunder or under the
Loan Agreement or Note, and the Secured Party's sole recourse hereunder and
under the Loan Agreement and Note shall be to and against the Pledged
Collateral.
8. ASSIGNABILITY BY THE SECURED PARTY. In the event of a sale or
assignment by the Secured Party of all or any of the Secured Obligations held by
it, the Secured Party may assign or transfer its rights and interest under this
Agreement in whole or in part to the purchaser or purchasers of such Secured
Obligations, whereupon such purchaser or purchasers shall become vested with all
of the powers and rights given to the Secured Party hereunder, and such Secured
Party shall thereafter be forever released and fully discharged from any
liability or responsibility hereunder with respect to the rights and interests
so assigned.
9. RETURN AND RELEASE OF COLLATERAL. In accordance with Section 3(B) of
the Loan Agreement, at such time as no principal, interest or other obligations
shall be outstanding and unpaid under the Loan Agreement or the Note, the
Secured Party shall release its security interest in the Pledged Collateral, and
shall deliver the Pledged Collateral to the Pledgor at the Pledgor's expense.
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Notwithstanding the preceding sentence, however, upon any forgiveness of
one-third (1/3) of the initial principal amount of the Loan pursuant to Section
2.2.3(i) of the Contribution Agreement, if there are no accrued but unpaid
amounts of interest or other obliations (other than principal not yet due)
outstanding under the Loan Agreement or the Note, the Secured Party shall
release its security interest in one-third (1/3) of the Pledged Collateral, and
shall deliver one-third (1/3) of the Pledged Collateral to the Pledgor at the
Pledgor's expense. At the Pledgor's expense, the Secured Party shall execute and
deliver such agreements, instruments and other writings, and do such other
things, as Pledgor may reasonably request in connection with the release of the
Secured Party's security interest and the delivery of the Pledged Collateral to
the Pledgor.
10. DUTY OF CARE. Beyond the exercise of reasonable care to assure the
safe custody of the Pledged Collateral while held hereunder, the Secured Party
shall have no duty or liability to collect any sums due in respect thereof or to
protect or preserve rights pertaining thereto, and shall be relieved of all
responsibility for the Pledged Collateral upon surrendering the same to the
Pledgor.
11. NOTICES. Except as otherwise expressly provided herein, any notice
required or permitted to be delivered hereunder shall be given in writing, and
shall be deemed to have been validly served, given or delivered (i) three (3)
days after deposit in the United States mails, with proper postage prepaid, (ii)
when sent after receipt of confirmation or answerback following telecopy, telex
or other facsimile transmission, (iii) one (1) business day after deposit with a
reputable overnight courier with all charges prepaid, or (iv) when delivered, if
hand-delivered by messenger, all of which shall be properly addressed to the
party to be notified and sent to the address indicated as follows:
(a) if to the Pledgor: ________________________________________
________________________________________
________________________________________
________________________________________
(b) if to the Secured Party: Hanover Capital Mortgage Holdings, Inc.
90 West Street
Suite 1508
New York, NY 10006
Attn: President
or to such other address as the party to whom such notice is directed may have
designated by like notice in writing to the other parties hereto.
12. WAIVER OF NOTICE, ETC. The Pledgor hereby waives notice of
acceptance of this Agreement as well as presentment, demand, payment, notice of
dishonor or protest and all other notices of any kind in connection with any of
the Secured Obligations, except as expressly provided herein. The Pledgor
further waives any right it may have under any state or federal law to notice
except as required hereby or to a judicial hearing prior to the exercise of any
right or remedy provided by this Agreement to the Secured Party and waives its
right, if any, to set aside or invalidate any sale duly consummated in
accordance with Section 6 hereof on the grounds (if such be the case) that the
sale was consummated without a prior judicial hearing. The Pledgor's waivers
under this Section 12 have been made
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voluntarily, intelligently and knowingly and after the Pledgor has been apprised
and counseled by his or her attorney as to the nature thereof and his or her
possible alternative rights.
13. REINSTATEMENT. This Agreement shall continue to be effective, or be
reinstated, as the case may be, at any time any amount received by the Secured
Party in respect of the Secured Obligations is rescinded or must otherwise be
restored or returned to the Pledgor upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Pledgor or upon the
appointment of an intervenor or conservator of, or trustee or similar official
for the Pledgor or any substantial part of his or her properties, or otherwise,
all as though such payments had not been made.
14. AMENDMENTS. This Agreement may be amended and the terms hereof may
be waived only with the written consent of the Pledgor and the Secured Party.
15. SUCCESSORS AND ASSIGNS, ETC. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their legal representatives,
successors and assigns, and the term "Secured Party" shall be deemed to include
any other holder or holders of any of the Secured Obligations. Where the content
so permits or requires, terms defined herein in the singular number shall mean
the plural, and in the plural number, the singular. In case any court of
competent jurisdiction shall hold any provision of this Agreement to be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby. This
Agreement may be executed in any number of counterparts, each of which, when so
executed and delivered, shall be an original, but all of which together shall
constitute one instrument.
16. GOVERNING LAW. This Agreement, including the validity hereof and
the rights and obligations of the parties hereunder, shall be construed in
accordance with and governed by the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as a
sealed instrument as of the date first above written.
"SECURED PARTY"
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By:___________________________________
John A. Burchett, President
"PLEDGOR"
_________________________________
Name:
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-29261 of Hanover Capital Mortgage Holdings, Inc. on Form S-11 of our report
on the consolidated financial statements of Hanover Capital Partners Ltd. and
Subsidiaries dated June 11, 1997 and our report on the balance sheet of Hanover
Capital Mortgage Holdings, Inc. (In Organization) dated August 8, 1997,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
August 26, 1997
<PAGE> 1
EXHIBIT 99.1
CONSENT OF DIRECTOR NOMINEE
To: Hanover Capital Mortgage Holdings, Inc.
I hereby consent to being named as a director-elect of Hanover Capital
Mortgage Holdings, Inc. in the Registration Statement on Form S-11 of Hanover
Capital Mortgage Holdings, Inc. and I consent to the filing of this consent
with such Registration Statement.
---------------------------------
John Nicholas Rees
<PAGE> 1
EXHIBIT 99.2
CONSENT OF DIRECTOR NOMINEE
To: Hanover Capital Mortgage Holdings, Inc.
I hereby consent to being named as a director-elect of Hanover Capital
Mortgage Holdings, Inc. in the Registration Statement on Form S-11 of Hanover
Capital Mortgage Holdings, Inc. and I consent to the filing of this consent
with such Registration Statement.
---------------------------------
John A. Clymer
